US academic says targeted rather than nationwide response to rising Auckland house prices would be 'prudent'

A US academic, writing for Treasury, has added his voice to those who felt that the Reserve Bank would have been better to target Auckland for LVR 'speed limits' rather than the whole country.

The RBNZ put limits on high loan-to-value lending in place in October in response to heating conditions in the housing market - particularly in Auckland.

But at the time the RBNZ ruled out specific regional targeting of LVRs, saying it "would be administratively complex, and would require difficult decisions to be made defining ‘problem’ areas".

Latest real estate figures suggest that the LVRs have had a dampening effect not just on Auckland, but on the rest of the country - which was not previously overheating in the same way as Auckland.

In a paper prepared for Treasury, titled: Housing Affordability: Lessons from the United States, Professor Mark Skidmore from Michigan State University's department of economics, has refuelled the debate about more specific targeting of LVR restrictions.

He said there was a growing recognition in the US that nationwide central bank policies targeted at the housing market "may be too blunt an instrument".

"...To date, the US has not implemented locally based capital requirements, in part because there are substantial barriers to overcome in implementing such a strategy in such a large and diverse economy.

"However, implementing locally based capital requirements (or other macroprudential tools) in a smaller country such as New Zealand is potentially more feasible.

"In particular, given that Auckland is the only region experiencing rapidly rising housing prices driven by population growth, it may be prudent to consider a targeted response as opposed to a nationwide response such as the loan to value speed limit (LVR) policy recently adopted by the Reserve Bank of New Zealand."

Instead, Skidmore said, perhaps differential LVR requirements could be implemented regionally.

"If policymakers desired to temporarily take the heat off housing market demand in Auckland in order to give supply an opportunity to catch up, one could implement a higher capital requirement and/or a higher LVR restriction in the Auckland region, and then gradually phase out the differential requirements proportional to the distance from the city core so as to minimise potential spatial distortions created by abrupt changes in requirements at jurisdictional borders.

"Importantly, the central bank would have to make it clear to economic agents that the imposition of the regional requirement is not permanent and is intended to allow developers the time they need to respond to increasing long-run demand pressures."

Skidmore did concede that "calibrating differential requirements" would be administratively complex and pose a range of technical challenges. 

He also said that if housing demand pressure in Auckland was in part being driven by international in-migration, "then one would also have to determine whether and where in-migrants get loans".

"Increasing capital requirements and the LVR requirements in Auckland may not necessarily affect housing purchase decisions of immigrants," Skidmore said.

He said that as with other "land constrained", growing, regions, land values in Auckland would likely continue to rise.

However, to relieve pressure on housing prices, New Zealand could, he said, consider the following strategies (primary government assignment in parentheses):

1. Introduce incentives, subsidies and other policies designed to increase density and expand development at the urban periphery as discussed above and by others (local and central government).
2. Use locally targeted capital requirements to temporarily take the heat off demand in order to give time for supply to respond to long-run housing demand pressures (Reserve Bank of New Zealand).
3. Promote development in Auckland region satellite communities (matched with coherent transportation infrastructure) in order to relieve pressures on the Auckland core (local and central government).
4. Strengthen other urban areas such as Christchurch so as to provide options to those who desire the amenities associated with of living in highly urbanised areas (central government).
5. Reduce the risk borne by developers by reducing uncertainty in the potentially lengthy and variable regulatory consent processes and by sharing in the risk associated with the financing of infrastructure for large development projects (local and central government)
6. Increase the costs of holding undeveloped property for speculative purposes by implementing a land value tax (perhaps substituting a land value tax for the property value tax). A land tax encourages the best and highest use of land, which means denser land use in core urban areas (local and central government).

Skidmore said strategies for taking the pressure off the Auckland housing market may require key investments elsewhere in the country.

He said that prior to the Canterbury earthquakes Christchurch was also experiencing significant population growth. However, after the earthquake population growth slowed significantly, and the number of international students attending Canterbury University dropped precipitously. Further, Canterbury net business growth had been negative in the period following the quake.

"While there have been new business arrivals, these are likely related to construction. What happens once the major construction is completed?

"Of the businesses that departed, where did they go and will they return as key infrastructure is rebuilt? Will Canterbury once again emerge as a major attractor of talent from abroad?

"Importantly, a thriving Christchurch can divert some of the housing pressure from Auckland," Skidmore said.

"One could argue that the country’s economic balance and regional growth trajectory (and thus the regional housing markets) will depend greatly on the Christchurch recovery. Christchurch is arguably the only other metropolitan area that can compete with Auckland for international in-migrants, and thus relieve some of the growth pressure in Auckland."