Bernard Hickey looks deep inside the Reserve Bank's Financial Stability report and finds out just how much Auckland's housing market dictates New Zealand's finances

Bernard Hickey looks deep inside the Reserve Bank's Financial Stability report and finds out just how much Auckland's housing market dictates New Zealand's finances
The horse has bolted; Auckland's dominance is increasing and its housing market issues over-ride the needs of the rest of New Zealand.

By Bernard Hickey

Auckland is incredible, and not just because of way its property owners will happily crash websites in their quest to know how much their houses are worth.

Or in the way they will then ring up their mortgage broker to see how much extra they can borrow to buy a new car or boat.

Auckland has become barely believable in a financial sense, but absolutely crucial in the eyes of those pulling New Zealand's interest rate and lending levers.

This week's Financial Stability Report from the Reserve Bank made it crystal clear that Auckland has become the centre of New Zealand's economic and political universe, more now than ever. 

Aucklanders may think this is normal, but it means farmers in Southland are paying Auckland interest rates and first home buyers in Palmerston North can't get a 90% mortgage because Auckland house prices rose 40% in less than three years.

Consider a few of the startling facts in the report.

Reserve Bank figures showed Auckland houses were worth 16.8 times a year's worth of rent in 2013. Given house price inflation of around 8.5% in the last year and rent inflation of 3%, that ratio would have risen to 17.7 this year.

That's up from 7.8 times a year's rent in 2001 and a ratio of 9.1 for the rest of New Zealand in 2013. This is more than double its long term average.

Auckland's house price to income ratio rose from 4.4 to 7.7 between 1999 and 2014, while the rest of New Zealand's ratio rose from 2.8 to 3.6.

The separation between Auckland the rest and the country is most evident in the amount of debt racked up by Aucklanders starting their families, relative to the rest.

A Reserve Bank study of the finances of cohorts of new mortgage borrowers aged around 38 found Aucklanders were responsible for 52% of all New Zealand's new mortgage debt stacked up from 2001 to 2013, which was up from just 35% from 2005 to 2007.

Christchurch aside, those home buyers south of the Bombay Hills (and north of Orewa) have rightly become increasingly agitated at the way their interest rates and their ability to borrow more than 80% of the value of their homes have been driven by Auckland's house price explosion.

That was rammed home this week when the Reserve Bank decided to leave its high LVR speed limit in place, defying expectations that it would be eased Christmas.

Instead, the bank decided to wait and watch to see if the record high net migration into Auckland fired up the housing market again.

Annual house price inflation has almost halved nationally over the last year to around 5% because of the high LVR speed limit and higher interest rates. Auckland's market has slowed too, but inflation has only fallen to 8.5% from over 17%. The trouble for the Reserve Bank is that 8.5% is still too fast, given it is faster than income growth of around 5%, which means indebtedness in Auckland is still growing.

Annual net migration is running at well over 50,000 and 80% of those go to Auckland first. The Auckland Airport customs hall has become ground zero for the New Zealand economy. 

Governor Graeme Wheeler reiterated again this week that Auckland is still not building enough houses to cope with its population growth and catch up with an existing shortage of up to 30,000 houses.

If the Government needed any more motivation to solve Auckland's housing shortage, this week's Financial Stability Report should be required reading. A flick through its pages could also be a useful way to sober up those Aucklanders still partying hard over their ratings valuations before a trip to a car dealership.


A version of this article was first published in the Herald on Sunday. It is here with permission.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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"sober reading" frankly I dont think they care BH, they think they are doing very well, and who cares about the rest of NZ.
Sadly the rest of NZ will pay a heavy price for this craziness.
rinse and repeat...

Localise the LVR restrictions.

Yesss!!!     This seems like the only fair thing to do.    Does the reserve bank care about the rest of country any more?   Their excuse that is was too hard to implement seems very weak to me.  Why not just say the LVR's apply within these council boundaries?    I think the reason they won't make them localised is political.   But of course they will never admit to that.

