Ashley Church

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.

The 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 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 Kiwis for whom their home equity was the key to their retirement; and a bonanza for property investors who would be largely unaffected by a drop since they are already required to hold at least 40% equity in a property due to current Reserve Bank rules.

Indeed, these consequences would be so devastating to so much of the economy that it’s difficult to understand the thinking of anyone who actually believes that this might be a good idea. Promoting it as a

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 means that it’s now significantly easier to “afford” the cost of servicing a mortgage than it was in the mid-1980s.

So if house prices aren’t the major barrier to getting into a home, what is? That’s easy – the deposit.

If we want to “fix” the housing market and allow young people to get into their first home again we don’t need to crash the market or try any of the other hare-brained schemes implemented by this and the previous government. All we need to do is dump the artificial loan-to-value ratio deposit restrictions imposed by the Reserve Bank.

If you want evidence of 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 didn’t fully embrace the suspension, first-home buyer home sales soared and people who could afford a mortgage but didn’t have a large deposit were finally able to get into the market because they no longer needed a crippling deposit.

The idea of “crashing the market” might have superficial appeal to academics and those struggling to get on the property ladder but it would bring little relief to first-home buyers and would do little more than kick-start another round of house price inflation in which the whole process would start all over again. - Ashley Church is a property commentator for OneRoof.co.nz. Email him at ashley@nzemail.com

Ashley Church

The idea of “crashing the market” might have superficial appeal to academics and those struggling to get on the property ladder but it would bring little relief to first-home buyers.

Falling house prices are normally a sign of economic

trouble. Photo / Getty Images

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