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RBNZ's Wheeler says annual Auckland house price inflation of 8.5% "not a bubble", but it would have been a bubble over 20% without LVRs

Property
RBNZ's Wheeler says annual Auckland house price inflation of 8.5% "not a bubble", but it would have been a bubble over 20% without LVRs
RBNZ Governor Graeme Wheeler in a Parliamentary committee hearing November 12/Lynn Grieveson/Hive News

By Bernard Hickey

Reserve Bank Governor Graeme Wheeler has told Parliamentarians that Auckland's housing market is not in "bubble territory", but there had been a serious risk of it becoming a bubble before the Reserve Bank introduced its high LVR speed limit in October last year.

Wheeler was asked by New Zealand First Leader Winston Peters in a Finance and Expenditure Committee select committee if Auckland's housing market had become a "speculative bubble."

Wheeler said Auckland's housing market suffered supply shortages and the combination of interest rates at 50 year lows, aggressive bank lending and rising net migration had created momentum in the Auckland housing market through 2012 and 2013. The high LVR speed limit had helped to reduce Auckland's annual house price inflation from around 17% at the time to around 8.5% now, he said.

"I don't think it is a bubble at present at 8.5%. I think we ran the real risk of a serious bubble had we not introduced these measures back in October last year. At that point house price inflation was running at 17% in Auckland. I think it would have gotten well above 20%," Wheeler said.

Asked again if Auckland house price inflation was a bubble, he said: "Not at present in terms of the rate of increase - but if you said to me: 'are house prices over-valued in Auckland?' I would say 'absolutely'."
 
"I guess there are two ways to think about the bubble. Most people think about a bubble in terms of the rate in increase that's happening at any particular time and what degree of momentum is there. So that's why I was referring to house price inflation now at 8.5%. Without these measures it was 17 and I think it would have gone above 20% - and I think then in terms of rate of increase you are in bubble territory."

Deputy Governor Grant Spencer later pointed out that leverage ratios of household debt to income levels had been broadly flat to falling in recent years.

"That's another reason why we wouldn't call it a bubble," he said.

Did LVRs hit first homers and help investors?

Elsewhere, Wheeler and Spencer pushed back against Labour and New Zealand First arguments that the Reserve Bank's high LVR speed limit had shut first home buyers out of the market and hit regional housing markets much harder than those in Auckland and Christchurch.

Wheeler pointed to Core Logic data showing the proportion of sales to first home buyers had averaged 19% over the last decade, but had only fallen to 17% since the introduction of the high LVR speed limit.

He said the bank had been concerned about house price inflation in more areas than just Auckland and Christchurch when it imposed the high LVR speed limit. He pointed to house price inflation in Taranaki, Nelson, Central Otago and Hawkes Bay running at 6-8% before the high LVR speed limit.

"The impact has been fairly evenly spread across the country," Wheeler said, adding that house sales volumes had fallen around 13% nationwide, but had actually fallen more than that in Auckland.

He said the bank had estimated the high LVR speed limit would reduce annual house price inflation nationwide by around 2.5 percentage points and the result had been a slightly greater fall.

Spencer said the high LVR speed limit had helped reduce house price inflation, which was a positive for first home buyers and reduced the potential capital gains for investors.

Housing supply

Wheeler emphasised that Auckland's house price problems were caused in part by supply shortages, which had been variously estimated from 5,000 dwelling units to 30,000 units.

"What's absolutely critical is that we get housing supply increased. It's encouraging to see what's happening in Auckland with the increase in housing permits, but it's still a long way short of where it needs to be," he said.

"We really need to see a stronger supply side response if we're going to see a better balance in the market."

Asked what the reasons were for the lack of supply, Wheeler referred to the costs and delays from development contributions and building consents.

Asked about foreign buying in Auckland, Wheeler referred to the now defunct BNZ-REINZ survey, which he said showed foreign residents responsible for 6.5% of property sales. He said it was "unfortunate" the survey had been discontinued.

Political reaction

Peters said the Reserve Bank's decision to keep the LVR limit in place until it saw migration falling reinforced his call for restraints on migration.

“New Zealand First has consistently warned about the negative effect of record migration topping 40,000 a year, yet the government fails to move. A simpleton could recognise that immigrants need somewhere to live and will add to the demand for houses," Peters said.

“The Reserve Bank is leaving the loan to value ratios in place to try and hold down housing prices, disappointing many young Kiwis who want their first home but will struggle to find the required deposit under this scheme. The Governor warned of a resurgence in the housing market prices, pointing to the migration figures. New Zealanders can rightly blame the government when this occurs," he said.

Labour Housing Spokesman Phil Twyford pointed to Wheelers' comments about supply shortages.

