Auckland’s New York House Prices Prompt Lending Curbs: MortgagesMatthew Brockett
When it comes to buying a house, New Zealander Ginny Braun is finding that her home town of Auckland is rapidly catching up to New York City.
“The market feels crazy, it feels like it’s out of control,” said the 40-year-old associate professor of psychology at the University of Auckland, who’s been looking for a house for more than three years. “I’ve heard people say it’s cheaper to buy in New York than in Auckland. Having lived in New York, that doesn’t seem an outrageous claim.”
Prices in New Zealand’s largest city have already surpassed four of New York’s five boroughs with an average of NZ$768,664 in July, the equivalent of $617,852. While short of Manhattan levels, prices are rising 13 percent a year. That’s why the central bank is set to join counterparts from Sweden to Canada in limiting mortgages. It wants to damp the booming housing market without raising interest rates and denting the nation’s economic recovery.
Curbing mortgages may not be enough. Rates are the lowest in almost 50 years and there’s a shortage of new homes in Auckland and earthquake-ravaged Christchurch, New Zealand’s third-largest city. Auckland’s growing population and limits imposed on urban sprawl left it with a shortfall of 30,000 homes last year, according to research by ANZ Bank New Zealand Ltd.
“The Reserve Bank is treating a symptom rather than the cause,” said Luke Malpass, a research fellow at the New Zealand Initiative, which analyzes public policy. Limiting lending will “take a bit of heat out of the market in the short term, but in the medium-to-long term it could have some unintended and undesirable consequences.”
Reserve Bank Governor Graeme Wheeler said in May he wants to place a “speed limit” on the number of loans banks can make against down-payments of less than 20 percent of a home’s value. In its Financial Stability report that month, the central bank expressed concern that banks were lending too much on assets that may suffer a price correction.
The Organization for Economic Cooperation and Development said in May that New Zealand’s homes were the fourth most over-valued in the developed world, behind only Belgium, Norway and Canada.
The RBNZ estimates that of the NZ$9.2 billion of new mortgages written in the year to May, 30 percent had a loan-to-valuation ratio of 80 percent or more. That’s up from 23 percent of new mortgages 18 months earlier, Wheeler told a parliamentary committee on June 13.
While the central bank hasn’t yet specified its planned limit for high loan-to-value mortgages, in a June consultation paper it gave 12 percent of new loans as an example.
The measures could make it harder for first-home buyers like Ginny Braun to get a loan. Braun said she has a deposit of around 10 percent, and saving to come up with a 20 percent downpayment “would push things a long way into the future.”
The lending curbs will “punish people low on equity for the sins of councils and central government,” said Malpass, who specializes in research into New Zealand’s housing market. “The real culprit here is a lack of supply.”
In the South Island city of Christchurch, more than 6,000 houses were destroyed or rendered uninhabitable by earthquakes in 2010 and 2011, the worst of which killed 185 people.
Christchurch’s city council had its accreditation to issue building permissions revoked in July after it failed to improve the approvals process. A government monitor has been appointed to help reduce supply constraints in a city where house-price inflation is running at 10.8 percent.
Across the country, there were only 16,929 residential building permits issued last year, down from 25,590 in 2007 and 39,766 in 1973. In Auckland, permits have averaged less than 3,800 a year since 2009 while the population has grown by more than 20,000 a year, ANZ Bank research shows.
Council regulations on urban sprawl, inefficiencies in the building permits process, high construction costs and population growth have all contributed to the housing shortage, said Cameron Bagrie, chief economist at ANZ in Auckland.
“The attack needs to be multi-pronged,” he said. “People are starting to realize the economic significance of this. If we don’t get Auckland right, the rest of New Zealand is going to pay for it through higher interest rates.”
While the Reserve Bank has pledged to keep its benchmark rate at a record low of 2.5 percent through the end of this year, Wheeler signaled for the first time on July 25 that he’s started to think about increasing it. The average floating mortgage rate is 5.8 percent, the lowest since February 1965, according to Reserve Bank data.
“It’s hard to see them avoiding putting interest rates up,” said Nick Tuffley, chief economist at ASB Bank Ltd. in Auckland. “But macro-prudential action may mean slightly later rate increases or slightly less tightening over time.”