Ummm... so the reserve bank is supposed to care about the rest of the country?  Isn't that the job of the government?  The heartland voted National, this is what they get.  The reserve bank is only acting because the government has created this mess.

What I dont understand is why the Govn isnt being brought to task and asked why it isnt stopping the influx....

Why do you think?

The most telling thing you say Bernard is about Auckland being the economic and political centre, I would like to see you explore that further. Why would I like to see that? Well, cities in general are merchanting and financial centres, not manufacturing powerhouses.
So in fact Auckland probably  isn't the economic powerhouse at all, it feeds off the rest of the county.
It seems Auckland has simply become a self reinforcing financing centre that has its foundation in a housing scheme supported by foreign money. Ponzi?
I have said it before that this housing bubble in Auckland will collapse the economy, part of that process you highlight here. So the bubble will destroy itself eventually, which isn't really a problem because it isn'at a productive part of the economy, the trouble is the collatoral damage.

not just merchanting and finance,   _administration_!  That makes huge difference to the velocity of money's shape  (the provinces will be 3:1, when then administrative centers are 10:1  !!!!)  So as long as there are cities to suck up wealth for the self-interested, then the system will by necessity of design stay cyclic, just like a fungus, drawing butrients from it's outsides until it collapses under the weight of it's own self-interest.     Roman forests only grow so fast, and you can't eat your sestertii (or burn it for cooking)...same as today, as the financial is devalued out of the provinces, the financial and administrative "centers" will follow - the first sign is the cutting of costs by constant centralisation.

Nice analogy, Romans also debased their silver coins by replacing them with silver plated copper.  Resulted in reduced purchasing power for the masses while the elites squirreled away as much real wealth as they could before the system collapsed.    

I would go with that. I haven't given the matter deep thought, but you could say that all forms of unearned income are equal?
Nice that you introduced the sustainability of resources that underpin an economy. Even in early Roman days resources were significant, the greeks burnt some of their own buildings in Athens so the Romans couldn't use the roof beams to build war machines.

Planes do not fly faster and faster.  Conchorde stopped about a decade ago.  It's plain physics, the increased friction makes it too expensive to fly fast.  Auckland is not getting closer to the rest of the world. The tyranny of distance still applied.

Good article Bernard...I was watching Q&A this morning and Corin Dann was asking John Key repeated questions about targeting investors...and Key tried to avoid the question several the end, Key resorted to his usual mantra that he is focussing on increasing supply etc...
It's disappointing that the Govt doesn't have the courage to address a monumental social and economic issue like housing affordability...there will be a tipping point at some stage. 

RBNZ could refine the LVR restriction to 90% of the 10 year historic average price. That way  it would reduce the risk to the banks from bubble prices. Should slow down speculative price growth in Auckland with smaller impact on the rest of the country.
On the supply side, introduce a land tax, to make it expensive to hold onto undeveloped land on the fringees and big sections in the centre of the city.

Why would you introduce that land tax??

Land tax incentivises the productive use of land and discourages land banking, rent seeking and speculation.

This why why it would never be adopted in a rent seekers paradise like New Zealand. It's entirely too sensible and would upset the (National) voters with a vested interest in unproductive asset price inflation.

Wikipedia has a decent article on the subject. There is an Australian documentary called "Real Estate 4 Ransom" on YouTube that covers it in detail.


LVR means Loan-to-Valuation Ratio
Banks will use their own Valuation (methodology) which (under normal circumstances) would be somewhat less than the price paid by the purchaser. That's an automatic deflator.
The purchasers who paid $1.7 miilion each for two houses in Sandringham last week would hardly have fit within the conventional definition of First-Home-Buyers. Most likely imports.
The way the valuation system works, the way Banks and Valuers do valuations and the way Real Estate Agents do assessments, nearly every property in Sandringham that isnt falling over has suddenly and substantially increased in price as a result of those two sales

The National party talk about supply being the solution to unaffordable housing. What they say is not complicated -open up huge areas for residential zoning and free the consumer from the bidding war that extracts monopoly prices. Yet in the past 6 years of government National despite saying this is the solution have failed to provide this solution.

