By David Hargreaves
Sometimes you can hear things, know things, understand things and yet somehow they don’t resonate.
And then there’s one thing you do hear that brings everything into sharp focus. It can be one apparently simple statement. It can be a number or a percentage.
I’ve heard all the talk about how stretched debt to income ratios have become in Auckland.
The Reserve Bank has been talking till its various senior execs are blue in the face about house prices now being 9.5 times income.
And yes, that doesn’t sound good, but somehow it doesn’t paint any great pictures in the mind.
However, put the same thing another way as the ANZ’s economists have in their latest Property Focus publication – and say that 51% of household income is getting sucked up by the interest payments on an average new purchase in Auckland and, well, frankly – wow! Wow! That’s the word.
I’ve always personally worked on the basis of trying to spend no more than about a third of my income on accommodation. I guess this is my own rough approximation of the ‘28/36 rule’.
The golden rule
The 28/36 rule of course says, in essence, don’t spend more than 28% of your income on mortgage payments and other housing related costs such as insurance, and don’t spend more than a total 36% on mortgage payments plus other consumer costs such as car loan etc. It’s a time-honoured, sound and sensible rule.
Have Auckland’s 51 percenters not heard this one?
Well, in all probability they have, but they’ve ignored it out of a sense of desperation to get on an Auckland ‘ladder’ moving ever more out of reach.
I’ve nothing but sympathy for those who have been battling to get on that Auckland housing ladder.
Anybody who has ‘waited’ for the market to settle down before making a purchase has seen prices in the past few years scream higher and higher, and out of reach.
So, there’s a kind of logic in doing whatever you have to in order to grab a home.
I can countenance that kind of ratio if interest rates are sitting at 20% and there’a belief that these rates are only going to go down.
Dice with death
Here, however, is the multi-billion dollar problem. Anybody doing that 51% dice with death is doing so at a time of historically low interest rates.
Yes, it’s not impossible interest rates could go down again – if there’s some massive kind of global implosion (and the chances of such a thing still have to be reasonable).
It’s got to be said though that the huge balance of probability is that rates are going to go up – as they have been already in recent months.
The Reserve Bank’s not planning any interest rate hikes in the near term. The rises in rates so far have stemmed from the big banks seeking to recoup the costs of their increased funding as they have to borrow more offshore to make up what’s become a large deficit between what goes out their doors in mortgages and what comes in through deposits.
So, the kind of incremental upward moves in mortgage rates we are seeing at the moment should not be a problem. But, however, if you are already up to your nostrils in debt, then very small moves will make a very big difference to your affordability position.
The assertion by ANZ’s economists that the ratio of debt servicing to household income is now for new Auckland purchasers the same as it was in 2007 is really alarming.
Because in 2007 of course mortgages were more like 9% – as against current floating rates of still mostly under 6%.
These 51 percenters have got no wiggle room.
Rate rises possible this year
I still think there is a strong possibility the Reserve Bank will be forced to raise interest rates much sooner than expected – maybe even this year. I think inflation is going to surprise on the upside, which would of course force the RBNZ to act.
If that were to happen then some people in Auckland clearly stand to be badly caught out.
There’s two things that stand out here.
Firstly, the magnitude of the Reserve Bank’s error in not getting debt-to-income ratios included in its ‘macro-prudential toolkit’ when that was signed off by then Finance Minister Bill English in 2013 is becoming bigger and bigger.
Secondly, I will now officially term it a disgrace the way this Government has turned its back on the RBNZ’s attempts to make up for lost ground by getting DTIs installed into the macro-pru toolkit this year.
Remember the Govt’s delaying tactics
I hope everybody remembers in future the cute delaying tactics that the Government has engaged in to block DTIs before this year’s election.
This is clearly one instance where for the good of the country people have probably needed saving from themselves. And DTIs would do that.
Look, we might get away with this.
There might not be any major rise in interest rates and eventually the 51 percenters will find some degree of comfort.
However, there’s clearly been some almighty gambles taken here. Buying a house is supposed to be all about security – not a high stakes gambling exercise.
It seems, however, that for at least some in Auckland, the latter is exactly what it has been and is.
I hope this all turns out okay, because it could be very messy if it doesn’t.
And just as a final word to the Government. Guys, what about reconsidering on the DTIs? Give the RBNZ this tool. They’ve promised they won’t use it right now.