Bad housing policy rears its head in New Zealand

Why is the New Zealand government undermining the Reserve Bank of New Zealand’s attempt to deflate their housing bubble? Contrary to common sense, New Zealand Prime Minister John Key hopes to ease concerns about housing affordability by increasing demand.

With an election around the corner, sound evidence-based policy is out the window and populist chicanery is back in fashion. Yesterday Key kicked off the National Party’s election campaign by announcing a plan to double subsidies directed towards first home buyers.

Under the proposal, the Nationals will provide an additional $NZ218 million ($A195.7m) over the next five years to low- and middle-income families looking to buy their first home. Currently, the Kiwisaver First Home Deposit Subsidy offers grants of up to $NZ10,000 for couples but that will double to $NZ20,000. The revamped scheme will only extend to newly created homes, with the grant in place for existing homes remaining unchanged.

But the cap on the value of the properties that can be purchased under the scheme for both new and existing properties will rise significantly. The cap in Auckland will rise to $NZ550,000 (from $NZ485,000) and $NZ450,000 in Christchurch and Wellington (from $NZ425,000 and $NZ400,000 respectively).

Key believes that this policy will ease the housing affordability concerns facing younger home buyers, but he is mistaken. With supply largely fixed in the short-term, these policies (similar to existing first home owner grants) are quickly incorporated into house price expectations, resulting in higher prices. Consequently, these policies merely create the illusion of greater affordability and will fool younger New Zealanders into taking on a considerable debt burden.

The main beneficiaries of the program will be property developers, who can now expect to receive higher prices for the properties that they complete over the next five years. Key would argue that this will result in a stronger supply response -- that developers will build more properties due to higher prices. But is that plausible?

In normal times, perhaps, but New Zealand already faces an unprecedented construction boom as it attempts to rebuild Canterbury and Christchurch. How much spare capacity really exists in the construction sector?

In that light, the policy is little more than a generous handout to property developers -- a sector which will benefit handsomely from the Canterbury rebuild. It’s hard to imagine a sector in New Zealand that is less in need of a handout over the next few years. Surely that $NZ218 million can be better spent on health care, education or fighting poverty?

Furthermore, the policy undermines attempts by the RBNZ to deflate their housing bubble. New Zealand has some of the most expensive property in the world compared to incomes and rents, which prompted the RBNZ to place ‘speed limits’ on lending activity.

Last October, the RBNZ introduced temporary measures to curb residential mortgage lending with high loan-to-valuation ratios. Banks were required to restrict new residential mortgages, with LVRs over 80 per cent (meaning a deposit under 20 per cent of the property value) to no more than 10 per cent of the value of their total residential mortgage lending.

These steps were taken to cool a rapidly overheating housing market and manage the systemic risks that can develop during boom periods. The Bank of England introduced similar measures not long after to curb their own excesses and there have been calls for the Reserve Bank of Australia to follow suit.

More importantly, those measures were working. According to recent modelling, “house price inflation is 3.3 percentage points lower” and “household credit growth is 0.9 percentage points lower” in March than would have been the case in the absence of the LVR restrictions.

If Key is serious about addressing housing affordability -- and he should be -- there are better ways to pursue it. Unfortunately he has placed his faith in a policy that is a proven failure; a policy that has been a disaster no matter the time or place (A worrisome debt trap for first-home buyers, July 29).

If he wants to boost construction, why doesn’t he ease the supply-side restrictions that artificially reduce land supply and increase prices? That won’t have a big effect now due to the Canterbury rebuild, but would increase supply considerable over the medium term.

If he wants to ease housing affordability, why won’t he touch New Zealand’s generous negative gearing scheme? Alternatively, he could simply get the hell out of the RBNZ’s way.

The National Party’s proposal to address housing affordability is poorly conceived and will simply result in first home buyers paying a higher price and taking on a greater debt burden. The supply response (if any) will be undermined by the Canterbury rebuild, leaving limited spare capacity across the construction sector. Unfortunately, this represents another victory for bad housing policy and a further blow for younger Kiwis.