COMMENT: A few weeks ago I read an article in which one of the bank economists was talking about the downward trend in the property market and noting that, according to figures from the Real Estate Institute, sales activity was falling in most regions of the country. I won’t name him for fear of embarrassing him, but he is quoted, in the article, as observing that the property market was “finally responding to the policy decisions thrown at it last year”. He went on to specifically name new investor tax policies, tightened LVRs, increased mortgage interest rates and the changes to the CCCFA as examples of some of the policy changes which had achieved this turnaround.
The inference was clear. The Government and/or the Reserve Bank had acted to cool the market and we’re now seeing the fruits of those actions playing out in house prices.
But is it true?
Sadly, no. In fact, of the four things specifically mentioned, two have almost certainly made no difference to house prices and the other two weren’t introduced to cool the market and were not part of a “coordinated package of housing market measures” as suggested.
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Let me explain, starting with the idea that the Governments tax policies aimed at punishing property investors have somehow moved the market. While these changes, which have included ringfencing of tax losses, removal of the ability to claim interest as a tax deductible expense, punitive changes to tenancy laws, and extending the brightline test to tax capital gains, have certainly proved popular with the public – a OneRoof-Kantar Housing Survey from last year showed that 62% of Kiwis believe property investors are the main cause of rising house prices – the reality is that they have a much smaller influence over house prices than we’re led to believe and are very unlikely to be a contributing factor to the recent market changes.
Likewise, the inference that the loan-to-value-ratio restrictions have caused the market to flatten demonstrates a lack of understanding of these measures. They were first introduced by the Reserve Bank in 2013 to “lower house prices”, but the bank itself quickly realised that these settings had failed to achieve this and, in more recent years, they’ve changed their tack and now claim that the restrictions are “to ensure market stability”. Their primary impact has been to make it much harder for first home buyers to get into the market and the idea that, after nine years, they’ve magically kicked in as a contributing factor in slowing house price growth is laughable.
No, the recent turn in the housing market was the result of two initiatives that actually have little to do with the housing market itself and, instead, are classic examples of the law of unintended consequences at work.
Ashley Church: “The Reserve Bank has been clear that it will continue to increase the OCR.” Photo / Ted Baghurst
The first initiative was a decision, by the Reserve Bank, to increase the OCR (which impacts on interest rates). This move wasn’t in deference to rising house prices, but rather, a response to rapidly rising household inflation. Interest rates are the mechanism that the Reserve Bank uses to fight inflation in the wider economy and they’re currently trying to reduce household spending in order to squeeze recent high inflation out of the economy. This measure will work but it wasn’t introduced as part of a package of housing market measures and its impact on that market is entirely incidental.
The second initiative was the introduction, by the Government, of draconian changes to lending rules. These misguided measures were intended to curb unscrupulous practices by fringe lenders but, instead, have thrown a spanner into the entire market, with the problem made even worse by risk-averse banks taking an over-zealous approach to their application. The effect on lending has been chilling – with an inevitable knock-on effect on market activity – but, like the move to increase the OCR, this has been the result of Government incompetence and broader events taking place in the economy, rather than clever policy.
Whether these measures will continue to cool housing market activity is an open question. Urgent recent amendments to the CCCFA will almost certainly restore mortgage (and other) lending to near-normal levels within a couple of months and I would expect the chilling impact of that measure to come to an end.
However, the Reserve Bank has been clear that it will continue to increase the OCR, progressively, until 2024 – which means that mortgage interest rates will continue to rise over that time. This will almost certainly temper the market, although the human tendency to “normalise” adverse events means that this will be partly offset as we adapt to the new reality.
Ultimately, as always, the market acts rationally in response to the events with which it is presented and no amount of Government tampering – deliberate or accidental – will alter that reality.
- Ashley Church is a property commentator for OneRoof.co.nz. Email him at [email protected]
