Gabriel Makhlouf bold on highlighting risk of high mortgage debt levels, but shy on calling for house prices to fall

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.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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26 Comments

Jenee , well done , good interview and report .

Our debt fueled spending binge is incredibly dangerous , the Auckland housing balloon is going to, at best, go through an adjustment , or at worst, it will pop.

That's whether Government likes it or not, because its gone too far, and is unsustainable .

How do people like Maklouf and Wheeler keep their jobs?
He has no real authority to have an opinion on Auckland Council being more responsible than Key and Co for the mess that uncontrolled immigration has left Auckland to clean up without Govt help.

Maklouf is a third rate UK civil servant who thinks he can be a big fish in a small pond over here in NZ, but all he has done is bring his third rate lack of progressive ideas to NZ. There is no point listening to him because he will never come up with anything new to address current problems. He is a yesterday man......

Just a reminder; Please keep the comments focused on issues rather than getting personal. IE, play the ball not the man or woman. Thanks.

Sorry Gareth my frustrations get the better of me sometimes.

If we were to dispassionately assess this governments and its chief economic adviser on the housing issue. We could go back through the Governments announcements since at least 2012 (and even earlier in 2007 before being elected they discussed some of this) … they have focus on …

1. Land supply
2. Infrastructure
3. Process
4. Construction costs.

But what changes have they actually achieved -very little. They talk about supply but don't do much.

Then of course there is the whole demand side which they refuse to even talk about -let alone act on.

Governments can only do what they can get the agreement of a Parliamentary majority to do. You can thank Peter Dunne in particular for the fact that this Government hasn't been able to do much about the issues you (rightly) identify. Every attempt they have made to free up land supply, make it easier to build infrastructure, simplify the process and reduce construction costs has been blocked by Parliamentary opposition and by local councils.

The government could have a cross -parliament accord addressing the housing supply issue if it had voted for it in parliament.

David Parker had a amendment change to the RMA -a national policy statement that eliminates urban growth boundaries and internalises the infrastructure costs of new development voted down by the National/ACT/Dunne voting block. Labour, Greens (as long as intensification restrictions were also lifted and the costs of climate change were included), NZ First and the Maori party voted for it.

http://www.inthehouse.co.nz/video/45201
http://www.inthehouse.co.nz/video/45207

David Seymour later in parliament announced he would not have given his veto to National if he had known about this amendment as he supports it.

That was indeed a great pity. But the same debate, indeed the whole history of RMA reform efforts, also included a whole load of stupid and counterproductive proposals by Labour and other opposition parties; so one can see why Seymour and National could miss the fact that there was actually a worthwhile needle in that haystack.

MdM look at the names and dates and tell me you honestly believe they used every option available to them to implement effective housing affordability reform. To me every politician named below failed to achieve the clear goals they were given and now they must be held accountable.

New Cabinet Has The Skill And Nous
Tuesday, 18 November 2008, 1:43 pm
Press Release: Property Council Of New Zealand

New Cabinet has the skill and nous needed to provide leadership and reform

Pulling New Zealand’s economy out of the recessionary ditch will be made easier thanks to the new Cabinet announced by Prime Minister Designate John Key, according to Property Council New Zealand.

Connal Townsend, chief executive of Property Council, said the new Cabinet was brimming with Ministers who understand the economic and infrastructure challenges that need to be addressed to return New Zealand to a period of sustained economic growth and rising living standards.

“Property Council has been impressed with the Government’s acknowledgement that New Zealand needs to change if we are to unshackle the economy. By giving the new Infrastructure portfolio to the Deputy Prime Minister and Minister of Finance, Bill English, the Prime Minister Designate has confirmed that developing infrastructure that enables an increase in economic productivity is a top priority.

“We are also pleased that reforming the Resource Management Act has been clearly signaled as a priority workstream, which is evidenced by giving the Environment portfolio to sixth-ranked Minister Nick Smith. The broad thrust of the National Party’s policy on resource management is sound and when enacted will enable New Zealanders to build and develop without the vexatious litigation that destroys affordability,” Connal Townsend said.

The inclusive nature of the new Ministry should also enable the Government to pass important new legislation in a timely manner, which will provide greater confidence to the commercial property industry.

“By having Act New Zealand, the Maori Party and United Future in the team, John Key has wisely expanded the Government to ensure that it is broad-based and stable. Property Council looks forward to working with all Ministers to progress changes that enable New Zealand to grow and prosper again.

“We are currently preparing briefing papers for a variety of Ministers, which informs the Government on key public policy issues of particular significance to the commercial property sector. Our first paper is being drafted for the new Minister of Local Government, Rodney Hide, which prosecutes the numerous failings of the local government sector as well as articulating a series of legislative changes that would once again make that sector operate for the betterment of ratepayers, as opposed to politicians,” Connal Townsend said.

End. (H/T JH)

Isn't it incredible how "policy advice" on this issue regresses and regresses in quality over time, as the problem gets more and more obvious and undeniable? We could go way back to when Don Brash was RBNZ Governor, in the 1990's, and that 1996 Report by Owen McShane ("The Effects of the RMA on the Housing-Cost Component of the CPI"), commissioned by Brash. Before the problem really even got underway!

The position of the National Opposition at the time of the 2008 election had been pretty much defined by Brash, and they were clearly critical of the Helen Clark government at this time, over housing affordability trends. One wonders who and what "got to them" once they won the election?

In Australia, we have a similar situation: Patrick Troy published "The Perils of Urban Consolidation" in 1998; a 2003 Report by Joye, Glaeser et al commissioned by PM John Howard, is one of the clearest analyses you will find anywhere on this general issue; Moran (2006) was also good - then everything has been going backwards ever since, every significant report is fudgier than the previous one.

