According to media this morning house prices are coming “off the boil”. You could be fooled into thinking they are falling, but they are not, they are just increasing at a slower rate. The bottom line is that house prices are still increasing at 11% per year. This is faster than incomes are rising, so housing is still becoming more unaffordable. Despite the sanguine media reports, the housing affordability crisis continues to get worse.
With no sign of building catching up with demand for housing that has been elevated by migration and tax loopholes, investing in housing still looks like a one-way bet.
Reserve Bank Can’t Fix Housing Affordability Without Government Action
National’s strategy for improving housing affordability has been to rely on the Reserve Bank to fix the speculation problem, while trying to focus its efforts on increasing the supply of houses. The latest house prices figures show this strategy has failed. Only taking action on the tax loopholes around housing will restore sanity to our housing market, as set out in TOP’s Policy #1.
Reserve Bank restrictions hit
The latest round of Reserve Bank restrictions mean that first home buyers need a 20% deposit, while investors need a 40% deposit. In a market like Auckland with average house prices around $1m, amassing the required deposit is a huge challenge if you are starting from scratch. As a result, like the introduction of previous restrictions, this has caused the market to slow slightly, at least temporarily while people amass the deposits needed.
Cashed up investors benefit
Yet somehow the proportions of properties bought by investors is not dropping off. Nationwide investor levels are steady, and in Auckland they are actually on the rise. How could this be when the Reserve Bank increased the deposits required from investors?
It turns out that Reserve Bank restrictions have dampened demand from first home buyers and first time investors, but not seasoned investors who have plenty of equity. Thanks to the rapid price rises in recent years many of them are easily able to amass the 40% deposit required to borrow more money.
With everyone else effectively locked out of the market, cashed up investors have the pick of houses and can make hay while the sun shines. This is the unfortunate side effect of the Reserve Bank restrictions, that it hands yet another win to the baby boomers. The only way to level the playing field for younger generations is to close the tax loopholes around housing so that the choice between renting and buying a house isn’t made on the basis of tax advantages.
Of course what the data doesn’t show us at the moment is how many of these cashed up investors are from overseas. The Government has promised to provide improved data on this issue.