Investors increasing Auckland price pressure – RBNZ

Reserve Bank Deputy Governor Grant Spencer said CoreLogic data showed that investors accounted for 41% of all Auckland market sales in June 2015.

This was an increase of 8% since late 2013.

In a speech in Auckland this morning, Spencer said this increase has largely been driven by smaller investors, with two to four properties, as opposed to investors with larger property portfolios.

“Consistent with the increased share of investor sales, there has been a disproportionate expansion in mortgage credit to residential investors.”

In the year to June 2015, new lending to investors increased by 40% nationally.

In comparison, over the same period new lending for all borrowers grew by 28% nationally.

More than half of the investor lending currently being written is at high LVRs of more than 70%, Spencer said.

“This trend is increasing the risk inherent in the Auckland market. The increasing investor presence is likely to amplify the housing cycle and worsen the potential damage from a downturn, both to the financial system and the broader economy.”

The RBNZ is concerned that a sharp fall in house prices could accentuate weakness in the country’s macro-economy. 

The situation would be heightened if banks then tightened their lending conditions markedly as it would result in greater declines in asset markets and larger loan losses for the banks.

Population growth combined with low interest rates has created strong demand and is driving up Auckland prices.

But Spencer said investor demand can contribute significantly to house price pressures.

“If investors wish to expand their housing portfolios at a greater rate than the growth in demand for rental accommodation, this can push up prices even though the underlying housing shortage remains unchanged.”

It is for this reason the RBNZ is targeting Auckland investors with the 70% LVR restriction, which is now scheduled to come into effect on 1 November.

Spencer said the RBNZ expects that the new lending limits for Auckland property investors will reduce heightened financial system risk and help moderate the Auckland housing market cycle.

However, he said the macro-prudential policy is just one of many measures aimed at reducing the imbalances in the Auckland housing market.

“Tax policy is also an important driver, and we welcome the changes – including the two year bright-line test - announced in the 2015 Budget.”

Much more rapid progress in producing new housing is needed in order to get on top of the issue, Spencer added.

To achieve this, more needs to be done about the limited supply of land ready for building; restrictive planning processes, and the lack of coordinated planning in infrastructure development.

“High-rise apartment construction and other high-density options will be a crucial part of increasing construction and reducing the supply shortage.

“But, at 18% in the year to June, the apartment share of consents remains well below levels seen in the mid-2000s and significantly below what we see in other major centres.”

Westpac senior economist Michael Gordon said the Deputy Governor's speech had no significant implications for markets and did not signal any new measures, on the part of the RBNZ, beyond those already announced.