Finance Problems for New Auckland Developments

13/02/2017

According to the Housing Affordability Survey, Auckland is the fourth least affordable city in the World behind Hong Kong, Sydney, and Vancouver. The median priced Auckland house is now ten times the median household income at $830,000 and $83,000 respectively, a situation that makes it very difficult for first-home buyers to enter the market. With population growing and annual net migration reaching a record high of 70,588 in 2016 according to Statistics New Zealand, additional supply is needed sooner rather than later.

While the Government continue to talk up prospects of new supply, just 10,000 dwellings were consented in 2016 compared to an estimated 13,000 needed to keep up with demand. Even if the unitary plan manages to reach its targets by stimulating building activity, finance remains a huge problem on the ground.

Tightening lending conditions by the big Australian banks are widely considered to be slowing down development, with lenders generally taking a more cautious approach to New Zealand property lending. The lack of a large second-tier lending sector and rising construction costs are also causing problems for some developers.

According to William Cairns, a director at mortgage financier Cairns Lockie, there are far fewer lenders than in the past across the industry: "If you go back 30 years ago, we had a plethora of solicitors, credit unions, building societies and finance companies that were New Zealand owned and operated. A lot of them were not particularly well managed. That was a regulatory issue. They haven't been replaced by New Zealand owned competitors to the banks. There is just not those large second tier players."

The plug has recently been pulled on a number of high-profile residential developments in Auckland, including a 91-unit development in Avondale called Flo Apartments and the St James Suites project who released this statement: "Financial institutions have tightened their lending activity to apartment developers in recent months, affecting a number of Auckland apartment projects." According to Greig Allison, a director of the Capital Group, "They definitely are tightening up. Banks have got limited capital. Their balance sheets are full. I think these deals are not happening because they haven't got the funding."

While the Reserve Bank want to increase supply levels to help cool down the market, they will also be happy to see a tighter lending environment to ensure wider economic security. The central bank imposed tighter loan-to-value-ratio lending restrictions on the banks last year as a way to mitigate risk, decreasing exposure to ensure against the risk of housing oversupply and big price falls. While a level of caution is definitely needed, additional funding options may be needed to help fill the gap and ensure increased supply levels over time.

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