Reserve Bank on the housing crisis: still at sea, but not drowned yet

Okay so I just finished reading the Reserve Bank’s report on the financial stability of New Zealand, and basically we are stuffed. Like honestly, right now I’m considering popping out to Pak’n’Save to buy canned goods in bulk. 

Basically, the housing crisis has come off the boil in the last 6 months, partly due to changes in the rules around how much money banks can lend on mortgages. So that’s good. Disaster averted, we haven’t drowned: for now. But all the underlying structural problems that got us here are still around, and until we do something about those we will never be out of the woods on this one.  And even if the price of housing tops out here, we will be feeling the effects of this housing bubble for years to come.

If you bought a house in the past year or two you won’t need me to tell you that if your income drops or mortgage interest rates rise you will be screwed. But the Reserve Bank handily worked out just how screwed people would be (severely screwed or mildly screwed) if interest rates went back to their usual levels (around 7%). And by severely screwed we mean having trouble paying for the groceries, and possibly default on your mortgage kind of screwed.

5% of those who bought since October 2016 would be severely screwed and another 7% would be mildly screwed. Of course, these numbers are worse for Auckland, because everything about the housing crisis is worse for Auckland. And if mortgage rates were to go up to 9% (which is higher than the usual for the past decade, but not out of the question) then 18% of recent borrowers would be severely screwed.

Okay, but how likely is it that everything goes to shit and interest rates go up dramatically?

Well, our banks depend on borrowing from Australian banks, and Australia’s housing market is even more broken than ours (and we all know that our housing market is a total shit storm). So we need for nothing to go bonkers in our housing market or Australia’s. The Aussie banks in turn depend on borrowing from global markets. So we also need nothing bad to happen anywhere in the world for the next few years. Which I’m sure will be fine because everything in Europe, the UK, and the USA is super stable right now. 

The Reserve Bank also says there is a risk of a sharp correction in house prices – which is economist-speak for “house prices could drop by 20% at any moment, we’ve got no clue, your guess is as good as ours really.” And if that happens then recent buyers could end up owing more on their mortgage than their house is worth. This wouldn’t change your mortgage payments, so it doesn’t necessarily mean people would get kicked out of their homes, but there’s no doubt that it would really suck. Honestly, if you own a house with a huge mortgage, a box full of tinned baked beans could be an investment worth considering about now.

And renters, don’t think you are getting off easy. “Rent yields are near record lows,” says the Reserve Bank. Well, that sounds boring. And low is good right? Finally, something that isn’t at record highs! But what it actually means is get ready because rents are about to go up. A lot. Especially in Auckland, because bugger you Auckland. You all know what you’ve done.

But actually what have you done to deserve this? Yes, record migration levels mean Auckland is heaving with people looking for somewhere to live. Victims of your own success, Auckland. No one to blame but yourselves for your own awesomeness. Try to be a little less awesome, in future okay? Phew, housing crisis solved. You’re welcome.

Maybe not.

Underneath the headlines about migration and the slow construction of new homes there is an incredibly boring and kind of complicated explanation about how our tax system distorts investment decisions which is driving demand for housing. And I saw you stifle a yawn just now, but buckle it up sweetheart, because this shit is really important. Like, future of the country important.

We have a huge loophole around property in our tax system. Like this hole is the size of the ozone hole, people. $11 billion. What this means is that people can tuck their money away in housing and perfectly legally not pay tax. And that tax people aren’t paying is worth $11 billion. It’s a free ride for property owners. And if you hire a good tax lawyer, maybe you can actually make your tax bill go down by popping a few hundred grand into a house or some land. You don’t even need to rent it out if you can’t be bothered with all the hassle of, you know, tenants.

Until we sort out this unfair tax haven, all the other things we do won’t matter, because people will still want to tuck their money into a property somewhere, snugly away from the taxman.

Labour have proposed a change to the tax rules around negative gearing – but this will only deal to a tiny fraction of the problem. Less than 2% actually. Same with the Greens – they’re just tinkering. The Opportunities Party (TOP) is the only party with a plan to close the entire loophole around property. This will reduce demand for housing – people will only buy housing as a place to live or to earn income as a landlord, not as a way to avoid tax. House prices will begin to flatten, and eventually wages increases will catch up to make housing affordable again. It will take a few years, but by then our debt should be under control too. Basically, we still have a chance at getting out of mess – we can still sail our battered ship back to a safe harbour.

Changing the tax regime will also lead to more houses being built. At the moment there is almost no cost to owning an empty block of land. When this tax is introduced land bankers will have a greater financial incentive to piss or get off the pot. This will free up a lot more land for building more houses.

Look, the housing crisis is huge and it can feel terrifying when you look at the size of the problem that successive governments have created. But we can do something. We have a plan that is backed by high-quality, international evidence. That’s policy-speak for “it will actually work.”