Wednesday, 30 October 2013

A tale of two cities

Grant Spencer, Deputy Governor at the Reserve Bank, gave a speech, Trends in the New Zealand housing market, to the Property Council earlier this month, and I have to confess that I've only just got round to reading the full thing. I'd seen the press coverage (for example Reserve bank boss backs loan rules in the Herald), which had focussed on the LVR points in the speech, and I'd wrongly assumed that there wasn't much else in the speech.

So, belatedly, I'd recommend reading it. It makes the point, in particular, that "The underlying issue in the New Zealand housing market is a shortage of supply. In Christchurch there is a specific housing shortage as a result of the earthquake-damaged housing stock. In Auckland, the shortage has been growing over a much longer period, with weak or declining rates of house building since 2005", as shown in the chart below.

Grant said that "Low rates of building have led to a gradually increasing shortage of homes in Auckland" and that "A significant limitation on new home building in Auckland appears to be a scarcity of available land" due to restrictive planning rules. And he's realistically downbeat about the likelihood of the 13,000 new homes a year that are needed to be built in Auckland happening any time soon: "meeting the combined three year targets of Christchurch and Auckland would require a major mobilisation of national construction resources. In all likelihood, the build will be stretched over a longer period".

You might well wonder, if the big issue is on the supply side, why the Reserve Bank came up with its LVR rules. But Grant went on to say that the supply side of the market isn't the only thing that's happening: "the supply of houses is an important determinant of house prices – but it is only one side of the story. We have seen the shortage of homes in Auckland emerge due to low construction rates over many years. But house price inflation has accelerated only over the past two years, over the same period that credit conditions became easier and population growth picked up with stronger net inward migration".

There's not a lot they can do about the migration demand - which as I posted here is getting stronger all the time - but they have felt they've needed to lean against the easy-credit demand pressures a bit with the LVR rules: "Expanding housing demand through easy credit will do nothing to speed up the housing supply response [i.e. house prices are already so high that builders will still be incentivised to build new ones even if the RB reins in the market]. It simply adds to housing demand, pushes up house prices and makes housing less affordable"
I was also encouraged to see that the LVR rules have a use-by date: "As the imbalance between demand and supply is reduced, we will look to lift the LVR restrictions...We will be looking for clear signs that excess demand pressures have substantially reduced and that a removal of the restrictions will not result in a return of such pressures".

Overall I was left with the impression that our central bank's analysis of the housing market, and the responses it's come up with, look both reasonable in themselves - and a good deal closer to reality than what their counterparts in Australia are up to.

I've posted before - Someone else is developing a housing headache, too...- that I think at least parts of the Aussie housing market are clearly overheating. The median house price in Sydney has just gone over A$700,000 for the first time, and the median apartment price has cracked A$500,000 for the first time (both estimates from Australian Property Monitors). And while RBA Governor Glenn Stevens isn't too perturbed about the national Aussie housing picture - "My own view, thus far, has been that some rise in housing prices is part of the normal cyclical dynamic, that it improves the incentive to build, and that a price rise reversing an earlier decline probably isn't something to complain about too has been a little too early to signal great concern", as he said in a speech yesterday - he is beginning to cast a beadier eye on some of the hot spots: "Investor participation in housing in Sydney, in particular, is becoming noticeably stronger. Over the past year, the rate of finance approvals for this purpose has increased by 40 per cent".

Even so, the RBA doesn't look minded to deal to what looks to me to be a market getting completely out of hand in places, and is staying in 'on your own heads be it' mode, or in the Governor's words, "lenders and borrowers alike would be well advised to take due care".

I wonder if that's adequate.


  1. Shouldn't housing market volatility be the domain of APRA in Australia? Doesn't the RBA just have one policy mandate/instrument? Looking at APRAs media pages they don't seem to engage with the public as much as perhaps they should, given the importance of prudential regulation for modern economic policy.

    I personally prefer splitting prudential policy from monetary policy (to reduce risks to MP independence) but it appears as though the prudential regulators world wide have been nowhere near as nimble as the central banks, nor as willing to engage with the public and the academy.

  2. Thanks for your thoughtful comment. You may well be right about APRA - I don't have a clear view of where the RBA ends and APRA begins (or how either coordinates with ASIC). I think your second para is right, too, by default the central banks have been quickest to stand up to the plate