Wednesday, 10 August 2016

A million dollars doesn't go very far...

The latest REINZ house price data are out, and to nobody's surprise they showed a hot market, with the national median price up 8.6% over the past year, and the Auckland median price up 12.2% to a new record level ($825,000). The median price on the North Shore (Auckland's most expensive region) is now $1,062,500.

Some of this is our own doing, especially the slow and inadequate response of housing supply, and some of it is down to cyclical issues like strong net immigration (which includes more Kiwis coming home, more not leaving in the first place, and more foreigners wanting to come here). But as I've argued before, we need to remember that there are broader global issues in play, too.

Those million dollar homes on the North Shore, for example, are nothing unusual in Australia. As it happens another lot of house price data came out this week, compiled by CoreLogic, and it showed how many suburbs across Australia are over the million dollar mark (Aussie dollars, at that). The latest answer? 613. And as the CoreLogic graph below shows, the number of million dollar suburbs has been rising strongly over the past three years.

Anything with a view of Sydney Harbour in particular is now stratospherically expensive. Here (again from CoreLogic) are the average prices in Australia's top 10 most expensive suburbs.

It's not much different where I grew up, in south County Dublin. Here's a typical four bedroom house from the area (full details here), close to where my sisters and I went to our secondary schools. The asking price in today's Dublin market will set you back €1,075,000, or some $1,660,000.

None of this is coincidence: the common factor is global monetary policy, which has been set on ultra-easy in the US, the UK, Japan and the Eurozone, and which has fed through to Australian and Kiwi mortgage rates, as the graph below shows. It starts back at the end of 2004 because that's where the RBNZ's data series on fixed rate mortgages (Excel file) starts.

You can see at a glance that our long-term interest rates are very closely linked to world rates (and if you'd like more formal research on the closeness of the link, have a read of an analytical note from the RBNZ, 'What in the world moves New Zealand bond yields?'). Our fixed rate mortgages are consequently set for us: they're smoother than the overseas rates, and there's quite a lengthy lag - it's about a year, eyeballing the graph - but they're dealt to us by the world croupier. We don't have a lot of say*.

And sometimes, like now, that can be a problem. We can end up with rates that don't suit our local objectives, just as the Irish did in the 2000s when they had low Eurozone interest rates dealt to them at a time when the Irish economy was already booming. And for us, it's going to get worse again, because of that lag between overseas rates and ours. There's a fair whack of the recent sharp fall in overseas rates that has yet to feed through to lower local mortgage rates and which has the potential to wind up our housing market a few notches more.

So when we're thinking about the local explosion in house prices, especially in Auckland, we absolutely do need to free up and accelerate supply, and do all the things that are under our control. But it's unlikely that house prices are going to go all the way back to their usual relationship to family incomes until global monetary policy also moves away from its current abnormal setting.

*The economics of it is that you can have any two off a menu of your own interest rate, your own exchange rate, and your preferred capital inflow/outflow. You might want to pick the interest rate plus one of the others, but you might not like the implications for the third.


  1. I enjoy your blog, wonder what's going to happen Tomorrow with the RBBZ decision re NZD?

  2. At the risk of blowing my forecasting credibility at one fell swoop, the odds are, a 0.25% cut. Don't think there's much choice after the Aussies cut theirs earlier this month (that international interest rate influence story again)


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