Treasury’s Chief Executive and Secretary is continuing to ring the alarm bells over the level of mortgage debt being racked up in New Zealand, but won’t go so far as to calling for house prices to fall.
Speaking to interest.co.nz in a Double Shot Interview, Gabriel Makhlouf said: “What I’m concerned about... is less the house price, but the amount of debt and leverage that people have taken out, which creates a risk to the stability of the financial system.
“The Reserve Bank’s (RBNZ) on the case on that, but that is a concern.”
RBNZ figures show the level of housing debt taken on by New Zealanders is growing at its fastest rate in more than eight years.
Housing debt swelled by almost $2 billion in August - a 9.2% increase from August last year. We now owe bank and non-bank lenders $225.98 billion in loans related to housing.
“High debt to income ratios leave households increasingly vulnerable,” Makhlouf said in a speech he delivered in June.
“A drop in income or a rise in interest rates might see some struggling to meet their mortgage payments. Households’ balance sheets could take a hit, as housing assets make up around half of the total value of household assets.
“That’s not just a concern for households alone.
“Housing represents around 60 percent of bank balance sheets. In the event of a downturn, the high levels of debt across the banking sector and significant level of indebtedness of individual households could have knock-on effects that might cause serious losses of confidence and financial disruption.
“In short, inflated Auckland house prices are a risk to New Zealand’s financial stability and the economy more generally.”
Yet Treasury, in its Monthly Indicators report released on Monday, dug into the detail a bit more and concluded: "At an aggregate level there are reasons to believe that debt levels remain manageable, albeit with debt levels being influenced by house price developments.
"At an individual level there are likely to be subgroups of households that are more exposed, with high debt levels increasing households’ vulnerability to shocks in income, employment and interest rates."
Income to house price ratio expected to fall without house prices falling
Asked by interest.co.nz whether he thought house prices needed to fall, Makhlouf was non-committal.
“I do think house prices are extremely high,” he said.
“It’s the ratio of income to house prices that’s the issue. Over time, as incomes rise, and as greater supply of housing comes in, that ratio will get smaller.”
The median house price in metropolitan Auckland is about 10 times greater than the median household income.
Asked what he would like to see this ratio fall to, Makhlouf said: “I don’t think there’s a magic number. Historically - I’m talking about 30 years - it used to be 1:3.”
He recognised Auckland Council released a report in September last year, which said it was realistic to aim for a reduction in the ratio to see house prices exceed incomes five-fold by 2030.
Auckland Council primarily responsible for solving Auckland’s housing woes
“It’s fundamentally a supply problem and we’ve got to do everything we can to make sure that supply’s happening,” Makhlouf said.
“So there’s been a huge focus on making sure the planning system works appropriately. And the Unitary Plan in Auckland is a very significant step forward… because it sets the direction which the market, you would expect, would respond to.”
Makhlouf sided with the Government in saying, “Fundamentally, I think the responsibility… starts with the local community [IE the Auckland Council]… Expecting the Government to fix the problem is a mistake.”
He said: “[The Council] needs to decide for itself that ‘Yes, we’re going to have more houses. Auckland’s going to grow. We’ve got to accommodate these people.’ There’s no point in saying, ‘We don’t want it to happen’ or ‘It’s going to be fixed by Wellington.’
“I’m delighted as to where the Council itself has taken the Unitary Plan.”
He recognised Auckland had been “slightly paralysed” by NIMBYs, but credited the Council for not letting them roadblock its work.
Central government doing its bit
Makhlouf believed the Government was doing everything it could to help the situation.
It has been working with Auckland Council on the Auckland Housing Accord. This aims to accelerate home building, with 39,000 new homes and sections expected to be consented during a three year period.
He said the Government was also looking to use spare land it has for housing developments. For example, it last month announced it would spend $750 million on the Northcote Development - a project that will see 1000 to 1200 homes build in the North Shore suburb, replacing 300 state houses. Four hundred of these properties would be Housing New Zealand homes.
“We’re supporting the Government and addressing what are some pretty fundamental issues that have blocked the supply of housing in Auckland,” Makhlouf said.
“The important thing is that there’s no silver bullet. Nothing is going to happen quickly here. This is a problem that’s taken quite a few years to accumulate and to think that we can suddenly create thousands upon thousands of houses in a blink of an eye, is just not going to happen.”
Having just returned from overseas, where he met his counterparts from around the world, Makhlouf said Auckland was in the same boat as other cities around the world.
“Attractive cities - whether they’re Vancouver, London, Sydney or Auckland - attract people to live in them and that means that the demand for accommodation goes up and we need to be in a position where our markets can respond quickly enough to accommodate those people.”
To hear Treasury’s stance on migration, see the first part of the two-part series of interviews interest.co.nz has done with Makhlouf here.