And then you have Phil Twyford, the Opposition spokesperson on Housing (and he has spoken well on it), then when he can action something, putting in a members bill on Wheel Clamping!!!!!!!

But maybe I am being too harsh, after all I'm sure the wheel clamping amendment is designed to help those poor people having to house themselves in cars.

National must be so thankful for the quality of the opposition.

I know, I know, he bangs on about it constantly, no-one seems to be able to get a word in edge ways for his non-stop jabber about it. Be good if just for a minute or two he'd say something about, oh, housing or something.

One cannot help but ask what impact removing any tax offset from debt related interest would have on this situation.

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.

What is he on about? - an over leveraged high value property price collapse triggers the write down of bank mortgage assets, which in turn causes the RBNZ, to invoke OBR, to haircut the owners of bank liabilities (deposits) to match. Unless, they run from the bank first.

More humbug - another bucket of mud

Note the statements
- total household debt is $226 billion, and
- households are over-leveraged

It is common knowledge that the valuations of all houses is now just over $1 trillion

What we are not told is the value of only those houses that are mortgaged, and how many

It is quite possible that the increase in debt could be attributable to any number of un-encumbered households who have suddenly decided to join the rush and take a punt, or more likely have used the equity in their un-mortgaged property to assist their children into the game

We need to know the amount of debt as a ratio of the value of the collateralised properties - by region

I note in particular two comments:
- “the amount of debt and leverage that people have taken out, which creates a risk to the stability of the financial system”
- “High debt to income ratios leave households increasingly vulnerable,”

This would seem to indicate that the Treasury thinks that the Reserve Bank needs to do more.
It is plain we cannot rely on banks to lend responsibly else we would not see lending at such high DTI levels . The RBNZ reported in July that more than 50% of loans to “investors” was on a DTI basis of greater than 5 – looks like crazy lending practices are being signed off by the directors of banks, - so much for self-regulation. Clearly it doesn’t work, it is imperative for DTI limits to be implemented.

Great questions and interview Jenee. Makhlouf sounded empty and unfocused. He also contradicted himself repeatedly (talking about "if we want prosperity" while at the same time putting Auckland on a pedestal as one of the most attractive cities to live in), His talk about "the community needs to take responsibility" does nothing more than remove central govt from responsibility and ensure that his peers look at him with approval.

How can you not be concerned about house prices - they are the reason people have to borrow so much and why there is a high level of debt

"It’s fundamentally a supply problem Fundamentally, I think the responsibility… starts with the local community [IE the Auckland Council]… Expecting the Government to fix the problem is a mistake.”

I'm afraid comments like these suggest that our Treasury is both politicised and speaking from behind ideological blinkers. Economics 101 highlights the importance of interactions between supply and demand in influencing prices and key elements influencing both the supply and demand side of housing are the responsibility of Government - e.g. tax relief for those who invest in housing, weak capital gains tax, inadequate investment in social housing etc. I'm increasingly worried that my children, my nieces and nephews will never be able to afford a decent house - unless they live in a smaller provincial area, where jobs are less available.

http://www.marketwatch.com/story/6-cities-where-you-can-own-a-home-for-u...

Some places like Awkland are the Pitts when it comes to affording houses. We all know that, it is drummed into us daily.

Some Pitts places are way better than Awkland...when all yo want is a roof over your heads,,,,it used to be called a "home", or a "house"....it used to be called..."Affordable."

He impressed me as someone with his head in the sand.
The government is letting in the immigrants but the people of Auckland own the problem of housing them and building infrastructure for them.
Auckland is loosing its quality of life for the locals but must seem pretty good if you have come from a city with 10 million people.
What are the new industries that this population growth are creating? How is this improving our exports?
How is this making NZ a wealthier, happier society? Why are educated leaders of our society like Makhlouf so locked in to the fable that growth for growths sake is a good thing?

NZ's lending to housing at end of August was about $225B
It is growing at 9.2%
NZ's GDP grew in the June quarter by 0.9%, say 3.6% per year.
This suggests that lending to households is growing disproportionately to debt by 5.6% (so excess lending is about $12B)
This means that about $12B of our $250B GDP is credit fueled illusion which will reverse at some point.

$225 billion - NOT - $225 million

Thanks, now corrected

“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.”

Seriously? That's the plan? Hope that the income to house price ratio will drop significantly to say 3 to 1? Unless income starts to grow at a rate significantly hight than housing prices, we will all own pet unicorns before the 3 to 1 ratio happens.

Here's my prediction: Housing market crashes, banks cry for help, need bailout. Property investors cry fowl, need bailout. Government gives in and tax payers who never bothered to join the silliness that is the housing market get stuck with the bill.

Basically he is saying that the problem with high prices is going to inflate away. eg House prices in terms of the dollar value will stay the same, but over time as incomes go up, the ratio will become less. This is because none will actually want to sell a house for less than they paid, even though this is common with other forms of investment such as shares. But this is going to take decades to inflate away the high Auckland house prices, as incomes are rising by less than inflation which is less than 2-3%. It is very difficult to get incomes to rise, as that money has to come from somewhere, unless it is printed. But essentially that means the house is dropping in value, as a million dollars will have less buying power in 10 and 20 years. For first home buyers, they don't want to wait a decade or two for that to happen, as it means they are locked out of buying a house at a reasonable price. It would be far better for house prices to drop. It should affect house owners, because they are buying and selling in the same market, unless they have a small equity in their house. It will really only affect investors who buy and sell for capital gains. In some ways I wish I had a job at the RB, but it would probably bore me to death. The number one problem that is actually fueling the rise, is the record low interest rates. But the reserve bank has little say on those because they are a global problem.