BNZ chief economist Tony Alexander has a "very strong warning to first home buyers" that floating mortgage rates in this country could be as high as 8.5% within three or four years.
The expectation in the market place is that the Reserve Bank will start pushing up interest rates from early next year onward.
Alexander told interest.co.nz in an interview that at the start of any cycle of interest rate rises home-owners tend to be resistant to the higher rates, because the vale of their property is rising and they are happy to live with the higher rates on that basis.
“History tells us that initially we just flip the bird to the poor old Reserve Bank and they end up having to take interest rates to a relatively high level. So, for every cycle it is what will be the extremity of interest rates this time around?”
He said that at the end of the last housing boom in the mid-2000s house buyers weren’t deterred till floating rates hit about 10.9%. The cycle before that it was 11.3%.
“I think people should budget on at least 8.5% this cycle – within three-to-four years.
“...There's a lot of guesswork involved in that. This is a very uncertain post-[2008 Global Financial Crisis] world still.”
Interest.co.nz calculations would suggest that based on the average floating mortgage rate of 5.65% at the moment and the average floating mortgage size of NZ$104,000, monthly repayments would go up some 29% from NZ$648 a month to NZ$837 a month if rates did indeed climb to 8.5%
The heat being generated in the housing market, particularly in Auckland, is prompting high-level concern and calls to action. The Reserve Bank is indicating it is prepared to use its freshly developed "macro-prudential tools" against the market. See here for our articles on macro-prudential tools.
The Government is meanwhile pushing through new legislation that will enact a new Housing Accord it has agreed with the Auckland Council aimed at building 39,000 new houses in Auckland over the next three years. See here for our stories on the accord.
Strong indications
In a speech last week RBNZ Governor Graeme Wheeler gave strong indications the central bank would be prepared to unleash the most talked about of the four macro-prudential tools and introduce "speed limits" on high loan to valuation lending, typically where the buyer borrows more than 80% of the value of the house.
“I think you can definitely count on it happening,” Alexander said.
He said, however, the RBNZ was definitely not using the LVR limits to replace increasing the Official Cash Rate - raising interest rates when it wants to slow down inflation overall in the economy.
“This is something focused very much on reducing bank exposure should there be a big decline in house prices down the track.
“...What the Reserve Bank is trying to do is limit the risk of a negative equity situation rather than necessarily cap the speed of price increases.”
First-time buyers hit
Alexander agrees that first-time home buyers are the people likely to be most affected by high LVR lending limits.
“Definitely, this is the problem. For the first home buyer just raising a 10% deposit for the likes of Auckland can be difficult enough. If you’ve got to come up with 20% it is going to be near impossible for a lot of people.”
Alexander reckons, however, that buyers will find still find the money but will just pay more for it.
“It’s going to shift the risk from maybe excessive bank exposure should house prices fall towards simply the individuals are going to be having greater cash outflows at higher interest rates.
“It also maybe means it increases the chances of the sort of unitised developments. Let’s say people are going to be thinking about inner city apartments for instance, you are going to get the developers come along to build the apartments, they will be marketing those apartments to first home buyers and also investors who want something low maintenance, (hopefully they are not going to leak this time around), the bit that’s going to be missing is going to be who’s financing it.
New investment vehicles
“We banks pulled back from a lot of this stuff a generation ago. Previously it was the finance companies. Some new investment vehicle is going to come in there. They are going to have nice attractive people marketing their products, maybe old people walking along the beach, saying you can earn another 1% to 2% here rather than bank term deposits.
“So, the money will start flowing into these new vehicles to finance the developments and so then the developers can say to the young people we can lend you 90% -95% finance because we’ve got the money. So, that I think is what’s going to happen over the next two or three years, partly as a result of the Reserve Bank policy.”
Does he mean therefore that we may see developments again such as the ill-fated Blue Chip companies that saw over 2000 investors left around NZ$84 million out of pocket?
“Well, it could be something like that. Hopefully not. I’ve got no evidence that anything out there at the moment is dodgy, shall we say," Alexander said.
People get desperate
"But history says to us that when people get desperate for their property exposure there are going to be people who come in to provide the financing, one way or another, that they are looking for. And I think that could be one form it will take, further down the track. We are not there yet, but it is a bit further down.
