I see that the latest Barfoot figures are out, and they are pointing to fairly strong sales figures in the Auckland region. That’s nice. There are also suggestions that this is indicative of a bubble or boom coming into the housing market. However, it is important to look at a broader view of what is going on, not just house sales for one agency in Auckland, in order to get an understanding of the what is really going on.
When looking at the housing market, there are a number of little points we need to keep an eye on.
- The regional split: We have commonly been told that Auckland and Canterbury have a shortage of property – all else equal this pushes up house prices in these regions. This is something we have seen happen.
- Borrowing to invest?: In 2003, households borrowed heavily and developers started building heavily. Now we have the opposite. Yes, in the year to April households borrowed 30% more (in gross terms) to buy housing. Yes, this was $45.4bn. However, the stock of mortgage debt rose by a more modest $2.4bn more – or by 1.4%, below the rate of inflation. Even as house sales and prices have climbed, households have taken the funds from sales to pay back mortgages – not to spend or build more houses. SO, while we could use the rising prices and investment in the mid-2000’s to point towards a bubble, this time we have limited investment and an underlying shortage of property driving up prices – this is not a bubble, this points to a failure somewhere in the building or credit markets.
- Credit conditions: Mortgage conditions have eased, and competition between banks (along with low wholesale funding rates) has driven down the cost for households. This sounds similar to what was going on during the boom time. But even so – we have pointed out that increases in NET borrowing have been low (or negative in real terms). On top of this, for various reasons credit conditions are tight when it comes to building houses – increasing the value of existing housing.
- Quality, income, and constraints: As the productivity commission noted, there are significant issues currently impeding activity in the building industry – and thereby pushing up prices.
When this combination of factors is taken together, it feels like we have a situation which is “supply” driven, with a shortage or property driving up values. This compares to any perceived “bubble” which would be “demand” driven, with expectations of capital gains leading to excessive investment and excessively high prices.
This distinction is important when it comes to the actions of the Reserve Bank. There are three questions they need to ask when looking where housing appears within the context of their goals of inflation targeting and financial stability:
- Are current interest rates consistent with the level of general demand in the economy? If the lift in housing market activity is supply driven, this suggests that interest rates should be lower relative to a situation where it is demand driven, with the increasing borrowing that entails.
- Is the current stock of debt, and banks attitude to risk in general, taking into account the full social risk associated with these elements? The RBNZ has introduced a range of policies to help ensure this is the case.
- Is the regulatory regime that the RBNZ implemented possibility having a greater impact on domestic demand, or the housing/construction market than was previously expected?