By David Hargreaves
Monthly house price data are always watched closely. This month's are going to be watched REALLY closely.
The March figures that will start to emerge next week should give the clearest signal yet as to whether the Reserve Bank's latest efforts to rein in the runaway Auckland housing market are having the desired (by the central bank) effect.
As of November, under new RBNZ rules, Auckland housing investors needed 30% deposits to get a mortgage. And in a more indirect shot at the Auckland market, the RBNZ relaxed the amounts banks could lend to house buyers with less than 20% deposits outside of Auckland. Banks are now, outside of Auckland, allowed to advance up to 15% of their new lending in high loan to value mortgages. Previously this so-called 'speed limit' was 10% right around the country. The 10% limit was kept in place in Auckland. This of course has offered some inducement for house buyers to look outside of Auckland.
The timing of the new rules coincided with the onset of the summer 'silly' season. And the RBNZ made clear from an early stage it wanted to see the February and March figures that would be more indicative of what's truly happening in the market before coming to conclusions on the success or otherwise of its new policies.
The figures the RBNZ is likely to watch most closely are those from the Real Estate Institute (probably likely to be released in the week beginning April 11). The REINZ figures are generally seen as providing the most timely house price information. The February REINZ figures, which were released on March 11, painted a picture of a somewhat softer Auckland market, both in sales and prices, but, conversely, showed much stronger activity across regional New Zealand.
I have said previously I thought it would not be long before the RBNZ was forced to reinstate the 10% speed limit in the rest of the country this year in response to the spreading out of the 'heat' from Auckland. RBNZ Governor Graeme Wheeler, however, appeared rather more relaxed on the subject than I might have expected when asked about it at the press conference for the March Monetary Policy Statement on March 10. Wheeler said the RBNZ was "not considering anything on macro-prudential policy at this point" in relation to the rest of the country outside of Auckland. As a matter of clarification, I should stress that the LVR speed limits are part of the RBNZ's 'macro-prudential toolkit'.
Wheeler went on to say that Auckland had a "very high" house price to income ratio of 8.5-times, while in the rest of the country on average it was just 5.1, making the ratio "70% higher" in Auckland.
“There is more scope in essence for house prices to adjust potentially in the rest of the country,” he said.
Taken as read those comments would suggest the RBNZ is prepared to allow the rest of the country some 'catch-up' time with Auckland. It is an intriguing strategy if that's the case. But equally it should be pointed out that this is a Governor developing something of a reputation for taking the marketplace by surprise. The decision by the RBNZ to cut the Official Cash Rate to a new record low of 2.25% on March 10 came only about five weeks after Wheeler had given a speech that portrayed him as a very reluctant cutter of rates.
It's an interesting mater for debate whether the country is better off having the whole nation's housing market ablaze as it was in the mid-2000s - or just Auckland's as has been the case since 2013.
In terms of the Auckland market, the anecdotal evidence is suggesting some re-emergence of foreign buyers who were deterred by new IRD rules effective from October 1 last year that required them to have an IRD number and a New Zealand bank account.
Likewise, the RBNZ's monthly figures showing the various categories of property buyers taking up mortgages, showed that nationwide (Auckland figures aren't broken out - it would be really useful if they were), the proportion of lending to investors is surging again after slumping toward the end of last year.
In October the money loaned to investors made up just 29.3% of the total advanced, plummeting from 34.4% in September. It was the first time the proportion had dropped below 30% in 2015.
However, by February 2016 that proportion had bounced back strongly to 34.4% again.
This suggests to me, although we should not get ahead of ourselves, that even if the March figures affirm continuation for now of a slowdown in Auckland, a fairly meaningful bounceback in market activity and prices may be just around the corner.
A further complication is the likelihood that the RBNZ will be forced (by the absence of significant inflation) to drop the OCR again - possibly as soon as next month. Of course even lower interest rates would on the one hand further fire the enthusiasm for housing as an investment and also make such investment more affordable.
And it's the appetite for borrowing that will be really starting to concern the RBNZ. Recently released figures show that the ratio of household financial liabilities to household disposable income has now surged to a new all-time high of 162%, and with debt servicing requirements so relatively modest at the moment due to the low interest rates, the potential appears there for this ratio to blow out much further yet.
New sector credit lending figures for February set to be released by the RBNZ on Thursday will likely show a further acceleration in the rate of mortgage lending growth. As of January the amount outstanding on New Zealand housing stock was nearly $213 billion, which was some 7.8% more than in January a year ago. That 7.8% growth was the fastest since July 2008 at the tail of the last housing boom.
The fact is even if the March housing data do provide some relief for the RBNZ, our central bank is likely to face many more headaches from this quarter over the rest of the year. And it's the public that will most probably ultimately need to take the RBNZ's medicine - courtesy of a fresh visit by our central bank to its macro-prudential toolkit.