By Bernard Hickey
Here’s a question for Auckland’s property owners, and be honest with your answer.
What would you do if you could take out a mortgage that was fixed for 12 years at 4.01% to invest in an asset that will last decades and have a guaranteed customer base of over 1.5 million? Would you take on that debt if the interest costs represented less than 15% of your income?
The answer for Auckland property owners in their own capacity is clear for all to see in the recent mortgage approval and house sales figures. House sales in Auckland rose to a 12 year high in July and more than 40% of the buyers were rental property investors or owner occupiers buying houses with mortgages fixed for one or two years at 4.7%.
Understandably, those home-buying investors were betting that demand for property would be so strong in a market that was already short of 30,000 houses that they would be able to rent out these properties and do well in the long run.
These investors were betting on the long term future Auckland and were comfortable to borrow at 4.7% to do it. They were also comfortable to do it in a way that rent barely covered the interest costs, or that interest costs were around 40-50% of take-home pay for owner-occupiers.
They were buying assets they could see and touch in a high growth market they understood and were confident in. Auckland’s houses are worth over NZ$450 billion and are being paid for with well over NZ$120 billion of mortgages, suggesting a gearing ratio of around 26%.
Aucklanders seem relatively relaxed about that level of debt gearing and serviceability for their own homes.
So why are they so nervous about their own Council’s gearing ratio of 17%, particularly when the population growth is expected to be explosive over the next two decades and the Council can borrow at 4% or lower?
Why are they so worried about being able to service that debt when 60% of New Zealand’s population growth over the next decade — and therefore its rateable base — will be in Auckland.
Why are they concerned about the need for the infrastructure that debt would pay for when they see it in front of their stationary windscreens every day? Why are they confident investing in housing that only has value if tenants and owner-occupiers can get to work on the roads, buses or trains and can drink the water and play in the council-run parks?
The Auckland Council and some of its councillors regularly argue that Auckland has maxed out on its debt and cannot afford to borrow more. That would be the case if the borrowing was for salaries and rubbish collection, but no one is saying that.
Ratings agency Standard and Poor’s has given the Auckland Council a AA credit rating and the Council successfully borrowed NZ$250 million from ‘Mum and Dad’ investors in March at an interest rate of 4.01%. There was huge demand which drove down the cost of borrowing.
The irony is that councillors opposing more debt are no doubt from the same communities and circles with over NZ$140 billion in term deposit accounts who are desperate to lend to Councils.
Auckland desperately needs investment in its roads, rail networks, buses, water systems and all the other infrastructure needed to cope with an extra million people over the next 50 years or so. Those people will be ratepayers and the growth of Auckland’s economy will support that debt.
The contradictory thinking about the personal debts of ratepayers and the public debts of their councils in a city that is growing as fast as Auckland is untenable.
Simply ask yourself the question: Would you borrow at 4% to invest in multi-generational assets with guaranteed customers in a fast-growing economy?
Of course you would.
The same could be said more broadly for the central Government in growth areas such as Auckland, and in areas of the greatest need.
The central Government can currently borrow for 3.3% and has a net debt to national income ratio of less than 30%. Yet it also has this same contradictory approach to using debt to invest in inter-generational assets.
Bill English and John Key like to congratulate the voting public on their ‘wisdom of the crowds’ when it comes to national savings and the current account deficit. They’re certainly not challenging the wisdom of the crowds jumping into rental property in Auckland. Yet the Government too seems reluctant to use the lowest interest rates in a couple of generations to invest in future generations.
The intergeneration scandal of the Government’s decision to stop contributions to the New Zealand Superannuation Fund is a case in point. It won’t borrow at 3.3% to contribute to a fund earning 10.3% in its first 12 years, and then it has the gall to collect over NZ$4.7 billion of tax from the fund.
Both Aucklanders and the Government should drop the two-faced approach to debt and invest in growth for future generations.
A version of this article first appeared in the Herald on Sunday. It is here with permission.