Auckland warned: ‘Game is over’

ANZ’s chief economist says ‘‘the game’s over’’ for Auckland’s housing boom, and warned New Zealand’s largest city is now heavily exposed to the risk of rising interest rates.

While Auckland has a major shortage of new houses being built at a time of record migration, Cameron Bagrie said the real driver of house prices was low interest rates.

With mortgage rates already climbing, Bagrie said higher borrowing costs would trump the supply shortage.

‘‘I think the big driver is interest rates, and interest rates are heading up,’’ Bagrie said.

‘‘We’re in a fundamentally different market now, so I think the game’s over. Auckland is in a consolidation phase.’’

While ANZ expected that there would be only a gradual increase in interest rates over the next two years, in which case Auckland house prices would tread water, Bagrie said it was ‘‘game on’’ if inflation rose faster than expected.

If that were to happen, the Reserve Bank would be forced to ‘‘play party pooper’’ by raising the cost of borrowing. Auckland was now much more exposed to rising interest rates than it was 2007, the last time the market turned.

‘‘House prices have risen to such an extent that we estimate that for the average Auckland household to purchase the average house ... debt servicing costs [principle and interest] would now represent 51 per cent of average disposable incomes,’’ Bagrie said.

Bagrie said there was clearly a supply shortage in Auckland, but argued that it was interest rates, rather than shortage, which were the main driver of rising prices.

Reserve Bank statistics show that the average interest rate on mortgages fixed for two years which banks are charging new customers rose from 5.06 per cent in October 2016, to 5.22 per cent at the end of January 2017. –Fairfax NZ