We have long written that the problem in NZ’s housing market, which more and more people are finally acknowledging, is a crisis, is a crisis of demand not of supply.
Central to the causation of inflated demand are two factors.
Firstly a terrible flaw in our taxation regime, wherein housing is one of the best tax shelters on offer and we’re all into it likes rats up a drainpipe.
Secondly the RBNZ has misguidedly maintained a bias in its prudential management of the banks that has accentuated the demand for housing well beyond what is ‘natural’.
And from time to time we get a third stimulus to demand – immigration.
What is so frustrating about this crisis from an economist’s perspective, is just how long this has been building.
Officials have never denied either of the primary causes and privately always tell me, it’s government policy and they can’t possibly publicly comment.
From time to time the RBNZ Governor will ‘fess up but then do nothing.
From Don Brash onward, these Governors have been gutless on this issue, they are slaves to the consensual view amongst central bankers, that housing is actually a low risk asset so banks should favour it in their lending. Bollocks!
Reserve banks around the world who have thought that just because a housing crash hasn’t happened, it won’t, have all been caught out… And our turn will come.
The first driver of the over-amped demand for housing is the tax break.
Let’s put it simply; if I put $300k in the bank I pay tax on the interest, if I buy a house with it I get the benefits of rent-free accommodation, tax-free.
Only suckers pay rent when those are the rules.
And on top of that I have all the benefits of my home being my castle.
Really it’s a no brainer.
The second driver is central banks’ encouraging their commercial banks to favour lending to housing over lending to business.
People can get mortgage finance at lower interest rates than they can for maintaining a business.
That cheap money just ramps the demand for housing for ever.
But it’s really toxic if you combine these two factors – favourable terms for mortgage borrowing togther with a tax break for home ownership.
Most governments don’t allow that, they try to dampen the tax break with a capital gains tax.
But not New Zealand, we’ve applied a double dose of stimulants to demand for housing for decades now.
It’s a slow-moving train wreck.
And finally we have the third driver of excess demand for housing – immigration.
This has boomed over recent years as the government has opened the spigots and used immigration as another way to stimulate demand.
Auckland property owners are thrilled – the price of their properties just got another boost.
Alongside these massive economic forces, twiddling with the RMA barely registers.
It might have political appeal but it doesn’t stack up.
The Treasury report cited by Nick Smith totted up the costs imposed by the RMA on development – costs such as providing infrastructure, or regulations governing how high roofs or ceilings can be.
Whopee – they found that if developers could do whatever they like, then the costs of building houses would be lower.
Is the Government really suggesting unfettered development – apartments all over One Tree Hill?
While the politicans go chasing ghosts, you should do as I do – buy lots of houses and farms.
Don’t bother with tenants or livestock – they just make the carpets dirty or require you to employ farm labour.
Lock the place up and wait for other New Zealanders to bid the price of both up.
It’s a no-brainer – the easiest way to make money in New Zealand.
Pity the poor sods trying to break into the market, it’s getting harder and harder.
Pull up the ladder Jack…
All because voters refuse to stop the circus.
Will the market crash?
It will have its short term “corrections” but until the two fundamental causes – tax breaks and flawed Reserve Bank policy – are addressed – the simple advice is buy as much property as you can.
Nick Smith will never be able to build enough houses, the Productivity Commission will never be able to free up enough land, to stop the prices going up long term.
I’m all for improving the RMA, but when the Government blames it for the housing crisis, we have moved into the realm of the surreal.
Or maybe they’re just happy to flatten the environment for the sake of cheap economic growth.