NZ Treasury warns on Auckland housing risks

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By Leith van Onselen

Following the RBNZ’s warning on Auckland housing last month, the New Zealand Treasury Secretary, Gabriel Makhlouf, has entered the fray in a speech delivered yesterday:

Infrastructure – in particular infrastructure investment – is another issue where Auckland is experiencing growing pains. There is no doubt that Auckland’s growth has created pressure on infrastructure. And it’s clear that the current system across planning, governance and funding is not optimising the delivery of infrastructure to enable this growth.

We all know that growth costs, and that we all face constraints…

The impact of high housing costs

That brings me to arguably the biggest, most complex issue of all, housing. Let me say a few things up front.

Auckland has 3 people sharing a home on average, the highest number in the country. Between 2001 and 2013, the average number of usual residents living in a private occupied dwelling within Auckland increased 1.7 percent, compared to a 3 percent decrease for the rest of New Zealand. When it’s clear that population growth is outstripping housing supply in Auckland, there is little doubt there’s a problem that needs to be tackled.

When investors are content to leave land undeveloped when there is such a high demand for housing, something’s not working.

And when New Zealand’s housing debt is around $215.9 billion, a 26.6 percent increase in five years, nobody should be surprised the Treasury is concerned.

The Treasury cares about these and other issues in the Auckland housing market because they have impacts for everyone from Cape Reinga to Stewart Island.

One of those impacts is the level of indebtedness. The housing debt I mentioned is far and away the biggest component of New Zealand’s $246 billion household debt, which itself has grown 26.2 percent in 5 years. By the beginning of 2016, the level of household debt to disposable income had risen to 163 percent. This is higher than in the lead-up to the global financial crisis and is likely to go higher still, with the Reserve Bank expecting credit growth to continue to outpace income growth…

Debt to income ratios are at historically high levels, and it now takes nine times the average household income in Auckland to buy an average house in this city.

High debt to income ratios leave households increasingly vulnerable. 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.

The Reserve Bank of New Zealand is very focused on preventing threats to the stability of the financial system, as is the Treasury. The RBNZ’s stress-testing of banks has provided insights to risks and helped banks identify actions they may need to take. As a result, our banks are in a stronger position to cope with major shocks than they were before the global financial crisis.

The Treasury’s broad interest in Auckland housing includes its effects on the labour market. The impact of high and rising house prices in Auckland is felt nationally by way of reduced labour market mobility… it’s difficult to attract these workers from elsewhere if they find it too expensive to buy a house in Auckland and put down roots.

We also miss out on making these workers more productive. Better productivity is the way to achieve sustainable economic growth and raise living standards. Selling ever higher priced houses to each other isn’t. Distorted Investment decisions are leading to lost opportunities for the country…

So what’s pushing up housing costs, and what can we do about it?

There are a number of drivers of house prices in New Zealand, most significantly supply constraints but also including low interest rates, population growth, income growth, tax settings, and high net migration…

This is against a background where we think the primary way to address housing affordability is through supply. If the supply of housing was more responsive to demand, then the pressure on house prices in times of higher demand would not be felt as acutely…

Addressing the housing challenge requires a concerted effort from both central and local government, and I think that we’ve been working well together.

Nothing new. But should at least add pressure to the various levels of government to reform the supply-side.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.