By John Bolton*
An article in the NZ Herald recently quoted a senior lecturer at the University of Auckland saying the housing crisis would end in tears. A KPMG report was cited stating people were borrowing twelve times their income. That was a surprise to me because it’s simply not what we see in the real world! People are not borrowing more than they can afford. They can’t as bank criteria won’t let them.
So, I had our IT team run our actual client debt-to-income ratios. By and large we came in at about five times income, maybe six at the upper end.
That didn’t surprise me. People that can borrow, are borrowing what they can afford and in itself that won’t end in tears. Obviously if prices fell and these buyers ended up with negative equity that would be worth a cry.
I think to really understand Auckland, we need to move beyond averaging numbers out. It's not simple.
Previously I have written about the restricted land supply that impacts Auckland, with water making up 40% of the city’s urban area. It's also not a uniquely Auckland problem with ‘housing affordability’ an issue for many growth cities around the world. NZ is also dwarfed by global money flows and the hunt for yield, and that's yet another factor.
In this post I want to dive into economic growth.
So, let’s start by imagining New Zealand had a growth rate of 6.00% per year. At that rate, we’d be a high-growth economy in anyone’s book, right? We’d consider that an Asian growth rate.
So, here’s the thing - Auckland’s GDP rose 31% in the past five years (or 5.6% per year.) Auckland is growing strongly and it’s not just population growth.
The problem with ‘averaging’ out growth is that it hides what’s beneath. Imagine if we could split Auckland in half again. I’d imagine Manukau would grow at around 4% with Auckland City close to 8%.
I’d suggest what we are seeing is the knowledge economy kicking into third gear. It’s the next evolution of our economic system and it’s growing strongly. The ICT sector has grown at 9.00% per year since 2007 and now contributes $3.6 billion in GDP. It employs 30,000 people with an average wage of $99,744 - almost double the NZ average. Xero is the poster child having grown to 1,700 employees in ten years.
Those in the ICT sector have experienced somewhere in the order of a 50% increase in income at the same time as interest costs have halved, in total increasing their borrowing power by 300%. That’s what happens when high growth meets low interest rates. Yet the headline is that wage growth has been non-existent for the past decade and for most people that's true, but not everyone.
A big chunk of our economy and people have missed out on this income growth. Is technology (aka the knowledge economy) already driving income inequality? And where does that go with robotics, AI, big data and cloud computing? Will we see more and more income inequality, driven by the next economic epoch we're now in?
And yes, if we jump back to average house prices, they have accelerated well ahead of overall income growth. There’s no doubt that property speculation has played its part driving up house prices, as has cheap debt and capital, and there’s no doubt that for many Kiwis affordability has been smashed by the resultant craziness.
All I’m wanting to highlight is that on both sides of the argument we tend to over simplify what is going on. High house prices are not just a NZ problem. At its core, the bigger issue is how we cope with asymmetric growth in an increasingly global economy (both driven by technology) with large amounts of capital chasing yield. You can then overlay local constraints like urban planning – it all plays a part.
Whilst I think house prices are at risk of falling on the outer fringes of the city, especially development land, my view is the inner city will hold its own. There’s no spare land in Auckland city meaning the only thing that will get built are town houses and apartments. High growth rates and low interest rates are not going anywhere anytime soon and I can’t see the new money wanting to live out in the burbs.
Just one perspective on a complex problem.
*John Bolton is the managing director of Squirrel Group, which includes Squirrel Mortgages and Squirrel Money. This article first appeared here and is used with permission.
35 Comments
asymmetric growth in an increasingly global economy
That pretty much sums up what I have been saying.
Central Auckland remains strong! Good to see it's not just me and DGZ claiming this.
Also I'm in IT and can confirm that incomes have gone up markedly since 2000, especially for advanced roles. There also seems to be a lot more account and project managers drawing high salaries. Helpdesk and desktop support have been in the doldrums but these are entry level roles and good places to get a foot in the door.
