Auckland house prices unsustainable: RBNZ

Reserve Bank Governor Graeme Wheeler

In today’s monetary policy statement, Reserve Bank Governor Graeme Wheeler said that house prices in Auckland continue to increase rapidly and are becoming more unsustainable. 

He then told media, at the post-MPS briefing, that Auckland’s house price-to-income ratio is now 9, while it is 4.5 around the rest of the country

This puts Auckland house prices in a grouping of cities that are among a dozen of the most expensive cities to buy property in in the world.

Wheeler also that said an ANZ survey late last year showed investor expectations were that Auckland house prices would rise by about 12% every year over the next five years.

“Cumulatively, that is an increase of about 75%. Whereas if the RBNZ does its job correctly, the price level will go up by about 10% in those five years. So we are watching the Auckland housing situation very carefully.”

The good news is that residential construction permits in Auckland are now running at about 8,500 a year, he continued.

“That is a step up – of about 20% on last year. And it is the highest rate of permits for about a decade. So that is promising.”

However, Auckland’s supply shortage is compounded by strong migration flows.

For this reason, Wheeler said the risk is that the housing imbalance could carry on for quite some time.

When asked whether the RBNZ might introduce income to loan ratios to get on top of the Auckland market, Wheeler emphasised that what is needed to address the problem is supply.

“That is why the residential permit numbers are so important – to see what the trend is. Macro-prudential policy can help to slow the rate of price increase, but it can’t solve the Auckland housing problem.”

Fortunately, Auckland’s house prices don’t appear to be being translated into higher consumption.

Wheeler said that, in the previous cycle, people were spending more than they were earning.

“This time round people seem to be spending out of their income, not out of the potential for capital gain. So Auckland house prices are not as big a part of the current story - although we are watching them with concern.”

While today’s OCR cut could lead to further mortgage rate cuts, Wheeler said the RBNZ’s measures around investor related lending have the potential to slow house price inflation in Auckland by 2% to 4%.

“It is certainly true that we have seen a reduction in mortgage rates that is quite substantial over the past year. So clearly as we ease monetary policy that has an impact on the housing market, but it is something we think about very seriously.”