The Auckland house market is "primed to soften" and the twin attack on it from the Government and the Reserve Bank may prove to be the "turning point", ANZ economists say.
In the ANZ's latest Property Focus, chief economist Cameron Bagrie and senior economist Mark Smith estimate that, based on current sales patterns, about 5000 house sales a year in Auckland could be affected by the RBNZ's 70% loan-to-value restrictions.
"...The Auckland market is primed to soften.
"Prices have risen by a third in two years and by two-thirds in five years. That’s a pretty stretched base to keep accelerating off, especially with major sources of buyer 'demand' now being targeted," they say.
"At the very least, sentiment will be negatively affected and sentiment is a crucial element of any asset market.
"Ultimately, we suspect this will mark a turning point for the Auckland housing market."
Bagrie and Smith say it is "telling" that there have been such a breadth of policy responses to the Auckland housing market in such a short space of time.
"We can point to the obvious financial stability justification (RBNZ) or politics (housing affordability, foreign buyers, the debate on whether we need a capital gains tax etc) but let’s not forget the currency too, with Auckland property one factor keeping the OCR higher than would otherwise be the case.
"Given commodity price falls, New Zealand needs a lower currency and only interest rate cuts will do that. You can’t simply dangle the possibility of cuts if you really want the currency down. Auckland property was a big hurdle standing between the Reserve Bank and a lower OCR."
But the two economists say that financial stability and housing affordability concerns are not the only issues.
"Given its size and importance, any action aimed at the Auckland property market has real implications for the broader economy and monetary policy.
"New Zealand is often perceived as a three-shot wonder growth-wise: Auckland housing, Christchurch’s rebuild, and dairying.
"Strictly speaking we think the story is broader than those alone, but each is still significant. Right now, dairying is facing a cash squeeze that will last until 2017. Christchurch’s rebuild is ongoing but the boost is waning, and with the housing market cooling and rents starting to recede in the region, the inflationary risk here is turning into a deflationary one. And now we have the Auckland property market under a multi-pronged policymaker attack.
"The airplane is progressively losing engines."
Bagrie and Smith say they suspect there is enough economic muscle across the wider economy to cope with "these additional headwinds".
"...But it adds to the shifting risk profile. Importantly, the RBNZ must be cognisant of economic risks around their central projection when it comes to setting policy."
In terms of the nitty gritty of the new measures, the two economists say there is a lot of uncertainty surrounding the precise application, "and there are a number of moving parts".
"REINZ figures suggest there were around 30,000 residential sales in the Auckland region over the past 12 months. Assuming a similar number of sales over the next 12 months and that the sales share to investors remains at 40%, this equates to around 12,000 sales per annum. Assuming Auckland sales have similar LVR characteristics as the nationwide average, slightly more than 5000 Auckland sales per year could potentially be impacted by this 70% LVR restriction, which is around 17% of total Auckland sales volumes. Whilst tight inventory levels, booming net immigration and low mortgage interest rates are likely to ensure still strong demand for Auckland property, such a sizeable potential impact is nothing to be sneezed at."
The economists believe that as the new initiatives don’t apply until October 1 this may "distort behaviour in the meantime".
"Some sellers may rush to get out while the going is good. Some would-be investors may also try to skirt the borrowing restrictions by getting in now.
"But we expect to see behavioural shifts straight away. The RBNZ has already made it clear that it expects banks to work within the spirit of the changes immediately and we are sure it will be monitoring bank behaviour closely. On net, then, it seems likely the changes could tilt the balance in favour of additional supply over coming months, further reinforcing the impact on sentiment and house price expectations. We will be paying particularly close attention to the number of property listings over the coming months."
But Bagrie and Smith say that "more active investor demand management" won’t fix the real shortfall of houses relative to Auckland’s population.
"However, the subdued nature of rental increases in Auckland (CPI rents were up just 2.6% over the 12 months to March) tells us the supply shortage thesis is not the only game in town; demand has also been fuelled by unrealistic expectations of ongoing price increases. Rental yields in Auckland (sub 4%) remain well below current (and historically low) mortgage interest rates. Ironically, higher rents could help push annual CPI inflation closer to the midpoint of the inflation target."
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