"The thousands of first home buyers who are shut out of the housing market may have hoped for a lifeline from the Governor by easing LVR restrictions today. They will be bitterly disappointed. But they should point the finger of blame at the Government which has failed spectacularly to increase housing supply," he said.

(Updated with more details from committee appearance, political reaction)

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39 Comments

It is interesting that he quotes the rate of increase rather than the actual level of prices as the definition of a bubble.

Time will tell.

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How many people enter labour market each year globally?

 

How many jobs are created each year globally?

 

Are really wage going down or up globally?

 

The increase in house price may just be a reflection of decrease in real wages.

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yet the house prices only rising in Auckland and Christchurch...wages are throughout NZ.

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FYI, updated with more detail from hearing, particularly around housing supply, first home buyers, investors and foreign buyers.

cheers

Bernard

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So price inflation of 20% in 12 months represents a bubble? Interesting.

So we missed the bubble by 3%.

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Updated with reaction from Peters and Twyford.

cheers

Bernard

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In respect of central bankers, watch what they do, don't listen to what they say.

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Reminds me of Bernanke's statement just before the sub-prime housing bust in 2008!  

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Reminds me of Comical Ali standing in front of American tanks saying no one was invading Baghdad.

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Yay !

So now you know , THIS IS NOT A BUBBLE , so the guru has delcared .

Its time to party and spend like drunken sailorsin a dirty port after 6 months at sea  !

Your increased wealth is real , you have earned it , so treat yourself , dont hold back on the new boat , double cab Ranger or Hilux or Navara , cruise to FIJI  or why not Hawai of even Tuscany

Do it on credit , and hock the house , after all you only live once !

Go forth and spend your new found wealth , Aucklanders

But be aware you could end up with a terrible  hangover at some future time

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Inflation is running well within the 2-3% band, yet housing prices are going ballistic in Auckland? How does that work?

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JC...   I've learnt that  it is growwth in the credit aggregates  / money supply   which is far more meaningful than the CPI.... in regards to Real Estate growth.

 

ie..   money supply growth is better reflected in Real Estate values than it is the CPI..

ie..  growth in money supply ....flows into assets...

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It's a very pragmatic appraoch and I take your point. However, the media and public are fixated on inflation, so why don't they start explaining based on asset prices relative to credit growth/money supply. Is there some issue with this?

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JC... thats a question I  ask myself....   i dont think the media or most of the public are... "original thinkers"...   ie... they dont come to their own understanding on things.

Not sure how or why everyone got "fixated" on the CPI as being Inflation....????? Why on earth would anyone think there should be a relationship between the CPI and House prices..??

For me..... Monetary inflation is the effects of increasing money supply ( credit ) in  an economy....  and this can manifest in different ways,... especially as economies evolve..

There are no mechanical relationships....   In a Global economy ...in regards to consumer prices , increases in money supply might well manifest in the form of chronic current acct deficits, as the quantity of imported goods consumed  increases.... rather than increases in prices...... yet we are fixated on the CPI...   ( this is why tradable inflation has been much lower than non tradables )

the effects of monetary inflation is there.....   but not where anyone is looking.

Same goes with asset prices.... 

In the mid 1980s' M3 money was $85 billion.....   Today it is $245 billion......   this is a massive increase in the quantity of money....    How do the effects of this manifest in an economy..??    ( this is a compound groth of 6%/yr.....   just so happens that NZ house prices have had a compound growth of about 6% over the same time period... 30 yrs. )

Just my view on things... of course....

I love Ray dalios understanding of an economy.....    he is a Man who watches credit growth etc... he understands how credit growth impacts mkts.

http://www.economicprinciples.org/

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I haven't looked lately Roelof, but when I did investigate this matter 75% of the money supply was equal to the level of housing debt, so you are on the money so to speak.

 

Interesting thing is that offshore cash buyers will contract the money supply as local mortgages are retired.

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The vast majority of the "money" supply comes from bank credit. The vast majority of bank credit is for residential, commercial and rural mortgages. Stands to reason.

Also what component of costs and prices is made up of mortgage/rent prices? Along with wages its generally the biggest expense. The flow on effects right through the economy are massive

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Well, the government, banks and central bankers are constantly harping on about people showing restraint, so why don't they address these issues so people can make more informed decisions? 
I think that part of the reason is that they might think that people might behave more irrationally if they think any instability or debt crisis can be papered over with more "supply" (of money that is).

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Economic orthodoxy is a big part of the problem. It assumes we are all rational, self interested and utility maximising and the economy always tends to equilibrium. GFC's can't happen according to neo-classical theory. Whatever price is paid is the "right" market price. It doesn't allow that what may be a "rational" self interested action by individuals, when aggregated may not be the best outcome for the country. Add in political expediency and short term profit maximising by the banks and recurrent crises are guaranteed. The point at which rational debate might have been effective is long past. The lizard brain rules at the moment.

