COMMENT: The recent edict from the Minister of Finance instructing the Reserve Bank to take account of the Government’s goals on house price stability and affordability for first home buyers will no doubt come as good news to many market watchers. While the Reserve Bank is independent from the Government, its actions are the major driver of interest rates and inflation, so surely, finally, this is the piece of the puzzle which has been missing and this simple instruction will solve the previously intractable issues of the market with one broad wave of the proverbial wand?
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Sadly, no. While the instruction to take account of the needs of first home buyers is welcome and overdue, the lion’s share of the work which will need to be done to support first home buyers still lies squarely with the Government and requires a suite of strong and decisive measures and initiatives from the Ministers of Housing and Finance. Furthermore, the Minister of Finance’s reference to “price stability” is nonsense which creates a straw man and ignores the history and reality of the housing market over the past 40 years.
Of course, none of this would matter if the announcement was just politically targeted window-dressing, as has been the case with so much of this Government’s action on housing – but that all changed the moment that the Reserve Bank was brought into the equation.
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Unlike the Government, the Reserve Bank has taken real and tangible action on the housing market over the past seven or eight years. This would be fine, except that where those actions have been specifically targeted at the housing market (rather than broader measures to support the economy, such as lowering interest rates) they have been almost entirely destructive to that market.
The most significant of these was the introduction of the loan to value ratio restrictions, in 2013, with a promise that these measures would reduce house price inflation and make the housing market more stable. The fact that house prices continued to increase and that the housing market didn’t need stabilising continue to be a blind spot amongst commentators and economists who continue to laud the LVRs as some sort of market panacea - but I digress.
The major legacy of the LVR restrictions has been their affect on first home buyers – and not in a good way. While first home buyers have continued to be the largest market participants over most of the past seven years, this is no thanks to the Reserve Bank (or the Government) and to the extent that they have been closed out of the market it is almost entirely due to the ridiculous 20% deposit requirement placed on them by the Reserve Bank under the auspices of the LVRs.
Of course, if the Government’s directive to the Reserve Bank resulted in the removal of the LVRs on first home buyers, all would be forgiven, but it won’t. The Reserve Bank will, instead, almost certainly try to introduce new measures to achieve the Government’s mandate. This is likely to be in the form of a further request to impose “debt to income ratios” - an insidious tool which places an artificial constraint on your ability to borrow by ignoring market realities. To date, the Minister of Finance has rejected previous requests to use this tool and we can only hope that he will continue to stand his ground in this regard.
The other measures likely to be imposed by the Reserve Bank will generally target property investors who have become the latest whipping boy of the Government (which continues to erroneously refer to them as “speculators”) and market activists who are already winding themselves up into an orgy of scapegoating.
These measures will continue to make absolutely no difference to the long-term upward trend of house prices – but will probably reduce the activity of investors in the market, over time. If this reduction in investors led to more homes being purchased by first home buyers I’d be at the front of the line to celebrate – but it won’t. Investors aren’t the obstacle to first home buyers getting into the market – the LVR rules are, and the Reserve Bank has no intention of changing those.
Instead, the “unintended consequence” of the Reserve Bank’s moves on property investors will be to reduce the growth in the supply of private rentals in the market, putting even more pressure on the Government to provide rental housing to a market in which it is already hopelessly behind.
- Ashley Church is a property commentator for OneRoof.co.nz. Email him at [email protected]
