LVR stalls regional housing recovery

Photo/Supplied

The decisive election result was a double-edged sword for the Reserve Bank, already struggling to contain a soaring Auckland property market. Although central bankers will have welcomed the certainty the September general election delivered, it also triggered an immediate boost to the Auckland housing market.

Little wonder Reserve Bank Governor Graeme Wheeler kept his hands firmly on the low equity loans restrictions aimed at curbing unsustainable house price increases, especially in Auckland.

The restrictions have sidelined many first-home buyers, and helped to halve the rate of growth in the Auckland market over the past 15 months. But assuming there are no unexpected international economic shock waves, house prices inmost Auckland suburbs look set to continue increasing for at least the next six to 12 months.

The combination of continued strong immigration numbers and the time it is taking to increase the number of houses available in the city, will underpin market strength.

Bank economists are forecasting economic growth of around 3.2 per cent throughout next year, down slightly from the current 3.6 per cent. But with continued relatively low interest rates, the absence of inflation, and continued strong net immigration, the Auckland house prices will probably continue increasing. Westpac NewZealand's chief economist Dominick Stephens says his bank expected the net immigration rate to reach 55,000 in the first half of next year.

"The resulting population growth has seen the Auckland housing squeeze get noticeably tighter, despite the increase in building in the region," he says.

"In recognition we have significantly upped our forecasts for Auckland residential construction - and even on that assumption Auckland's housing shortage is likely to get worse before it gets better." Stephens says this year inflation looked to be on the rise again, and the Reserve Bank had felt comfortable raising interest rates to keep inflation pressures and house prices in check. "But as inflation has turned out softer than expected, once again threatening the lower end of the target range.

The RBNZ's dilemma is starting to look similar to last year." If the housing market re-ignited in coming months, it might not be appropriate to tackle it through higher interest rates, at least not at this stage. "In this situation, the LVR cap would continue to play a useful role; it would certainly make little sense to remove it." The extent of the spring boost in the Auckland market has yet to fully work through to the market statistics, but those involved in the real estate market say they have been busy since election day.

The clearance rate at city auctions has improved, after a winter and pre-election lull, as potential buyers waited to see whether the election would clear uncertainty created by potential policy changes such as the introduction of a capital gains tax on investment properties.

Mortgage brokers, real estate agents and valuers say they have been busier since the election, handling a stronger than usual spring bounce in the Auckland market. Monthly statistics to the end of October also partly reflect the uplift, but with the time taken to complete the sales process, the full extent of the boost may not be clear until early next year.

But it appears the strength of the spring bounce helped confirm the Reserve Bank's decision to retain the "temporary" loan-to-valuation restrictions, despite public pressure from the Deputy Prime Minister and Minister of Housing Bill English to lift them. Politicians are still feeling the resentment of those involved in real estate outside Auckland and Christchurch.

Regional market players say the LVR restrictions smothered a modest recovery in many markets when they were introduced in October last year. But the size of the Auckland property market means this is where the central bankers are concentrating their gaze.

In its latest half-yearly financial stability report, the Reserve Bank said the LVR restrictions would be temporary, but they would remain in place until there was little risk of a resurgence in house prices.

It says the restrictions have helped moderate house price increases since their introduction in October last year. "However, there remains a risk of a resurgence in house price inflation, particularly in light of strong immigration flows. Consequently, we do not consider it appropriate to ease the LVR speed limit at this time."

Wheeler says the bank would like to see house-price inflation rise no faster than household incomes. "We would like to see house prices over the long term increase no more than the rate of nominal income growth," he said when releasing the Financial Stability Report last month.

"Hopefully, as we start to get the supply response coming in with increased building and the special zones up in Auckland, we'll see some better balance in the housing market in terms of supply and demand." Wheeler and his Deputy Governor, Grant Spencer, have been wary of predicting exactly when the restrictions were likely to be lifted, and commentators say they are likely to be phased out progressively rather than lifted in one step.

The building industry is gearing up to increase the supply of new homes in Auckland, but this cannot happen overnight. BNZ's chief economist Tony Alexander says he commented in late 2008 on a shortage of houses in New Zealand, and he then forecast that prices would not plummet.

"From the second half of 2009 I made no prediction regarding house prices," he says. "But whenever anyone asked whether they should buy a house in Auckland nowor wait, every time I said I would buy now, and I still say that." Auckland started with a shortage of houses in 2008, and the shortage worsened as house construction fell back to levels of the 1960s during 2011.

"The shortage continues to get worse as the number of consents issued in the past 12 months in Auckland has not even reached the 23-year annual average, which produced the shortage in the first place." The Auckland Council had estimated in 2012 that 13,000 dwellings should be built each year, but two years later only 7320 dwellings have been built during the year to September.

Only 5595 were built during the 12 months to September last year, and Alexander says prices keep increasing. He agrees with the Reserve Bank decision to retain the LVR restrictions. "The timing is too soon and were I running the RB I would want to see much more evidence of a sustained suppression of house-price inflation before backing away from using this new tool, especially when such rules are being increasingly taken up by other central banks around the world."

The Reserve Bank has for the first time revealed figures showing lending for mortgages broken down by the type of borrower. In September, 10percent of lending went to first-home buyers, 59.6 per cent to other owner occupiers, 28.8 per cent to investors, and 1.6 per cent for business purposes.

Alexander says lending to investors is almost three times as big as lending to first-home buyers. Little wonder then the central bank is looking at imposing some form of restriction on investors who own multiple rental properties. There is wide spread doubt in the industry about how such restrictions could be introduced effectively, but the central bankers say they will consult further with the industry during the first quarter of next year, before deciding what to do.

A partner at accounting giant PwC, Roger Kerr, says the housing market levelled off through the middle part of the year as a result of the LVR restrictions, mortgage rate increases from March to June, and fears of capital gains taxes from a potential Labour coalition government during the lead-up to the September poll. But he told interest.co.nz that fixed rate mortgage interest rates are lower today than in March when the Reserve Bank began increasing the official cash rate.

Job security was arguably higher now as many sectors of the economy signalled shortages of skilled and semi-skilled workers, and the New Zealand dollar was at a lower entry point for Asian investment buyers of New Zealand real estate. Property, particularly commercial and industrial property, was seen as providing higher investment returns than bank deposit interest rates at 4 per cent, and New Zealand shares had enjoyed a spectacular run-up, but could be becoming fully priced.

Roger Kerr says local government restrictions on fringe city land availability was still a major factor in keeping land prices artificially high, and out of reach of first-home buyers who want to build a house. He says the housing shortage was being addressed at a rapid rate, which would eventually correct the supply/ demand imbalance in the market.

"However, while credit is easily available and considered cheap the increases in property prices will continue," said Kerr. Other commentators agree, and say the supply imbalance cannot be corrected overnight, pointing to further increases over the next 12 months, at least.