CHART: The reason why the RBNZ is looking to cool Auckland's hot housing market

Richie McCaw knows how it feels… Photo: Hannah Peters/Getty Images

Last month the Reserve Bank of New Zealand announced additional measures to cool Auckland’s hot housing market.

Restricting growth in high LVR investment lending, increasing deposit requirements for investor loans, along with greater capital weightings for investor loans, are the two main proposals currently being floated to cool the rapid growth in house prices in the city.

The chart below, released by the RBNZ this morning, shows why the bank has decided to take action. It plots annualised house price growth against house price to income ratios for various cities across New Zealand. As you can see there is a vast difference between the developments in Auckland to other major cities in New Zealand.

Based on its analysis, the RBNZ believe house prices in Auckland are now among the most expensive in the world.

“Auckland house prices are significantly more elevated relative to incomes and rents. The Auckland housing market is now one of the least affordable housing markets in the world, with a house price to household income ratio of around 8. By some estimates, this surpasses ratios seen in London and Melbourne, and approaches Sydney multiples.”

In what is a similar scenario to what is being seen in Australian cities at present, particularly Sydney and Melbourne, the bank believes investors are playing a major role in driving Auckland house prices higher.

“There is evidence that investors are playing a growing role in the Auckland market, and an increase in investor demand is likely to be one factor contributing to stronger market conditions. The investor share of transactions in Auckland increased from around 36 percent prior to the introduction of LVR restrictions to over 40 percent in the first three months of 2015. Some of this increase in the investor share is due to falling participation by first home buyers following the introduction of LVR restrictions. Nevertheless, the level of sales to investors is around 12 percent higher now than immediately prior to the introduction of LVR speed limits and has been strong recently”.

As a result of rapid house price appreciation and the increased involvement of property investors, the RBNZ believe the risks of a substantial correction in Auckland’s property market are increasing.

“The Reserve Bank’s concern is that the risk of a substantial correction in the Auckland property market is rising, and will continue to rise the more that prices depart from fundamental values. A significant correction in house prices could be triggered by a range of factors, including a sharp economic downturn leading to a marked deterioration in the labour market and a turnaround in migration flows, or a material increase in mortgage interest rates. Such a correction could threaten the stability of the banking system if the resulting increase in mortgage default rates and credit losses were sufficiently large. A large correction could also generate a significant period of macroeconomic weakness, particularly if a large number of households ended up in a position of debt overhang following a market correction. Such a scenario would further exacerbate stress on bank balance sheets”.

As a result of the proposed changes to cool Auckland’s property market they forecast sales will fall by 8%, and house prices by between 2-4%, in the year to October 1, 2016, one year after the tighter restrictions will be put in place.

Many will be watching to see if they cool the property market, particularly those across the Tasman.

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