What is the problem? Does John Key not believe his own words or am I missing something? More questions and some honest answers are needed in my opinion.

Sound bites sell.

Strangely enough putting a surplus of >$450,000 build cost houses on the market isn't actually going to cause the price to drop much...and for some reason they're having a tough time finding a fool big enough to put their money into that (deliberately build excess houses, so they'll drop in value....)

Lol. This video depicts the supply side argument well. Especially part one.

I think more thinking is also needed about infrastructure or at least the allocation of right of ways. The division of public and private places in advance of development. Plus consideration given to the government compulsory acquiring rural priced land for residential purposes as an emergency measure to the current housing affordability crisis.

It's not the LVR causing this, it's the stationary wages and dropping discretionary incomes (for outside of Auckland).   The property markets are light on properties and what is there isn't picking up much premium, AND there's too much chance of being walloped by an interest rate rise (from Auckland's effect)

Likewise in Auckland, the LVR is marginal effect.  It's a bidding war to get tradable properties at those rates, and the Kiwi's just don't have the money to service such investments (unless they have large portfolio's behind them already - and even then, at this interest rate it is less risky to Hold than punt.)

Well actually I dont agree, the LVR's effect on FHBs looks signifcant.

May it remain so - 10% down is just gambling with other people's money and if the tax payer doesn't backstop FHBs, nor should depositors without substantial reward to compensate for the risk, beyond that which is currently offered. Double nominal GDP growth should be the minimum benchmark interest rate for low deposit mortgages.

Housing is a very safe place to store one's wealth. Auckland and New Zealand is the better for it. 
New Zealand's economy will grow larger on the back of booming property markets.

Not if most of it is owned by the rentier class

Housing has been a very safe place.......
Using the past to predict the future is for the foolhardy.

That is an incredibly bold statement.  Parking all your wealth in an asset class that is 68% above its long term average?

So whats new here? Surprise, surprise Auckland house prices are worth more than Dunedin...the last time I checked so were houses more expensive in St Germain, Paris vs. Lyon. The average London house price is $1 Million NZD (up 20% vs LY) and thats for greater London, let alone being close to tube station or shock horror to have a slice of garden. (And lets be fair to be close to London centre you need to live in a scummy basement 2 bedroom flat with kitchenette and noisy neighbours plus enjoy a one hour tube commute)
At least a million in Auckland buys you a 3 bedder in Kingsland.

Exaggerated.  I live (rent) in a very nice 90sqm two bedroom maisonette with a lovely backyard and garden around six minutes walk from Kennington tube and enjoy a short fourteen minute tube commute to Angel, or I can just walk for twenty minutes and be at Southbank or London Bridge.  I never hear any sound from my neighbours because the walls are solid brick.
The estimated current (October) value of the property is 563k according to Zoopla (this is bloated with QE and six years of 0.5% interest rates propping up the market).  If you want a house for 200-250k you can go out 20km to Croydon or Sutton, which are 20 minutes from Victoria by National Rail.
London isn't "cheap" in absolute terms, but Auckland is on another planet when it comes to relative income versus the cost of living.  I'm trying to put together a case for purchasing a median priced house on the outskirts of Auckland at the moment (family is the drawcard), and even if I put down a 50% deposit its difficult to see how the net rental income would cover the mortgage.  It screams speculative bubble.
Plus at least in London you aren't in some backwater hick town with woeful infrastructure, where electric trains are from the future and people are still having serious arguments about whether a rail tunnel is a good idea. 

hmmm...just checked the prices for 3 bedroom (terrcaed) housing in Kennington...the average for (terraced) house there is 1 Million GBP....thats over 2.0 Million NZD dollars...2 bedroom flats 600k GBP (1.2 Million NZD)

You forgot mention how people in England are also paid in GBP, but I am sure they still realise they have a problem as well

A flat in Merivale CHCH or this "Ideally located on a stunning tree-lined Central Park block,

