Moves to cool the Auckland housing market

COLUMN Deborah Carlyon

House prices continue to surge across New Zealand topping 20% for the year to 30 September 2015, an 11 year high. Unsurprisingly, Auckland leads at 29%, but the rest of the North Island is now up 16%. High Auckland prices are creating a halo effect as buyers compete for better value in Northland, Waikato and Bay of Plenty.
Prices are becoming increasingly stretched relative to both household incomes and rents, but they remain supported by lower fixed mortgage rates, tight dwelling supply and high net migration, at an all-time high of 61,234. Although annual building consent issuance in Auckland is also at a decade high of 8,500, the sheer number of new migrants and returning New Zealanders remains a big contributor to price pressure because so many stay in Auckland for employment.

 

Although the shortage of new houses in Auckland continues to support prices, there is evidence of a slowdown in sales volumes after two new laws came in - the foreign purchaser requirement for an IRD number and the new bright line test for property investors.
I covered this in my last column, "Buying to renovate for investment", and it seems the reality of an unambiguous tax on capital gains for property speculators selling a rental within two years, spurred many to buy well before 1 October.  This is just one of a raft of laws and speed limit restrictions designed to curb runaway house prices.
Now there is a distinct Auckland focus:
- No more than 10% of borrowers with less than 20% deposit
- Loan to Valuation Ratio(LVR) capped at 80% for most owner occupiers
- Auckland rental property investors need a 30% deposit (70% LVR)  
From 1 November 2015, speed limit restrictions outside Auckland are being eased:
- Up to 15% of new mortgage lending to borrowers with less than 20% deposit
- Easing applies to both property investors and owner occupiers
With landlords able to borrow more in other cities, the aim is to redirect investor demand to ease the pressure cooker Auckland market.
Why the concern? Housing lending makes up about half of bank lending in NZ and speed limits and LVR restrictions aim to support the stability of the housing market and reduce the risk of a disorderly correction in house prices.  
Most recently, Treasury has waded into the debate with a proposal to restrict the amount house-hunters can borrow according to how much they earn. Banks already have guidelines but official intervention is certainly possible. Similar rules were introduced in the United Kingdom a year ago where most home buyers can only borrow 4.5 times their annual gross income. The Auckland median house price is $771,000 – nearly ten times the median household income putting it among the 10 least affordable cities in the developed world. If the UK limit was applied here, a typical Auckland family could borrow only around $370,000 towards a house. That would be tough, but banks would retain some flexibility and may consider other income sources such as first home buyers having flat-mates.
The Reserve Bank is in a difficult spot. It needs to reduce official interest rates to stimulate the economy in the face of low dairy prices, a still high NZ dollar, and stubbornly low inflation. With global interest rates at virtually zero and unlikely to rise significantly for a few more years, mortgage interest rates are at historic lows.  
Borrowing at 4.49% for 2 years means existing borrowers can keep the same repayments and knock off their loans years earlier. Unfortunately, it also means new borrowers can bid up house prices because repayments are affordable. If interest rates reduce more, the surge in prices will gather pace. The danger is when mortgage rates increase, home owners on fixed incomes could struggle and risk default.
This is why Treasury and the Reserve Bank are exploring alternative measures to keep prices rises in check. Property tax changes, tighter restrictions on Auckland borrowers and pressure on Auckland Council to speed up building consents and land supply, are all factors that are starting to have the desired effect.
So, if you are borrowing more for a renovation, take advantage of the low interest rate environment. Those 2 year special mortgage rates at 4.49% look pretty attractive because most economic indicators point to inflation and interest rates still being low in two years’ time when you need to rollover. However, if affordability is a worry, spread some borrowings out to five years also at 5.35%, for longer term cash flow certainty.   
Deborah Carlyon is an Authorised Financial Adviser. This column does not provide personalised advice. Her Disclosure Statement is available on request and free of charge by emailing deborah@stuartcarlyon.co.nz.

You might be interested in reading: The A to Z of financial knowledge.

This article by Deborah Carlyon featured on page 26 of Issue 017 of Renovate Magazine. Renovate is an easy to use resource providing fresh inspiration and motivation at every turn of the page, for ardent renovators seeking to integrate the latest products and technology into their homes.

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*All information is believed to be true at time of publishing and is subject to change.
Deborah is a Certified Financial Planner (CFPCM), a member of the Institute of Financial Advisers (IFA) and an Authorised Financial Adviser (AFA). She is a principal of independent advisory company Stuart + Carlyon. This column does not provide personalised advice. Deborah’s Disclosure Statement is available on request and free of charge by emailing deborah@stuartcarlyon.co.nz.