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OneRoof.co.nz
COMMENT
Here’s one simple alternative to crashing the entire housing market You don’t need to wipe out the economy to get more people on to the housing ladder.
T
he New Zealand Herald recently published a fascinating article addressing the question of what would happen if house prices fell. In the lengthy piece, outlined are a range of scenarios based on house prices falling anywhere between 10% and 40%. It quotes the views of various commentators, including yours truly, and it touches on the frequently promoted idea of the Government or Reserve Bank doing something to deliberately crash house prices in some sort of managed process, which would, apparently, be preferable to a sharp correction in house prices. It’s a topic in which I also have a strong interest. If we were ever silly enough to actually manage to bring about a controlled drop in prices of 40%, the consequences are entirely predictable and would have a devastating impact on the Kiwi economy.
These consequences would include negative equity (owing more on your home than it was worth) for anyone who borrowed 80% of the cost of buying a house in the last couple of years; the reduction or even termination of cashflow facilities for mum and dad businesses which Ashley Church used their home as security with the bank (and the subsequent knock-on impact on business viability and jobs); a massive reduction in spending confidence throughout all parts of the economy; the postponement of retirement plans for tens of thousands of The idea of Kiwis for whom their home “crashing equity was the key to their the market” retirement; and a bonanza for might have property investors who would superficial be largely unaffected by a drop appeal to since they are already required academics to hold at least 40% equity in a property due to current Reserve and those struggling to Bank rules. get on the Indeed, these consequences property would be so devastating to so ladder but it much of the economy that it’s would bring difficult to understand the little relief to thinking of anyone who first-home actually believes that this might be a good idea. Promoting it as a buyers.
serious strategy is not only insane, it’s also incredibly irresponsible. But more to the point, the article actually asks the wrong question in that it presupposes that reducing house prices is somehow the key to resolving housing affordability. It isn’t. Why? Because almost every article you read about housing affordability is dishonest in that almost all of them only focus on median incomes and house prices. Measured by these two things alone, affordability is absolutely reducing – but you can’t accurately measure affordability without also taking into account the cost of servicing a mortgage, which has dropped through the floor since the 1980s. Indeed, so dramatic is the impact of the reduction in mortgage interest rates that the proportion of the average Kiwi household income that services the mortgage in an average Kiwi home has dropped from more than 50% in the 1980s to about 37% today – just slightly higher than it was in 2001. This
just look at what happened during the period that these silly rules were last suspended. Even during a period in which the banks themselves Falling house prices are normally a sign of economic didn’t fully trouble. Photo / Getty Images embrace the suspension, means that it’s now first-home buyer home sales significantly easier to “afford” soared and people who could the cost of servicing a mortgage afford a mortgage but didn’t than it was in the mid-1980s. have a large deposit were So if house prices aren’t the finally able to get into the major barrier to getting into a market because they no longer home, what is? That’s easy – the needed a crippling deposit. deposit. The idea of “crashing the If we want to “fix” the market” might have superficial housing market and allow appeal to academics and those young people to get into their struggling to get on the first home again we don’t need property ladder but it would to crash the market or try any of bring little relief to first-home the other hare-brained schemes buyers and would do little more implemented by this and the than kick-start another round of previous government. All we house price inflation in which need to do is dump the artificial the whole process would start loan-to-value ratio deposit all over again. restrictions imposed by the - Ashley Church is a property Reserve Bank. commentator for OneRoof.co.nz. If you want evidence of this Email him at ashley@nzemail.com
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