Housing ‘playing catch-up’ in capital
Wellington’s housing market is still playing ‘‘catch-up’’, amid warning that the boom in Auckland and its surrounds is over.
Yesterday ANZ chief economist Cameron Bagrie warned that ‘‘the game’s over’’ for the Auckland housing boom, with rising interest rates set to trump a supply shortage in New Zealand’s largest city.
It was the latest in a series of warnings that a combination of rising borrowing costs and lending restrictions was likely to cool house price increases, and with it consumer confidence.
But Bagrie said Wellington – currently among the strongest parts of the country – was more affordable than Auckland, giving prices more room to move.
‘‘I don’t think the affordability metrics are as stretched in Wellington as they are in Auckland. The market is still playing a little bit of catch-up,’’ Bagrie said.
Despite rising more than 21 per cent in 12 months, Wellington house prices are only 29 per cent above the price reached in 2007, the last time the housing market peaked.
That contrasts with a 52 per cent rise for average prices across New Zealand, while Auckland prices are more than 90 per cent higher than in 2007.
Bagrie said Wellington’s relatively late arrival to the housing boom would likely see the market stay strong this year although ‘‘by 2018 the interest rate effect will come through and dominate’’.
Although the official cash rate (OCR) remains at an all-time low, mortgage rates have been slowly climbing for months, as banks scramble to cover a gap between local deposits and what they lend, at a time when global borrowing costs are increasing.
Reserve Bank statistics show that, for new customers, the average interest rate on mortgages fixed for two years rose from 5.06 per cent in October 2016, to 5.22 per cent at the end of January 2017.
This was despite the OCR being cut by 25 basis points to 1.75 per cent in November.
Although Reserve Bank governor Graeme Wheeler said on March 23 that a supply shortage could see house price increases resume, Bagrie said interest rates, rather than a lack of houses, was driving the Auckland market.
‘‘You’ve still got a [supply] shortage, so Economics 101 tells you prices have got to go up,’’ Bagrie said. ‘‘But the housing shortage has not been the dominant player here in terms of what’s driving the market.’’
A growing ‘‘disconnect’’ between house prices and rents in Auckland showed that borrowing costs were the main factor, he said.
‘‘You can’t ignore the impact that interest rates have had on the market, and I just think that’s going to be the dominant driver and influence on the market going forward.’’
While a gradual rise in interest rates would see the Auckland market tread water for two years, it was ‘‘game on’’ if inflation forced the Reserve Bank to hike interest rates faster than expected.
ANZ estimated that the cost of servicing a mortgage with a 20 per cent deposit on an average house in Auckland would be 51 per cent of average disposable incomes.
‘‘A 1 percentage-point increase in mortgage rates would see this jump to nearly 56 per cent, which is far higher than in 2007, when the minimum mortgage rate was closer to 9 per cent.’’