Investors driving up risk in Auckland housing but no room to raise interest rates, Spencer says

Monday 24th August 2015

The growing presence of investors in Auckland's property market is increasing the risks, and is likely to both amplify the housing cycle and worsen the potential damage from a downturn both to the financial system and the broader economy, said Reserve Bank deputy governor Grant Spencer.

In a speech to the Northern Club in Auckland, titled "Investors adding to Auckland Housing Market risk", Spencer said housing supply in the city is growing "nowhere near fast enough to make a dent in the existing housing shortage."

"In the meantime, net migration is at record levels, and investors continue to expand their influence in the Auckland market,” he said.

In May, the Reserve Bank announced a tightening of its restrictions on the number of new home loans banks can make at high loan to value ratios for Auckland while easing the restrictions for the rest of the country. The changes come into effect in November. Today Spencer reiterated the Reserve Bank's call for more progress in developing new housing in the city, while welcoming tax changes imposed by the government, including a non-resident withholding tax, a two-year bright-line test and a requirement for tax numbers to be provided by house purchasers.

Spencer said that the Reserve Bank recognises that low interest rates are contributing to housing demand pressures, but that "the current weakness in export prices, economic activity and CPI inflation means that interest rate increases are likely to be off the table for some time.”

“A sharp fall in house prices has the potential to accentuate weakness in the macro-economy, particularly if banks tighten lending conditions excessively, leading to greater declines in asset markets and larger loan losses for the banks," Spencer said. "A key goal of macro-prudential policy is to ensure that the banking system maintains sufficient prudential buffers to avoid this sort of contractionary behaviour in a downturn."

Investors now account for 41 percent of Auckland house purchases, up 8 percentage points since late 2013, he said. The most notable gain had been "purchases by smaller investors and investors reliant on credit," he said. "Half of the new lending to investors is being written at loan to value ratios of over 70 percent."

The 24 percent jump in Auckland house prices in the past year, compared to 3 percent for the rest of the country, "has stretched the price to income ratio for the Auckland region to 9, double the ratio for the rest of New Zealand, and places Auckland among the world’s most expensive cities."

BusinessDesk.co.nz

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