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The latest Weekend Herald led with the headline “House Prices Cool Off”. Given that house prices in our largest city are already grossly unaffordable, you could be fooled for thinking that meant prices had stopped climbing, and might even be falling.

Fat chance.

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The evidence for this “cooling” off in the housing market is that price growth rates have halved to 12.2% over the past year – not that prices have fallen. Doesn’t it show how nutty things are when “cooling” really means warming more slowly? What other asset in New Zealand gained 12.2% in the last year and that’s described as “cooling off”? 12.2% returns available on anything else would entice a stampede. Oh that’s right, there is a stampede into property – has been for years.

The Herald notes the market is “cooling” only in Auckland, that investors are now chasing “bargains” around the rest of the country.

Never fear, price rises are expected to “cool” further over the coming year; the article predicted by rising only by 10%, or 5% at the low end. Have we collectively gone mad?

This “cooling” is due to the latest round of loan to value ratios imposed by the Reserve Bank. Housing Minister Nick Smith will no doubt be crowing; in election year price rises would be within his target of ‘single digit’ rises.

Is Nick’s target good enough? At TOP we say no, it isn’t good enough, not by a long shot. We want to cool off the housing market for sure; but to us that means that house price increases have to be kept below income rises, and ideally below the rate of inflation. A cooling housing market should mean that housing becomes more affordable, and that isn’t anywhere close to happening at the moment.

To put this in perspective, inflation is nearly zero, and incomes grew over the past year by 1.7%. Interest rates are at all time lows, which has kept housing reasonably affordable, but by all signs they are about to start climbing which will put the squeeze on mortgage repayments.

Even a 5% price rise is a pretty good return on investment for something that requires no effort. Certainly investor Gary Lin was happy with that return during a ‘flat’ period in the market. The Herald profiled investor Lin who has a portfolio of 13 houses that allows him to play World of Warcraft on his computer all day. He’s a real hard worker.

Given that the return on renting out a place in Auckland remains below 3%, a 5% return on capital gain (which remember is tax free if they hold the property for more than 2 years) is still looking pretty good. No wonder so many investors are happy to leave their houses vacant when they earn more simply through capital gain.

Of course this news isn’t so good for those locked out of the home ownership side of the market. Rising prices are filtering through to put more pressure on rents also, which will only put more heat on already struggling families.

We’ve been conditioned to be grateful for single digit price rises, when in fact, the goal should be no rise in house prices at all – as per the plan set out in TOP Policy #1: Tax Reform. None at all.

This would prevent a housing market crash while allowing incomes time to catch up. We would immediately see our hard-earned money going into true investments like businesses, rather than trying to get rich by buying houses off each other. Houses would eventually become affordable once again to the younger generation. In the mean time income tax rates would drop, making 80% of Kiwis better off.

Sounds like an impossible dream? There is a precedent for this overseas. Several European countries have taxes on housing and wealth that New Zealand doesn’t have. Many of them, such as Germany and Switzerland, have had flat or declining real house prices for the past 40 years. They invest in businesses instead.

As the Herald points out, our property sector is now worth $1 trillion, compared to a mere $114 billion in our stock market. And we wonder why we languish near the bottom of the OECD’s income ladder. We simply have too much invested in underperforming assets, simply due to the tax advantages those assets offer. 

TOP’s tax rebellion would really “cool off” the housing market, and not in the way the Herald means. We would freeze it rigid. Kiwis like Lin would finally have to look elsewhere for get rich quick schemes, and start investing in businesses that provide exports and better jobs. He might even have to give up playing World of Warcraft

Showing 10 reactions

  • Oliver Krollmann
    followed this page 2017-01-19 18:07:30 +1300
  • Gold Money
    commented 2017-01-18 11:36:20 +1300
    Immigration policy Monetary policy Fiscal policy
  • Andrew Crooks
    commented 2017-01-17 20:29:48 +1300
    Geoff doesn’t seem to realise that property prices are buoyant because of low (and staying low) interest rates.
  • Steve Cox
    commented 2017-01-17 19:49:08 +1300
    House prices are currently at 7 times the average wage instead of the historical 3.5 then to get back to that historical amount it is going to take a long time unless house prices fall.
    If house prices just stopped growing it would take 30-40 years for the average wage to catch up – that’s assuming an annual wage growth of about 2%.
    So the only option is for prices to fall. The question becomes how far and how fast.
    Politicians could do it overnight if they had the cojones. But they won’t because most of them are playing the property speculation game as well.
    What could they do? Extend the bright line test from two years to cover all property profits (except the family home). Do what is the case in the USA where the only security for a property is the property itself (no personal guarantees). The Reserve Bank could make banks treat loans on non-family homes as business loans with a much higher equity ratio than residential mortgages have.
    But politicians want to be re-elected so…
  • Vicki Currie
    commented 2017-01-17 19:19:38 +1300
    Is it possible that because our country is so empty compared to the rest of the world that prices could keep increasing for the forseeable future if immigration numbers and population increases? How much impact does demand vs other factors like economy and mortgage rates have on bubbles?
  • Matt Walkington
    commented 2017-01-17 18:04:41 +1300
    History shows financial bubbles burst.

    The obvious question is: are there conditions that will burst the NZ housing bubble sooner rather than later?
  • Steve Cox
    followed this page 2017-01-17 14:56:00 +1300
  • Gold Money
    commented 2017-01-17 14:43:22 +1300
    Deleveraging is needed. Agreed?
  • Gold Money
    commented 2017-01-17 14:38:06 +1300
    Monetary and fiscal policy (Labour and National) has created incentives to borrow and ‘invest’ in property. A gross misallocation of capital that previous governments have endorsed. I am pleased that Gareth and the TOP party are prepared to discuss it. Tax reform is needed.
  • Vicki Currie
    commented 2017-01-17 12:46:49 +1300
    Moved back to Carterton a couple of years ago and I have seen dozens of houses with SOLD another wanted on them….must be all those first home buyers lol! There is a huge boom going on here at the moment, prices rising very quickly as is demand as Wellington commuters and property investors compete.