Will house prices fall?

Photo: Getty Images
Photo: Getty Images
A glimmer of good news appeared at last on the housing front this week.

Consents for new dwellings in September are up nearly 5000 on the same month last year, Stats NZ reported. The figure over 12 months is 47,331, a record. Auckland leads the way, including many consents for apartments. Otago numbers are also high.

This is good news because increased supply could encourage house-price reductions, even when such falls will cause pain to recent buyers and to wider economic buoyancy.

Housing was in “crisis” during National’s last term. As everyone knows, it has subsequently become much, much worse. The ridiculously stratospheric prices — among the highest in the world and rising more than 30% in the past 18 months — are damaging for several reasons.

There is the issue of homelessness and overcrowding because of insufficient homes to rent. There is the matter of poverty. When large proportions of income go on rising rents, sometimes 40%, that leaves little even for basics. Whatever the Government endeavours to achieve in reducing child poverty and inequality is overwhelmed by the housing crisis.

Even double-income young professional couples are struggling to save the deposit needed to buy a home, especially in Auckland or Queenstown Lakes. Even in the poorest parts of South Auckland prices are crazy. Even homes in struggling rural towns are no longer cheap bargains.

Million-dollar houses in Dunedin were once rare. Now, they are unexceptional. The bubble keeps expanding no matter how much the Reserve Bank tries to talk prices down. Adrian Orr warned about “unsustainable” house prices and a heightened risk of correction on Wednesday. He will be proved correct at some stage. The bigger the bubble, the more likely it will burst. Unfortunately, Reserve Bank governors have little credibility on such matters because of past pronouncements.

Mr Orr presented figures to illustrate that over time houses are not a one-way bet. The Irish crash during the Global Financial Crisis was spectacular.

The more than $50 billion “created” when the Reserve Bank bought government bonds and low-interest rates — not just supply and demand — have been among the largest causes of housing inflation. Increased minimum deposits, banning overseas buyers, tax-deductibility and other changes for investors and a doubled bright-line test have all failed to stop runaway increases. Next in the Reserve Bank’s failed arsenal are debt-to-income ratios. Mortgage rates are also rising.

Meanwhile, many New Zealanders — unable to travel overseas and with the paper net-worth of homeowners climbing ever higher — are spending freely. This sugar-high stimulates the economy and is reflected in the likes of the extraordinarily low unemployment figure, 3.4%, that came out on Wednesday.

Prices are now so inflated that stagnation and slow slippage for several years will still not be enough to make dwellings affordable. A jolt down to the already sky-high levels of a year ago and then stagnation might be the best result, even if that hurts recent buyers, and spending takes a hit.

An economy relying on escalating house prices is like a house built on sand. It is inherently unstable. House prices were wrongly predicted to fall when Covid first hit. Who knows what will happen when travel again opens up, when young New Zealanders can leave on overseas experience or can easily emigrate to Australia? What, too, will be the eventual impact on supply from National and Labour’s recent agreement on urban intensification?

The soaring numbers of building consents suggest homes and apartments will be more readily available and runaway prices curbed. But, given the regular failures of economic forecasting and the vested interests in housing, price trends remain unpredictable. Nonetheless, the phenomenal boom has been bad for those shut out of homes, bad for social cohesion and bad for the poor.


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