Desperately seeking 'sustainable' - why the (house) price will never be right

Property / opinion

David Hargreaves examines the Reserve Bank's view of where house prices need to be and concludes that for many people, houses will never be 'affordable' again

10th May 22, 2:24pm by David Hargreaves

Was anybody else a bit surprised with the Reserve Bank's assessment that house prices only needed to be between 5% and 20% lower than they are now to be 'sustainable'?

Since the RBNZ first started to mention last year that house prices were above 'sustainable' levels, it's been one of life's little mysteries as to what would actually be a sustainable level.

Clearly the RBNZ was not keen to put numbers on what sustainable actually was but when appearing before Parliament's Finance & Expenditure Committee last week the central bank's top brass coughed up the 5% to 20% price drop figures.

I would assume they feel a bit more comfortable quantifying matters now that house prices ARE demonstrably easing.

But only a 5% to 20% drop?

Let's take the latest available nationwide median price as of March from REINZ, of $890,000. So, if we take the low end of the RBNZ 'sustainable' price range, 5% off that would be a reduction of $44,500, taking the median down to $845,500.

Okay, how about something more bracing? Let's try the full monty 20%. That would lop $178,000 off the median, taking it down to $712,000. There we go. Sustainable prices are us.

However, we could spoil this a bit by having a look back at what prices have done in the past three years. The March figures provide a splendid point of comparison since we can say that for 'us' the pandemic effectively 'started' in March 2020 with the first Great Lockdown.

What about those median house prices then?

Well, in March 2019 in those lazy, hazy, non-crazy pre-Covid days, the nationwide median price was $585,000. A year later it had risen to $665,000. By March 2021 it was $826,000 (a 24.2% rise in 12 months). And by March this year it was $890,000.

If we roll all the gains in median prices over the past three years up, we get this:

In the 12 months to March 2020 prices climbed 13.7%.

In the 24 months to March 2021 prices climbed 41.2%

And in the 36 months to March 2022 prices climbed 52.1%.

Yep, that's right, over the past three years our houses have risen in 'value' by over a half. In dollar terms the median amount increase is over $300k. Feeling richer? You should be. If of course you own a house.

So, the point of saying all that is?

Well, only that finding a 'sustainable' level from this point is not going to equate to anything like as affordable a level as previously.

If we go back to the computations of what the RBNZ's 'sustainable' numbers would do, well, the 5%, or $44,500, reduction in the median price of March 2022 would take us down to $845,500.

That $845,500 price would be 2.4% HIGHER than the steroid-driven $826,000 median of March 2021.

It would be 27.1% above the median house price in New Zealand at the start of the pandemic in March 2020.

And it would be 44.5% above the median price of three years ago in March 2019.

Well, what about the top end of the RBNZ 'sustainable' estimates? Okay, let's try the same thing with applying a 20% reduction.

Remember, apply a 20% drop to the $890,000 March 2022 median would take us down to a figure of $712,000.

This would be 13.8% (chunky sort of drop) below the March 2021 median price.

But it would still be 7.1% ABOVE the March 2020 levels and a very comfy 21.7% above the March 2019 median.

Okay, we haven't talked about inflation, which wasn't an issue even a year ago and now is. Back to that shortly.

Just to finish off the thread about the 'sustainable' price level first though, the magnitude of price fall that would be required to send the median house prices back to the levels they were one, two and three years ago would be as follows:

A 7.2% price fall would be needed from now to take the median back to March 2021 levels. (Could happen.)

A 25.3% fall would be needed to retrace back to March 2020 prices.

A 34.3% fall would be needed to retrace back to March 2019 prices.

Wow, our prices really did rise a lot, didn't they?

To go back to the Reserve Bank, it needs stressing on an ongoing basis that the central bank is NOT about making house prices affordable (or even trying to push them up as seems to have been a popular misconception that started around 2020 and during the waves of Covid financial stimulus).

On a very basic level the RBNZ's over-riding thing is that it doesn't want wild gyrations in house values that are going to cause ructions with the banks (who've provided the mortgages) and lead to huge stability problems and earning us banana republic status.

So, when the RBNZ says 'sustainable' it means prices at which the housing market will continue to function normally and the financial sector will not be experiencing ructions.

Sorry people, the RBNZ won't be trying to push prices back down to where they were.

