The Reserve Bank (RBNZ) thinks house prices are nearing sustainable levels, despite remaining out of reach for many New Zealanders, and it's therefore easing lending restrictions.
The national house price to income multiple is 7.2, and Auckland's 8.9. These are high by historic standards but down from peaks of 9.3 and 12.6, respectively, in November 2021. (See interest.co.nz's house price to income multiple chart at the foot of this story).
“Our current assessment is that, given recent falls, New Zealand house prices are closer to being at sustainable levels than has been the case in recent years,” the RBNZ said in its May Financial Stability Report.
“Current prices are within the range of fundamental values suggested by some of the metrics we monitor, but the overall balance across indicators suggests prices remain somewhat overvalued”.
Affordability v sustainability
The national average residential property price was $928,656 in CoreLogic’s House Price Index data released for April. This may not feel particularly sustainable to would-be first home buyers unable to get into the property market, and is still about $200,000 higher than the pre-Covid March 2020 level.
But Reserve Bank governor Adrian Orr said there was a difference between affordability and sustainability, with the central bank only targeting the latter.
“Sustainable is something that you can explain with the underlying economics and settings of supply and demand. That may mean that something is sustainable but not necessarily affordable to all”.
“Affordable is a very loaded concept. Affordable to who? A first home buyer, a low income, a high net worth — what does it mean?”.
The bank assesses whether house prices are at risk of causing financial stress by considering metrics such as whether it was cheaper to rent, build, or buy a house. As well as mortgage to income ratios and rental yields relative to other investments.
“In Aotearoa, ‘sustainable’ has been outweighing ‘affordable’ for a long time now because of the underlying economic constructs,” Orr said.
Underwater houses
The RBNZ thinks the proportion of home buyers that are in negative equity—when a mortgage is bigger than the value of the property—is likely somewhere between 2% and 4%.
Around 25% of the current stock of mortgage lending originated during 2021, when house prices were abnormally high, with about a fifth of this being to first home buyers.
The rapid rise in debt servicing costs has been testing households that borrowed at high debt-to-income multiples during the past three years.
Many of these borrowers are facing interest rates above those at which their servicing capacity was assessed by the lenders.
A strong labour market and wage growth has been helping keep heavily indebted households from falling into default, but a larger-than-expected increase in unemployment is a key risk to financial stability.
RBNZ Deputy Governor Christian Hawkesby said loan-to-value ratio (LVR) restrictions had protected most households from falling into negative equity when house prices were elevated in 2021.
LVR restrictions were raised to their tightest settings and are now being rolled back to more middling settings.
“This reflects our assessment that current lending activity presents fewer risks to financial stability and household resilience than those of the past couple of years,” the RBNZ’s report said.
The central bank has recently been given the ability to impose debt-to-income ratios as another way to control risky borrowing. This restriction will be ready in about April next year, but is unlikely to be deployed.
“At the moment, the trend is for us to be easing those macroprudential tools. They are tools you want to be putting on when those vulnerabilities are building,” Hawkesby said.
In this stage of the economic cycle, the RBNZ wanted to be easing restrictions so as to be able to put them back on later if risk levels rise.
Some economists have predicted that house prices have already found a floor, which could be reinforced by looser lending restrictions.
The central bank said there was a risk that house prices could actually fall below its assessment of sustainable levels.
Lower house prices meant there was less risk of a sudden correction, and lending conditions remained tight regardless of the RBNZ’s rules.
Additionally, there had been little demand from investors due to the phasing out of tax deductibility on mortgages and low yields on rental properties.
House price to income multiple
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48 Comments
There is a plausible outcome where we see a small degree of further price declines in nominal terms and then a 5-10 years long stagnation in house prices while nominal/real wages grow (at least in relation to housing). So a crash in real terms but not nominal terms.
Yea it is strange that people think Tradies should not be well-above median wage. It is a skilled and important job, why shouldn't it have high remuneration? Most tradies are vastly more useful and important for maintaining our standard of living than huge swathes of office jobs. Especially in the finance industry.
Definitely some resentment from white collar workers who see trades as somehow socially "beneath them" and don't like the idea they earn a fair bit more than them (or at least can do).
As one example, NZ would be vastly better off if a good chuck of our law graduates went into the trades (or pretty much anything else).
