By David Hargreaves
The conflict around attempts to bring more ‘densification’ into Auckland's housing mix highlights once again how difficult it will be find a long-term fix for the city's rising prices.
There will be frustration felt within the Government and the Reserve Bank that, just as some signs are there that the Auckland market has lost a bit of steam (for now), then so reasons to believe that future upward pressure on prices will resume are emerging.
I'm actually increasingly of the view that unless it becomes possible to structurally overhaul Auckland (which would entail the 'stripping out' of 'leafy' central-city suburbs such as Parnell and Herne Bay and entirely replacing them with densified inner city accommodation - and let's face it that ain't going to happen) then the geographically constrained nature of the city will ensure (notwithstanding the odd external shock) onwards and upwards for house prices in the foreseeable future.
Auckland, and the people attempting to buy houses in it, are paying the price for the abysmal non-planned way the city developed historically. A rambling village still searching for a proper centre is attempting to become an international city.
Against this backdrop, a variety of measures are now being employed. The jury is out on the Reserve Bank's latest weaponry, the 70% of LVR lending limit for Auckland housing investors. This measure, deployed from November, followed on from the October introduction of new taxation measures.
The long-term impact of these taxation measures on foreign buyers is difficult to read. But beyond the febrile anecdotal tales, it has been reasonably difficult (because of the lack of data collection) to tell just how much the Auckland market has been pumped up by money pumping directly from offshore anyway. And the other point is, as long as we keep a hands-off approach (and it looks like we are stuck with it now) to barring offshore ownership, then as one group of buyers - okay let's say Chinese investors - perhaps step back then so they could be replaced by buyers from other places.
Anyway, yes, at the moment, there have been signs of slackening in the Auckland market.
The Real Estate Institute's stratified measure, which regrettably REINZ no longer releases publicly (it sells the information), shows Auckland prices have apparently fallen 8.3% since the peak in September.
Last year I picked that Auckland house prices may register an annual fall between 5% and 10% in the first 12 months of the new RBNZ rules for investors.
Many were happy to call me wrong at the time, and I think, already, I'll fly the white flag and say I will be.
First, it is early days for the new RBNZ measures. Second, nobody should take too much heed of what the market's doing in December/January.
The Reserve Bank's said it wants to see what's happened in February/March before forming a view and I agree.
When the RBNZ initially introduced a 10% 'speed limit' for the banks in terms of new lending in excess of 80% of LVR in October 2013 there was a sharp reaction from the market. But there's a couple of things worth remembering about that. Already by the time those LVR limits had been introduced in late 2013 there was an expectation that the RBNZ was going to start hiking interest rates. This it duly did with the ill-starred four hikes in 2014. My view is that the RBNZ now, when talking about the success of those initial LVR measures, rather understates - to say the least - the impact those rate hikes had. The other thing is that the LVR measures were a very 'new' thing for the banks to handle - and they were super, super cautious in their approach and so slammed the brake on high LVR lending rather harder than they arguably needed to.
I think its reasonable to think that every subsequent measure of this type that the RBNZ introduces might have a weaker and less lasting impact as both the banks and the punters find ways of better adapting their behaviour, effectively getting around the rules.
The RBNZ is not at this stage publicly breaking out Auckland borrowing stats, but the nationwide figures for November and December suggested that housing investors were finding ways of meeting that higher threshold of needing 30% equity to borrow rather more easily than I suspect the RBNZ might have hoped.
I think what we might be seeing at the moment is that quite a lot of people got in with house transactions before the November introduction of the new measures and the slackening we've since is a combination of indigestion from that rush and summer. Come March/April I think there might already be signs that the impact of these investor rules is lessening.
Of course with the way the global economies have started out this year, the possibility that some big external shock hits our housing market this year is very real indeed.
But if we take the fingers-crossed view that such an outcome doesn't occur, I think the Auckland housing market's likely to start pushing up again quite soon.
According to Statistics New Zealand this country had a net population gain through migration of 65,000 people in 2015, and 30,000 of them settled in Auckland.
Stats NZ figures also show there were 9251 building consents for new dwellings in Auckland in 2015. If you take the Auckland average of three people to a house this means they didn't quite start building enough houses just to accommodate new migrants - let alone any natural population growth or people moving to Auckland for work from other parts of the country.
Now, efforts are being made on the building front. Just four years ago only 3772 consents for new dwellings were issue. In the past three years the numbers of consents in Auckland have, on a year-by-year basis, increased by 1700,1300, and 1600. You take a rough average of that rate of increase and it suggests another increase in the region of 1550 or so will be well possible this year, taking the number of new dwellings for this year to perhaps 10,800, which would break the 10,000 mark for the first time since 2004 when more than 12,000 consents were issued.
Despite the efforts though, it still only looks like playing barely-catchup. These are not figures that suggest the appetite for Auckland houses is going to be sated.
The only question to my mind is how long the Reserve Bank will wait before it needs to take further action. I think matters are likely to be clear by mid-year, so some sort of further response will likely occur in the second half.
At this stage the RBNZ would appear most inclined to dip again into the goodie bag called 'macro-prudential tools'.
What I fear though is that we are just going to see a proliferation of these things (macro-prudential tools). And the more of them we get, just possibly the less effective they will be and there's also the concern that each new one might create its own specific set of problems.
The Government needs to get more involved in dampening the demand side - and reining in migration would be a start - but it's not shown much inclination so far.
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