Therefore, unless we really do get a housingeddon event, with 30%+ falls, prices are simply going to be less affordable than they were on an ongoing basis.

But...

Well, now, yes, inflation. Mentioned it before. Potentially a very significant factor, of course.

I have opined previously that inflation, hideous as it may be, could, strangely enough, help to make prices more 'affordable' without the need for nominal prices to actually fall much if at all.

However, there's a lot of caveats on that. A would-be house buyer would need to ensure they keep their job, that they get pay rises that at least come close to meeting inflation and lastly but by no means least, can they afford a mortgage?

The latter point is not trivial. According to RBNZ statistics, in April 2021 the market average one-year fixed mortgage rate was 2.3%. As of April 2022 it was 4.3%. Interest.co.nz's calculator says that a 30-year term mortgage for $336,000 (the average-sized mortgage in the month of April 2021) would have been costing $1293 a month a year ago - but now at 4.3% would be 1663 a month, working out at $4440 more a year, or $85 a week more. Wow.

So inflation might 'help' the buyer - but the agonising interest rate rises aimed at trying to quell inflation most certainly will not help.

What's the upshot of all this?

Well, our house prices may well achieve 'sustainable' levels at some point in the next 12 months.

But, unless there's a crash - and I just think the whole NZ housecentric mindset mitigates against that - then what we are left with is a market that will be less affordable on an ongoing basis than before the pandemic.

It just might mean that on an ongoing basis unless the young have loaded parents (IE mum and dad have houses), or they are prepared to do that most un-New Zealand thing and rent for life, then many are going to head off overseas. And through time I reckon those migration floodgates will open again, particularly for the wealthy who will come here, and well, buy houses of course. Ensuring that in perpetuity now New Zealand will be an 'expensive' place to buy a house. 'Sustainable' - but expensive.

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59 Comments

by malamah | 10th May 22, 2:39pm 1652150390

RBNZ surely is not in the political arena to make sure prices are affordable, but rather making sure they can sustain an economy without exceptional risk.

There are external pressures on house prices.

My opinion is that 5 - 20% is an admission that house prices hold too much risk at their current level, not a benchmark or target. Ultimately, as is pointed out in the article, RBNZ does not have complete control over house prices however may intervene if things go wild. 2023 potential DTI for example - or further reviews into risky lending by large banks.

by Squishy | 10th May 22, 7:05pm 1652166312

There is little RBNZ can do to mitigate the monetary policy they are forced to run. They don't set zoning laws or building standards.

by RickStrauss | 11th May 22, 10:03am 1652220186

Auckland and Wellington Councils currently look chock full of intransigent NIMBYs too, from their reluctance to move toward more affordable intensification instead of unsustainable sprawl.

by Fitzgerald | 10th May 22, 7:48pm 1652168893

Anchoring bias.

https://en.m.wikipedia.org/wiki/Anchoring_(cognitive_bias)

by malamah | 10th May 22, 2:52pm 1652151175

An opinion piece though, so we can take from it what we will.

by Squishy | 10th May 22, 2:53pm 1652151209

If you can get the data you're better off looking at historical trend and then how many standard deviations you are above or below the historic trend.

by Independent_Observer | 10th May 22, 3:01pm 1652151676

You could view it as house price growth relative to disposable income....

https://pbs.twimg.com/media/FP09Fo-WQAodb3H?format=png&name=medium

In which case we would be many standard deviations above normality.

And its funny how in the US they think that they have another property bubble on their hands....yet their prices are now just returned to be inline with growth in disposable income....where as in the rest of the anglosphere we have house price growth multiple times that of disposable income and are like 'who cares about disposable income when worrying about house prices....I can just buy a rental and use somebody else's disposable income to pay for it and the falling interest rates will always make it cheaper to pay off the debt!'

by Squishy | 10th May 22, 6:57pm 1652165836

The US generally has less restrictive zoning laws than other countries which probably caps prices.

That data is interesting but I think you'd need to go back much further because the 1970s was a period of high inflation and 2010s a period of very low inflation. Your dataset needs to be long enough to rule out interest rate supercycles.

by Independent_Observer | 10th May 22, 3:11pm 1652152277

I think you might be struggling with an anchoring bias assuming that current prices are a sound basis to provide a rational analysis from. What happens if current prices are completely irrational? What is the point of anchoring future calculations from an irrational starting point?