My wife is a nurse (post graduate) with 23 years of experience and gets paid $34/hr. Police / fire / teachers / paramedics are in much the same boat. It's hard to reconcile the new minimum wage, with those on the public pay roll and then tradies on $75-100 per hour exc GST.
My other issue with the cost of tradies is value for money. More and more of my experiences are they turn up when they choose, mot when they say. Workmanship that needs scrutiny, and a lack of accountability when things do not go to plan. The lack of competition due to high demand has allowed a cost ceiling to evaporate and the level of service to drop. If you ran a cafe like that you'd be out of business in a heart beat.
I am a registered nurse with 20 years of experience and I am on $45/hour due to the recent pay increase, that followed the Pay Equity Act negotiations. On a lot of issues I have been dissappointed with this Labour government but on Pay Equity they have done well.
It is a reasonable salary. I could probably earn more in Aus (still many of my colleagues are going there and the reality is the health system must pay the international going rate) but my life is here in NZ, and I am happy with that.
I teach physiotherapy for a university. I have 30 years experience and postgraduate qualifications. As well as teaching i maintain a clinical caseload. I earn about the same as a primary school teacher who has no postgraduate qualifications or extra responsibilities.
While the nurses have done well to finally get decent pay, the rest of the allied health workforce is underpaid. NZ will haemorrhage those workers until pay gets sorted.
Law graduates may well became tradies - as law is one industry that is about to get smashed by AI.
Imagine when ChatAi gets access to the full NZ, UK etc case law and legislation. eg provide you issue details, ten ask write me a legal submission to argue my case.
Even without such access I tested it to write a brief summary of a decision I wanted to send as an email summary to an attachment.
Id seriously reconsider law as a degree.
New Zealand homes are shockingly poor quality and vastly overpriced.
Million dollar homes with walls an inch thick. Hot in summer, cold in winter and requiring DVS systems. Others closer in quality to a portacabin.
Can’t say the quality anywhere matches the workmanship expected in other countries.
Tradies are no different to estate agents. They have fully exploited market forces and there is little correlation with expertise or quality.
Hmmmm ...
“Affordable is a very loaded concept. Affordable to who? A first home buyer, a low income, a high net worth — what does it mean?”.
This is something that - once again - we see our politicians failing at. They need to define "affordable" so that the RBNZ doesn't have to make such asinine statements that show them shirking and smirking behind their remit.
I'd suggest 5 times incomes as a maximum. (Like the good old days. The even better days? It was 3 times!)
So how could the RBNZ implement such a policy?
One way would be with maximum initial loan terms. (Again like the good old days!) I'd suggest 20 years or less. This actually builds 'resilience' into the system too as mortgagees make larger capital repayments from day one (building up equity faster) and they can lengthen the loan term if they run into cashflow difficulties.
It would also bring down house prices. You'll note that this has very similar effects to raising/lowering the OCR without bludgeoning everyone! It also targets mortgages and households quite explicitly while leaving other sources of lending less restrained.
Yup, "sustainable" is a ludicrous concept. Sure we can continue buying ridiculously overpriced houses if we ignore all the negative externalities, e.g. homelessness, health problems, congestion, old age poverty etc etc.
Why can't they spell it out in black and white, higher prices are fundamentally a political decision. If we want affordable houses there are plenty of tools, the powers that be are just unwilling to use them.
In many places up and down the country FHB have very little chance of buying a property also mortgages at 9 times income is just setting up people for a lifetime of financial hardship. The market will continue falling until average wage couple can purchase a home at 4 x DTI. Young people need to believe they have a hope of owning a property or many will just leave New Zealand at the moment most will be living with parents into their 30,s. This government needs to be building houses and renting at low rates, many are living in cars or overcrowded houses crime is rapidly becoming a every day event and unless housing affordability be it rent or buying a home is possible a huge breakdown in society will occur.
... mortgages at 9 times income is just setting up people for a lifetime of financial hardship
This is very true if people max out their disposable income paying the mortgage over a 30 year term and inflation stays low.
How about loosening the RBNZ inflation range a bit. How about a new range of 3%-5%? Many countries find that range completely normal. [I can hear the howls from you all now.]
Alternatively, we can implement initial mortgage term limits of 20 years or less ... and take our medicine now before even more people get caught for life!
In case you didn't know ... The banks do not want initial mortgage term limits at all! The actually want longer terms so mortgagees just pay them rents for ever!
