A guest poster at Kiwiblog predicts a property price crash.
Jenée Tibshraeny considers the impact of a 20% fall in prices:
1. Someone wishing to make a 20% deposit would have to save $23,400 less. . .
That would make houses more affordable though it would come at a high price for any vendors who had bought recently.
2. Rents would likely stabilise. . .
That would be an improvement on increases that are making the poor and not-so-poor poorer, although some would still be too high for many.
3. Homeowners would feel less wealthy. . .
If they don’t have to sell, that’s only a feeling.
4. A 20% fall in house prices would put 7.7% of mortgage debt ($22.3 billion) in negative equity, according to the RBNZ. . .
That would be only a paper loss for anyone who held on to their property but an expansive problem for anyone who had to sell.
5. Businesses – particularly small ones – with loans secured against residential property would get nervous, threatening people’s jobs. . .
That isn’t good for businesses or their employees.
6. Business confidence would take a knock, with a question mark over the degree to which this would stymie investment. . .
Falling business confidence reduces investment and employment.
But what of the harm caused by continuing steep rises in house prices?
New Zealand’s economy and financial system are precariously built on the housing market. It is for this reason policymakers would rather protect than risk damaging this market.
But what we need to realise is taking a block off the top of the game of Jenga that is the housing market, and sliding it back into the foundation, is possibly lower risk than taking another piece out from the bottom to keep building an increasingly shaky tower.
More research needs to be done around the trade-offs surrounding changes in house prices from inflated levels.
2021 needs to be the year of challenging the narrative that house prices must always keep going up.
A fall in house prices would hurt some people, but what if the steep increases are doing more harm than a fall would?
Ben Thomas writes:
. . . Prime minister Jacinda Ardern must take her share of responsibility for encouraging the property feeding frenzy of the past few months, which threatens to create a new and permanent class division in New Zealand society.
Ardern did not create the conditions for New Zealand’s housing crisis – blame for that falls mostly at the feet of Sir John Key, Helen Clark, and the Reserve Bank’s plummeting interest rates and removal of loan-to-value ratios (LVRs) in response to Covid-19.
However, through her actions and her words, the prime minister has not just failed to dampen down, but has actually poured petrol on the pyrotechnic panic-buying that has seen prices spiral out of control. . .
In December, she gave her clearest commitment yet to seeking “sustainable” growth in house prices: “I think people expect you see that in the market,” she told Interest.co.nz by way of explanation.
What’s sustainable? The sort of mad prices people are paying now, well above what anyone on an average income can afford aren’t.
This reassured homeowners. But the comments are extraordinary: the Government does not even currently guarantee savings that are deposited in Kiwibank in the event of a financial crisis (and which offers a 0.9 per cent interest rate on term deposits).
The flipside of the implied, but increasingly explicit, guarantee for housing is a signal that the Government will try and ensure housing only ever becomes more expensive, even if more slowly. That’s a red rag to investors who can leverage existing homes to borrow almost free money, and desperate first-home buyers borrowing to the hilt.
It also ensures, as we are seeing now, record low levels of houses available to purchase. Why would you sell now if the prime minister has guaranteed that your house will be worth more next year and in fact, probably, next month? . .
You don’t have to live in it or rent it out is you know that significant capital gain is assured making it a very secure investment, albeit one predicated on growth rather than yield.
Just as the public (or at least those who can save, beg or borrow for housing) is responding to incentives offered by the Government, Ardern is responding to incentives of her own.
The obscene political calculus is that, while 64.1 per cent of people still live in owner-occupier households, if property prices were to double in the next three years Ardern’s party would probably be re-elected with an even larger majority than it currently has. . .
What politician would not find that attractive?
The result of pursuing these short term incentives is less palatable for the long-term legacy of a centre-left government. That is, overseeing the final seismic shift in house prices, out of the reach of all but existing homeowning families, that leads to not just widening but perhaps irreversible inequality.
It’s worth considering the scale of the disparities between two different New Zealands.
The idea that an Auckland home could earn more than an Auckland worker is no longer even shocking. But during the month of October alone, the value of a median price Auckland house went up by $45,000.
Whether or not it’s shocking, it’s wrong.
Like any mass panic, it is contagious. Alert level 3 lockdown stopped the coronavirus spreading outside Auckland in the second half of last year, but it could not hold back Auckland investors from bidding up, then buying up, property throughout the regions, as has already happened in large parts of south Auckland.
Gisborne, on the East Coast, one of the regions the hardest hit by the early Covid disruptions and with a median household income roughly $23,000 less a year than Wellington’s, saw house prices increase by 43.8 per cent.
We have, in part at the government’s urging, gone past a housing crisis, a mere shortage of homes, and into a frenzied carve-up of the country’s future wealth.
Whatever this month’s announcement, the bigger “reset” that is almost complete is a fundamental shift away from a society where social mobility is possible (however imperfectly) through education and work, towards one where property and even the trappings of a middle class life are kept exclusively within one band of society. Haves and have-nots; the landed gentry and serfs.
The idea of New Zealand as an egalitarian country where Jack and Jill were as good as their masters and mistresses has been in no small way been built on the ability a sizable majority had to own their own homes.
Now that has become an impossible dream for too many and created the nightmare of increased rents and more poverty with all the social problems that stem from that.
This has provoked the usual calls from the left to increase taxes, or impose new ones. That would be nothing more than tinkering and hasn’t worked as a brake on house prices anywhere else.
The steep prices are a result of demand outstripping supply and the only sustainable solution is to increase the supply.
The much slower rise in house prices in and around Christchurch when constraints on development were lifted after the earthquakes shows what can be done.
The supply is so far behind demand even that won’t be a quick fix, but it will eventually work and when supply catches up with demand, the pressure on prices will subside, as it should.
House prices don’t have to keep going up. Once people get their heads round that they’ll look for other more productive investments without the financial and social ill-affects that come from the current steep and unsustainable increases in property values.