Housing market continues to bedevil reserve bank

By NZPA

Friday 26th January 2007

Reserve Bank Governor Alan Bollard is once again shaking his fist at house buyers.

He warned this week that in the absence of clear indications that housing and domestic demand was easing a hike in interest rates could be needed. That could possibly come as early as March.

The threat came as Bollard held the Official Cash Rate (OCR) at 7.25%, for now. The rate has been at that level since December 2005, remaining stable through nine reviews.

The Reserve Bank had expected the housing market, along with consumer demand, to resume a slowing trend this year and next year, Bollard said.

Now it was not so sure, particularly if Government spending continued to increase.

In the past, the theory was that if the Reserve Bank raised interest rates, demand for housing would ease as higher interest costs flowed through into mortgages.

Nowadays, with so many people on fixed mortgages, the Reserve Bank's power to control the market is greatly diluted, leaving an image of a forlorn Bollard wringing his hands in despair.

But he is far from alone in railing against the ramp up in this country's housing prices.

Earlier in the week the United States-based free market-favouring consultancy firm Demographia released its third annual housing affordability survey, covering six English-speaking countries including New Zealand.

It estimated that for the third quarter of 2006 the median house price in this country was six times the median household income.
That gives this country, along with Australia, Ireland and Britain, a Demographia housing affordability rating of "severely unaffordable".

That contrasted with recent decades when the median multiple was generally three times or less than median household incomes among the countries surveyed, Demographia said.

The historic affordability relationship did still continue in many housing markets of the US and Canada, although Los Angeles-Orange County was the most unaffordable of all markets surveyed with a median multiple of a whopping 11.4.

Demographia does not buy many of the explanations for the rise in house prices.

It does not accept that higher demand arising from lower interest rates has driven prices up, nor that the rises are a result of heightened demand for existing houses in better neighbourhoods, nor that landowners on the periphery collude to inflate prices.

As far as Demographia is concerned, the problem is caused by constraints on the supply of land for residential development.

Demographia's figures on housing affordability backed up some released at the start of January by Massey University.

Massey said houses in this country were at their least affordable since it started surveying affordability in 1989.

Massey University Property Foundation director Bob Hargreaves agreed high house prices were causing problems, but doubted there were any easy solutions.

Home ownership rates had been dropping steadily, even though most renters say they would rather own their own home, he said.
Ultimate decisions on land availability were made by politicians, mainly at local government level.

Those politicians represented home owners who were often not happy with proposals that could cause property prices to drop, such as nearby subdivisions with low cost housing.
Planners also often took a different perspective from Demographia.

They tended to argue that denser cities were better because more efficient use was made of land, while opening the floodgates to much more subdivision could cause such problems as worsening congestion, Hargreaves said.

Demographia report co-author Hugh Pavletich, of Christchurch, does not accept the argument that dispersing residents of a metropolitan area ever further from the core will result in continually worsening traffic congestion.

The lower the population density in a metropolitan area, the less chance of traffic congestion as people and businesses dispersed through the area, he said.

"The more you can liberalise the system and allow business to get close to people and people get close to business, in fact you reduce travel times and congestion."

Trying to "strangle" cities, as was happening now, caused the areas to go from "sprawl to splatter", Pavletich said.

People were forced to drive ever greater distances as they escaped from urban areas to try to find affordable housing in satellite-type towns.

The kind of natural expansion promoted by Demographia would require only about 100th of 1% of New Zealand's land area a year, he said.

Responding to the report, Housing Minister Chris Carter acknowledged there was a problem, but insisted land availability was not the cause. Rather, it was the cost of the houses being built on the land.

Building permit numbers hit a peak in 2004, but they were at the high end of the market, Carter said, adding that developers needed to be offered incentives to build affordable homes.

Pavletich disputed that reading of the problem, saying new affordable housing was not being built because land prices had gone through the roof.

No more than 20 to 30% of a new house price should be spent on the land, but it was up to 50 to 60% now.

"It needs to be instilled in local communities that they just can't go and ring-fence their cities and inflate the property markets," he said.

"The urban property markets are seen as a one-way bet.
"People know full well councils are ring-fencing their cities creating scarcities, new supply can't come in," Pavletich said.

"Grossly incompetent government policy" was allowing prices to rise so quickly.

House owners were leveraging off the inflated equity in their homes to buy further property.

"It's what we call stacking, and people have been furiously at it for the past five to 10 years, just stacking up properties, and just by the skin of their teeth trying to hold the whole thing together on a cashflow basis," Pavletich said.

Massey University's Hargreaves said developers would go where profits were highest and low income housing was usually less profitable.

Overseas, incentives tended to be used to encourage the building of lower-priced housing. For example, permission might be given to a subdivision provided a certain%age of houses built on it were lower cost, he said.

Also making a contribution to the issue this week was Westpac, which set out the extent of the housing market problem in its quarterly overview of the New Zealand economy.

It pointed out that housing-related inflation had become "arch-villain number one" in the Reserve Bank's fight to drag down domestically generated inflation.

"Prospects for house prices are of critical importance, not just for the inflation outlook, but the economy in general as housing generated wealth has fuelled consumption," Westpac said.

On its estimates, housing equity withdrawal amounted to $4.2 billion, or 5.3% of disposable income, in 2006. A substantial portion of that went towards consumption expenditure.

The housing boom had been a boon to many individuals, Westpac said.

Mortgage borrowing had increased by $67.6b during the past six years, predominantly funded from overseas. In the same period, the value of housing assets had increased by $306b.

"While it makes a whole lot of sense from an individual perspective, the property boom has been much less beneficial from the country's," Westpac said.

"NZ Inc has been borrowing from overseas to mainly fund consumption or new house building. This has done nothing to improve our ability to service that debt.

"The result, from the country's perspective, has been an overheated consumer, too high a currency, higher than otherwise required interest rates, a ballooning current account deficit and overseas debt, and substantial pressure on the productive side of the economy."

The past cyclical nature of house prices in this country, along with recent corrections in Australia, Britain and the US, "suggest the New Zealand housing market is living on borrowed time", Westpac said.

But it was difficult to predict when a correction would come in this country, as the market appeared now to be driven by sentiment, rather than fundamentals.

In any case, Westpac did not expect house prices to fall, but to enter a flat period for four years or so.

Comments from our readers

No comments yet