Disturbing house-price increases

Observing  the feeding frenzy on house prices is also like watching a slow-motion train crash. The soaring prices are harmful for several reasons, but no-one seems to be doing anything like enough to prevent them.

If anything, official policies through the Reserve Bank just seem to be making it all a lot worse.

The 20% increases across this country over the past 12 months entrench and exacerbate the inequality between those already owning houses and the rest, as well as between the young and older generations. They magnify individual and national debt burdens, increasing vulnerability to future shocks. They divert money to non-productive assets.

It is not just in Auckland that those without high-paying jobs and/or family financial backing will give up on dreams of owning their own homes. This is not just disheartening and demoralising but also damaging to the fabric of our society.

The Reserve Bank is helping to drive the escalation through its measures to keep interest rates extremely low, through its creation of money and through low-cost lending to the banks. If prospective homeowners can manage the deposit, even interest on an $800,000 loan might well be less than the cost of rent. Investors, meanwhile, encouraged by the low rates, pile in.

Remember, the bank’s job by law is not to be concerned about property prices per se. Its aims are to promote a sound financial system and stable prices (inflation of about 2%) and the maximum number of sustainable jobs. In fact, high and climbing house prices can suit the Bank by these criteria. People feel wealthier on the back of soaring property values and therefore are likely to spend more, creating jobs, whether that be in retail, hospitality or in-home improvements. The economy is stimulated.

The bank, at least, is mandated to be cognisant of financial risks.

It is here that it has used loan-to-value ratios (LVRs) deposit requirements to create a bigger buffer for house-buyers should prices plummet. LVRs also build in more security for the banks themselves.

Last week, in the face of the soaring prices, the Reserve Bank indicated it planned to introduce them in March. Banks have begun to take that message on board and are tightening requirements.

Hopefully, particularly tough LVRs can be introduced for property investors so that the demand from them reduces. More homes would then be available for first-home buyers. Hopefully, March is not too late, and the current crazy competition for houses can be contained.

The plateau in house prices in Christchurch after the earthquakes illustrates the key to dampening the increases. Because land and infrastructure became available around the city and because many builders joined the rebuild, many homes were constructed and demand was satisfied.

Everyone, including the Prime Minister, recognises the need for changes to the Resource Management Act and building rules, infrastructure development, workforce availability and cheaper costs for materials. These are all parts of the framing to increase supply.

The last three years and the Kiwibuild debacle, nevertheless, do not augur well for the necessary rapid improvements needed in these areas.

Some of the pieces are being put into place. But targeted and faster action is needed.

A house-price crash is a reverse concern. While that might improve affordability, it would be economically and socially disastrous. And a crash is possible, as evidenced in, for example, Ireland after the Global Financial Crisis. Prices dropped significantly, too, in part of New Zealand in the wake of that crisis, if only for a relatively short time.

If this country had managed to tick along with minimal or no increases for several years, as occurred in Christchurch before its recent rises, housing affordability could have crept back eventually.

The rises of the past 12 months, however, push any such scenario much, much further into the distance.