Ashley Church: Are rising house prices really a bad thing?

OPINION: When I talk about property cycles in New Zealand, I’m not just talking about what happens to house prices. I’m also talking about the reactions of politicians, regulators, interest groups and the media – all of which also follow a cycle in their predictability. Right now, the signs that we’re at the beginning of the next Auckland property boom are becoming increasingly clear – and right on cue, we’re seeing the same calls to “stop house price inflation” and “bring down house prices” that we’ve seen at the beginning of each previous cycle.

Over the next few months these calls will intensify; a “culprit” for rising house prices will be identified (this changes from cycle to cycle); and, at some point, new rules or regulations will be introduced to address the issue. A year or two down the track the impact of these measures will be assessed and we’ll find, to our horror, that they have had virtually no impact on house prices - which will broadly double over the next seven to ten years despite this intervention.

Implicit in all of this is the mantra that house prices are out of control and that we need to “fix” them. But are they? To understand the insanity of our typical response we need to use something other than house prices to make our point, because we’re simply too brainwashed in the idea that ‘house price inflation is bad’ to see that issue clearly.

So let’s consider wage and salary inflation. Imagine that we were seeing seven to ten percent growth in this year on year, and that wages were roughly doubling every decade for about sixty five percent of the working population but staying flat for the remainder of the workforce. Imagine that the Governments response to this was to try and find ways to slow or stop wage inflation – or even reverse it so that wages started falling!

Crazy, right? Yet that’s exactly the policy approach that successive Governments have taken to house price inflation.

According to Swiss-based Research Institute Credit Suisse, New Zealand is now the world’s fifth richest country – with only Switzerland, Hong Kong, the US and Australia ranking higher. The report goes on to make clear that this wealth is largely due to our house prices. This will have come as no surprise to anyone who understands the New Zealand property market and is in rebuttal to the claims of those who say that buying a home or investing in property adds nothing to the overall economy. For generations, Kiwis have been using the steady increase in the value of their homes to fund travel or major purchases, buy businesses, pay for their kids’ education, and support themselves in retirement. It’s a sobering thought to realise that if Kiwi house prices had not increased to the extent that they have over the past four decades, our ability to do these things would be severely impacted and we would be much less wealthy as a result.

But what about those people who are victims of house price inflation? People who want to buy a home but are closed out by high house prices or ridiculous deposit requirements. Surely logic dictates that the correct approach would be to introduce measures to help these people to get into the market – not to punish those who are already in it?

These people are overwhelming first home buyers, but even here, things aren’t as clear-cut as we might imagine. We now know that first home buyers constituted the largest single group of house buyers between 2013 and 2018 in every part of New Zealand except Auckland – so being a first home buyer, in and of itself, isn’t necessarily the problem.

When we drill down we find that the people struggling to get into their first home are those on low incomes, and (particularly in Auckland) those on high incomes but who are unable to put together a large enough deposit. Yes, rising house prices make things harder – but outside of the two obstacles mentioned here, most first home buyers persevere and eventually manage to get into a home.

So clearly the response to this issue should be to implement initiatives to overcome these problems? Low or no deposit lending where the Government guarantees a portion of the loan for the first five years, shared equity schemes, rent-to-own programs, lease-to-own programs, and communal ownership schemes are just some examples of the kinds of things that a government could do to move the dial on home ownership without destroying the essence of what makes the property market work.

Perhaps this time round we won’t make the mistakes of the past four cycles with reactionary and pointless responses? Only time will tell.

- Ashley Church is a property commentator for OneRoof.co.nz. Email him at [email protected]