Housing crisis to end in tears

09 October 2017
Michael Rehm, The University of Auckland Business School, Department of Property

Massive amount of pain before ‘off-the-wall’ mortgages are eased.

Reigning in bank borrowing, rather than building more homes, may be the answer to Auckland's housing crisis, an Auckland property expert believes.

Dr Michael Rehm, a senior lecturer in property at the University of Auckland Business School says lowering lending to more manageable debt-to-income ratios is likely to lead to a drop in house prices "overnight".

"But if this happens, it would mean up to 60 per cent of sales couldn't happen," he says. "Many mortgages are astronomical; they are 'off the wall' and there is going to be a massive amount of pain to get to where we need to be.

"But if something doesn't happen it is only going to end in tears."

Rehm says debt-to-income ratios in New Zealand are in the stratosphere. A recent KPMG Financial Institutions Performance Survey (FIP) suggested most mortgages are sitting between nine and 12 times borrower income (this equates to a household with an income of $70,000 taking on a mortgage between $630,000 and $840,000).

"This should be much lower - somewhere between three and five times income," he says.

Rehm says building more houses is not necessarily a silver bullet and may even drive prices up.

"In Dublin, a city about the same size as Auckland, between 2002 and 2007 almost 100,000 new dwellings were built; but this only succeeded in fueling a speculative housing bubble and driving prices up by 85 per cent," he says.

Rehm lays the blame on "unbridled" bank lending.

"All roads eventually lead back to the banks," he says. "It is scary so many young people cannot afford housing. I believe the fastest way to turn it around is by restricting lending and if they pull back on credit, that alone I think will help draw prices back.

"Banks are looking to maximise their profits and compete against each other; to do this they need to grow their mortgage portfolios."

Rehm says in 2016, 52 per cent of bank lending went on housing compared to just 14 per cent in 1984.

He says he can see no way out of the crisis without economic pain and political fall-out: "If policy-makers genuinely wish to make housing affordable once more, prices must be brought down, but I fear few will the have the courage to really make war on prices."

"The tragedy is the debt saddled on Kiwi homeowners generates interest, a large chunk of which goes to shareholders off-shore," he says. "Anyone taking out high debt is taking real risk and if prices start dropping they are sitting ducks."

Rehm's comments come amid wide-ranging debate on the issue and uncertainty at the direction a future government will take in combating the problem.

Michael Barnett, chief executive of the Auckland Chamber of Commerce has also entered the discussion suggesting politicians have become obsessed with pushing us into house ownership.

"Here's a home truth," he says in an opinion published in the NZ Herald: "You don't have to own a house to have a home. There are other ways of living the dream of having a secure, warm, healthy and happy home whether it is owned or rented as part of a social housing association, community co-operative, the government or local council."

Rehm does not think the election outcome will have any marked effect on the housing market: "It seems fairly certain that NZ First will be part of whatever government is formed and, given that, I would imagine the only changes we could potentially see in the housing market is a reduction in immigration (New Zealand takes in about 72,000 immigrants a year, NZ First policy is to limit this number to 10,000).

"This would primarily affect the rental market as new immigrants tend to rent rather than purchase," he says.

Rehm says this is likely to dampen housing demand, curtail speculation from non-resident and might even dissuade some from moving to New Zealand.

He says the recently published ASB Housing Confidence survey - covering the three months to August - actually shows a softening in the market with house sales at their lowest rate in three years.

This subdued activity has coincided with a sharp slowing in house price growth during 2017, with prices in Auckland and Christchurch having fallen slightly. With the market expected to remain 'soft' over the next few quarters, the survey predicts fewer price gains.