Auckland's housing market isn't the biggest threat to the economy because an "apocalyptic scenario" is unlikely to occur unless a combination of an outbreak of foot and mouth disease, Rangitoto's volcano springing into life, and houses being able to be built at half their current cost occur, says BNZ's chief economist Tony Alexander.
Alexander says this in his weekly overview, adding a significant fall in Auckland house prices is unlikely given a shortage of housing supply and population growth.
His comments come after the Reserve Bank, in its bi-annual Financial Stability Report last week, warned of a growing risk of a sharp correction in Auckland house prices painting a picture of housing in the City of Sails as the biggest risk to the country's economy.
"A number of people are saying that the biggest threat to New Zealand’s economy is the Auckland housing market. This is not correct. A threat has to be assessed based on the probability of its occurrence and the apocalyptic scenario people postulate of prices falling over 40% is very unlikely to occur unless we get a combination of foot and mouth, Mount Rangitoto bubbling, and a technological discovery allowing houses to be built for half their current cost," Alexander writes.
He suggests the "common expression of fear" about Auckland housing is driven by several things. The first is the failure of prices to stop rising and fall as "99% of people" have predicted since 2008.
"The desire to one day be right and the inability to understand why they have been wrong leads people to assume unsustainable unpredicted forces have been at work and eventually the truth will come out and past wrongs will be righted," he says.
Secondly, impatience from a Reserve Bank that has taken its eyes off the ball by letting an asset market surge to an extent central bankers decided post-Global Financial Crisis wouldn't be allowed to happen again.
"They are struggling to develop and implement new weapons to influence the housing market now that changes in the Official Cash Rate are off the table because of entrenched low consumer goods and services inflation," Alexander suggests.
Thirdly, concern about worsening housing affordability for young people. This, he suggests, is leading to a "misplaced leap of logic" that because young people are supposed to be our most valuable asset and because something's happening that makes them unhappy, this will eventually be removed one way or another.
"Don’t know how but worldly or other-worldly forces will eventually gallop over the brow of the hill and save the day."
Fourthly, a desire by many frustrated buyers for a price correction so they can purchase and make a future capital gain.
"You may recall that in one of the three surveys I used to run I would ask respondents to indicate whether they were happy or sad that house prices were rising. A majority were happy. Remember that as you lobby politicians to implement measures which will lower house prices and cause voters to opt for the other party," says Alexander.
'A Muldoonist nightmare'
Meanwhile, Alexander also says it's "highly likely" that under a future government the newly introduced two year bright line test for capital gains tax will be extended to five years, then seven years, and eventually 10 years. Furthermore he expects the Reserve Bank's new rule whereby Auckland property investors must have a deposit of at least 30% to get a bank loan, will be extended to other parts of the country if house prices there deliver price rises that "start to scare them."
"This is an example in fact of the way in which the Reserve Bank is outright experimenting with non-OCR tools to influence bank housing risk. They will be wondering how messy the 30% tool will become if they need to extend it to other regions. Will they stick with 30%? What about 15% in some, 45% in others? It could become a Muldoonist nightmare," says Alexander.
"Oh, and be ready for Auckland’s 30% to be boosted to 50% if that market reignites in the New Year. Trigger? When the Chinese economy stabilises, growth lifts, and the Beijing government relaxes rules on private capital outflows in order to achieve their goal of making the Yuan a truly global currency like the US dollar. They will have no choice in relaxing the capital outflow rules if global acceptance is what they want. Timing of such a thing is however anyone’s guess," Alexander writes.
"Remember how so many people ascribed foreign Chinese as main players in soaring house prices? I have yet to have a single person say to me that the sharp lift in dwelling sales outside Auckland and upward pressure on prices is being driven by foreign buyers let alone a Chinese hoard (sic)."