By Bernard Hickey
Reserve Bank Governor Graeme Wheeler warned the Government in June last year that its expanded HomeStart scheme to subsidise first home buyers, which was launched today, could boost property developers' profit margins and further pump up already over-valued house prices over the long term.
Wheeler's June 18 letter to Finance Minister Bill English was disclosed after an official information request from the Green Party. The advice from the Reserve Bank related to an earlier version of the Government's expanded first home buyers scheme that was focused on increasing the subsidy for buying existing homes. The Government subsequently tweaked the policy to focus an extra NZ$213 million in subsidies over five years on helping first home buyers to buy new builds to increase supply.
However, the Reserve Bank was also critical of the expansion of subsidies for new builds.
"While the higher subsidy for new builds should promote increased housing supply, it is unclear what the ultimate effects of this will be," Wheeler said.
"We would caution that if the supply of affordable housing is restricted by other factors such as planning and resource constraints, then the likely expansion in demand from increased subsidies could result in increased developers’ profit margins," he said.
"Over the longer term, subsidies have the potential to add to existing house price pressures in what is a highly overvalued market."
Wheeler also warned that the expanded first home buyer subsidy scheme could significantly dilute the effects of the Reserve Bank's high LVR speed limit introduced in October 2013. He
"Accordingly, we recommend consideration be given to a more modest expansion of the scheme," Wheeler said.
"We consider that a smaller increase in the WHL quota, to 3,500 rather than 5,000 would be less dilutive of the LVR policy. We also believe there is merit in reducing the magnitude of the proposed increase in house price caps," he said.
Housing Minister Nick Smith was challenged in Parliament by Green Co-Leader Russel Norman in Parliament over the advice (See video above).
Smith defended the Government's actions, saying the advice was received before the Government changed the scheme to focus its increased subsidy on new builds.
Treasury also warned the Government that bigger first home buyer subsidies had pushed up prices in Australia and were expected to do the same in a supply constrained environment.