The heightened activity and strong price gains in the Auckland housing market have made RBNZ action likely very soon

Short headline: 
Green light for RBNZ action

By David Hargreaves

Well, the Reserve Bank was looking for hard evidence of a reheating Auckland housing market and it's getting it, in spades.

What the central bank actually intends to do about the problem will be occupying many minds in many places both within and without the RBNZ at the moment.

To me it's looking increasingly likely that the RBNZ will unleash new weaponry either in conjunction with, or maybe just before, its next Financial Stability Report (FSR) on May 13.

My colleague Gareth Vaughan produced this summary earlier in the year of some of the likely options the RBNZ might dip into to slow the housing market. I've got a few more thoughts on this that I'm sharing further down in this article.

But, first, a little background:

In what could be termed his annual scene-setting speech, on February 4, the RBNZ Governor Graeme Wheeler made extensive reference to the housing market, with the slightly, I thought, ominous observation that the central bank would "be talking more about the housing market over the next few months".

Wheeler noted that house price inflation slowed last year as the restrictions on high loan to value lending, introduced by the RBNZ in 2013, coupled with four hikes in official interest rates, helped to constrain demand. But this demand now appeared to be increasing again in Auckland due to rising household incomes, falling interest rates on fixed- rate mortgages, strong migration inflows and continued market tightness.

The RBNZ would have a "clearer assessment" when the February/March Real Estate Institute (REINZ) data was available.

In other words, the RBNZ thought there was a problem, but it wanted to see the smoking gun before firing off its own weapons.

Auckland houses moving

Okay, so we haven't yet seen the REINZ figures for March. But the February ones showed Auckland median prices up 14% on the figures recorded 12 months earlier. More tellingly, the REINZ Stratified Price Index, which which adjusts for some of the variations in the mix that can affect the median price, registered an eyebrow-raising 6.4% gain in Auckland over just three months.

As far as March was concerned, the essential thrust of those REINZ figures has been backed up by the latest data both from QV and from Realestate.co.nz.

What is becoming more and more clear – and there are interesting nationwide implications – is the extent to which a heated housing market is and seems likely to remain an Auckland story.

There are nationwide implications from an Auckland housing boom because a third of us live there, but also if a heated Auckland market is tackled by nationwide curbing measures this risks an adverse impact on the non-Auckland market.

I've already commented on that issue and suggested that maybe now is the time to be seriously considering Auckland-specific measures.

It's all about Auckland

The extent to which the housing problem is focused on Auckland is aptly demonstrated by QV's figures over time. For the full 2013 calendar year, Auckland's prices rose 15.4%, according to QV.

As the LVR measures, and rises in interest rates, started to bit, that rate of price growth slowed considerably, to an annual rate of 9.2% in October. Now, as at the end of March, it has surged to 13.9%.

Complicating factors are coming in the form of record levels of inbound migration and relatively low levels of new building activity.

According to the nitty gritty provided by Statistics New Zealand, over 25,000 of the 55,000 or so net migrants in the past 12 months have settled in Auckland.

That's a lot of people to house and no wonder the natives are getting restless over the apparent lack of progress in ramping up house production.

It's better than you think

Personally, I don't think the Auckland housing construction figures are necessarily as poor as is being made out.

The fact that the country's second largest city Christchurch is currently being rebuilt is obviously going to draw off a lot of the builders.

But if you look at the detailed figures for building consents in Auckland in February, there were 528 new dwellings consented, compared with just 464 in the same month a year ago – although admittedly the latest month's figures included 98 apartments, versus just 28 a year ago (although perhaps higher apartment numbers will become the thing?).

If you go back to February 2012, there were just 313 new dwellings consented. So, the numbers have certainly risen sharply from a very low base.

Step back in time

It's worth looking back into the dim, dark, recesses of the 1990s – again February figures. In 1991 when the country was in a pretty serious slump there were 410 new dwellings consented in Auckland in February. Next year it was 431, the following year 467. Not much happening. But in February 1994 there were 566 and then February 1995 there were 740.

There was a similar kind of build up (to a peak of over 1000 in February 2004, though blown out by over 500 apartments) in the early 2000s. The point is, that the rubber band takes a little while to wind up.

It will wind up again and I think if people fret too much about the current state of building activity in Auckland there is a risk of seriously over-cooking things.

I wonder for example how many potential first-time house builders have waited for the Government's HomeStart package and its unfortunately-timed April 1 introduction.

Government-induced delay

In Graeme Wheeler's confidential memo of June 18 last year commenting on an earlier version of the package, he said: "A 1 April 2015 start date has potential implications for the path of house sales/ new construction over the next 12 months. It is possible that potential buyers (especially of new builds) will look to defer purchases until they can take advantage of the subsidies. Thus announcement of the changes could result in some market weakness in the near term, but promote stronger activity through the middle of 2015."

As I say, it will be interesting to see what happens.

Whatever, what all this means is that the RBNZ is going to act very soon.

We already know that the bank's planning to shift loans by property investors into a new category, which could pave the way for a new macro-prudential tool to be aimed against them.

There's been constant speculation about some sort of debt-to-income limits, which seems to me a sound idea.

Limits on interest-only

And then how about the possibility of limits on interest-only loans? Anecdotally the numbers of interest-only loans are on the rise.

Personally, I can't see why on earth you would want to have a mortgage on an interest-only basis when the interest rates are at historically low levels. Surely this is just inviting trouble. It's a strategy that absolutely demands an increase in the value of the property.

Now, we know property values are increasing at the moment – and history tells you they do over time. But there can certainly be times when they don't.

Worryingly, there's not too much information in the public domain about what proportion of loans are interest-only. The RBNZ has relatively recently started collecting this information from banks and had indicated it may start publishing it, though at this stage has no timeframe for doing so.

The banks are mostly pretty coy about what proportion of their books and of new lending is interest only. We asked the big four and Kiwibank for some rough figures.

Westpac said is figures had remained consistent at around a quarter of its portfolio, while Kiwibank gave a figure of about 5-6%. The other banks cited commercial sensitivity and wouldn't say.

A way to target Auckland

I would be guessing, but I would suggest a fair proportion of interest-only loans would be in the Auckland market. Targeting these might be one way of doing a kind of Auckland-specific targeting without actually saying that's what's being done – if that is the big objection to doing specific Auckland targeting.

I think a combination of debt-to-income limits and limits on interest-only loans would be a good way for the RBNZ to start on this issue.

Whatever the central bank decides – I hope the Government leaves it alone.

You can argue about how much or little impact the new HomeStart package will have on house prices. Personally, I would say it must have some impact.

There's no question in my mind that the Government was moved in the direction of this policy by the 2013 implementation of LVR limits.

The RBNZ introduces a policy to dampen the housing market. The Government sees for it, the very toxic picture of young people locked out of the house market and does its darndest to undermine the RBNZ with this new policy.

Whatever the RBNZ decides to introduce next, the Government really needs to keep its hands off.