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Yes, I realize this but a rational, self-interested individual makes decisions based on perfect information. Therefore, central bankers and politicians should provide the information to enable those individuals to maximize utility through individual decisions. They are emplyed by us after all. 

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Auckland is a bubble by virtually any definition.

 

- Prices to income, prices to rent, debt to GDP, housing stock value to GDP, yield, relative to historic prices, relative to inflation, proportion of interest only loans, proportion of income spent on housing, etc....

 

That fact that supply is limited and immigration is high doesn't mean it's not a bubble and just because there is a bubble doesn't necessitate a crash in prices in future...

 

 

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They better be careful what they wish for with supply. Oversupply made the Irish, Spanish and US bubbles pop with a bigger bang. They are even talking about bulldozing new homes in Ireland and Spain even though many can still not afford them, just to support prices in the rest of the market. 

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Another defense is that property prices are higher in cities such as London and Zurich.

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Rising house prices in Auckland are a reflection of rising credit from banks wanting to increase market share and media driven sentiment/euphoria. Bank competition can result to a race to the bottom - in lending standards. How long before we have a 50 year mortgage here? High debt no longer has a stigma or it seems any concern for most people. Worry about it later. That guy putting a boat and $30,000 jet ski on his mortgage is extreme but typifies this philosophy.

Immigration and supply pressures exacerbate house price inflation but if kiwis can't get copious easy credit, they can't bid prices higher. Falling credit or another credit crunch will see prices fall like 2008/2009. Job losses and less immigration will exacerbate the fall.

The elephant in the room is that affordability and a balanced economy can't return without all forms of property falling including rural and commercial. But that fall will also destabilise the economy because property and the mortgage debt is too big to fail. It's a no win situation because its been allowed to get so out of proportion. Hence the RB and govt making tut tut noises but never really doing anything serious.

Cullen, English and Bollard have an awful lot to answer for

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I like your perspective. It appears to me that even the slightest fall in house prices could be devastating for the NZ economy. Even a so-called "slow melt" or period of minimal growth for an extended period would be potentially harmful as people's expectations for the pot of gold are now so high. It possibly may have been better if house prices had collapsed to some degree during the GFC and flatlined to now. 

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Yeah the post GFC was the perfect time to implement reforms to the financial system. Instead the govt and banks have doubled down. I fear NZ and Australia won't go as unscathed in the next one. It will be 1987 on steroids as all the hot money disappears

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Doubled down. What an apt description. 

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Exactly. I think a lot of investors take comfort in the 'too big to fail' element but there comes a point where there is just too much debt relative to too little income. China springs to mind.

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Yes I think many people reason that everyone they know is in the same boat so what the hell. Go for it. Mania, herd mentality, whatever. They know politically that any pain they may face in the future will be hard to ignore

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I'm not sure they do think like that. I think they buy the whole narrative. The media keeps pumping them with rankings putting Auckland  NZ as up there among the world's most desirable places to live. Their emotions are being fully tickled. 

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It is a very nice city but not at current prices or immigration levels. Will be ruined at 2 million. In Napier at moment looking for a job and property and my eyes have been opened. Fantastic place

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Westshore, Ahuriri, the Hill ;)

Totally agree with your first comment.

Ive always wondered if a big crash could bring the banks down and reset/wipe debt and credit.

The people with the most debt may benefit the most..

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My friend from Spain put it well.  He said no matter where you go in the world everyone is told that where they are from is the greatest place in the world and everyone wants to live there.   It's such an easy sell to peoples emotions no matter how true or false it may be.

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Thats not true, I'm from Southland.

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Indeed.  It's laughable the "world city" pedestal they constantly put Auckland on.

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....yep Auckland is a great place, you can tell every long weekend as the motorways choke with escapees trying to escape the insanity for 2 or 3 days. 

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Well said. That guy never considered the possibility that his house might someday decrease in value. It is outlying suburbs like Flat Bush where prices will fall first, and negative equity is a very real possibility.

We are currently on a five week trial of the NZ Herald and its obsession with Auckland house prices and rates typifies the irrational exuberance mentality.

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delete

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And in other Good News:

  • Synthetic cannabis has zero long-term effects
  • The Pope is Anglican
  • Ursine detritus is never found in the Woods
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Gee this sounds familiiar,

"historian Kenneth Jackson writes about how our tax structures around home loans financed the growth of suburbia, inflated housing costs, exacerbated segregation, and contributed to the decline of manufacturing by encouraging, as Jackson put it, “Americans to over-invest in shelter and under-invest in productive enterprise.”

http://grist.org/business-technology/the-sharing-economy-cozies-up-to-s…

So where next for NZ debt I wonder? 

regards

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