A 5% or 20% movement from an irrational starting point doesn't align with long term, fundamental values of affordability.....and fundamentals are timeless principles that in times of excess speculation are oddly and always dismissed as not being relevant so as to justify the current irrational market pricing!

You could ask our bitcoin friends why one bitcoin is now worth half of what it was a while back....have the fundamentals of that investment changed? Or are investors being irrational now by only valuing it at half the value it was previously? 50-100% deviations in something that hasn't intrinsically changed are odd don't you think if the utility of the asset is unchanged?

Why would property be any different? (and before you reply with 'you can't sleep in a bitcoin'.....realise that property markets around the world have in the past fallen by the same amount as bitcoin has recently......so despite it having different utility, the same intensity of speculation/animal spirits can be at play).

by ShoreThing | 10th May 22, 3:00pm 1652151608

But, unless there's a crash - and I just think the whole NZ housecentric mindset mitigates against that

I'm not sure I entirely agree. People talk about low interest rates, construction costs, foreign buyers and housing shortages as if they were the only factors determining house prices. I think they all probably play some part, but another huge factor in all this is the animal spirits side of the equation. Looking at the fundamentals, it stopped making sense a long time ago. Median multiples are sky high, rental yields are rock bottom and we have the lowest interest rates in history. Auckland's population declined last year and yet prices went up an absurd amount. It's clearly the attractive capital gains that are fueling the market. I think a large part of the runup in house prices over the last decade or so has been largely due to housing being seen as a riskless easy money opportunity that you'd be silly not to get involved in. The thing is, once the worm turns and capital gains are off the table and in fact capital losses are likely, where is the price support? Animal spirits work both ways. If it kicks off, who knows how big the fall is going to be? Any estimates of 5% - 15% falls are just as pie in the sky as 5% - 15% rises.

by Independent_Observer | 10th May 22, 3:03pm 1652151812

Absolutely....Animial Spirits by Shiller and Akerlof covers this topic well. Generally any excess emotion towards an asset on the upside of a bubble, is meet by equal amounts of the opposite emotion in a future time point (greed vs fear).

Animal Spirits (book) - Wikipedia

by Gummy Bear Hero | 10th May 22, 3:08pm 1652152129

The owners of Andy Warhols picture " Marilyn " have sold it in New York for $US 195 million ... $ 300 million NZD ... alert the RBNZ ... we've located someone who could afford a house in Auckland ! ...

by Carlos67 | 10th May 22, 3:44pm 1652154256

Actually the people that can afford that are the root cause of the problem. The top 5% have practically all the money and the bottom 20% don't know where their next meal is coming from. Hardly what you would call a Rembrandt, still thats the level of madness in the world these days.

by Small Kev | 10th May 22, 8:08pm 1652170110

“And through time I reckon those migration floodgates will open again, particularly for the wealthy who will come here, and well, buy houses of course. Ensuring that in perpetuity now New Zealand will be an 'expensive' place to buy a house.”

I share the same view, there are people with money waiting to get in. Many of them will pick up an average pay job or operate a small business. They will be semi-retired and own a couple of houses and maybe drive a nice car.

Unfortunately New Zealand isn’t a country full of opportunities but a place to retire and enjoy life. Houses, restaurants, supermarkets, shopping malls and holiday spots that’s all this country will need.

by agnostium | 11th May 22, 9:23am 1652217790

It's funny you say that. I love New Zealand, left family in Europe to live here I love it so much, but when we first visited circa early 2000's that's what we said: It would be a wonderful place to curl up and die, once you'd got all the living life out of you. It seemed to be changing for the better in the early 2000's, especially Auckland (Britomart, Wynyard, investment in Public Transport and Cycling) it felt like it was becoming a real city which could appeal to young people from all over the world. I've still not given up on Tamaki Makaurau but it does feel like the is a real risk that we're going to head back to the early 2000's when it was dead and unappealing for anyone wanting any sort of excitement from life.

by Market Interest | 11th May 22, 10:18am 1652221117

There are still many, many great aspects to living here, but I have to agree and disagree on Auckland. What's been done to the central city in the name of progress is indeed a crime against humanity. But the CRL development had already killed off business pre-Covid, anti-social behaviour has been tolerated to the point that it's now actually attracting the trouble makers, and this bureaucratic love affair with public transport and cycling isn't shared by anyone...which is evident from the fact that trains and buses are almost always completely empty, and there's a 100:1 ratio of electric scooters on the so-called cycle lanes. All this combines to make it both expensive and unprofitable to run hospitality in Auckland - no wonder it's dead and unappealing.

