By David Hargreaves
Just about everybody knows (hopefully!) that you should never attempt to extinguish a fat fire in a frying pan by using water.
The water, so the theory goes, will splash the fat, spreading the fire and making matters far worse. Water may even cause oil to explode.
A damp cloth thrown over the pan to suffocate the fire is apparently just the ticket.
Now, I have no idea who worked out that particular dynamic, but it is to be presumed that some sort of proper research has been done into the subject, identifying all the factors that contribute to the situation and what the appropriate response should be. If you know what the cause of the problem is and the contributing factors, then you know what the solution is.
Well done if you guessed that the latter part of that last paragraph was not really talking about kitchen fires, but had neatly moved on to the housing market fire currently raging in New Zealand. What should be used for water in this situation? And, indeed, is "water" a good idea or is the equivalent of a nice damp cloth needed?
The Reserve Bank is angling to apply what looks suspiciously like its version of a damp cloth on New Zealand's (for "New Zealand", read "Auckland") over-heating housing market through the introduction of "speed limits" on high loan to value (LVR) lending. See here for articles about the RBNZ's new "macro-prudential tools". So, clearly the RBNZ sees ready access to borrowed money as a key contributor to the rising house market.
In fairness to the RBNZ we need to remember that the primary focus of limits on LVR lending is to ensure continued financial stability. And the RBNZ is very worried about that at the moment for reasons I have previously outlined. But clearly the central bank is also hopeful that constraining the amount banks can lend will also rein in house market activity, particularly in Auckland.
Slaughter at the auction
Of course, as anybody knows, that won't work, because the real reason Auckland house prices are soaring is due to plane loads of Asians arriving, crowding into auction rooms, and buying tens of houses at once all with money they brought in with them in suitcases and therefore being unaffected by LVR limits. I know this is true because a relative told me they had talked to a good friend who knew somebody who had been to an auction and seen it for themselves.
Given that this is the truth, then both the Government and the Auckland Council should be told because they have mistakenly entered into an Auckland Housing Accord in an attempt to build an extra 39,000 houses in Auckland during the next three years, erroneously believing that shortage of houses is the problem.
Meanwhile, the economics folk at Westpac have gone completely off at a tangent, suggesting that anticipation of future capital gains is actually a key driver of the house prices. Economist and fund manager Gareth Morgan has also had the temerity to make similar suggestions in the New Zealand Herald newspaper.
A multitude of ills
So, to sum up, it appears the rising house market in Auckland is due to easy access to bank loans. No, hang on, it's Asians buying houses. No, it's a shortage of houses in Auckland. Wrong again! It's investors grabbing houses in anticipation of future capital gains, secure in the knowledge that the investment playing field is stacked in their favour in NZ because there's no capital gains tax on houses.
The point I am making, tongue in cheek, is that there are actually a hell of a lot of reasons being bandied around for why the house market, particularly in Auckland, is over-heating.
The trouble is that attempts to tackle the problem so far appear to be taking the view that there is one cause. The RBNZ will try to tackle the supply of money. The Government/Auckland Council will attempt to tackle the supply of houses. Nobody's doing anything about offshore investment in NZ houses. And, likewise, there's nothing being done - either through imposition of taxes or other deterrents - to dampen the appetite of Kiwis to own houses as investments. So, that's two problems "being tackled" and two that aren't. But what about some sort of strategy that accepts there may be several causes of the heated property market?
For what it is worth, I actually do think the biggest single factor in play in the Auckland housing market at the moment is the desire, no, the need, of Kiwis to own property investments. After all, if the Auckland problem was just all about a shortage of places to live then rentals would be rocketing in line with house price inflation - and they are not.
The guessing game
But I admit, I am guessing. I also think a lot of other people are also actually guessing too when they assert why prices are rising.
There is not enough information on the dynamics driving this current market.
If we look, for example, at the anecdotes regarding offshore investors buying New Zealand houses, there is no qualitative evidence available. If the country is going to look - and I think it should - at some sort of ban on offshore house ownership, we need to know just what the current extent of such buying is. After all, if we don't have a marker in terms of who is buying property and where they come from, how are we to properly gauge the success or otherwise of any future measures put in place?
Then there is the supply issue. Logic suggests that Auckland, having gone from building about 11,000 houses a year in the early 2000s to a more recent average of only about 4000, is short of houses. But how many houses short is it? The official estimate is that the shortage is about 30,000. If we accept that estimate is correct - and I'm not really sure how accurate such an estimate can ever be unless you work on the basis of deciding there must always be X number of people per house - then it is still difficult to quantify just how much of the upward pricing pressure now is due to the shortage and how much is other factors.
Moving on up
On the demand side, there's - again anecdotal - suggestions that many Aucklanders moving up from their first homes are buying a second home, but keeping the first one as an investment. So, that's basically the same thing as these people going out and buying an investment property. But, unfortunately again, beyond anecdotes there seems little hard evidence of how widespread this practice is. Are numbers of people who own 2,3,4 and more houses actually officially collated? Presumably the IRD knows about such cases but is the information collated somewhere in a useful usable way? And how current is such information? Like with details on the overseas buyers, we are it seems very short on qualitative information on who is buying houses as an investment and who is buying to live in.
In my view we really need this information on a very timely basis, all held in one database; how many buyers are from overseas, how many people are buying for investment purposes as the properties are bought, and how many properties are involved.
Surely until reliable sources of such information are collated - and this is where the Government needs to get involved - how can we confidently talk about banning offshore based investors, or putting capital gains tax in place? And worse, how can we be so confident that ramping up the supply of houses is absolutely the right thing to do?
In all probability all of the factors mentioned here, possibly along with some not mentioned, are all coming together to put pressure on the housing market. But nobody seems to really have a handle on the extent to which the various factors are contributing. Nor has anybody to date suggested a strategy that actually looks to tackle a variety of factors - rather than just one.
Firstly, we need better information, somehow. Then there needs to be an integrated approach, with the Government getting involved along with councils and the RBNZ. These parties all need to be working together, not separately.
The frying pan's on fire but - in my view - we don't actually what exactly is in the pan and causing the fire. So, how can we confidently try to put it out without splashing everywhere and causing the fire to spread?
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