Home truths

Don’t believe everything you hear about the housing market

Opinion: Labour, National, the Reserve Bank, landlords, banks, councils and first-home buyers blamed each other this week for the crisis. Who’s right? And what should they do instead of bickering?

The housing debate raged this week almost as much as the housing market itself. The politicians talked faster than the auctioneers and were just as sweaty. Home-buyer anxiety approached Wellington tenderopening time levels. No one is publicly happy, although the Reserve Bank said it appreciated the wealth effect on economic growth, and homeowners are quietly planning their next trip to Harvey Norman and Bunnings Warehouse.

‘‘This is like the greatest boom I’ve ever seen in my lifetime,’’ said Gerry Harvey, the 81-year-old founder of Harvey Norman this week. He predicted another three or four years of rampant sales of couches and flat-screen-TVs, sales of whichwere up 25 per cent in the September quarter from a year ago.

Politicians and financial bureaucratswere less thrilled. The Opposition called on the Government to rein in the rogue Reserve Bank’s cheap lending to banks. The financeminister took the unprecedented step of writing to the Reserve Bank governor asking him nicely not to blow up house prices too much more.

The Reserve Bank effectively said thanks and invited the Government to act as well.

Both Jacinda Ardern and Grant Robertson refused again to introduce a wealth tax, a land tax, a capital gains tax or a stamp duty to hose down demand. They did, however, say they’d have another look at the currently five-year-long ‘‘bright line test’’ and the ringfencing of landlord incomes for tax purposes as part of a ‘‘review of housing settings’’.

Following Robertson’s letter, Adrian Orr went on to say at a news conference and in interviews that he was doing his job of stimulating activity to boost inflation and support jobs, partly because higher house prices keep homeowners spending and keep small businesses employing. He said he welcomed being asked to advise the Government on what it could do, including with taxes and the wider issues of housing supply.

For good measure, Orr then copied the finger-wagging of previous governors Graeme Wheeler and Alan Bollard by warning home-buyers that prices could fall, and how that could be risky for banks, in the hope of taking some pressure off the market. But that tactic is likely to fall on the deaf ears of home-buyers who have heard Peter cryingwolf on housing busts too many times.

Then the Reserve Bank published fresh figures showing rental property investors using bank loans worth more than 70 per cent of the value of the homes they were buying doubled their share of house buying to 18 per cent in the five months between the easing of LVR restrictions inMay and the end of October.

First-home buyers have increased their share too, but only slightly, and they rightly pointed the finger at landlords, who were able to weaponise their piles of equity over the years with loans from bankers who know themwell.

Sowho’s right and who’s wrong, and what might happen next? Starting from the top of the Beehive and moving down, it’s worth pulling apart the various deflections, denials, diversions and dissemblings to understandwho should be doingwhat if they were all serious about improving housing affordability for renters and buyers, although many in reality don’t actually want that.

1. The prime minister: ‘‘Maybe we could help first home buyers get bigger deposits.’’

This was a conventional and perfectly political response that ignores the underlying issues and would actually make things worse. For first-home buyers, their biggest hurdle now is not the cost of servicing debt, but the size of the deposit required.

The previous Government progressively amped up the power of Government money and Government-mandated savings to help first-home buyers into the market to compete with landlords and other owner-occupiers.

It encouraged first-home buyers to withdraw from their KiwiSaver accounts and then pumped that up with up to a further $20,000 subsidy per couple.

But adding to first-home buyer deposits simply adds fuel to the fire. The extra finance just pushes up the price of existing houses.

2. The prime minister: ‘‘Perhaps it’s all the cashed-upKiwis coming home? And I can’t stop them coming.’’

No, that’s not the main or only reason. It may not be a reason at all. A net 500 New Zealand citizens amonth came home in the four months to the end of September. That compares with net migration of over 6000 amonth over the same period a year ago.

If anything, migration should have been detracting from housing demand, not adding to it.

It’s true the Kiwis arriving home are more likely to be cashedup homebuyers than international students and temporary skilled workers, but each arrival would have to be a big buyer of multiple properties for them to be the reason, especiallywhen nearly 9000 homes amonth are being sold.

But the prime minister is not completely wrong. When the borders open there will be a new flood of migrants, supercharged by New Zealand’s success in dealing with Covid-19.

3. The finance minister: ‘‘No one could have predicted this boom and the Reserve Bank’s money printing to lower interest rates to soften the Covid-19 blow is a big factor.’’

That’s true in a limited and shortterm sense. If the Reserve Bank had not cut the Official Cash Rate from 1 per cent to 0.25 per cent and then embarked on a $100b programme of money printing and bond-buying then there would not have been the fall in mortgage rates to around 2.5 per cent that triggered the latest boom.

But the Reserve Bank and the Governmentwere staring down the barrel of what seemed at the time like a Depression-era collapse.