If you mean incomes in IT have grown by employee turnover then I might not laugh at your statement. Because across many sectors in the tech industries wage growth has been pitiful and certainly much lower than global rates even accounting for cost of living variances. Pay rates for senior level engineering positions are still pitiful and if you work in the industry I would encourage you to migrate overseas or into upper level management to get a much better investment for any skills. Certainly most in the senior level roles can never afford basic housing in NZ at entry level. It has been quite noticeable at business conferences when conversations do turn to standards of living to hear so many crestfallen and cynical positions. Many did leave for much more lucrative positions overseas (especially at the extremely higher skilled roles, even in post doctoral medical & engineering fields). Even at the entry level roles they would be paid far higher than mid and senior roles in NZ. When considering the return for the investment the only reason to stay in NZ is family, and even then you would be able to afford frequent flights on the higher wage or do a stint for a few years and return with large capital backing. If you still wanted to invest in NZ as well investments can be easily managed overseas.
People gravitate to where the jobs are and that’s always been the case
Auckland is the big smoke of NZ
Salaries and wages have been lower in NZ forever which is why people primarily migrated to Australia with the sunshine a close second
However there was a uniqueness to Auckland and mass immigration has I feel harmed more than it has improved living standards
Zachs daughter was turned away from employment at McDonalds which would never have happened pre the great National party open immigration student visa programs
I hope she found a job Zach
There is still a big drain of high level IT development going to India and east Asia.. Don't rub your hands too hard because it may your role being outsourced next.
Yes, you can argue 'til the cow comes home regarding their quality of work, but it's all boiled down to costs
I'd argue that it is actually a terrible piece.
Just read what he is trying to say.
Two key points he makes:
Median income to median house price isn't a thing because "our" (heavily biased) data says it isn't.
We need to move away from looking at numbers to "imagining" what is happening. I agree, the averaging isn't a great approach, but "imagining" isn't a realistic alternative.
Agreed.
An average is meaningless without knowing the range.
A stable housing market has a low medium multiple so what the Auckland medium multiple tells us is we are still in bust territory.
And the real issue about who can afford - are all the people who can't afford home ownership just because of a dysfunctional housing policy.
Yeah.
Auckland is a high cost city and so articles like this that always state "IF" Auckland can attract high value jobs/professions/investors it will be a success.
The big "IF" is no one can really work out what advantages Auckland has over the cities it competes with. The only regional city with similar cost structures to Auckland is Sydney, but Sydney dwarfs Auckland in size and wealth. Auckland is more costly than Melbourne, Brisbane, Perth, Adelaide, Christchurch, Hamilton and Tauranga.
"By and large we came in at about five times income, maybe six at the upper end".
That is high. Most of these households will be dual income? All it ever takes is mum or dad householder losing their job and that becomes 10-12 times for that household.
And, playing with averages works both ways. It's like how NZ's debt to GDP is say 170% whereas there are lots of highly leveraged households and lots with no leverage. The average hides the danger.
"Auckland is growing strongly and it’s not just population growth".
Well, it's mostly population growth, with a bit of credit growth thrown in (multipliers, etc, etc). Let's get real here - until New Zealand can grow it's productivity, it's all just fluffy narrative.
Frankly, I think when you're this close to the action (as in John's case) the dangers can be hard to spot.
Xero is possibly not the best example to use - it has yet to turn a profit. The only way to make a money with Xero is to trade it's shares - 52wk high 35.50 / low 16.80 - and then there are the IT company's that have recently failed....
He complains about using averages but he then focuses on one sector of the economy. Sorry, you have to take the whole economy into account not just parts that are "doing" well and support your argument. As DC pointed out this morning, while China has a huge trade surplus in manufactured goods it has an equally huge trade deficit in services - you have to look at the whole picture.
When I hear of the big salaries being paid to IT workers, something makes me very nervous on their behalf.
All these new terms: talk of "disruption", "robot", "artificial intelligence".
It all has a very year 2000 feel to it as if its a big concerted marketing push in order to increase the funds flowing into IT.
Sure, there will be a certain amount of legitimate additional automation that will be able to be done by computers. But that has been steadily happening since about 1983.
It won't be long before the Auckland Council tries to incorporate artificial intelligence in some of its IT projects. When that happens, that is the day that we know that we are all stuffed.
When I hear of the big salaries being paid to IT workers, something makes me very nervous on their behalf.
Much coding is being done in countries such as Vietnam. It's even the source of some of our "successful ICT sector." http://www.augensoftwaregroup.com/about-us/
It's not necessarily Kiwis making fat salaries into the future for "doing IT."