The reason living in Auckland is so bad is:
- Lack of infrastructure. Public transport?  One train?  Commuting to work is a joke, even when it's not rush hour, getting anywhere is still a joke.
- Lack of interesting things to do.  Yeah, there is the odd concert and other stuff, but it does not compare on any level to Sydney, London etc. The outdoors? Not in Auckland.
- Shite housing quality. I have lived through several nasty UK winters, but none were as bad as those I spent in Auckland. Why? Badly designed and built houses.
- Weather.  Marginally better than England.  Really. Less rain and wind where I used to live.
- House prices compared to incomes, plus interest rates.  Probably the worst city in the entire world for this.  Don't bother coming to Auckland unless you have shedloads of cash.
All of the above combines to: 
Spend all of your working life paying for a hugely overpriced house that is badly built, with marginal weather, spend two hours a day commuting, don't see your children (if you can even afford them), as you are too busy working/commuting.
The best thing NZ has going for it, is definitely NOT Auckland. People with half a brain should try to avoid it, and most of Auckland’s residents would probably move if they could find work elsewhere.

Born and Bred Aucklander...your comments a tad over the top and hope you have moved out.
Rated top 10 City in the world..nothing from the UK made it on the list.  Saying that I am moving to Wellington in year and bracing for the windy city.

Top 10 city in the world for expats with $$.  Not for you "average" joe, sorry. I've lived in plenty of cities and Auckland is one of the worst...

Notch, you are on the money with #1,3,& 5.  I'd flat out reject #2, there is plenty to do in and around Auckland if you aren't afraid of a bit of nature, if you want theatre and ballet and art galleries and all that "cultured" popycock then maybe you have a point.  I don't have the personal  experience to comment on #4, but it's not what the english visitors i've meet have told me.
And spot on with your last sentence, next year i'll be looking for a move out of Auckland, at least until the housing crash of 2017(?) brings the house prices back to something close to sanity.  Just trying to decide between the Naki or Napier/Hastings way

#4, Auckland is much wetter and windy than London.  The outside temperature in winter is higher, but the higher humity makes you feel the cold more and most houses are colder on the inside than in London, because there ALL the houses have been upgraded with insulation and central heating and most have double glazing.  Auckland rental housing stock on the whole is atrocious 

Sheesh. Just put interest rates up another percent or two immediately. Stop the half measures. Act decisively to actually solve the problem and stop stoking the bubble.
Will this cause the bubble to pop? Yes. Will it cause pain and anguish? Yes. Will it cause less pain and angusih than letting the bubble grow even more before it pops?
Bill English just needs to put taxes down and run a nice fat deficit at the same time so we can sort the mess out with the least pain and anguish. Corporate tax at 12% or so would also bring in high tech firms from Aussie and we will have a sound economy not based solely on milk powder exports to China.
Usually the best way to solve a problem is to actually confront it, not pretend to yourself that it's all under control really. Bill English and the Graeme Wheeler are still denying that house  prices are out of control.

Alan Bollard and Michael Cullen between them managed to increase the level of household debt by roughly $100 billion and created the current house price bubble in the process.
There is no easy way out, the easy way out doors are closed.

We all reconise the issues,  no matter where one is in NZ.
Yet little is said about where is this taking Auckland an NZ, and at what piont.
We know things cycle in around 7 to 9 yrs.....and it was 2006/7 when the Domm And Gloomers where highly critized.. and BH alng with many other where right... and the sub prime bubble burst internationally...but NZ was left relativily uneffected.
Before the Doom and Gloom where 'warnings' from the RB, comentators for around 12 to 18 months.
We dont have to go back to the Romans..  less than a decade will do...or maybe the 90s.. and lets not forget the inflated boom of the 80s crash... Then mid 70s
hmm funny that...5 finacial 'incidents' over around 1/2 century... thats a cycle every 7 to 9 yrs
And if u wish to go back further, say late 1870s, allow a little adjustment for the odd world war....
The fundimentals are just brewing to the surface, the historic event cycle is coming up, the commentors, RB etc shovelling papers.....
Maybe something to think about.
So its a matter of when, not if, and who takes the brunt this time....

