BNZ’s Chief Economist Tony Alexander reflects on how the Unitary Plan will affect soaring Auckland house prices and future urban growth.
For the third time in three years the Reserve Bank has imposed new rules on the minimum deposit size investors must have when using a mortgage to buy property in Auckland. The first occasion was October 2013 when the 20% minimum was introduced for all borrowers. Then in October 2015 we had the 30% minimum for Auckland investors. Now we have a 40% minimum starting from October this year, although this has already being applied by banks for lending not arranged before the policy was announced a month ago.
Following the first two credit controls, the Auckland housing market slowed down for three to four months in terms of more days being taken to sell a dwelling, sales easing, and prices flat to falling. So it seems reasonable to expect that from late-July through to perhaps the end of November the same thing will happen. The question is however, what will happen after that? Will the market take off again?
In all probability, yes. Interest rates are continuing to fall with the Reserve Bank cutting the official cash rate by 0.25% to 2.0% mid-August and there is scope for two more cuts before the end of the year. Most banks passed on very little of the most recent cut, but extra cuts might be followed up on more strongly depending upon whether offshore funding costs increase once again.
Net migration inflows are likely to remain strong and keep a firm focus on the shortage of housing in Auckland, which the Independent Panel redoing the Unitary Plan assessed to be 40,000 dwellings. While the plan will provide scope for more dwellings to be built, it is extremely unlikely that construction targets will be met, especially as demographers appear to be raising their estimates of how fast Auckland’s population will grow in the next few years.
Some in particular are talking about Auckland moving from 34% of New Zealand’s population in 2013 to 40% as early as 2021. The common discussion regarding where to fit an extra one million people in the next 25 years could change to the next 20 years or less. Which makes building extra houses at the required pace even more difficult than if we just stick with the Unitary Plan projection of one million more in the next quarter of a century.
The plan aims at allowing for 422,000 more houses. But that is the number of dwellings which sat in the Auckland area at the 2001 census. So the plan is to build in 25 years what it took 161 years to build following establishment of Auckland as the country’s capital (short-lived) in 1840.
Or look at it this way. Between 2012 and 2016 the number of consents issued for dwellings to be built in post-earthquake Canterbury was 1.5 times the average for the past 25 years. This is with resources moved into Christchurch from the rest of the country, goodwill toward removing barriers as quickly as possible, and plentiful finance.
Auckland in contrast needs to issue 2.5 times the average number of consents issued each year for the past 25 years if it is to meet the 422,000 target. This is not just very unlikely, it seems completely impossible without allowing the entry into New Zealand of some tens of thousands of extra builders and labourers. This won’t happen because pressure exists for immigration to be cut, not raised.
The upshot is that the shortage of dwellings in Auckland is large, it will get much larger. Although raising minimum deposits will take some buyers out of the market, come late this year, the chances are that prices will again rise at a fast pace. However, keep in mind what we wrote in this column last month.
Prices are now eye-wateringly high, and the Reserve Bank is highly likely to introduce further restrictions on credit supply next year if the market does shoot up again. This may include raising the minimum deposit to 50%, along with introducing rules restricting loan sizes to multiples of household income. Come late-2017 a structural flattening out in prices is likely to start with oscillations for the next few years around a very slowly rising average price.
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