As widely predicted the Reserve Bank held the Official Cash Rate at 7.25%. But don’t expect an easing in interest rates or a sharp fall in the exchange rate in the near future.
To quote Mr Bollard “Certainly we see no prospect of an OCR easing, given the relatively high medium-term inflation outlook. An early decline in interest rates, as expected by some in the financial markets, would reignite spending and hence inflation pressures.”
The good news is a lowering in fixed mortgage rates as the swap rate has eased. Many banks and non-bank lenders are now offering two to five year residential loans at under 8%.
The bad news is the latest AMP Home Affordability Index declined 4.8% in the December quarter. Increasing house prices, rather than interest rates, remained the principle driver. The Medium Dwelling Price increased 3.4% to $300,000. That’s 54% up on the 2002 price when the recent spectacular rise in prices commenced.
Meanwhile a new international survey claims New Zealand is facing a housing affordability crisis. See http://www.demographia.com/dhi-ix2005q3.pdf
The study looked at the cost of housing in relation to income in six countries – Australia, Canada, Ireland, the U.K., the U.S. and New Zealand. It uses the Medium Multiple ratio of median house price to median household income in selected cities in each of the countries.
A ratio of 3.0 or less means housing is affordable. It then rates 3.1 – 4.0 as moderately unaffordable, 4.1 to 5.0 as seriously unaffordable and 5.1 and over as severely unaffordable. Auckland has a ratio of 6.6 placing it 15th equal with Hobart and Vancouver in the 20 most unaffordable housing markets in the survey. The top 6 in order were Los Angeles, San Diego, Honolulu, Ventura County, San Francisco and Miami in the U.S with ratios from 11.2 – 8.8. Sydney was the 7th most unaffordable at 8.8. The other two N.Z. cities studied in the survey, Christchurch and Wellington were 29th and 39th respectively with ratios of 5.9 an 5.2.
To me the most interesting observations from the survey were:
• In Australia 6 of the 8 housing markets are rated as “severely” unaffordable, the other 2 are “seriously” unaffordable. The average ratio is 6.2.
• In New Zealand all 3 major markets are “severely” unaffordable. The average ratio is 5.9.
• In the U.S – where there has been major concern about the housing “bubble” – the average ration is 4.6. The markets included all metropolitan areas with population over 700,000. Of the 67 markets surveyed 31% were still affordable but 30% were “severely” unaffordable. In 1995 nearly 90% of the U.S. markets were rated affordable and none were “severely” unaffordable.
• In recent decades the ratio has been below 3.0 in most markets surveyed. In other words this is a new phenomenon.
• High housing prices in New Zealand are expected to reduce home ownership levels to 63% by 2011 - down from a peak of 74% in 1991.
Their conclusion is price increases are not mainly the result of low interest rates, easier borrowing conditions, or other macroeconomic factors usually blamed. Otherwise the increased ratios would have occurred in all markets.
“Rather” they say, “they are a result of regional factors caused by government policies that create land scarcity. The main cause seems to be excessive land use regulation that strangles housing markets and drives prices upward at rates far higher than can be attributed to conventional economic trends.”
“Simply stated, scarcity raises prices including the price of land and houses. The loss of affordability is so immense that policies such as affordability quotas, first home buyer grants, workforce housing or tax relief programmes cannot possibly make a material difference, despite their rhetorical attractiveness in some circles.”
The report has been seized upon by the opponents of the Resource management Act, who blame authoritarian restriction of land use, unreasonable delays in approvals, and bureaucracy generally, as a major component of price increases. And there would be few people here - from large developers to house owners doing minor renovations - who would disagree.
It’s a bit tough to solely blame regulations though. On the demand side is the desire for the best location – from city to suburb to street. You can’t blame the regulators that Parnell is only so big, or Paritai Drive only so long.
For the vast majority of people their residence is their major asset. And if you’ve got a good house in the right location - and are not highly leveraged to the degree that you have to sell - it will remain one of the best investments you can ever have.
In my view any weakness in the housing market will result from the ease in which borrowers have been able to obtain residential finance and the level of their borrowings. Not only for their own residences but for:
• Consumption. Especially for imported items - which is just about everything we buy. Everyone’s expecting the dollar to drop - so Buy Now!
• Businesses. The banks are notoriously reluctant to lend on any business that can’t show at least three years of profit and positive cash flow. There are very few equivalent non-bank lenders to go to – and they have pretty much the same criteria. Of course you can go to one of the numerous finance companies and pay higher rates and fees – but it’s much easier to borrow against the (new found) equity in your house and enjoy residential rates and conditions.
• Residential investment. If you buy a house to rent out you can borrow 80% or more interest only at residential rates. And you can keep on doing it as long as you spread it amongst the multitude of lenders now available. But if you want to buy a commercial property you can borrow 65% and are paying higher commercial rates. And can you believe it. They want you to reduce the principle outstanding each year.
• Commercial property. For the very reasons given above it’s easier and cheaper to borrow against your house and use the money to put towards commercial property. But beware. Cross collateralisation of securities between your home and an investment can be very dangerous if there is a downturn in the economy.
It’s good practice to isolate your borrowings to specific assets and amongst different lenders – even if the servicing cost is slightly higher. If one investment does turn bad you don’t need a lender looking for recourse on your good investments – as many did in the late 1980s
A large proportion of the business I do at Global Pacific is re-financing clients who want to do exactly that. For more information call me anytime on 021 902 004.
Cheers
JP
John Paine
Global Pacific Corporation Limited
P O Box 3229, Auckland, New Zealand
Phone 64 9 303 3700, Fax 64 9 303 3031
Mobile 64 21 902 004
Email john.paine@globalpacific.co.nz
Web site www.globalpacific.co.nz
Please note that all opinions and statements expressed in this newsletter are indicative of my opinion only. Global Pacific Corporation Limited issues no invitation to rely on the information contained in this newsletter and intends by this statement to exclude liability for any such opinion and statement.
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