Still, they must have known or at least wondered what would happen to house prices. This problem is also not going away quickly. Most economists expect these near-zero interest rates to be around for years to come.

4. The Reserve Bank: ‘‘We had to remove the LVR restrictions in May and now we’re bringing them back as soon as we can in March.’’

Once the banks and the Government had agreed on a mortgage deferral programme, the Reserve Bank had little choice but to suspend the LVR restrictions.

That’s because a loan just below the threshold for being categorised as ‘‘high LVR’’ could easily bounce up to the riskier category if payments were deferred and added back on to the rump of the loan.

But once it was clear that the economy had stabilised, employment had not cratered and the banks were starting to expand their high-LVR lending, the bank could have moved faster and pushed the banks behind the scenes to put a sock in their high LVR lending pipes and signalled an early reimposition.

Reserve Bank figures out this week showed high-LVR lending to landlords was three times higher in the five months to October than a year earlier, but only went up a third to first-home buyers. The Reserve Bank waited until November 11 to reverse course and signal reimposition two months early in March.

5. The prime minister and finance minister: ‘‘We’re already doing a lot to lift supply. Building consents are at record highs and Ka¯inga Ora is flat out building 8000 new state houses over the next four years.’’ Consents are at record highs in nominal terms because our population ismuch larger than it used to be, but our building rate per thousand residents is woeful, compared to the 1950s, 1960s and 1970s. The Government has suggested it cannot go any faster because there are shortages of skilled tradies.

That’s true right now, but the industry would like to properly scale up for the next decade or two, confident in knowing there will be a high base-level of demand from Government building, or Government-backed building. Before they employ and train a lot of apprentices and build big prefabrication factories, they want to be sure there won’t be a collapse in demand the next time the housing minister changes or interest rates go up.

The Government should be committing to a much bigger build programme, having funded it and secured bipartisan approval. Labour is understandably wary of KiwiBuild-type promises. But if it’s serious about resetting expectations around supply and prices, then it has to have a longterm view around using supply to improve affordability and improve the ‘elasticity’ of a market response the next time there is a demand shock.

6. Labour and the Opposition: ‘‘Don’t worry. We’re replacing the Resource Management Act. Thatwill fix it.’’

No it won’t. TheRMAitself is not the problem, particularly around blockages of new supply from councils reluctant to allow new development and the expensive infrastructure they need to fund with higher debt and/or rates.

TheRMAis expertly wielded by anyone who wants to prevent new housing supply for whatever reason, from nimbys to supermarkets blocking rivals.

But it is the councils who wield it best, blocking the creation of new suburbs and the need for new pipes, roads, footpaths, parks and streetlights. That’s because many of them are either at their debt limits (or pretend to be) or simply won’t borrow and build because the ratepayerswho vote own properties in the leafy suburbs don’t want to pay extra to ‘‘subsidise’’ the addition of new people. If theRMAis removed as a tool to block things, there will be other ways invented to obstruct development.

Amajor reset of local government and central government financial and civil relations and governance is required.

7. Landlords: ‘‘Why are you all being so mean? Weprovide a service and are just responding to the existing incentives. And look over there at the share of first-home buyers, which is at record highs. Don’t blame us.’’ As pointed out above: Riskier lending to landlords trebled, but onlywent up a third to first-home buyers. Landlords created the turbo-boost that lifted the speed of the market, but they are just responding to the incentives of low term deposit rates, mountains of equity in their existing properties, low mortgage rates and a desperation (often) to buy properties for their own children.

8. The banks: ‘‘Don’t blame us. We’re also just responding to our incentives. And we could actually have opened the pipes even more, but chose not to because we’re being responsible and cautious.’’

The banks can rightly say it’s not really their fault. The Basel rules on capital allocation have progressively drawn banks more heavily into mortgage lending because the capital required is low, the risk of default is low and it’s a quick and easy way to shovel lots of loans out the door. Secondly, they could have gone utterly ballistic if they wanted to betweenMay and October.

But the banks shouldn’t get off completely scot-free. Some of that caution was because they could not have coped with the demand in the form of mortgage processing and customer assessment. The seemingly selfless announcements in the past 10 days of banks not doingmuch more high-LVR lending was about closing the door to business they couldn’t handle.

9. Every property owner and politician under their breath: ‘‘Don’t do too much to make housing affordable. It might reduce the value ofmy house and mylife savings, and endanger the banks.’’

This is the dirty not-so-little secret of the entire issue, which was perfectly encapsulated by the primeminister’s comment in the last debate before the election that she would not want house prices to fall.

Outright price fallswould be politically difficult, given young renters don’t vote and property owners do, but less financially damaging than many think because a 20 per cent fall would take prices and values back to where they were a year ago.

The dirty not-so-little secret of the entire issue was perfectly encapsulated by the primeminister’s comment in the last debate before the election, that she would not want house prices to fall.