Peter Lyons applauds the Government initiatives on housing supply.
Recent moves by the Government to increase the supply of housing should be applauded. They are not a magic bullet or a "quick fix" solution but they are a start. The housing affordability issue lies at the heart of our economic future yet this is the first time that the issue has been directly addressed in recent years.
The solution lies in developing a more responsive market for new housing by reducing the current impediments to supply.
A review of the housing market over the past decade highlights the merit in addressing housing supply. The housing boom of the early 2000s was sparked by an immigration spike in 2002-03. This set in motion a demand-driven momentum in the market. As house prices rose this created a self-perpetuating feel-good cycle and a belief that house prices could rise forever. Until 2007-08 our economy was booming as people felt wealthier mainly due to rising house prices.
This allowed them to borrow and spend more, further pumping up the housing market. This process was happily facilitated by the banking and real estate sectors.
A factor influencing this process was the role played by the Reserve Bank. The bank is required to control inflation. During the boom it was raising interest rates to dampen inflation pressures. This made the lending by banks even more profitable, as they were able to borrow cheaply overseas and pump these funds into our mortgage market. The efforts of the Reserve Bank to rein in housing inflation were thwarted by aggressive bank advertising and the self-fulfilling illusion of rampant house prices.
The global financial crisis changed the dynamics of the market. Lending dried up and house prices stalled and fell. But on the supply side of the housing market, the effect of the crisis was the collapse of the finance companies. These companies were a key source of funding for property developers, many of whom went to the wall. The supply of new dwellings slumped.
Combine this with tighter building codes and stricter council consent requirements following the leaky homes debacle and New Zealand now has a housing supply issue in certain areas. A less-than-competitive market for building materials doesn't help.
Proponents of a capital gains tax as the solution are pursuing a valid policy for the wrong reasons. A CGT will not solve the issue of housing affordability or future asset bubbles.
The valid argument for such a tax is to create a more equitable and comprehensive tax base, where speculative activity is taxed in the same manner as productive activities.
Current house-price momentum is likely the result of pent-up demand, record low interest rates and supply constraints in certain areas. What is needed is a much more flexible market for new dwellings whereby supply becomes more responsive to changes in demand. Restraints on supply favour existing home owners so the Government is likely to encounter significant opposition to its proposals.
But unless the issue of housing affordability is addressed, our economy will continue to stagnate.
Our best and brightest will head overseas. Young home-buyers will be forced to take out massive mortgages and effectively become indentured to the banks, with the interest they pay accruing mainly to overseas shareholders. These funds could have been used to start new businesses, acquire new skills or invest in existing businesses. While we bid up our house prices and delude ourselves we are getting richer as a nation, our productive assets will continue to be snapped up by overseas buyers.
•Peter Lyons teaches economics at Saint Peter's College in Epsom and has written several economics texts.