Widen the roads, open up bus lanes for private vehicles, get rid of that hopeless 30km/h speed limit and provide parking at a reasonable price, and the city will come to life again.

by agnostium | 11th May 22, 4:50pm 1652244647

Oh dear, I think it's this sort of thinking that, if it prevails, will mean we lose a whole bunch of young professional who are attracted by proper cities while all us oldies are stuck in congestion ...

Pretty much everything you have suggested is incompatible with a vibrant city

by John from Holland | 11th May 22, 6:47pm 1652251638

I wonder if you guys are talking about the same thing, Auckland vs the CBD.

We had a store in the CBD 20 odd years ago during the power crisis, it was certainly dead then and took along time to reboot, but don’t think it ever fully recovered.

by GV 27 | 12th May 22, 6:49am 1652294989

None of that stuff will undo the damage of $15 beers and until then, hospo is on a hiding to nothing.

But sure, let's make it harder to get around for people who aren't using cars, that'll definitely get the punters through the door in town.

by Dale Smith | 10th May 22, 3:38pm 1652153926

How about running a few historical graphs showing what the trend would have looked like on a median income model, if after the GFC, National had made policy changes to keep the rise (after the last fall) to no more than inflation, and then what it looks like since Labour took over if they had done the same thing

And then finally if policy changes were made now at the bottom of the suggested falls you described and prices only gained by inflation from that point on.

All are based on the median income multiple so wage inflation is factored in.

Because we all know that the house price per se is irrelevant. It's how much truly disposable income you have in your hand once all things like housing, food, other compulsory costs etc. are taken out.

by Independent_Observer | 10th May 22, 3:48pm 1652154495

Relative to discretional income, prices are completely out of control. And ultimately, house prices must be sustained against the cash flow that determines their price....(income).

https://pbs.twimg.com/media/FP09Fo-WQAodb3H?format=png&name=medium

by realterms | 10th May 22, 4:11pm 1652155914

We really are shaping up as the poster child for stupid. Article in the economist this week putting us in the "leading" group (along with aus and the nordics) as most likely to be f$&#*#d by rising rates and our stupid housing markets.

by Independent_Observer | 10th May 22, 4:59pm 1652158762

Yes I don't have a subscription but saw one of the tables from the article on twitter.....think we were 2nd equal right as most at risk....

Great problem to have though apparently....better than being in a depression.....which uses the same reasoning as deciding to stay drunk in order to avoid a hangover.

by Whatwillhappen | 11th May 22, 9:55am 1652219727

It's worth signing up to a free account so you can view 3 articles a month.

by RickStrauss | 11th May 22, 10:06am 1652220381

And we have had successive governments full of wise heads and parties of "sound economic management" who perpetuated this absurdity for their own portfolio profits, insisting it was a "good problem to have". Absolutely despicable that NZ politicians and bureaucrats have run economic, housing and tax policy in this way and created such a massive millstone around NZ's neck while penalising and discouraging productive work.

by Dale Smith | 10th May 22, 5:26pm 1652160396

In effect, for most people, there is no discretionary income.

And any attempt at savings in any area that is not restricted by decree will only get absorbed by the restricted asset. Hence the more anyone tries to save, or a builder tries to save on material costs, or labour inputs, within one build cycle, the price of land and the other restrictions (which have now crept into the building supplies), keeps going up.

That is why, in spite of increased supply, things have been getting dearer, not cheaper.