“...The challenge for the Reserve Bank here is that last time they did not monitor adequately the finance companies. This time they’ve actually had a sentence in something they released a just few days ago, indicating they will be keeping an eye out for any new sort of financiers that do appear maybe offering top-up finance. So, I think they are determined to get on top of it this time around. But like I say, when you are talking about maybe an individual project and the finance available for that project I’m not necessarily convinced that they will have much of a role there.”
On the proposed Auckland Housing Accord and its targeted 39,000 new homes, Alexander said it was "definitely a good target to have", given the estimates of a current housing shortage in Auckland of up to 30,000 homes.
No resources
“My point is that the resources are not going to be there – the carpenters, the electricians, the council inspectors, the engineers, the architects. We’ve had five years of very weak construction in New Zealand, so there is a lot of catch-up to be done.
“Especially in the context of the rebuilding of Christchurch the resources won’t be available.”
But Alexander said that assuming Auckland building activity now does ramp up, this will produce a squeeze on available labour and building materials down the track. This will “most definitely” lead to concerns about inflation.
He said there were four different problems associated with the housing market:
- Affordability. Can I afford to buy a house in Auckland etc.
- Physical availability of low cost accommodation for the low income people.
- Bank exposure to riskier lending.
- And then, mainly from the exporters angle, the prospect of the currency going through the roof when the Interest rates go through the roof because the inflation goes through the roof because the construction prices rise.
“My view is the resources for the construction to rise massively won’t be there, that simply means the prices go up, the wage rates, the materials costs etc. You get the inflation, you get the interest rates going up potentially strongly in the next three years and you get the currency going back up again as well.”
Alexander questioned whether even if a lot of land was freed up in Auckland and a fall in section prices resulted, would that be good interest rates and exchange rates?
Even more demand
“If the sections are cheaper we are going to look to build more houses, there’ll be even more demand for materials and people. The costs, the wages go up even further and THAT is the driver of inflation not the rise in the house price itself, because that isn’t in the inflation measure. All of these things are and therefore you actually get a worse interest rate response eventually from the Reserve Bank. It’s a perverse world.”
Anecdotally, one driver of higher house prices, particularly in Auckland, has been an influx of foreign buyers - many based offshore. Alexander has attempted to quantify the extent of such activity through the BNZ's monthly housing survey done in conjunction with the Real Estate Institute. The specific questions relating to the geographic origins of buyers were included in the March and May BNZ-REINZ surveys, producing a figure of just 3.6% of buyers nationwide from overseas and not intending to live in New Zealand.
Commenters on the interest.co.nz website have tended to be very sceptical about the results from those surveys. But Alexander's not budging on his view.
“Well, I say bring on YOUR results. Not a single person has come to me with anything other than some sort of sprawling anecdote about the Chinese taking over the world. Come to me with your survey. It only has to be Auckland for instance, showing the proportion of house sales that are going to people overseas. Chinese, poms or whatever.”
“...I think one of the issues here is that we’ve got a lot of panicked people in the housing market now,” Alexander said.
He said he had been telling people back in 2009 that it was a good time to be buying a house, but many people were put off by talk of falling prices.
Stacked-up investors
“What you’ve got now is at least four years worth of people stacked up on each other all scrambling to make a purchase and of course if are looking to buy a thing you are hoping that some other buyers will go away. You are looking at who else is out there at the auctions etc.
“And I think that what people are hoping is that some legislative change could be made to scare away maybe some of the foreign buyers because they are in this panic trying to catch up on buying they maybe should have done one, two, three, or even four, years ago.”
Alexander re-iterated previous comments he has made, however, that whatever the current reality of Chinese buyers in New Zealand there will only be more in future, given our increasing trading links with the country and its burgeoning middle-class, meaning more investment money is available.
“I am a strong supporter of the Government in fact putting in place legislation, which would limit the purchase of houses in New Zealand by foreigners.”
He said a starting point would be the Australian rules, that say, in essence that overseas-based foreign investors can only buy new houses, not existing ones.
“I personally think that is what we need to move to in New Zealand.”
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