Low borrowing costs are something the government has highlighted after the central bank rejected a call by Prime Minister John Key to exempt first-home buyers from the new lending rules. Key yesterday announced a package of measures aimed at helping first-home buyers.
“The Reserve Bank is clearly trying to damp demand by shutting a portion of the market out,” said Kirk Hope, chief executive at the New Zealand Bankers’ Association in Wellington. “But international experience shows that credit controls don’t work.”
In Sweden, which in October 2010 capped mortgages at 85 percent of a property’s value, apartment prices jumped 11 percent in the 12 months through June compared with a 3 percent gain the previous year, according to Svensk Maeklarstatistik.
There are signs lending curbs are working in Canada, which in June 2012 reduced the amount homeowners can borrow against the value of their house to 80 percent from 85 percent and lowered maximum borrowing periods to 25 years. Prices across 11 Canadian cities rose 1.8 percent in June from a year ago, the slowest since October 2009, according to the Teranet-National Bank Composite House Price Index. Hong Kong and Singapore have also imposed lending limits.
The Reserve Bank is considering public submissions on its new tools and will publish a response in due course, spokesman Angus Barclay said.
Auckland city’s average house price of $617,852 makes it more expensive than London and most of New York.
While the Real Estate Board of New York put the average for the city at $779,000 in the second quarter -- led by Manhattan’s $1.4 million -- Auckland city’s average exceeded those of the Bronx, Queens, Staten Island and Brooklyn.
In the wider Auckland region, home to a third of New Zealand’s 4.4 million people, the average price in July was NZ$644,973 ($518,429), Quotable Value New Zealand Ltd. said Aug. 8, higher than in three of New York’s five boroughs. In London, the average house cost 318,214 pounds ($493,168) in the second quarter, according to Nationwide Building Society.
New Zealanders’ love of property has its roots in the country’s colonial past. Settlers arriving in the early 19th century saw land as a means to establish independence and generate wealth.
Houses were traditionally built detached on quarter-acre blocks of land, affording people the luxury of their own backyard and garden. The concept was immortalized by the 1972 book “The Half Gallon Quarter Acre Pavlova Paradise,” a humorous look at life in 1960s New Zealand.
While the quarter-acre block is increasingly rare today, home ownership is still a cultural rite of passage, reflected in the absence of a capital gains tax or stamp duties on residential property.
Capital gains can be taxed if a property is bought solely to profit on resale. Still, the new lending curbs are unlikely to affect foreign speculators.
“There’s a hell of a lot of foreign investment,” said John Bolton, Principal at Squirrel Mortgages in Auckland. “I had a guy in here a few weeks ago who’d purchased six properties in Auckland and had no debt on any of them. He was from Malaysia. Everyone loves property in a rising market.”
The opposition Labour Party has pledged to ban overseas-based investors from buying houses in New Zealand if it wins next year’s election.
Both the government and the opposition are also promising to facilitate the construction of thousands of new homes in the next few years by forcing councils to free up land around cities and fast-track building consents.
Boom and Bust
In the meantime, the central bank’s new rules may simply push borrowers into the arms of less-regulated lenders such as finance companies, 45 of which went bust in the wake of the global financial crisis, said David Tripe, Director of the Centre for Banking Studies at Massey University in Palmerston North.
“We’re talking about the introduction of rules that might actually give that sector another boost, potentially exposing people to risk in other ways,” said Tripe, who argues the Reserve Bank would be better off forcing banks to increase capital buffers.
“The reason you implement macro-prudential policies in the first place is because you fear a boom might lead to a bust,” he said. “If you’ve got a bust, the best thing to have is banks with lots of capital.”
If lending curbs do succeed in damping demand, Malpass sees a risk that investment in new houses will also be discouraged. Unless the root causes of the housing shortage are addressed, “prices will probably continue to increase,” he said.
That’s little comfort to Braun, who said she’s tired of attending packed open homes and auctions where the sense of “greed and desperation” are palpable.
“People still have to live somewhere,” she said. “I started working 11 years ago, paid off my student loan and started to save for a house, but the Auckland housing market has moved faster than our ability to save. It’s incredibly depressing and disheartening.”