Until the dysfunctional system is fixed, the Vampire Squid of these Govt. policy restrictions will consume all, as they are doing, until there is nothing left, and a crash occurs, as it starting to happen.

by Erant | 10th May 22, 5:38pm 1652161123

I assume such restrictions "by decree" could be macroprudential DTI and LVR limits set at meaningful limits, but the RBNZ is still dithering on DTI and then only considering a DTI at a ridiculously high levels (of >6).

by malamah | 10th May 22, 5:54pm 1652162081

I do wonder how they may introduce a DTI for owner/occupiers with an existing mortgage. I guess it might be applied to new mortgages only? Hard to tell really, but agree that >6 is too loose and relatively pointless against the original initiative. ie protects banks from risk more than it aids the FHB, which is the intention.

by Dale Smith | 10th May 22, 7:52pm 1652169172

You have to be very careful to differentiate what side of the line the restriction is attributed to. A supply restriction by definition causes supply to decrease relative to demand, which causes prices to increase.

DTI and LVR cause demand to drop relative to supply and cause prices to fall, and thus are not restrictions to supply, but restrictions to demand. If you have no supply restrictions, then you do not need demand restrictions, as they will find a free market stable equilibrium. It can be counterintuitive to understand this. but think of it like this:

If there are no restrictions to supply in a free market system relative to the demand, then supply will equal supply (both up and down in any cycle) in almost real-time, and prices will remain stable. But restrict just one of the product inputs, relative to demand, and the price will increase. The price cannot fall any lower than this because they are being produced at the most competitive price, and if anyone demanded a lower price then it would be unprofitable and the supplier would stop making them causing the price of the remainder to rise to a point where the supplier starts supplying again. ie they are in equilibrium

This stable house market point exists in markets that have an approx. 3x median income multiple (this seems to be a universal maxim). Because we don't have a stable market due to all the restrictions in them, we are many median multiples away from that and the only way we can return to a stable market is to 'fall/crash' back down.

If you break out the component parts of land and house costs, you can quantitatively see these extra restrictive supply costs that result in these high median multiples, and if removed by the correct Govt. policies would keep prices closer to the 3x median multiple.

The problem is getting back to that baseline without overshooting at the other end and ending up going into a greater correction than planned. There is enough median multiple fat in the system for prices to fall 50%.

by GV 27 | 12th May 22, 6:51am 1652295097

The time to act was in the early 2000s before the GFC - the crap we let fly under Labour is why the GFC was the GFC.

But you're right. Housing affordability should be measured in net incomes, not gross. Gross incomes aren't real.

by HouseMouse | 10th May 22, 3:43pm 1652154230

Just like its application in environmental terms, the term ‘sustainable’ as applied to house prices is fraught.

Sustainable for whom?

I think as per how it’s applied in environmental terms, it needs to be viewed in a holistic sense in terms of the ‘overall good’.

And if you look at it that way, then house prices are probably 40-50% higher than a sustainable level.

I certainly don’t think it’s sustainable that most Middle income households can no longer afford to buy a house, without help from the bank of mum and dad. That’s not sustainable in a socio-economic sense.

more broadly it’s not sustainable if we want a society that is not suffocated by extreme inequality. I for one don’t think it’s any shock that violent crime is on the rise.

so, in summary, sustainable house values are not those that can be sustained by market factors (and market failure as the case is). That seems to be the way the RBNZ is viewing it. I doubt that is how the government intended it.

Rather, sustainable house prices are those which allow society and our economy to function relatively equitably and effectively.

by Independent_Observer | 10th May 22, 3:49pm 1652154570

Yes and many people who own homes, now wouldn't be able to afford the house they live in if they were a FHB. Lucky timing of birth year huh...

by RickStrauss | 11th May 22, 10:07am 1652220426

Ehem, you mean "prudent and hard working", not lucky of birth year, surely?

by J.C. | 10th May 22, 4:04pm 1652155447

Sustainable for whom?

Good question. For buyers, for the banks, for the govt, for retailers and the consumer economy?

They haven't really defined and communicated what sustainable means and how they have included the interests of each stakeholder.

by DTRH | 10th May 22, 3:55pm 1652154922

At the moment only around 5% of Auckland population could afford average house for scratch couple would need to be earning 400 k between them not many of them couples around In Auckland.

by Nifty1 | 10th May 22, 4:07pm 1652155660

Agree with this article, well written.

by nz-it-worker | 10th May 22, 4:09pm 1652155750

To go back to the Reserve Bank, it needs stressing on an ongoing basis that the central bank is NOT about making house prices affordable (or even trying to push them up as seems to have been a popular misconception that started around 2020 and during the waves of Covid financial stimulus).

