Are policies directed at the property market too little, too late?
The message from local and central government for the majority of this year has been that we face a critical housing shortage. Certainly it is more acute in Auckland but that fact is not surprising given the expected rise in the population to c. 2.5m in the next 30 years.
The Reserve Bank has made it clear that it is going to implement policies to take some steam out of the property market that will require banks to restrict lending for loans of over 80% loan to valuation ratio. Potentially reducing these high LVR loans from the current level of 25% of all new loans to below 10%, with the consequential effect of cutting off supply of funding for first homebuyers especially.
The political parties have rallied to the call of seeking to assist these first homebuyers. Labour’s view is that its all the fault of overseas speculators and will outlaw overseas based buyers. National has announced the raising of the dual thresholds of income and purchase price of homes eligible for the government deposit subsidy scheme through Kiwisaver.
In my view neither really are significant or well directed enough to address the fundamental issue. We have a shortage of housing – this matched to increasing demand fueled by record low interest rates is pushing up prices. Prices are rising at a rate that sucks in speculators – this virtual circle is dangerous and is the heart of a property bubble. To this is potentially being added the dangerous risks associated with alternative lending sources which will be keenly sought out by buyers who cannot meet the 80% loan / 20% equity criteria, likely to be set by banks. Be wary because this property bubble is going to pop.
How can this situation be averted? In someway I don’t think it can. Property cycles happen and keep happening. They build slowly, they gain visibility and media coverage, they explore and they then implode. Doing something today is too late in my view we have too much fuel being poured on the fire. My only hope is that we fizzle rather than pop!
So what could have been done? I think part of the solution could have been addressing all three issued cited above – build more homes, support first time buyers and reduce risk in the property market. To a solution, have a look at the UK government scheme – New Buy.
Put together a few years ago when the property market and the economy was on its knees the plan was to encourage group home builders to add new stock of home to by; encourage home buyers to buy new homes, and thereby stimulate the economy and through government support underwrite the risk component of loans to make buying new homes attractive through a much lower deposit requirement.
New homes have additional benefits they are more energy efficient, they can be built to meet the growing intensification requirements of our largest city, and they add supply at the bottom of the market.
This last point is key because the vast majority of new homes built, particularly of the past 5 years has been tailored designed homes built for owners with a median size of at least 220m2 – 4 bedroom on a 500+ m2 section. We need more homes (apartments, townhouses, multidwelling units) – this is how younger generations want to live and can afford to live.
The government could have taken parts of the UK scheme. Created a loan guarantee for new mortgages on new build properties with a minimum 5% deposit. The government could then have incentive building companies to build homes faster and more affordable by fast tracking consents and discounting compliance costs based on property construction type. They could have partnered with group homebuilders to offer these New Build home loans. They could have even required citizenship or residency requirements to access this component. The key thing would have seen a more holistic integrated programme that would have seen investment funds flow to building companies to move ahead and create supply ahead of demand, create modular construction techniques with scale advantages and move our building industry from being a craft built cottage industry into a scalable industry.
Now the fact is the UK scheme is attracting a large amount of negative press as it is seen as a accelerant of property inflation however there is no doubt based on the reports by group builders that they are seeing big increase in demands for new homes – that means they are building more, that increases supply and that will in time affect underlying demand which can be the most effective tool to take the air out of the property bubble.