After the Reserve Bank of New Zealand (RBNZ) prematurely decided to ease its successful mortgage LVR restrictions yesterday, New Zealand’s new finance minister, Grant Robertson, has claimed that he wants to simultaneously improve housing affordability while ensuring that home values continue to rise by 2%-3% a year. From NewsHub:
“What we’ve seen with what [Reserve Bank Governor Grant Spencer] has done here is that he’s got some confidence now the housing market heat’s coming down, and he’s prepared to loosen these restrictions.
“We’re also really pleased that he acknowledged one of the reasons he’s got confidence is that we’ve got a plan to actually take the heat out of the housing market – build those KiwiBuild homes, crack down on the speculators”…
But that solution won’t be to bring the prices of existing homes down, if Mr Robertson has his way. He would be happy for prices to keep rising, but at 2 or 3 percent a year – not 10 or 15, as they have been.
“I want them to go up more slowly – people need to have value in their properties, but it needs to be a market that’s affordable. You don’t get that unless you’re building a mixture of homes – that’s the big problem that we’ve had. The homes that are getting built are the big 150sqm, three-bathroom homes. That’s not what KiwiBuild is about”…
“I want house prices to moderate – what that means is a sustained period where they’re not going up by 20 percent, but people get value in their priorities – but they’re aren’t going up to the extent that people can’t afford to be in the market.”
Labour went to the election with an excellent housing platform that addresses both supply and demand distortions via negative gearing reform, banning foreign buyers of existing homes, tighter capital gains taxes, removal of urban growth boundaries, plus bond financing for infrastructure. Its plan to reduce immigration by around a third is also sound, and would help to relieve chronic housing and infrastructure pressures, especially around Auckland.
That said, Robertson’s promise to deliver more affordable housing while at the same time protecting existing home values is a contradiction in terms.
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The fact of the matter is that it would take many decades of stagnation (let alone price rises of 2% to 3% a year) for Auckland housing to return to ‘affordable’ levels, which necessarily means that prices will need to fall – a point illustrated in September by Mike Reddell:
A couple of weeks ago I showed this chart. Starting from a price to income ratio of 10 – roughly that in Auckland now – it traces out how house price to income ratios would evolve if nominal house prices were unchanged from here on (something both party leaders now appear regard as a good outcome).
Just focus on the green line. If we have inflation averaging two per cent, and productivity growth matching the performance of the last 30 years (quite a step up from where we are now) it would take almost 25 years to get price to income ratios down to even around five times income.
Not that I can blame Robertson for taking this approach. Labour must try to deleverage and deflate New Zealand housing without causing an outright crash – a difficult task when New Zealand housing is at such extreme valuations:
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Robertson is clearly walking a housing tightrope and trying to balance competing interests. I just hope Labour doesn’t go weak at the knees and abandon its housing policies as the market turns down. There is only one genuine solution for housing affordability: lower prices, especially with respect to land.
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.
