RBNZ warned Government that HomeStart subsidy for first home buyers could boost developer margins and pump up already over-valued house prices

RBNZ warned Government that HomeStart subsidy for first home buyers could boost developer margins and pump up already over-valued house prices

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.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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I'm not eligible for the subsidy because I'm "too rich". The income thresholds aren't realistic in the Auckland market.

 Me too mate.  But I don't feel "rich" at all... especially considering how much rent I pay.

Further proof that National has no real interest in housing affordability. The opportunity to intervene seriously was around 2011. Now National can make radical reforms and be seen to 'crash' the market or let things keep going knowing that the Auckland bubble is one of the few drivers of the NZ economy.

Take OZ as a classic example of the first time buyers grant boosting prices, slam dunk really.

Exactly. Giving a FHB an extra $20k is at 1:5 lending then allowing the bank to lend them an extra $80k. So bang, +$100k to bid up prices from the panicked 'buy now or forever rent' part of the buyers side of the market. Not really any sort of useful solution to the underlying problem. Unless the underlying problem is the future business for banks in this country....

Who can guess what throwing more dollars at the constrained supply will do?

I thought house prices were going to drop ?!? 30% right?

They well drop 30% possibly more in other areas.
We are looking at the biggest bubble of all time - it's just a matter of time.
The 2007 GFC was dodged by lowering interest rates; people loaned more, pushing house prices further past realistic local income ratios, totally unsustainable.
Generatyion X & Y burden to the eye balls with Education, Health, Housing costs. Those mega high paying jobs $200K plus are few and far between.
When people put major skin into something they'll doing just about anything to survive boil thier shoe laces for lunch to hang on. Thats what many are doing.
Fortunately for them the National Government is doing little as next to nothing to seriously increase supply of affordable residntial housing where its most needed i.e Auckland CBD fringe suburbs with high density housing. This will have long term detrimental effects on NZ sociol welfare.
When the next global financial blip hits - interest rate,cost of living, unemployment rises and people can't pay there debts, there will be many left holding the can.
There should be little pitty for vulnerable people driven by greed and fear, overcommitted financial commitments. Devasted because the National Government were more concerend with protecting the NIMBYs / wealthy property racketers of socioty failing to recognise the principal of seperating residential housing from the claws of capitalism.
There needs to be a fundemanental change in the way in which the speculitive property industry operates. People need to be abile to buy affordable housing of the shelf, there should always be over supply to handle the employment economic ebb and flow . Auction with all the manipulation and easy funding very much a secondary option.
Why we loan so much money overseas along with billions of interest; to buy property that is here for the people who live and work in our communties is not good policy.

It's interesting that you bring up interest rates as part of an argument that the market will drop.  NZ's interest rates are amoungst the highest in the developed world and we still have Auckland house price inflation.  If there were to be a shock to the system that forced house prices lower the RBNZ would certainly intervene to stop the slide; the first thing they would do...  lower the OCR.  There is plenty of room to control a house price slide before we hit a 0% OCR, at which point it becomes ineffectual.  Then there's QE which we could resort to. 

And regards affordable housing...  there are plenty of flats, apartments and terraced houses that are affordable, in Auckland.  What needs to change is the expectations of FHB's and others (such as yourself); you can't expect to buy a 5 bed, 3 lounge, 3 bath mansion in Herne Bay for $400k as your first home. 

The more useful quote from Bernards past is that NZ's economy is a housing market with a few bits tacked on. The numbers support that statement. But just keep trolling because you surely know better.

I like that quote I use it often, but I thought it was "NZ's economy is a housing market with a few cows tacked on."

BH is a national treasure. I took his advice with regards to Xero. He was bang on back then and I paid my house off because of it. I do how erever use him as a contra indicator when it comes to property ;)

Small anecdote, which I've frequently retailed, from the start of the Aughties.
In Christchurch, around 2000 or so, it was perfectly possible to pick up 100 squares shacks in poorer suburbs for well under $50K.  Especially so if the '3 D's' (Ollie Newlands) - Death, Divorce and De Bank - were the driver for a given sale.
 
Along come the economoic naifs at Labour, with thoughts of Housing for the Downtrodden.  Outside Awkland, the original Welcome Home loans were worth $100K.
 
Loan criterion:  can ye fog a mirror?
 
Overnight result in Chriustchurch:  a '1' magically appears in every asking price.........everywhere.  Universal price signal.  $50K shack is now $150K.
 
And this quote (no link, long since succumbed to link-rot) from the late William Rees-Mogg is shurely worth recycling yet again:
"If one asked a competent graduate of a business school to design a business plan for a national cartel to raise house prices to the maximum, it would have four elements, all of which exist in our present system. It would license housebuilding, so that no one could build a new house without a licence, or even rebuild an old house or a redundant barn. It would encourage developers to maintain large land banks in order to benefit from rising prices. It would leak out new permissions only after long periods of delay. It would combine this with an unlimited flow of mortgage credit and relatively low rates of interest.
If you restrict supply below the market clearing level and increase funding, you will inevitably create a bubble and you will lock people out of the market. That is what has been done; those are the consequences that have followed. "
How are we doing, using this checklist?

  • License housebuilding:  LBP's up the wazoo.  Check.
  • Land-bank.  Much in evidence.  Check.
  • Interminable consenting processes.  70-odd rule-bound, planner-infested TLA's.  RMA reform holed below the waterline.  Check.
  • Unlimited flow of cheap credit.  With LVR cautions, Check.

Are we then still surprised that we have a housing bubble?
 
Finally, check figure 1 from the RBNZ's speech to property types coupla years back.  Says it all, really.

this governement is not going to do anything about auckland, why would they if the bubble burst they wont be in office and they can blame the other side, if it doesnt burst they can tell everyone they are now rich they now are
not much help to pensioners who will have heavfty rate bills to pay or us poor taxpayers who will see more of our taxes going into paying for housing supplement top ups for rentals
 its simple in your in the housing market in auckland you are missing out just dont be last in

Add to that the fact that the government kept money laundering laws exempt from real estate and anyone would think that they're actually TRYING to increase house prices!
 
<SHOCK HORROR>

It's clear that the Govt is just trying to keep the bubble from bursting as much as they can.
my only fear is that once it will burst the Banks will steal my deposits to recover their losses from lending to finacial retards, and the govt (labour probably) will steal my taxes to help the finacial retards. 
And will be stuck there, paying my rent and working my ass off all over again to be in a worse position than I was a year earlier.
Actually, it's not a fear, just a motivation to leave for good.