Has any OECD country managed to control the house prices in their major cities.?
If so how did they do it?Can it be replicated in NZ?

Germany. Right to build in the constitution. Strong local and state government. Puts public transportin advance of development. Construction workers catch the bus, train... to work. 50 hectares of greenfield development per 100000 people compared to 15 in the UK.

Texas and the South in general. Instituted pro supply measures like Municipal Utility Districts following the savings and loans crisis a few decades ago. Transport has historically been provided by the Federal Highway Act.

Florida repelled all its metropolitan urban limits post GFC. So it will be interesting to see if it joins it's affordable southern neighbour's or the expensive east and west coast cities.

Japanese housing affordability has deflated from its famous 80 bubble. Not sure exactly why. Transport is mass transit orientated.

But if public transport is put in before development, how could it have met the required patronage and destination employment targets necessary to begin construction?

Some transport history:

  • Transport companies used to drive land development.  US railroads and London tube companies were the classic cases.  Developments follow the advancing line of stations/acreage.  Company clips the ticket on said development, encouraging more of the same.
  • Try 'What we talk about when we talk about the Tube' - John Lanchester; as a primer here.
  • That development potential is one massive reason why retrofitting PT into existing built-up areas is an economic no-go:  there's too little added development value for the whole shebang to make any investment sense whatsoever.
  • Better to start afresh:  as Kumbel noted on this here august blog, if Hamilton had an economic clue it would be pitching to be the new work zone instead of South Auckland.  The motorways and existing rail network alone, all point there.  However, having economic nous is as rare as huia guano amongst NZ public authorities, so no-one should hold their breath waiting....

Auckland - the gift that keeps on giving....

retrofitting PT into existing built-up areas is an economic no-go:  there's too little added development value for the whole shebang to make any investment sense whatsoever

Wonder why?

Local government exists for the benefit of the people it serves

Retrofitting would be of enormous benefit to the ants-nest that Auckland is

But, as you say, of no benefit whatsoever to the public purse

retro-fitting PT isn't a no-go.  The northern busway has been a massive success.  45% of city commuters take the bus in the morning.  That's effectively doubled the capacity of the bridge.  How much did buslanes on dominion road cost?
Sure the rail tunnel is expensive, but it's only a fraction more than the waterview connection.  Both are needed to allow more sprawl.
I don't know why the government isn't doing another Hobsonville at Huapai around a new rail station using the refurbished diesel trains to run fast, frequent, and reliable 45 minute ride into the CBD. Another 5-10,000 homes a 45 minute stress-free commute to the CBD sure would make a dent in that supply shortage.

Dtcarter I agree. If the land around Huapai was purchased at rural rates by a transit development agency they would capture a large amount of capital uplift that would contribute to paying for the rail infrastructure upgrade. Solving the affordable housing problem and infrastructure problem in one go.
Why isn't our government doing this?

Want some real action ... Remove the interest deductability on residential investment. There is no way a FHO can compete currently

Or make interest deductable for owner-occupiers.  Not uncommon in other jurisdictions.

high house prices lead to low investment and are in-fact deflationary to other area's in the ecconomy. As an Auckland example, Ponsonby road will never get the often discused light rail or tram service to the city because the lack of population dencity wont afford it. The lack of population is because home owners don't have to sell or develop their property to fund their retirement, they can rent out and / or finance the gains.

We also need to look at curbing immigration, I mean how on earth did that woman who drove drunk and pregnant down the wrong way on the motorway, resulting in the death of another, get into this country in the first place, I wonder what special skills she brought with her.
And we need to put the lid on foreign leeches in the housing market, I wonder how much welfare they are receiving

Immigration is the root cause of all of Auckland property prices - even a blind man can see that.  But for some reason no one in the MSM seems to want to make an issue of it.  Instead we focus on how to cater for this increase.
All this new infrastructure, increased demand on our land and rivers, the need to commute further and further each weekend for a beech, some space, some quality recreation areas is all caused by more people.  We are the problem folks and adding more of us to the equation will never solve any of the problems we focus on - as Auckland is just starting to realise.