I don't buy that at all. As the school boy cricket coach said, they consciously boosted asset prices (principally housing) for the wealth effect.

RBNZ Chief Economist and Head of Economics, Yuong Ha, wanted people to acknowledge the RBNZ’s view that while lower interest rates boost asset prices, this has a wealth effect, which boosts confidence, spending, economic activity and employment.

From a financial stability perspective, he said: “The worse situation we’d face right now is actually if we had house prices falling.

“That’s always the flipside. You’d be dealing with a Covid recovery and a disruption in wealth through lower house prices.”

https://www.interest.co.nz/banking/107444/rbnz-not-looking-%C2%A0rein%C2%A0-property-investors-lvr-restrictions-saying-falling-house

by Independent_Observer | 10th May 22, 4:22pm 1652156549

Goes to show how completely out of control our central bankers are....in one sentence they want rising prices for the wealth effect, the next they don't want higher prices because they are unsustainble, the next they want more lending against the housing market to avoiding a depression, then they are concerned that there is too much housing debt because of the risk it causes our financial system.

A group of people who are completely lost. Its also highly hypocritical. The statements are full of paradox and confusion.

by AJ123 | 10th May 22, 4:40pm 1652157652

If the conclusion "that for many people, houses will never be 'affordable' again" then why to worry let the median price reach 3 or 4 million, only those will live who can afford and rest can leave the country.

What a pathetic conclusion.

And it is now clearly written on walls the interest rate will increase by Fed's, and it definitely take us to pre covid level 25% decrease in house price, but remember as people was not able to predict the ceiling of price increase in 2020 and 2021, in same way no one knows the floor, it can reduce more than 25% also.

by Nzdano | 10th May 22, 4:52pm 1652158367

House prices in the long run will converge around: Build price + raw land price + development costs.

With any increase in population, demand will keep pushing existing house prices up until building new is competitive.

The incremental cost of new supply will ultimately determine the price level of existing stock.

Unless of course there are already more houses than we'll ever need and no new supply is needed.

The only way to make housing affordable is to make new supply cheaper or reduce population.

by Independent_Observer | 10th May 22, 5:02pm 1652158926

Or because land values act in a similar fashion to bonds, where increasing interest rates bring the face value down. We've just happened to have the longest bull run in history of bonds.....and the biggest loss to bonds to the start of any year ever.

by Harvey W | 10th May 22, 7:02pm 1652166159

You're right nzdano, and our greeny influenced govt is making building costs higher and higher. Great idea, but can we afford it?

by RickStrauss | 11th May 22, 10:09am 1652220575

Much of the high cost has been caused by the industry itself and the need for council and government to try to protect ratepayers and taxpayers from having to clean up industry malpractice - as they had to after trusting the industry with self-governance and getting the leaky buildings crisis in response. The industry would ideally self-insure and have less regulation, except no one is willing to underwrite it.

Perhaps if we could have more personal responsibility than running and hiding by closing LLCs and moving on to the next project leaving creditors and tradies out of pocket...

by Carlos67 | 10th May 22, 7:27pm 1652167628

The only outcome from "Cheaper" houses is likley to be even smaller sections and more crap built houses, if thats even possible because there is already crap being built even now. There will be shortcuts and problems for future owners and it will be 2000 all over again. Really nothing changes in this country, we go round and round in circles doing the same things and expectiing different outcomes.

by Averageman | 10th May 22, 5:32pm 1652160774

Everyone that owns their own home, and want their family to stay in NZ wants house prices to drop. That is actually a much larger group that the leveraged speculator. Recycle WFF into supporting FHB'ers, and the vast majority of Kiwis want prcess to drop.

by Carinaz | 10th May 22, 5:33pm 1652160806

Thanks David Hargreaves for highlighting, how screwed the entire system is - pioneered by central bank and politicians.

