Affordability not the problem

Economic research company, Strategic Risk Analysis Ltd, has just released one of its regular reports and it claims house prices are not as unaffordable as is popularly thought.

In his "Raving", managing director Rodney Dickens said that when the interest costs faced by new buyers, both in Auckland and nationally, as percentages of incomes are taken into account, there is no housing affordability problem.

Low interest rates have made housing as affordable for new buyers in Auckland as has been the case on average since 1992, he said.

Further, around the rest of the country, housing costs, in terms of interest outlays as a percentage of incomes for new buyers, are below average.

House prices, particularly in Auckland, are very high relative to income – but Dickens said this doesn’t mean there is necessarily a large downside risk for house prices.

“High house prices relative to incomes don't in themselves pose a threat as long as interest rates remain low.”

While many commentators think that interest rates will head lower this year and will remain quite low, Dickens is not as convinced.

But he said what happens to interest rates will be critical to house price behaviour, with what happens to migration of secondary importance.

“If interest rates were at average levels the affordability of Auckland house prices for new buyers would be as challenging as was the case just before the fall in prices in 2008.

“But when might interest rates increase and is there any risk of a large increase, like the increases in the 1990s and 2000s that eventually culminated in falling house prices in Auckland and most parts of the country?”

The threat to house price growth then is not unaffordability, but a “normalisation” of interest rates.

In Dickens' view, the persistent period of low interest rates will, ultimately, contribute to an inflation problem.

This means the Reserve Bank will, eventually, have to lift the OCR - rather than cut it – and this could prompt interest rates to go up which, in turn, could cause problems for many property owners.

However, this is in the current context where the national demand-supply balance in the housing market is still strong and likely to strengthen as buying by foreign investors recovers, he said.

“A surprise this year and beyond should be that house price inflation remains more resilient than the Reserve Bank expects, even when Governor Wheeler is eventually forced to hike the OCR.”