Bernard Hickey: City housing, country pain

Graeme Wheeler says Auckland is not building enough homes. Photo / NZ Herald

Auckland is incredible, and not just because its property owners will happily crash websites in their quest to know how much their houses are worth. Or in the way they will then ring their mortgage broker to see how much extra they can borrow to buy a new car or boat.

Auckland has become barely believable in a financial sense, but absolutely crucial in the eyes of those pulling New Zealand's interest rate and lending levers. This week's Financial Stability Report from the Reserve Bank made it clear that Auckland has become the centre of New Zealand's economic and political universe, more than ever.

Aucklanders may think this is normal, but it means farmers in Southland are paying Auckland interest rates and first-home buyers in Palmerston North can't get a 90 per cent mortgage because Auckland house prices rose 40 per cent in less than three years.

Consider a few of the startling facts in the report. Reserve Bank figures showed Auckland houses were worth 16.8 times a year's worth of rent last year. Given house price inflation of around 8.5 per cent in the past year and rent inflation of 3 per cent, that ratio would have risen to 17.7 this year. That's up from 7.8 times a year's rent in 2001 and a ratio of 9.1 for the rest of New Zealand last year. This is more than double its long-term average.

Auckland's house price-to-income ratio has risen from 4.4 to 7.7 since 1999, while the rest of New Zealand's ratio rose from 2.8 to 3.6.

The separation between Auckland and the rest of the country is most evident in the amount of debt Aucklanders racked up starting their families, relative to the rest. A Reserve Bank study of the finances of cohorts of new mortgage borrowers aged around 38 found Aucklanders were responsible for 52 per cent of all New Zealand's new mortgage debt stacked up from 2001 to last year, which was up from just 35 per cent from 2005 to 2007.

Christchurch aside, home buyers south of the Bombay Hills (and north of Orewa) have become increasingly agitated at the way their interest rates and their ability to borrow more than 80 per cent of the value of their homes have been driven by Auckland's house price explosion.

That was rammed home this week when the Reserve Bank decided to leave its high LVR speed limit in place, defying expectations that it would be eased by Christmas. Instead, the bank decided to wait to see if the record high net migration into Auckland fired up the housing market again.

Annual house price inflation has almost halved nationally over the past year to around 5 per cent because of the high LVR speed limit and higher interest rates. Auckland's market has slowed, too, but inflation has fallen to only 8.5 per cent from more than 17 per cent. The trouble for the Reserve Bank is that 8.5 per cent is still too fast, given it exceeds income growth of around 5 per cent, which means indebtedness in Auckland is still growing.

Annual net migration is running at well over 50,000 and 80 per cent of those people go to Auckland first. The Auckland Airport Customs hall has become ground zero for the New Zealand economy.

Governor Graeme Wheeler reiterated this week that Auckland is still not building enough houses to cope with its population growth and to meet the existing shortage of up to 30,000 houses.

If the Government needed any more motivation to solve Auckland's housing shortage, this week's Financial Stability Report should be required reading. A flick through it could also be a useful way to sober up Aucklanders still partying hard over their ratings valuations.