Via StuffNZ:
In an ideal world, the CEO of Westpac New Zealand would like to see house price growth remain on hold for the next few decades.
Speaking at a Trans-Tasman Business Circle breakfast in Auckland on Wednesday, David McLean said: “What we think New Zealand needs is a long period – maybe 20 or 30 years – of zero house price inflation, combined with steady growth in other parts of the economy.”
He said this would “gradually correct” housing unaffordability without igniting the economic carnage that a big price downturn would cause.
Furthermore, it would “gradually ween New Zealanders off the conviction – which is entirely justified because it’s been reinforced by economic evidence over the last 50 years – that investing in the housing market carries by far the best risk/reward of any asset class”.
McLean recognised achieving zero house price inflation during a sustained period of economic growth would be difficult; requiring a range of tough-to-implement measures and attitude changes from the public.
He said Europe had to some extent achieved this, but noted Europeans’ attitudes towards housing and their tenancy rules enabled them to essentially be renters for life.
He recognised it was hard to see a complete transformation in thinking and approach in New Zealand.
“What we can do is work on the obvious problems of supply and demand.”
McLean noted recent government policy changes aimed at taking the heat out of the demand side of the market, namely property investors being required to have a 40% deposit, the foreign buyer ban, and the extension of the bight-line test from two to five years.
“It’s a bit too soon to tell what long-term effect these will have,” he said.
“House price growth has definitely cooled, but we don’t yet know whether this is a structural change or whether the market is just temporarily pausing for breath.”
In other words, house prices would almost halve in real terms over thirty years. A few points to add:
- this is a measure of how large is the bubble;
- it won’t happen because markets that are driven by capital gains (see Straya’s negative investor carry) tend to either rise or fall;
- it might have worked in the 1970s with inflation at 12% but in a deflationary world with wages bogged down cheaper houses can only come about via nominal nor real value falls.
And so, we will support it until it breaks everything there is to break.
That said, when it does break it might fall for thirty years. After the 1890s bust, Melbourne fell for 70 years!
Of course, that couldn’t possibly happen again…
