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Alistair Helm questions whether the announced political policies to address the housing market are sufficient or timely enough

Posted in Opinion

By Alistair Helm*

The message from local and central government for the majority of this year has been that we face a critical housing shortage. Certainly it is more acute in Auckland but that fact is not surprising given the expected rise in the population to c. 2.5m in the next 30 years.

The Reserve Bank has made it clear that it is going to implement policies to take some steam out of the property market that will require banks to restrict lending for loans of over 80% loan to valuation ratio. Potentially reducing these high LVR loans from the current level of 25% of all new loans to below 10%, with the consequential effect of cutting off supply of funding for first homebuyers especially.

The political parties have rallied to the call of seeking to assist these first homebuyers. Labour’s view is that its all the fault of overseas speculators and will outlaw overseas based buyers. National has announced the raising of the dual thresholds of income and purchase price of homes eligible for the government deposit subsidy scheme through Kiwisaver.

In my view neither really are significant or well directed enough to address the fundamental issue. We have a shortage of housing – this matched to increasing demand fueled by record low interest rates is pushing up prices. Prices are rising at a rate that sucks in speculators – this virtual circle is dangerous and is the heart of a property bubble. To this is potentially being added the dangerous risks associated with alternative lending sources which will be keenly sought out by buyers who cannot meet the 80% loan / 20% equity criteria, likely to be set by banks. Be wary because this property bubble is going to pop.

How can this situation be averted? In someway I don’t think it can. Property cycles happen and keep happening. They build slowly, they gain visibility and media coverage, they explore and they then implode. Doing something today is too late in my view we have too much fuel being poured on the fire. My only hope is that we fizzle rather than pop!

So what could have been done? I think part of the solution could have been addressing all three issued cited above – build more homes, support first time buyers and reduce risk in the property market. To a solution, have a look at the UK government scheme – New Buy.

Put together a few years ago when the property market and the economy was on its knees the plan was to encourage group home builders to add new stock of home to by; encourage home buyers to buy new homes, and  thereby stimulate the economy and through government support underwrite the risk component of loans to make buying new homes attractive through a much lower deposit requirement.

New homes have additional benefits they are more energy efficient, they can be built to meet the growing intensification requirements of our largest city, and they add supply at the bottom of the market.

This last point is key because the vast majority of new homes built, particularly of the past 5 years has been tailored designed homes built for owners with a median size of at least 220m2 – 4 bedroom on a 500+ m2 section. We need more homes (apartments, townhouses, multidwelling units) – this is how younger generations want to live and can afford to live.

The government could have taken parts of the UK scheme. Created a loan guarantee for new mortgages on new build properties with a minimum 5% deposit. The government could then have incentive building companies to build homes faster and more affordable by fast tracking consents and discounting compliance costs based on property construction type. They could have partnered with group homebuilders to offer these New Build home loans. They could have even required citizenship or residency requirements to access this component. The key thing would have seen a more holistic integrated programme that would have seen investment funds flow to building companies to move ahead and create supply ahead of demand, create modular construction techniques with scale advantages and move our building industry from being a craft built cottage industry into a scalable industry.

Now the fact is the UK scheme is attracting a large amount of negative press as it is seen as a accelerant of property inflation however there is no doubt based on the reports by group builders that they are seeing big increase in demands for new homes – that means they are building more, that increases supply and that will in time affect underlying demand which can be the most effective tool to take the air out of the property bubble.

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The above article was written by Alistair Helm, and is republished with his approval. The article was originally published on Properazzi here ». You can contact him here »

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31 Comments

Using the UK as an example is

Using the UK as an example is useless.
Alistair should get a real job.
 
read:
Rics survey shows house prices rising at fastest rate since 2006 peak

Royal Institution of Chartered Surveyors says property sector has 'turned corner' prompted by Help to Buy and other schemes

George Osborne's schemes to kickstart house sales have fuelled a surge in interest from homebuyers and the fastest rise in prices since their peak seven years ago, according to a wide-ranging survey of estate agents.

In the latest indication that a recovery in the property <http://www.theguardian.com/money/property>  market is under way, the Royal Institution of Chartered Surveyors <http://www.rics.org/uk/> (Rics) said that Help to Buy and other initiatives have prompted the sector to "turn a corner" after its post-recession slump. Its monthly report says prices are up for a fourth consecutive month as buyers return to the market in their biggest numbers for four years.

link:

http://www.theguardian.com/business/2013/aug/13/rics-house-prices-rising-fast-peak

Alistair should get a real

Alistair should get a real job.
 
LoL - what's real job - does fronting one's own foreign earned capital to live off count?