I agree. Inflation rate should be zero, which aligns the capacity to produce with the capacity to consume. Once you take efficiencies such as technological advances into account, you would expect to see deflation, as less work is required to produce the same product.
Replace "officially" with "nominally" and the headline would make more sense.
That said, it doesn't look good at all.
A credit crunch as bad as 2009 could be on its way. The USA Fed will respond as it always does and the RBNZ and RBA will follow suit. Alas for the USA - this may be the end of the greenback being the world reserve currency. Mind you, that's been said many times before and it didn't happen. But this time it is different.
Maybe an OCR at 2.5% by Christmas? (Yeah. You'll say I'm dreaming, and I probably am. But it is a possibility - albeit remote.)
Maybe 7.5% after the next OCR increase.
But by Christmas the destruction wrought by the RBNZ will be clear for all to see. And many retailers and inner city businesses - who rely on Christmas sales to break even - will be going to the wall after Christmas. Add to that what is happening overseas and by Christmas it'll be a mess.
My timing may be optimistic but it remains a question of when - not if. The OCR will whiplash back. Shock and Orr has become power mad.
The RBNZ thinks the proportion of home buyers that are in negative equity—when a mortgage is bigger than the value of the property—is likely somewhere between 2% and 4%.
2-4% of a pool that includes those who have owned for decades makes this look low.
How about the % of those who purchased in the last 2-3 years?
How about the % who are not yet negative but have now lost the equity of their deposit?
No. Actually, it's not.
So long as the rate stays below 10% and remains consistently at the same level it's not much different to a consistent 2% or 3%.
Many other countries run much higher inflation ranges than we do and their economies truck along just fine.
The killer issue is, and always has been, unforeseen movements in inflation or deflation. That's when things get screwed up. And big swings really screw things up. But as always, there are winners and losers. For example, people with large mortgages will be thrilled if inflation stays at 7% for the next 10 years.
Do you think the good folk at the reserve Bank talk like that when they are having dinner with their families? They are reinventing the English language!
“Current prices are within the range of fundamental values suggested by some of the metrics we monitor, but the overall balance across indicators suggests prices remain somewhat overvalued”.
Put numbers on it FFS!
I did like Orrs explanation of sustainable though. It was actually a refreshing admittance of their MO, and I agree, housing affordability is a governmental issue.
It is Orwell 1984 doublethink…
‘Doublethink is a process of indoctrination in which subjects are expected to simultaneously accept two conflicting beliefs as truth, often at odds with their own memory or sense of reality’
It happens when there is a political agenda to spread propaganda to the people.
It doesn’t take much analytical thought to realise the RBNZ and our main political parties regularly lie and attempt to deceive us all to cover their own incompetence and for their own political gain (transitory inflation, affordable housing, controlled immigration - all complete lies).
Such are the times we live in…
It was actually a refreshing admittance of their MO, and I agree, housing affordability is a governmental issue.
I couldn't disagree more.
If the RBNZ is going to reduce the OCR to near zero, at the same time the NZ Government is keeping the economy afloat with borrowed cash, then the RBNZ is culpable of appalling mismanagement and it is completely the RBNZ's fault.
You can't adopt monetarist central banking dogma as the RBNZ has and then claim massive assets bubble of their own making are someone else's fault! Such a suggestion is nonsense!
I would agree that housing supply is mainly a government issue though. (In actual fact, it's been mainly a Local Government issue. Thankfully, Central Government cried, "Enough!", and did something about it with the MDRS and NPS-UD.)
A simple definition for affordable to me is a working class family in any suburb in the country being able to afford the mortgage to buy the house they are currently renting. As opposed to sustainable which presumably means that a dwelling exists to house that family somewhere in the country. Irrespective of whether it is owned, rented or emergency housing. For me it is a simple equation. The Government change the RBNZ mandate to affordable and then thrash out the definition.
If someone can afford to rent, then they should be able to buy. The renter for life is paying off an asset for another party who then gets title - in spite of the renter actually paying for that asset.
This works because of tax and inflation. Thieves in the night.
Housing tenants was a way quite a few people got rich. So easy when could just write off all the costs, and keep all the benefits. I just wish our government could retroactively claim tax on the rent incomes of slumlord LLs who profitted beautifully for years in that system.
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