House prices can’t be allowed to continue to gallop away, says the Finance Minister. But what can halt the growth? Bruce Morris reports
Three months on and nothing much has changed. As open homes in Auckland are still humming on the verge of winter, the banks continue to compete furiously for mortgage business at ultra-low interest rates and the imbalance between supply and demand remains skewed.
With an eye on next year's election, the politicians are now playing their hands and the Reserve Bank and the international agencies are becoming more concerned at the surging prices. But while they're trying to talk the market down with warnings of peril ahead if prices continue their rapid rise, the "SOLD!" signs are everywhere.
Everywhere, that is, in Auckland - where Real Estate Institute figures showed 3359 sales in March, with the average property taking 29 days to sell. It was the highest March level since top-of-the-boom 2007, when 3884 properties sold after sitting, on average, for 27 days.
The national statistics suggest the rest of the country has now started to join the party that's delivered big prices rises in Auckland - where the average price has now reached over $1 million in 17 suburbs - and, for different reasons, Christchurch over the last two years.
But the big-city weightings are distorting the picture: values in most parts of the country are still down - in many cases substantially so - on the highs of the last boom. In price terms, that's nearly six years going nowhere.
Wellington is really just pottering along and, while the provincial cities have broken out of the mire of a year or two ago, they are no better placed. Hamilton is stirring, but the other cities are at best steady, slowly inching their way back to the record levels of 2007; generally, they remain subdued with volumes improving but prices staying flat.
The upper-North Island rural towns continue to do it hard. Many of them are still drifting and real estate agents from Kaitaia, Dargaville, Kaikohe and Kerikeri in the north to Kawerau, Taumarunui, Turangi and Tokoroa in the south must grimace when they hear the commissions of their Queen City cousins.
While the news beyond Auckland is generally looking a little brighter - or at least a little less grim - the gulf in price performance is striking.
Property Report statistics cover 202 North Island suburbs outside Auckland and Wellington and just three of them, Fitzroy in Hamilton and two areas in Taranaki, have now scraped their way above the 2007 peak. Forty of the 52 Wellington suburbs are still behind, but in Auckland only 10 of the 168 supercity suburbs - all of them in the far north and south - are dragging the chain. A bracket of suburbs has risen in average value over 2007 levels by between 30 and 39 per cent; around 40 per cent are up by more than 15 per cent.
As the disconnect between rents and prices continues to grow, how much longer can it go on? Are we seeing what former US Federal Reserve Board chairman Alan Greenspan called "irrational exuberance" (when he suggested the dotcom-fuelled sharemarket of the 90s was over-valued)?
To support their contention there's nothing irrational about surging values, observers point to Auckland's growing population, a lack of new building and land for development and confidence in the economy. All those factors, stimulated by very low mortgage rates, have brought demand well ahead of supply and price rises have followed.
So while there are strong reasons for the Auckland gains - and a momentum which may be slowed only in the short term by Reserve Bank action on interest rates and loan levels - the sort of growth of the past two years can't be sustained indefinitely.
When the factors fuelling the present Auckland boom change, prices may plateau and perhaps fall. That would simply reflect a normal housing cycle. Over time the trend is up, but there will always be flat periods and times of decline.
Such a measured response is what New Zealanders are accustomed to: a levelling off in prices as demand wanes and, at worst, a drift backwards for a year or two before the next upwards cycle. At least in the cities where opportunity lurks.
But what happens if the Auckland-led price inflation continues to gallop away, feeding more strongly beyond its boundaries?
Disaster, according to Finance Minister Bill English, whose Budget last month introduced a plan to dampen demand by building more houses.
Agreeing that the Government steps won't solve the problem overnight, English noted: "What we've learned from the global financial crisis is that in countries like Spain and the US, where they've had housing bubbles, is that there is widespread destruction when those bubbles burst, and Ireland has been the same. We must learn the lessons from those countries that 12-to-15 per cent compound house price increases are dangerous for an economy and that's why we need a collective will to help solve this problem."
The International Monetary Fund is the latest international agency to warn that New Zealand houses are over-valued - by about 25 per cent, according to its modelling. The ratio measuring the gap between prices to incomes is now 20 per cent above the 30-year average and higher than in Australia, Britain or the United States.
While wages will move more as the economy improves, the pressure on house prices in the future will be from increased supply to satisfy demand.
The Government wants 39,000 new houses in Auckland over the next three years and will work with the Auckland Council to make it happen - most likely on the far edges of the city where land is available.
Obviously that will have an impact, but the ability to create affordable homes - high in the minds of the Government, its coalition partners and other main parties with barely 18 months to run until the election - is strongly linked to the cost of land. Even on the perimeters of the city, it will not come cheap. And, besides, what impact will all those distant houses have on prices closer in?
Questions are also being raised over the three-year programme target. The Government is helping developers by clearing the way, but the plan will be funded by private enterprise and there are concerns at how realistic the goal is when resources will be so stretched by the Christchurch rebuild.
In the future, more houses for Auckland may keep a lid on prices and a capital gains tax will help to restrain values, though that will come only with a change of Government. Other steps can also be taken to indirectly hold down prices. An end to claiming mortgage interest as a landlord's expense would work to some degree, but is politically unpalatable for National, and Labour has so far offered no view.