Forget ' timely" and think

Forget ' timely" and think misdirected.
The Govt is addressing the symptoms and not the cause of the Auckland  housing bubble .
And preversely , the Govt. is thereby compounding the problem, because the incentives given the first time buyers will only stimulate that market further , and help to maintain those unrealistc prices .
Simply at current prices , demand exceeds supply and until it is addressed prices will increase until supply and demand are in equilibrium .
Government should be signalling that it intends to free up land for development , if it really wants to take steam out the market

"My only hope is that we

"My only hope is that we fizzle rather than pop!"
I'm hoping for an enormous pop and plummeting prices. Then, as a cashed-up buyer, I can strike and get a half decent house without a burdensome mortgage.

zoltuger congratulations -

zoltuger congratulations - your greed knows no bounds!
The quintessential vulture.
SK
 

and you are not?  What is

and you are not?  What is greed in this case? he's making no profit just keeping his powder dry to buy at a sane price.  He's not aiming to make a killing by on selling, or sitting there like yourself counting the paper gains with glee.
A lot different IMHO.
regards
 

steven, your opinion is not

steven, your opinion is not humble.

Who's the greedy one? Me,

Who's the greedy one?

  • Me, a first home buyer being overwhelmed by astronomical price rises; or
  • Speculators, making tax free capital gains by riding the bubble?

The sooner and harder the bubble bursts, the better. Then I might have a chance at owning a house in Auckland.

Zoltuger, home owners are the

Zoltuger, home owners are the greedy ones and should be land taxed for wanting to live in their own homes. This home ownership self gratification nonsense is shifting money from the productive sector. Landlords are providing a sevice ie shelter and it is a very important service. Homeowners should be encouraged to rent rather than buy. Look at Germany. The model of business entrepreneurship. More people there rent rather than buy their own homes freeing up capital to invest in businesses..

Germans might not want own

Germans might not want own property as through 2 world wars, depression and hyper inflation, they mey view property like kiwis view shares, remember 1987 anyone.

Speechless! You be trollin',

Speechless! You be trollin', right?
 
"Home ownership self-gratification"; is that describing some sort of abnormal fetish, or is it simply the desire for people to live in a house that they own? Is desire for single home ownership in the DSM-5 now? On that point, perhaps you might disclose to the rest of us just how many homes in Auckland you are withholding from the market for the betterment of those who don't own one!
 
Perhaps if housing prices were reasonable, people might have money left over for investment in businesses and in other types of entrepreneurship. Choosing between your own house or a business investment doesn't have to be a zero-sum game, but in this city, it's getting closer every day to becoming one.

The Tax Working Group that

The Tax Working Group that met and proposed a number of solutions a number of years ago, their favoured tax policy was a tax on Invested Equity. Now it escaped me at the time and I am just getting my head around it, that this tax is actually targetted at home ownership, your typical mums and dads and old folk that have invested equity tied up in their houses. Property investors usually have minimal or no invested equity, preferring 100% financed which equates to no tax on no equity. The equity usually resides in their own home. In order to move equity to the more productive economy you need to get people renting rather than buying to maintain some sanity in house prices. It is the homeowner that is driving ever increasing prices because they are buying on emotion. Speculators ride on this emotion, ie they buy run down, do it up and on sell to a emotive buyer prepared to pay ridiculous prices. PI's just sit back and relax and watch those prices. PI's are driven by the rent not by house price increases.
It is not PI and speculators that drive market prices. These are business people and they buy on logic. Yes they take a huge risk but they would be very logical with their approach. Homeowners are the illogical emotive buyers. Home owners are also the largest property investor group. So if you are serious about reasonable prices and moving money into the productive sector, you have to target homeowners.

OK, I appreciate your point

OK, I appreciate your point of view, and I'd be happy to see more entrepreneurialism in NZ using some of the finance that currently gets sucked into housing.
 
However, advocating, as you did, that first home owners should actually be penalised goes against the cultural norm of home ownership in this country. Now, you can argue that cultural norms are not logical, and you'd be right from a purely monetary viewpoint, but nonetheless, their power should not be underestimated. People will pay almost unreasonable sums to meet that norm of ownership, which is what's happening at the moment.
 
From a purely financial point, what you argue makes sense, as probably all people with ownership in property are partly responsible for the inflation of prices. But, in my point of view, first home owners should be at the front of the queue, followed closely by PIs (who may or may not provide this 'social service' that you and Your Landlord are well-known for espousing). Speculators really need to be encouraged to invest elsewhere. That's the main purpose of discussions around capital gains tax/stamp duty and, more radically, property portfolio limits, etc.
 
The big problem is that none of us have access to any reliable figures on first home buyers, PI portfolios, overseas investors, etc. So the real impact of first home buyers can be conjectured, but not known for certain. I realise that as a landlord, you are naturally advocating for a system that benefits you (i.e. more entrepreneurial renters to fill your properties). Just consider beyond yourself and beyond money issues that home ownership tends to foster community involvement, care for local environment, social stability and other worthy outcomes. Why should these be discouraged?

http://www.bloomberg.com/news

http://www.bloomberg.com/news/2013-08-12/bankers-returning-as-kiwi-diasp...
Uh oh - here come the expat kiwi bankers - now you have to compete with them as well.

