Up isn’t the only way for property prices
Values have fallen before — let’s make it happen again
Arecollection: I bought my first and only Wellington house off the back of a major price slump in the 1970s which saw house prices fall by around 40 per cent in real terms between 1974-80.
It was way beyond my means of course (“worst house, best street” and all that). But the “bank of my mum” leveraged her house to help me with a deposit. I still recall the mainstream banker turning me down with the patronising advice that I should get my younger student brother to guarantee the loan — fat chance when he was not the one earning.
So, it was off to the private solicitors’ market where I readily signed up mortgages at 12 per cent (first) and 15 per cent (second) to back my purchase of a home-and-income property. Back then, if you were buying a rental house — as half of the property was to be tenanted — you paid a commercial interest rate.
Not so these days for the many who have invested large in residential property in the last decade to ride an extraordinary boom in house prices, fuelled by very low interest rates that many of us would not have expected to see in our lifetimes.
The point of this recollection is that I was a beneficiary of a house price slump — as many others would be if this Government, with support across Parliament — engineered a correction.
An engineered correction is exactly what is needed now so that people can buy homes for themselves and their families without ridiculously extending themselves.
Surely it is time that Jacinda Ardern — who has ruled out capital gains taxes during her prime ministership and presumably wealth and/or land taxes — revises her view.
Such taxes won’t in themselves ensure that house prices drop.
But Ardern — and her Finance Minister Grant Robertson, who this week passed the buck ever so slightly to the Reserve Bank — should be working to effect that much-needed correction.
According to the 2021 annual Demographia international housing affordability report — out this week — it is more affordable to buy a house in San Francisco or London than it is in Auckland.
This report ranks Auckland as the fourth least affordable housing market in the world.
This is obscene for a relatively lowwage economy.
If Ardern and Robertson were serious, they would legislate a breathing space preventing investors from buying residential houses until the market slack was taken up.
They could legislate so investors paid a much, much higher interest rate differential than budding home owners, so it was more difficult for them to bid up prices, and ensure that differential was siphoned into a fund to help others who just want a home.
Then there is the option of usurious stamp duties for commercial investors.
On the supply side, simply commandeer land and bring in container loads of prefab buildings from China and the workers to get them up quick smart.
Back to the 1970s: the Palmerston North property company that had acquired my place from the extraordinary Miss Maudsley, who past the age of 80 found the Wellington incline had finally got too much for her — was overstretched. They sold. I bought.
As Peter Nunns wrote in July 2016 on the Greater Auckland website: “Remember in the early 1970s, New Zealand experienced a rapid increase in house prices caused by, among other things, a swift run-up in immigration and a shortage of builders and building materials.
“Between 1971 and 1974 real house prices increased by 60 per cent. This caused alarm, and the Government responded by loosening planning controls to allow more flats to be built in cities. Then the 1973 oil shock hit, net migration turned negative, and the economy entered into a prolonged slide. (Thanks Muldoon!).
“From 1974 to 1980, house prices fell by around 40 per cent in real terms. By the end of the decade houses were no more valuable than they had been at the start.”
Successive prime ministers have not entertained measures which might even nudge prices downwards, let alone bring about the fall that former Reserve Bank economist Arthur Grimes has promoted.
There is a fundamental problem here.
Ardern — like many of us — is the beneficiary of the house price boom.
But she is also a Labour prime minister who appears determined not to allow house price falls because voters now expect rises will continue ad infinitum.
The fear of missing out is driving prospective owners.
As Ardern said this year: “It is much more sustainable to have those much smaller increases. I think people expect that you see that in the market.
“What we also accept is that for most New Zealanders, their house is their most significant asset.”
Last word to Grimes. He observed in March 2016 that the REINZ Auckland median house price had reached $820,000. Four years previously, it was $495,000 — a 66 per cent increase in four years.
“What’s more alarming is that in 2012, many people considered that house prices were already getting out of reach for most people. That was particularly the case for young people and low-income earners,” said Grimes.
As he said, that extraordinary increase — coupled with the already high level in 2012 — was behind his call to a recent Auckland Conversations event that policymakers should strive to cause a 40 per cent collapse in house prices to bring the median back to around $500,000.
Those prices have since skyrocketed — but where is the action?
An engineered [house price] correction is exactly what is needed now so that people can buy homes for themselves and their families without ridiculously extending themselves.