Monday, 15 July 2013

The Auckland housing market revisited

On Saturday afternoon, I counted the residential ads in the window of a real estate agent in Mairangi Bay.

There were 44 of them (not counting an ad for a resort, which seemed to me to be more of a business than a residential listing). 38 were already sold. Of the last six, 4 were for undeveloped sections, and 1 was for property on Great Barrier Island. That left just a single ad in the window for the only unsold Auckland residential property they had on their books (an apartment). In short, virtually everything's been sold.

They had a window of rental properties, too. A very ordinary-looking three bedroom home in Browns Bay - which is admittedly a nice neighbourhood with good amenities - will set you back $520 a week. What the real estate agents call an 'executive' home, and what you and I would call the sort of home we're actually looking for, is currently going for over $1,000 a week. There's no two ways about it: when a good quality home is costing you over $50K a year to rent, things have got pretty pricey.

In the spirit of 'economics by walking around', I've drawn several conclusions from this.

One is that everything you hear about the tight Auckland housing market is absolutely correct. If anything, I'd say that it is even tighter than I had imagined.

Another is that I think this is specific to Auckland, and not a symptom of (say) nationally lax or generous lending standards by the banks. If this was happening because all the banks were lending everywhere to anyone who came through their doors, then the estate agents' windows would be equally as full of SOLD signs in Alexandra and Waikanae, and - from admittedly anecdotal accounts of both places recently - they aren't.

And that kind of bothers me: why are the macro-prudential battering rams about to be deployed, if the problem isn't one of nationally excessive credit growth? Especially, as I've posted before, when the statistics on bank lending on houses, or to the household sector more generally, aren't showing any signs of running out of control. I've just re-checked them on the RBNZ website: credit extended to the resident private sector was up 4.3% year on year in May, and lending on housing was up 5.3%. These look to be distinctly unalarming numbers.

And a last thought is that I'm not too bothered by these high housing and rental prices. Of course, they have provoked just the sort of media reaction you'd expect - it's those Asian-Australians-insert-your-target-victim-group-here that are pricing homes out of the reach of battling Kiwi families. But let's go back to Economics 101. Why, in workably competitive markets, do you ever see high prices, and what are they meant to do?

Hmm. Let's see. Demand increases while supply is constant. Tough one. I'd just observe that all the facts are consistent with an immediate rise in demand (the economy doing much better than expected, the Auckland economy humming along, possibly Christchurch refugees) encountering a short-run fixed supply, and high prices are allocating houses to those that value them most. I don't see a national macroeconomic issue here.

I wouldn't underestimate the supply response, either. I've posted before that as I go running around the North Shore, I've noticed a very substantial amount of infill housing development. In recent weeks, it's taken off even more. I wouldn't say that every single large section has been built on, or that every dilapidated 1950s home has been turned into two fancy townhouses, but it's heading that way. This looks like a problem that is part of the way to fixing itself.

I have a lot of sympathy with the argument that even purist inflation-targetting central banks need to be mindful of asset price movements. And I'm also mindful that real-time policymakers will find it hard to differentiate between relative price movements (not an issue for monetary policy) and generalised price pressures. And I'm mindful that central banks have a particular set of risk-management priorities, which above all are focussed on taking the low-probability but high-impact events out of play. They have to be very careful not to make expensive mistakes. All that said, I'm really struggling with the currently accepted notion that the Auckland market has got out of hand because of over-loose monetary policy.

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