Simplisticly the market needs

Simplisticly the market needs a significant drop to align house prices with incomes.
Politicians of whatever hue see that as impossible to achieve. So unless there is an external force, very little will happen. The problem should have been dealt with when it was manageable back in 2004 or before.
Investors need a real push to release stock at realistic prices to new owners. Pigs might fly but we can only hope. Use of  taxation to make gearing less attractive would not damage lightly geared investors and at the same time would provide the incentive to soften the market over time.

May be easier to focus on

May be easier to focus on raising wages than expect the property market to fall.

The Governments own Savings

The Governments own Savings Working Group looked into the house price issue and put the blame fairly and squarely on Government policies blaming tax breaks for property investors and high immigration.
The Government poo-hooed that saying that there were studies which looked at specific areas and could find no evidence that migrants with money earned off shore affected house prices. Politically the Govt has no opposition to this position given strong vested interests and a left -wing where many favour open borders.*
The Australian Productivity Commision concluded that there was little or no discernable benefit to Australians from immigration it had all been captured by the migrants. Our Productivity Commision had it's terms set so that they  "are relatively uncontroversial given the desire to establish broad political support for the Commission
 

"a left -wing where many

"a left -wing where many favour open borders.*" Which is classic green v socialist/liberal outlook clashing.  I certinly Im sure am not classed as anything but left wing, but I want zero or close to it incoming.
regards
 

A very odd source recently

A very odd source recently illustrated perfectly why Aucklands house prices are high and other countries (in this example Spain) are so low.  There was a Top Gear episode held in Spain where they drove from the south of Spain to Madrid.  They drove through entire suburbs, entire towns, even a airport that was brand new and completely deserted.  Even on the outskirts of Madrid there were brand new suburbs lying empty because they were building like crazy and now the demand has dropped off.  Subsequently prices have plummeted. 
 
I'm not for one minute saying that we should go the way of Spain, what I'm saying is if you want prices to drop you should build lots, and lots of affordable houses. 

Too little too late? Yes and

Too little too late? Yes and yes as I have articulated many times!

Alistair - your comment that

Alistair - your comment that Labour are arguing that the housing crisis is all the result of foreign buyers is simply untrue. Labour's policy has evolved over the last year to address both supply and demand side factors, as is necessary to address this crisis. Dealing with foreign speculation is just one of a suite of measures they propose.

As for sprawl (spontaenious

As for sprawl (spontaenious organisation -developer pig-heaven) being the answer recent studies sugest that sprawl limits oppurtunity for low paid people to work as they are stranded by physical seperation.
http://www.nytimes.com/2013/07/29/opinion/krugman-stranded-by-sprawl.html?_r=0
 
New data supports Paul Krugman's contention that sprawl inhibits the American Dream.

At least alistair

At least alistair acknowledges that the boom WILL end, whether it fizzles or pops is the big question

I don't share your

I don't share your confidence. Conventional wisdom says you are right. But these are not conventional times. When the price of entry into new zealand is $1,000,000 and while so many houses in the inner-suburbs are selling for $1,000,050 this in-coming tidal wave has no end in sight, and has no reason to end. Government could lift the price of entry to $1,500,000 and they will keep coming and the price of houses will simply rise up to meet the revised entry level.

Surely the answer is simple:

Surely the answer is simple: The entry price is $1m, but you've got to build it yourself and it has to be affordable housing.

Zoltuger: That is not going

Zoltuger: That is not going to happen under this current regime. It will happen one day, but that day is some way off, and when it does happen it will be too late. The flood of off-shore money that has jacked up prices so far is just the beginning. You ain't seen nothin yet.

What you are talking about

What you are talking about though is the top end of the market, a boom there wont pull up prices in the first time buyer / $4ook range....at least I cant see how? 
We certainly need to stop this cr*p of if you have 1mil you can come in.....If there is a business opportuniy here in NZ leave the space open for NZ business owners, unless the foreigner actually brings a business here which will employ NZers and is an export earner.  So yet another migrant coming here and importing yet more cheaply manufactured crap we dont need IMHO.  
 
 
 

And you could fit the worlds

And you could fit the worlds population on Lake Taupo (the late Owen McShane), And NZ is only .07% urbanised, shockingly under populated, hundred percent pure, getting better and better ("world class city")....
well good luck with all that
http://www.economist.com/blogs/analects/2013/08/tackling-pollution-china?fsrc=nlw|newe|8-12-2013|6371957|37425103|AP

I used to spar with McShane

I used to spar with McShane hereabouts. Like Simon, he forgot about the support acres required.

Alistair Helm is another

Alistair Helm is another "supply-side" functionary. Build more. What he doesn't explain (and they never do) (in auckland anyway) is where. Oh .. you mean build up .. high-rise apartments .. densification

Do you think NZ houses are

Do you think NZ houses are the most flipped ones in the world ?