NZ steps-up rhetoric on housing market

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By Leith van Onselen

In recent weeks, I have described how New Zealand’s authorities have become increasingly vocal on the issue of housing affordability as well as the macroeconomic risks posed by New Zealander’s seemingly insatiable appetite for housing and high levels of mortgage debt.

Late last week, the new minister for Housing, Nick Smith, vowed to address the woeful state of New Zealand housing construction, promising to take action to free-up urban land supply across New Zealand’s major cities:

Newly appointed Housing Minister Nick Smith says land costs will be his “No 1 target’” as he takes on the challenge of making the dream of home ownership a reality for more New Zealanders…

New Zealand historically had one of the world’s highest home ownership rates, but for the past 25 years that dream had been slipping away, he said.

‘‘No-one should doubt the Herculean task that is required to bend this curve of history and make home ownership more affordable’’…

House prices rising significantly faster than incomes had created a boom enjoyed by many existing homeowners but had created a huge hurdle for first home buyers, he said.

‘‘I’ve got my eyes focused on all components of the housing cost equation – the land, the infrastructure, the building materials, the labour and the compliance costs. We are going to need improvements in all five if we are to make genuine progress on housing affordability.’’

The price of sections had gone up disproportionately, and the Resource Management Act was not working to support home affordability, he said. Councils had not seen housing affordability as an important consideration. ‘‘I have had mayors, councillors and planners tell me that’s not their worry. Well, that is simply not going to fly when they hold the critical lever of land supply.’’

Dr Smith said that in Auckland and other cities, there was a real failure in urban development strategies.
Outraged communities blocking attempts to allow multistorey and infill development resulted in ‘‘the worst of both worlds – limited intensification, limited green fields development, and land prices going through the roof’’.

Dr Smith said there were two myths: that growth in cities would compromise agricultural production, and that dense housing was needed to combat climate change by reducing emissions. If all New Zealand’s expected population growth of 50,000 a year was in typical stand-alone houses, only 50 square kilometres would be needed over 20 years, while studies showed that those living in higher-density housing had greater emissions, he said.

He would also examine councils’ approach to subdivisions.

‘‘I’ve seen well-meaning but impractical and very expensive rules imposed on developers, that just drive up section prices. Nobody is going to build a $150,000 home on a $250,000 section’’…

‘‘I am against at the level of paperwork now required for building even a simple standard home.’’

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Bravo. I never thought I would hear a politician comprehensively addressing the issues and recommendations presented by the Productivity Commission Inquiry into Housing Affordability. If Minister Smith can back up his words with action, then it will go along way to restoring affordable housing to New Zealand, as well as improving macroeconomic stability by helping to mitigate the house price/credit cycle.

On a side note, anyone questioning the woeful state of housing supply in New Zealand only needs to look at Christchurch – New Zealand’s second largest city. The early-2011 Canterbury earthquakes wiped-out more than 10,000 homes, yet despite the carnage, dwelling consents (approvals) have failed to respond (see next chart).

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For its part, the Reserve Bank of New Zealand (RBNZ) has also stepped-up its rhetoric, once again warning against rising house prices and hinting that it could take action if the situation persists:

A 12 per cent annual increase in the price of Canterbury houses has prompted the governor of the Reserve Bank to offer the strongest hint yet that action is needed to ease the pressure on New Zealand’s “booming” housing market.

Speaking yesterday to business leaders in Christchurch, Graeme Wheeler said the bank was keeping a very close eye on the housing market and its impact on inflation.

Wheeler noted the pressures in Canterbury prices with a 12 per cent annual rate of increase, and in Auckland where the annual level of increase has fallen back from a 10 per cent to 12 per cent peak to 8 per cent.

The increase in house prices in the rest of the country was about 5 per cent, he said.

The bank was mindful about the pressures that could come from a “housing boom”, as well as inflation, higher construction costs and the impacts on people’s wealth.

“We’re monitoring the situation very carefully.”

Wheeler’s comments are the strongest signal yet that officials are extremely concerned about housing affordability.

However, Interest.co.nz’s Bernard Hickey is clearly not impressed with the “open mouth operations” coming out of the RBNZ, posting a detailed critique of the RBNZ’s record and documenting numerous occasions over the past decade when the RBNZ warned of rising house prices and growing macroeconomic risks, but failed to take action.

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With a new Governor at the wheel, hopefully the RBNZ will learn from past mistakes and take action to tame the credit impulse. The political mood around housing policy appears primed for action and failure to act would be yet another wasted opportunity by the RBNZ.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.