By John Bolton*
An article in the NZ Herald recently quoted a senior lecturer at the University of Auckland saying the housing crisis would end in tears. A KPMG report was cited stating people were borrowing twelve times their income. That was a surprise to me because it’s simply not what we see in the real world! People are not borrowing more than they can afford. They can’t as bank criteria won’t let them.
So, I had our IT team run our actual client debt-to-income ratios. By and large we came in at about five times income, maybe six at the upper end.
That didn’t surprise me. People that can borrow, are borrowing what they can afford and in itself that won’t end in tears. Obviously if prices fell and these buyers ended up with negative equity that would be worth a cry.
I think to really understand Auckland, we need to move beyond averaging numbers out. It's not simple.
Previously I have written about the restricted land supply that impacts Auckland, with water making up 40% of the city’s urban area. It's also not a uniquely Auckland problem with ‘housing affordability’ an issue for many growth cities around the world. NZ is also dwarfed by global money flows and the hunt for yield, and that's yet another factor.
In this post I want to dive into economic growth.
So, let’s start by imagining New Zealand had a growth rate of 6.00% per year. At that rate, we’d be a high-growth economy in anyone’s book, right? We’d consider that an Asian growth rate.
So, here’s the thing - Auckland’s GDP rose 31% in the past five years (or 5.6% per year.) Auckland is growing strongly and it’s not just population growth.
The problem with ‘averaging’ out growth is that it hides what’s beneath. Imagine if we could split Auckland in half again. I’d imagine Manukau would grow at around 4% with Auckland City close to 8%.
I’d suggest what we are seeing is the knowledge economy kicking into third gear. It’s the next evolution of our economic system and it’s growing strongly. The ICT sector has grown at 9.00% per year since 2007 and now contributes $3.6 billion in GDP. It employs 30,000 people with an average wage of $99,744 - almost double the NZ average. Xero is the poster child having grown to 1,700 employees in ten years.
Those in the ICT sector have experienced somewhere in the order of a 50% increase in income at the same time as interest costs have halved, in total increasing their borrowing power by 300%. That’s what happens when high growth meets low interest rates. Yet the headline is that wage growth has been non-existent for the past decade and for most people that's true, but not everyone.
A big chunk of our economy and people have missed out on this income growth. Is technology (aka the knowledge economy) already driving income inequality? And where does that go with robotics, AI, big data and cloud computing? Will we see more and more income inequality, driven by the next economic epoch we're now in?
And yes, if we jump back to average house prices, they have accelerated well ahead of overall income growth. There’s no doubt that property speculation has played its part driving up house prices, as has cheap debt and capital, and there’s no doubt that for many Kiwis affordability has been smashed by the resultant craziness.
All I’m wanting to highlight is that on both sides of the argument we tend to over simplify what is going on. High house prices are not just a NZ problem. At its core, the bigger issue is how we cope with asymmetric growth in an increasingly global economy (both driven by technology) with large amounts of capital chasing yield. You can then overlay local constraints like urban planning – it all plays a part.
Whilst I think house prices are at risk of falling on the outer fringes of the city, especially development land, my view is the inner city will hold its own. There’s no spare land in Auckland city meaning the only thing that will get built are town houses and apartments. High growth rates and low interest rates are not going anywhere anytime soon and I can’t see the new money wanting to live out in the burbs.
Just one perspective on a complex problem.
*John Bolton is the managing director of Squirrel Group, which includes Squirrel Mortgages and Squirrel Money. This article first appeared here and is used with permission.