The Reserve Bank's bag of tricks is more likely to be successful in the short-to-medium term through higher interest rates to stifle demand and tighter loan-to-value ratios. Looking back to the peaks of 2007, it's interesting to note the average floating mortgage rate was 9.7 per cent (hitting 10.6 per cent in March 2008 when the number of monthly sales in Auckland slithered to 1621, pushing the days-to-sell indicator to 36).
Six years ago, New Zealanders were being warned that booms didn't last forever and, with interest rates around 10 per cent, they certainly bought with their eyes open, even if some minds were closed.
Can the same be said today? New Zealanders do have strong faith in property to steadily rise in value, and the path of history - with a few bumps along the way - certainly gives cause for that confidence. But does everyone buying now on a 5.8 per cent floating mortgage have their eyes wide open?
That is a key question with the first lift in rates expected in nine or 10 months, and perhaps some rapid rises after that if the dollar starts reflecting more of its true value. A 1 per cent lift in floating rates will cost a borrower on a 20-year $400,000 table mortgage an extra $43 a week. If rates rise to 7.5 per cent (and they were above that level every year from 2003 to 2008), the extra weekly cost will be $82.
Home-owners with limited equity in their properties will be hardest hit because they tend to borrow to the hilt and often have little room to manoeuvre, especially if they buy at the top of a cycle.
A new wave of those buyers anxious to find a first home will hardly be helped by another tool in the Reserve Bank's kit: tightened loan-to-value ratios.
The bank's concern is the stability of the country's banking system and, from September, it is tightening loan ratios - essentially to protect banks against themselves.
With around 30 per cent of mortgages involving people with less than a 20 per cent deposit, this is a significant step.
The rationale: 90 or 95 per cent loans may help people to buy a house but the risk of default increases when an economy turns and jobs are at risk.
When banks are required to demand a 20 per cent deposit (around $100,000 for an entry level home in the lessfashionable Auckland suburbs), that will be hard for many first-home buyers to manage.
For a lot of Aucklanders, it may be the end of aspirations to own a house, and the Government - publicly anyway, to help ward off electoral damage - would like the Reserve Bank to consider exempting first-home buyers. But with such buyers making up a high proportion of new borrowers, there seems little chance of that happening.
Tighter loan rules should take some of the sting from price rises, and even real estate industry leaders see the merit.
Peter Thompson, managing director of Barfoot & Thompson, told the Herald last month: "Will it bring prices back? Possibly, slightly, but not down. It will make people decide whether they're going to buy more carefully. I've been saying for several years that 90 to 95 per cent mortgages are going to set us up for a fall."
In the same story, David Whitburn, president of the Auckland Property Investors Association, predicted price drops.
"If highly geared [over 80 per cent] loans are restricted, then there is no question that this will restrict house price growth. This move will not stop property cycles but will, in all likelihood, slow down Auckland house price growth, and raise rents in the lower-mid house price levels, as fewer people will be able to finance their own homes," he said.
However, economist Rodney Dickens is not so sure. He thinks buyers shut out by more restrictive lending will find other funding channels, as the market responded in the Muldoon era.
There have been signs for a couple of quarters that the sellers' market in the more central Auckland suburbs is pushing some people beyond what seems logical value. That's a subjective assessment, of course, and real estate agents will always argue that a price achieved at auction is "the market talking". But the real estate market isn't that pure. A house that sells for $1 million today could go for less a month later when different people see different value.
Agents who felt for their clients in the dismal days of 2008 and 2009 are now raising their eyebrows at some of the prices reached in quite modest suburbs.
Million-dollar sales in areas such as Waterview, Mt Roskill and the less showy North Shore suburbs, and properties regularly selling at 30 to 40 per cent above capital valuations set less than two years ago, suggest we may be getting over-heated. Kerry Stewart, QV operations manager, says demand is so high in parts of Auckland that "there is little opportunity to delay making offers".
No one is talking about general panic-buying, but when buyers reject the advice of agents to see a lawyer before signing an agreement - and that is becoming less rare - the warning bells should be ringing.
Anne Duncan, principal of Mt Albert-based Anne Duncan Real Estate, has noticed the trend as people worry about being beaten to a house by an unconditional buyer.
"People who spend $5000 on a car will get an AA check and take their time to make sure it's okay, yet some people are prepared to sign a contract for a $700,000 or $800,000 house without checking with their lawyer," she says. "That's really ill-advised."
In a normal market where supply matches demand, preauction advice that, say, a garage or bathroom may not have been built legally - or a leak is suspected in a bedroom - are usually noted with caution. There's always another house that won't cause sleepless nights. But Auckland auctions at the moment are littered with such conditions and the impact on bidding is negligible.
In normal times, valuers or building inspection companies might have a week or two to complete reports before deals are finalised. But some reports today are needed in 24 or 48 hours as unconditional buyers put the pressure on.
The "need" to secure the house a buyer has researched is amplified at auction. With building reports, valuation guides (often needed to obtain a mortgage) and legal advice perhaps around the $1000 mark, it's costly to bid, and then miss out, at auction. It's even more costly when a buyer has tried and failed five or six times.
It's that "always missing out" experience that's helping to drive Auckland prices, especially at the lower levels. And it may be a little while yet before people start getting what they want at prices they are happy to pay... with no one breathing down their neck.