by TommyYank-old | 11th May 22, 9:21am 1652217709

I would put Politicians at the core of doing the screwing. By the late 80's Government policies doomed New Zealand to the reality we now live in by not offering then what took until 2007 to arrive-Kiwisaver. That meant that two generations of Kiwis financialized Housing into a business dominated by the marginal buyer, who unlike other countries was not the 1st Home Buyer, but an investor because there was no other rational place to deposit your retirement savings but in Residential Single Family Houses. Had politicians both incentivized and penalized Kiwi's to stay out of Housing as their core retirement savings House prices would never be where they are. Now given where they are it will take a more rational government to realize and understand their Job no 1 is to offer First Home buyer's low deposit government backed insurance (like happens in the US with 3 different SOE's) to insure they can get on the property ladder, while protecting the Banks from systematic risk. If they don't places like Auckland will be eating their young, and many will take flight who otherwise wouldn't. Here is charter for one of those US SOL's like NZ had till the early 70's:

"Fannie Mae was chartered by U.S. Congress in 1938 to provide a reliable source of affordable mortgage financing across the country. Today, our mission continues to provide a stable source of liquidity to support low- and moderate-income mortgage borrowers and renters. One of the ways we do this by enabling greater access to affordable home and rental housing finance in all markets and at all times."

by Uh Oh | 10th May 22, 6:10pm 1652163054

With new tax laws taking away interest deductibility (which is the single biggest expense for leveraged investors), rising interest costs, new tougher lending criteria, and possibly new DTI limits,

It is getting much harder to get funding now, and harder to make investments stack up from a cashflow standpoint

In the OECD countries we are ranked no. 3 on the house price to income ratio of 145.0, Just behind Portugal and Canada which have 146.8 and 146.6 respectively. Australia is 119, Japan is 109 (100 = 2015 prices)

https://data.oecd.org/price/housing-prices.htm

What makes you believe that it will continue ad infinitum?, Why do you think they are trying to slow it down?

by Dale Smith | 10th May 22, 7:08pm 1652166527

They are trying to slow it down at the wrong end, ie if they just removed the initial structural restrictions that cause these other reactive restrictions plus their extra added costs, then housing would organically become more affordable without the heavy command and control hand of Govt. which will only result in a crash.

by Small Kev | 10th May 22, 10:05pm 1652177135

Sustainable once it becomes normal.

All the restrictions actually act as protective mechanisms to the housing market, imagine they just let it run free, the housing market will sure crash but they are putting the brakes on to prevent the crash.

by Dale Smith | 11th May 22, 8:34am 1652214888

Two points.

1) Putting a demand restriction on top of a supply restriction doesn't work. It's the equivalent of trying to fix a wrong action with another wrong action and expecting the right action.

2) If you go with the idea that they have 'control' as to the way the market goes, then they must have had been by their own design that prices increased by over 23% per annum. Why did they do that, why didn't they just stop it from happening? The reality is they don't have near the control they claim, mainly because they don 't know what the correct action is to put a wild cat back in the bag once they have let it out.

by Bluff | 11th May 22, 7:28pm 1652254087

Good article thanks Interest. I'm leaving this beautiful but mentally challenged country that values speculative asset growth vs people. A great country now an over priced ponzi sand box for the elite land owners to play in.

by Whome | 11th May 22, 7:02am 1652209324

Good analysis and rationale David.

in regards to the comments here it’s such a bore to hear the same old bleating and bitterness about house prices being unsustainable, unaffordable, never this unaffordable before, near worst in the world, due to crash, must be decimated. It’s the same views being repeated over and over again and given prime media time to anyone who has an extreme opinion about it and/or forecasts the end to it. The sheeple have been fearfully bleating about a looming correction for decades and say “yes that’s why it must be fixed, Can’t you see we are on the precipice of a property doomsday Armageddon?”

ALL of the negative opinions and screeds of academic papers produced in the last 30 years reasoning why property prices MUST AND WILL FALL then never get out of control again, have amounted to… ZERO. It has though achieved big overnight egos (you see the proud faces on the front page of newspapers…looking like some saviour shepherd for the herd for a short time before fading away from the limelight when their so called unaffordable story was eliminated by yet another surge or milestone in property values.

The eternal “housing crisis” story has granted election victories through empty promises to solve it and will continue to do so. It won’t be solved until the govt go back to their knitting and actually focus purely on getting 1HBers into their own modest first homes and let the rest of the market do it’s thing. Most existing homeowners don’t have to sell and after all we only owe $340Billion against properties valued at $1.75Trillion… that’s right as a nation our LVR is around 20%… Hardly a recipe for total annihilation of property values.

