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NZ Politicians key to fixing housing bubble

Property Here - Monday, April 15, 2013

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Government remains ideologically opposed to dealing with the demand side by way of a capital gains tax.

Rising house prices are taking capital away from other sectors. Photo / Paul Estcourt
Rising house prices are taking capital away from other sectors. Photo / Paul Estcourt

The value of my biggest investment went up by about 13 per cent last year. Sadly, I don't feel any richer.

In fact, I'm stumped as to what possible benefit this rise in the value of my house offers me. It's the same house it was 12 months ago, just another year closer to needing some serious DIY.

I could cash up, but I don't want to move. I like Auckland.

If I did move I'd want to move to a bigger house in a more central suburb. But I'm buying in the same market in which I'm selling, so a rising market doesn't help.

Even though I'm on the property ladder, the exponential nature of rising prices means the amount I'd have to add to my mortgage to trade up is far greater than it was a year ago.

In other words, if I had a $500,000 house a year ago and wanted to trade up to a $600,000 house I would have needed an extra $100,000. Now I need an extra $113,000.

Actually I'd need more because the central suburbs are soaring faster than the city-wide average.

Still, it might be all right if local salaries were keeping up with the property market - but they aren't.

So it is not just those struggling to get into the property market who lose, those with aspirational goals (or growing families) are up against it too.

There is just one obvious way to utilise the big nominal gains that are occurring on my household balance sheet.

I should talk to my bank and use the value of my house as collateral to buy another.

Then I can be a tax-free winner in the New Zealand property boom. I can watch the equity in the second house grow.

And unlike my actual home, I can sell this one when I'm ready and realise those gains, tax fee, to improve my lifestyle.

Given the structure of our tax system and New Zealand's persistently rising property prices you can't really blame the individuals who do this - even though they further exacerbate the housing boom.

It is a logical way to create personal wealth. And, of course, it does require hard work and discipline.

If my goal of getting rich wasn't secondary to my goal of being as lazy as possible at the weekend, then I'd probably do it too.

Unfortunately my capacity for dealing with plumbing, painting and paperwork is barely sufficient for one property.

Never mind, one day when the kids are gone I can trade down and use the extra cash to fund my retirement and some travel.

I'll need the cash for travel if I want to visit my children who will be forced to leave Auckland if the disparity between house prices and wages continues to grow on its current path.

But wait, there is more; this property investment tradition is deeply damaging to the long-term growth of the New Zealand economy.

As well as accelerating property prices it is taking investment capital away from the productive, job creating sector.

What this country needs is more jobs and higher wages. That's means more wealth-creating companies and more growth for the companies we have. Our companies need local capital.

We need a thriving stockmarket that small businesses aren't afraid to list on. We need great pools of savings to invest in smart Kiwi companies.

None of this is rocket science and regular business readers will have heard it before from other far more thorough commentators.

Even Finance Minister Bill English sees the problem.

In a speech to the Wellington Employers Chamber of Commerce last week, he talked up the slowly improving savings rate in this country but warned that it would be a shame to see it undermined by another housing boom.

He says that the Government will act to curb house price growth.

But will it act? Or will it leave it to the Reserve Bank to take the heat as successive Governments have done for the past decade?

The Reserve Bank has two ways it can exert an influence on the supply and demand of the housing market - both are indirect via bank lending.

It has control of the official cash rate which broadly sets the level of retail bank interest rates.

But in the current global environment it can't hike rates aggressively to increase the cost of borrowing because doing so only adds to the appeal of the kiwi dollar for traders, pushing it up and further undermining our productive export sector.

The other power is its ability to regulate bank lending as part of its oversight of financial stability. The supply of cheap money can be limited by imposing stricter rules such as loan to value ratios, meaning banks can only lend to certain limits. It is looking at doing just that - albeit not fast enough for some critics.

But the primary reason for these new bank lending rules would be to ensure our banking system is stable and won't collapse if there is another financial crisis. An impact on house prices would be a secondary bonus.

And there is no certainty that these kind of restrictions would curb demand - so far they haven't in China where the powers of the regulators are far more extensive and absolute.

In Beijing, they have banned single-person households from buying more than one house and in Shanghai banks have been banned from giving credit to third-home buyers.

In this country, we'll see far more subtle use of powers, possibly limits on the lending of 100 or 90 per cent of a property's value.

The real power for fixing this problem lies firmly with the legislators. If you want to have a real impact on supply and demand you have to go straight to the source.

But we've got a Government that remains ideologically opposed to dealing with the demand side by way of a capital gains tax.

And on the supply side ideology has again stumbled in like a drunk to an orderly dinner party.

Once again Aucklanders look on as central and local government waste time fighting over how best to fit more Aucklanders into Auckland. Wasn't the Super City meant to end this?

In short, we seem to have made no progress towards dealing with house prices despite having been granted six years' grace since the peak of the last bubble.

Let's hope English is serious in his belief that this bubble is bad for New Zealand.

Let's hope when he says the Government plans to act he doesn't just mean having a scrap with Auckland Mayor Len Brown and ticking the box on the Reserve Bank's new financial stability policy.