By David Hargreaves
Well, that didn't take long at all, did it?
Take a decent bit of late summer weather, add a vigorous round of 'open homes' ...and there it goes ...the Reserve Bank's latest initiative to dampen the Auckland house market fire - up in smoke.
That the Auckland market was bouncing back from a quick pause after the impact of new tax rules and of recent new RBNZ restrictions was not an enormous surprise. Anecdotal evidence, plus already released figures from Barfoot & Thompson and from QV, suggested this was happening. But the extent of the bounce, as demonstrated by the Real Estate Institute figures for March, was staggering.
RBNZ Governor Graeme Wheeler - who had stressed that the March REINZ figures were the ones the central bank would look most closely at - must be sporting singed eyebrows today after getting too close to the scorching data.
Here's the Auckland story in three figures: The median price in the region dropped by $50,000 in January, then lifted by $30,000 in February, and then absolutely rocketed by $70,000 in March.
The $70,000 gain in price is a record for a month-on-month increase, easily beating the previous high of a $45,000 climb in the median that came last March. So, Aucklanders have seen the value of their bricks and mortar gain $100,000 in two months, with the median now sitting at a record $820,000. What's more fun people, going out to work? Or staying at home and watching the value of your property climbing $1600 or $1700 a day?
The people finding all this distinctly un-fun will be the folk at the RBNZ. What to do now?
If we go right back to the time of development of the RBNZ's 'macro-prudential toolkit' in 2013 and subsequent introduction of 'speed limits' on the amount of high (above 80%) loan to value lending the banks could undertake, it should be recalled that the central bank was not keen on the idea of regional targeting.
The RBNZ did an about-turn on this last year with the announcement that Auckland housing investors would need minimum deposits of 30% and that the 10% speed limit for banks on high LVR lending would be retained in Auckland - but in the rest of the country it would be relaxed to 15%.
We have lift-off
Subsequent to all this, housing markets elsewhere in the country have caught fire as well. I suppose we can only speculate whether the RBNZ's attempts at targeting have actually helped to spread the fire elsewhere, or whether that's just something that would have happened. It's fair to say it HADN'T happened at the time the RBNZ made the initial announcement on Auckland targeting last May. But equally, it was surprising it hadn't occurred to that point.
In deciding its next step a key thing to consider for the RBNZ will be whether it keeps going with the regional targeting or drops it as a bad bet.
At the press conference for the March 10 Official Cash Rate decision Governor Wheeler appeared to indicate that the RBNZ was prepared to allow the rest of the country a period of 'catch-up'.
He stressed 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.
Does this, therefore suggest the RBNZ might consider 'doubling up' on its efforts to target Auckland and leave the rest of the country to sort itself out for now?
It would be risky. We appear to be moving quickly from a situation in which one regional housing market (albeit the country's titan-sized one) is on fire, to having the whole country ablaze.
Enough is enough?
If the RBNZ decides enough is enough for the non-Auckland parts of the country it could very quickly reimpose the high-LVR 'speed limit' for the banks at 10% and perhaps introduce the 30% deposit rule for investors outside of Auckland too.
That would redress the balance somewhat - but sure as heck wouldn't fix the problem in Auckland.
I'm increasingly of the view that the only way for the RBNZ to keep its financial stability concerns in check is by acting directly against the banks, who are the fixers and facilitators of all this. Logically the best way of reining the banks in is by forcing them to hold more capital against their mortgage portfolios. This essentially would do three things: It would make the banks more financially secure in the event of a housing downturn, it would give the banks less scope to lend, and it would make the banks less profitable. And, yes, they could be expected to scream blue murder about particularly the last of those three.
But I don't really see that there are too many other viable options.
Raising interest rates is a proven house market dampener, but that isn't going to happen. Indeed the RBNZ may be under pressure to still further reduce the Official Cash Rate from its current record low 2.25% as soon as at the next OCR decision on April 28. On that one, much will depend on the inflation figures out next Monday (18th). If those figures point to ultra-benign inflation too far adrift of the RBNZ's 1%-3% target band then the central bank will be under pressure to do another cut. The high New Zealand dollar is another factor putting downward pressure on rates.
Bucket of petrol
It goes without saying that a further interest rate cut would be another bucket of petrol on the house fire.
Levels of household indebtedness are rising. The ratio of household financial liabilities to disposable income has blown out to a record high 162%. This apparently stressed financial state of affairs is currently largely buried by the low interest rates - which are making debt servicing costs, even at these higher levels, quite a bit cheaper than they have been at times. But when interest rates do finally start to 'normalise' - whatever that is now - then, hmmm.
I'm not sure that right now even higher capital requirements for the banks are going to necessarily take that much heat out of the housing market. But what they would do is provide a much bigger safety net for the banks and our economy if a big market correction came.
Sometimes the banks need saving from themselves. I think we've reached that point.