Not to mention - lawyers! "software that uses AI to automate the drafting of legal paperwork for real estate deals" Might john Bolton be out of a job himself in due course?
https://abovethelaw.com/2017/07/startup-says-its-first-robo-lawyer-for-…
Uninterested
1983 ? windows 95 saw the start of the PC boom & the real mass use of the internet albeit dial up
The speed of change is what’s different now
We are on the cusp of electric self drive vehicles including trucking
There might be 1 human up front in a line of automated trucks. No taxi drivers unless you wish to pay more
Robotics and Artificial Intelligence merging ever closer eliminating human workers at all levels
Would you rather be operated on by a AI robot which never needs a good nights sleep or a grossly overworked
human surgeon who hasn’t slept properly all week ?
Speed of change is getting faster
In 1985 I was the first person in the large organization I worked for to use a spreadsheet for doing a cost benefit study. Prior to that tables (from a booklet) were used. Its not all about the internet.
Eventually, some proportion of the traffic/ manufacturing will be done like you say. Trials are required. Widely publicised balls ups will occur. Liability sorted out. Wages will drop in order to compete against the machines. I think it will be a very slow process.
Depends what you call slow Uninterested
I was at a huge IKEA store today that had a row of fast chargers in the parking lot for everyone’s electric cars
Even little towns have fast car chargers now
It will come to NZ
Every Toyota now has auto stopping for pedestrians & will steer the car back into your lane with lane assist
Even reversing the car will stop by itself if there’s something in the cars path. This is all now standard across the Toyota range base models up
Yes there will be accidents with self drive cars but not as many accidents as with humans driving them
$3.6 bio is nothing to sneeze at, but Bolton is mad if he thinks that the NZ economy will be transformed into a high-income, tech-driven economy. A handful of leading ICT companies and strong growth in the sector are all very well, but the reality is that the key driver of the NZ economy is consumer spending on goods and services. ICT ventures can have a relatively short life cycle. Take for example Infotools. Fantastic business and story, but their offer can easily be replicated by cheaper suppliers out of Asia or even implemented on the client side by hiring directly and having a clear strategy.
He complains about using averages but he then focuses on one sector of the economy. Sorry, you have to take the whole economy into account not just parts that are "doing" well and support your argument. As DC pointed out this morning, while China has a huge trade surplus in manufactured goods it has an equally huge trade deficit in services - you have to look at the whole picture.
Yep, it's a bit of an "I'm alright because my clients work in IT" puff piece.
Unlike Europe, Asia and North America, NZ just does not have any significant legacy of industry and technological advancement.
Sure we can do niche stuff, but not the really big stuff.
It's always going to be just a bit of icing on top of our agricultural / tourism / property Ponzi economy cake.
We have had examples such as F&P (esp. healthcare), Sistema, Navman etc. We seem to have tended as a country, at least recently, to end up selling things off to foreign ownership eventually (part of the boat, bach and BWM mentality?) rather than creating a wide swathe of long-term companies.
Also worth noting that many countries with a very strong industrial base have protected their fledgling industries from global competition until such point they're ready for it (e.g. Japan with cars, China with online tech), something that's now anathema to the ideology of many folk currently.
Rick
A friend of mine is a friend of ( now doesn’t this sound like a Remmers cocktail party ) the Navman guy
who sold out to the US Corp
I think it was 50 million but I forget.
NZ just needs to follow the Netherlands approach to agriculture
See National Geographic
It depends what one means by 'doing well'..
Gross GDP growth is good, but per capita is poor. Productivity growth is poor
Much of Auckland's growth is predicated on a precarious property Ponzi.
Personally, I think Auckland only has a veneer of 'doing well.'
Nice city, though.
The squirrel has obviously lost his nut collection. Does Bolton truly believe he is the only person with regional GDP data and what the specific drivers of regional growth have been over the period thru March 2016. When one speaks of a knowledge economy, anyone requiring a mortgage can look at the information fastidiously documented on Interest.co and arrange thru a lender best terms , without passing over ongoing trail to the likes of Bolton. Maybe Interest.co could have a one- off referral fee.
Previously I have written about the restricted land supply that impacts Auckland, with water making up 40% of the city’s urban area.
Auckland is on an isthmus, which means as the city gets bigger the relative availability of land increases rapidly. Auckland does not suffer from a restricted land supply, Auckland merely suffers from an idiotic council.
The distribution of loans would have more meaning than the average. It would be more useful if JB was to provide a graph of lending multiple volumes. And also split this out to show the multiple against guaranteed income vs the "liar loans" (bonuses, self-employed etc).
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