The Auckland 'Halo Effect' burned brightly in the latest set of housing figures to shine a spotlight on the central challenge for the Government and the Reserve Bank.
Quotable Value's data for house values in July showed Auckland's housing markets still rollicking along and spreading the joy and pain to most of the rest of the country as investors gear up their fresh equity to buy more rental properties.
QV reported yesterday house values rose 6.1% nationwide in the last three months to the end of July and were up 14.1% in the last year. Auckland values rose 5.2% in the last three months and were up 16.0% from a year ago. The average value in July was NZ$992,207 and is sure to be over NZ$1 million later this month at current growth rates.
QV's valuers reported there were some initial anecdotal evidence that the Reserve Bank's July 19 announcement of a new nationwide requirement for rental property investors to have a 40% deposit had caused some buyers to withdraw offers, but that it was too early to see it in sales figures. We will not get more comprehensive sales figures from REINZ until later this month.
If anything, the heat in Auckland was just as intense in July and continued to fire up markets both large and small around the country.
"Increasingly we are witnessing unconditional offers being made in order to secure a property without completing adequate due diligence," QV's Auckland valuer James Wilson said.
"This behaviour is driven by a growing fear of missing out which is rife across the market," he said.
Inflation in the hottest spots of Hamilton (31.5%), Tauranga (26%) and Queenstown Lakes (27%) have been joined by some unlikely cities, including Napier (15.1%), Rotorua (25%) and even some towns such as Kawerau (41%) and Otorohonga (29%) as first home buyers and some investors pushed out of nearby cities and ventured further afield for perceived bargains.
Even the quietest markets such as Wanganui (+10%), Hastings (14%) and Dunedin (11.7%) saw double digit growth. Only Westland saw falls, and even Christchurch saw low single digit inflation, even though rents are falling there.
LVR impact estimated
Meanwhile, Infometrics' Gareth Kiernan published an analysis that estimated the Reserve Bank's September 1 Loan to Value Ratio (LVR) changes could reduce sales volumes nationwide by between 15.4% and 21.7%, depending on how aggressively rental property investors use the 'combined collateral exemption'.
This exemption, which allows homeowners to borrow up to 80% of the value of their own home to spread it out across a variety of rental properties at 70% currently, is shaping up as a crucial factor in the effectiveness of the LVR changes.
The Reserve Bank allowed the exemption for the second round of changes aimed at Auckland investors, and it was used aggressively both within Auckland and outside Auckland, as we highlighted in our July 20 Hive News email.
The removal of the distinction between Auckland and the rest of New Zealand will reduce the ability to 'arbitrage' between the 70% and 80% restriction levels that Auckland home owners used after the November 1 rules, but there will still be plenty of room for property owners in Auckland and elsewhere to leverage up their already turbo-charged equity in their own homes to 80% to buy more rental properties with the 60% restriction.
"Although investors will have less scope to use the combined collateral exemption, we expect that most investors will still have considerable scope to rearrange their financial affairs to get around the new restrictions," Kiernan said.
He estimated the LVR restrictions could reduce house sales volumes outside of Auckland by between 19% and 25%, while it could reduce house price inflation outside of Auckland by between 4.7 percentage points and 6.3 percentage points. Volumes inside Auckland could fall between 7.7% and 14.4%, while inflation could fall by between 1.9 percentage points to 3.6 percentage points in Auckland.
Investors most confident in housing
However, none of this is affecting rental property investor confidence, as shown by the ASB Investor Confidence report for the June quarter that was released this morning.
It found net overall investor confidence (the difference between those who feel their return on investment will get better in the year ahead, and those who feel it will get worse) rose to 9% during the three months to June 2016 from a four-year low of 3% in February. It peaked at 29% in the June quarter of 2014 and had been on a downward trend until the March quarter of this year.
It found that investors were most confident about investing in their own house (21% seeing it as providing the best returns), followed by a rental property (20%), a term deposit (13%), KiwiSaver (8%) and shares on 6%.
ASB general manager wealth Jonathan Beale said the perception of New Zealanders that investing in their own home or rental properties was "unusual by traditional investment standards."
"Thinking of your home as an investment is not a great idea. Yes, it’s wise to pay off your mortgage as quickly as possible to be debt-free, but your house is first and foremost the roof over your head, not a financial tool to make us wealthy," Beale said.
“It seems New Zealand is still not investing in the share market because of what happened in the 1987 sharemarket crash," he said.
He should perhaps have a chat with ASB's lending managers dealing with mortgage brokers...
In other economic and financial news...
Wholemilk powder prices, which are the basis for the dairy payout, rose 9.9% to US$2,265/tonne in the fortnightly Globaldairytrade auction overnight. Economists had expected a rise of 6-7% and further rises are expected and necessary to justify the NZ$4.25/kg payout.
Meanwhile, farmers are still cutting their cloth to fit as they enter a third consecutive year of unprofitable payouts. DairyNZ estimated yesterday the average break-even cost for farmers had dropped by 20c/kg to NZ$5.05 this season and is down from NZ$5.77/kg two years ago. The average farm has effectively cut around NZ$100,000 per year in costs per farm.
Elsewhere, the Chinese steel dispute may be starting to infect the rest of New Zealand's trade with China. NZFarmer reported China had imposed extra border controls on Kiwifruit imports from Zespri after two containers of Zespri kiwifruit hade been found to contain a fungus (Neofabraea actinidiae) that could cause fruit to rot when in long-term storage.
Have a great day. We'll be watching out later today for June quarter wages figures.