The old HNZ used to do a great job of looking after 1HBers for decades last century whilst letting the rest of the market live and die by the forces of supply and demand.

Lets go back there.

by Dale Smith | 11th May 22, 8:28am 1652214482

Bit contradictory.

You lament all the DGM, and then say:

'The old HNZ used to do a great job of looking after 1HBers for decades last century whilst letting the rest of the market live and die by the forces of supply and demand.

Lets go back there'

Which I agree with, but will result in the exact lowering of prices/crash as you are bemoaning.

by Whome | 11th May 22, 11:51am 1652226680

Seemingly so but I don't believe so because these first homes purpose built by the government would only be for sale to 1hbers who could be contractually 'locked in' for a decade (ie with an interest free or low interest deposit loan for that term) to give them a good reason not to just buy then resell in a few years (if the value rose). The govt could temper the volume released to meet the 1hb demand of the day and whilst that would have some flow on effect for rents this would mainly affect the entry level type properties. Just because you can buy a brand new terrace house now for $700k in Auckland that doesn't mean the multi million mansions drop in value.

The rest of the market would not be kept 'dragged down' by these properties at the entry level (which would of course be subject to rising building costs over time too but at least the 1hbers would actually be helped to get started).

Every 2nd and subsequent homeowner and investor was once a 1hb, we typically don't stay in our first home for life, we spend more to upgrade to better property/locations and/or invest in rental/s.

Btw I'm not bemoaning a crash, just the rhetoric around one which never ends.

by dbbr | 11th May 22, 8:41am 1652215296

Ireland 2.0.

by Whatwillhappen | 11th May 22, 9:59am 1652219963

We can only hope.

by Tom Joad | 11th May 22, 12:46pm 1652229969

But, unless there's a crash - and I just think the whole NZ housecentric mindset mitigates against that

A very dangerous assumption to make.

Holland was "tulipcentric" in the 1630's

London was "SouthSeacentric" in the1730's

Japan was "stock and landcentric" and New Zealand was "sharecentric" in the 1980s

The World was "dotcomcentric" in the early 2000s

USA was "housecentric" in the late 2000s

There's plenty more examples of collective manias which ultimately unravel into collective panics. To assume the NZ house bubble is immune from "animal spirits" is to ignore what has caused it's very formation - aided and abetted by the cheerleaders and banks of course!

by Wrong John | 11th May 22, 1:47pm 1652233660

Govts & their ''civil service hoards'' seem to be a large part of a lot of what is said/posted above. They seem central to what's going on, especially in housing, from quite a few posters, and not only on this site either. Let's take a look at this group of people for a second.

Brought up far from any tough real world activities, isolated down towards the bottom of the planet & plugged in to the tertiary driven west-view of the world (when it only represents a small % of about 1.5 billion out of the 7.5 billion people on the planet) when the other 6.0 billion aren't anywhere near as wealthy (unless you're an oligarch) educated or have as many opportunities that we in the west have enjoyed for 75 years or more.

These govt / workers / bureaucrats call then what you will, have been told what to think for their whole lives with most of them never really knowing any different of exactly how big & bad most of the planet really is. Whilst they appear educated they are in fact narrowly so, as they have no idea how hard life is for 6 out of every 7.5 people on planet Earth. If they did, they wouldn't be trying to destroy what has taken centuries to create, by bringing in loony laws that just make life twice the price & very much harder for everyone.

They do not understand how life actually works (look at Germany's shock & horror recently upon realising that their whole belief about Russia was a con) nor do they understand that those 6 people actually think very differently to the 1.5 people(us) as Mr Putin has so obviously pointed out this year.

These over-tertiaried urban (so-called elite) posers wouldn't know how to balance their own bank account, let alone know when their car wof was due, as they have now idea how the working classes struggle to get through the day let alone the year. They have all the theory in the world but couldn't mow their own lawns because the lawnmower man dos that. They are so smart they are totally useless in everything pragmatic, practical or promising & never move out of their big city tertiary complex unless the govt pays for their costs to speak at the conference in Wellington about how to find a new name for giving away money to the unfortunates, so they can breed on as they have done for the past 50 years, creating a 30% dead-weight of dumb people that can now only be spoon fed by their civil servants, whilst in a break from their endless meetings & committee's ..............

God help us.