RBNZ sounds the alarm on Auckland housing

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By Leith van Onselen

After the REINZ reported annual house price inflation of 25% in Auckland (on a stratified median basis) earlier this month, Reserve Bank of New Zealand officials ramped up their warnings, telling Parliament’s Finance and Expenditure Select Committee that Auckland house prices were in “dangerous terrritory” and vowing to rein the market in.

Yesterday, the RBNZ released its 2014-15 annual report, which again has sounded the alarm over Auckland’s bubbley housing market:

We are conscious of the impact that low interest rates and aggressive lending competition among banks can have on housing demand and its potential to feed into house price inflation. We remain concerned about the financial stability risks and risks to the broader economy that would be associated with a major correction in Auckland house prices.

Although a strong supply response over several years is needed to address Auckland’s housing imbalance, we felt that macro-prudential policy could help to reduce the financial stability risks arising from pressures in the Auckland housing market. The proposed loan-to-value ratio (LVR) measures and the Government’s policy initiatives that it announced in the 2015 Budget should begin to ease the impact of heightened investor activity, and help lower the financial and economic risks while important regulatory and infrastructure issues are addressed and additional investment in new housing takes place.

…developments in the Auckland housing market pose risks to financial stability. While the Auckland housing market slowed immediately following the introduction of LVR restrictions in October 2013, market activity and house price growth increased significantly from late 2014. An increase in leveraged investor activity in the Auckland market appears to be one factor contributing to this resurgence. A significant correction in the Auckland housing market could place strain on the banking system and broader economy. Such a scenario would exacerbate macroeconomic weakness, especially given the high levels of household indebtedness…

There is little doubt that the Auckland housing market is out of control. Price growth is nuts:

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And valuations are beyond absurd:

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There has also been widespread anecdotal evidence of speculative investment, perhaps best illustrated by the below report by Stuff.co.nz, which profiled a basic Auckland home that was flipped four times in three months, achieving a total increase in value of $153,000:

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The three-bedroom home in Henderson was sold by its owner of three years Sue Wilson to Xiaoli Zhen in May for $475,000, only for it to be sold again to a trust just weeks later for $522,500.

The trust then flipped the Bruce McLaren Rd property again earlier this month for $559,000, according to CoreLogic data.

Most recently the house was listed last week by Barfoot & Thompson and was sold for $628,000…

The former owner of the house, Sue Wilson, told the New Zealand Herald she bought the cross-lease property at 1/161 Bruce McLaren Rd in 2012 for $291,000.

Wilson said the fast turnover and escalating price of the property, which was advertised as a “first home or investment”, was shutting first-home buyers out of the market.

“I was horrified. What annoyed me most was we’re trying to get young people into houses and this sort of thing is going on with them bumping up the price,” she told the New Zealand Herald.

Neighbours told the newspaper the property sat empty during July and value was not added through renovations or improvements other than professional staging.

With New Zealand’s economy now weakening on the back of collapsing dairy export prices, and immigration likely to slow fast, it’s hard to envisage how things can end benignly in Auckland.

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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.