Restrictions on overseas investors buying existing New Zealand houses could be a good idea, BNZ chief economist Tony Alexander says.
In his "weekly overview" Alexander cites the rules in Australia, which say that if you are Australian or have residency you can buy what you want. However, if you are an outright foreigner then you may not buy an existing house. But you can get a new house built.
"In this way the residential purchase rules applying to foreigners act to boost the supply of housing across the Tasman. In the context of a housing shortage in New Zealand that would seem like a good idea," Alexander says.
At the moment there are no restrictions on overseas investors buying ordinary New Zealand homes. Anecdotal evidence has it the quickly warming house market is being at least partially fuelled by overseas buyers, with resultant suggestions that there should be limits placed on foreign buyers.
The BNZ in conjunction with the Real Estate Instate of New Zealand does a monthly survey on the housing market. This month's will include more specific information on just where recent buyers of properties come from.
Alexander last week cited an email from an Auckland developer talking about getting out-bid by foreign buyers for sections. This week he talks about another email he has received from someone in Wellington, who says it is "not just Auckland where Chinese clients are buying property".
"We are spec building in Johnsonville, Wellington, and traditionally spec building means you complete a house, then sell it," the email reads. "Now we are lucky to get foundations completed before we have a buyer on it. Of the seven we completed last year we sold all but one to a Chinese family, which was sold to an Indian family.
"As one client of a 190m2 home built on two levels on a 250m2 site said: 'I am 35, until I was 30 I never lived lower than the 24th floor and I had to change countries to achieve that. I have a freehold home here in NZ financed in China, my parents live upstairs and I can walk out onto my own grass at ground level and have two cars in my own garage. You can even get abalone inside harbour! – yes I am happy.' The 10 sites we have under construction at present are all sold – only two have been sold to non-Chinese, but still Asian buyers. The nine sites we have in planning; we are already receiving enquiries from … (insert any nationality beginning with Ch)," the email said.
Alexander says the challenge to kiwis is to move beyond "myopic Yellow Peril thinking" and to figuring out how we can best make money out of the boom in Asian economies and the centre of global economic activity shifting from the North American-European axis "to our doorstep of Asia for the rest of the history of this planet".
"...But also, it is entirely possible given the worsening home affordability problem in Auckland in particular that legislative changes may be needed – not just in New Zealand but in other countries as well," Alexander says.
He also comments on some of the suggestions being made specifically on home affordability.
"One commentator noted that the government would not want to go into next year’s election with high angst regarding home unaffordability. Actually, there are a lot more people who want house prices to rise than there are wanting them to fall. Or to put it another way, governments probably don’t want to go into an election having taken measures which make people feel poorer," he says.
Proposals to reduce prices by freeing up land and cutting building costs are unlikely to have the results many people seek, Alexander says.
"Firstly, few people are interested in further urban sprawl in Auckland given the poor public transport system. Second, there is no shortage of land in most regions of the country outside Auckland. Even in Christchurch there is a lot of land available to build on – yet prices still rise. Third, not everyone in fact believes there is a shortage of land in Auckland. In the opinion of NZ Mortgages and Securities principal James Kellow in a Sunday Star-Times article this week there is not a shortage of land but a shortage of developers and financiers.
"Fourth, building material costs reflect the style and size of the houses we like to build, and the ever tightening standards which get applied for construction – insulation, water-tightness, inspection frequencies, earthquake standards etc. There is no magic wand which one can wave to make prices of 4 by 2 or gib go lower. In fact construction costs will only rise in the next few years due to labour shortages across the construction field."
Alexander says there is also the issue of whether the rising house market we are now seeing is a "bubble". He doesn't think so, at least yet.
"In a true bubble, debt growth in the household sector would be a lot more than the 0.4% a month we are currently seeing. Second, in a bubble one would expect to see the entire spectrum of the housing market rising but that is not (yet) the case. Partly this is because for the upper end to move you need a lot more business profitability for the SME sector which is something we do not yet have in the economy."
Alexander says what is going on is a simply a reinforcement of a realisation that set in about 15 months ago that there is a fundamental shortage – especially with some five year’s worth of young buyers now entering the market to make the purchase they should have made in 2008, 2009, 2010, 2011, or 2012" but did not because people told them house prices were going to fall sharply – simply because various measures showed them to be over-valued".
On the potential of imposing maximum loan to value ratios - limiting the amount banks can loan on specific properties, Alexander says if you put a minimum deposit limit of 30% on the value of a property, many young buyers would be excluded.
"Those still committed will take on higher costing second mortgages or unsecured loans. Investors will shift from buying $900,000 properties to chasing $600,000 ones and again first home buyers will face higher competition in their price bracket.
"Plus, not everyone buys with a mortgage and the anecdotes suggest many overseas buyers pay cash. Therefore minimum deposit rules would favour foreign buyers unless foreign purchase rules are introduced," Alexander says.
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