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

COMMENT: Back in July I wrote a column which questioned the ability of Treasury officials to accurately predict what would happen to house prices over the next 18 months. My challenge was based on Treasuries patently ridiculous claim that house prices would increase by just 0.9% in 2022 as a result of the Governments muddle-headed attempts to control the housing market (my words, not theirs).

Two months on and the absurdity of their prediction is becoming increasingly obvious. New figures from property data company Valocity tell us that New Zealand house prices have now reached a national average of $1 million for the first time ever, having increased by 27% since September 2020 and 4.9% over just the past three months.

To be fair, 4.9% per quarter annualised is 19.6% per year – so house price growth has slowed a little over the past three months. But almost 20% per year is still extraordinary by historical standards and there’s absolutely no sign of the market cooling off anytime soon.

But should we be worried by this? In my opinion – no.

Predictably, we’re already seeing angst and handwringing from the usual suspects, with renewed calls for government intervention, claims that young people can now no longer afford a home, and calls for increased regulation in the housing market.

Ashley Church: “House price growth, in and of itself, is not a bad thing.” Photo / Ted Baghurst

But, as always, such calls are emotive rubbish underpinned by a mixture of virtue signalling and a lack of objective thinking and market knowledge. I know that’s not a popular view but, as I said in an open letter to the Prime Minister back in June, house price growth, in and of itself, is not a bad thing provided other more important indicators are still heading in the right direction.

Let me explain:

1. House price growth is a good thing.

In 2019 the Swiss-based Research Institute, Credit Suisse noted, in a report, that New Zealand is now the world’s fifth richest country and recognised that our wealth is largely based on property ownership, noting that this is more evenly spread than is the case in comparable nations. The report was correct. 65% of kiwis own their own home meaning that a significant majority of us do well when the market goes up. As such, the pathway to prosperity and wellbeing should be blindingly obvious to any Government or social agency that genuinely wants to improve the lot of the average New Zealander.

2. There’s been no drop in the number of people buying their first home.

Yes, you read that heading correctly. According to other data from Valocity, the number of people getting a mortgage to buy their first home has held steady at about 40% of all mortgages advanced over the past 12 months and first home buyers are still the dominant buyer group in the market – just as they have been for almost all of the time since 2013. The claim that first home buyers are being squeezed out of the market simply isn’t backed up by the evidence.

3. Housing affordability hasn’t significantly changed over the past 20 years.

Again, that statement probably sounds unbelievable, but it’s true. Since the mid-1980s the increasing cost of housing has actually been more than offset by the decreasing cost of mortgage interest over that time. This means that, contrary to headlines and commentators telling you that housing affordability is now worse than it has ever been, it now takes considerably less of the average Kiwi families household income to service a mortgage than it did in the late 80s – and only marginally more than it did in 2001. This will deteriorate a little over the next couple of years if mortgage interest rates start going up, as expected – but the impact will be far less than you’re being led to believe.

4. The market will find its own equilibrium.

New Zealand governments which have tried to control prices have failed - without exception – and over 40 years of history teaches us that the market will find its own equilibrium. Put another way – when buyers decide that house prices are too high the market will adjust or level off. It’s that simple.

But if rising house prices aren’t the problem – what should we be focusing on?

That’s easy – first home ownership. Yes, first home buyers remain the single largest buyer group in the market – but an aspirational government would push to get that number even higher because nothing promotes greater community participation than a society in which the maximum number of people are homeowners.

An aspirational Government wouldn’t be trying to control house prices – it would be dumping the LVR rules on first home buyers and promoting first home buyer deposit underwrites, rent-to-buy and lease-to-buy schemes, shared equity programs, and even a re-invention of the old Family Benefit Home Ownership scheme.

Increased home ownership, not crazy schemes to control house prices, is the key to solving the housing crisis.

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