OPINION: The risks associated with solving a non-existent housing problem

Peter Thompson - Managing Director, Barfoot & Thompson
OPINION: The risks associated with solving a non-existent housing problem

There is a strong resistance in some quarters to the Government’s proposed legislation that will prevent overseas residents from buying residential property.

The latest to add its weight against the legislation is the International Monetary Fund with officials from the organisation labelling the proposal ‘discriminatory ’and ‘hinting’ it is an overreaction to a problem which may not exist.

This comes on top of the majority of the more than 200 submissions being considered by the Parliamentary sub- committee considering the Bill, strongly opposing the legislation as it currently stands.

SEE ALSO: 30,000 homes behind the 8-ball

There is no suggestion the Government will not proceed with the Bill.

It has too much political capital invested in curbing the involvement of overseas investors in the residential property market.

At best, what the criticism might achieve is to smooth many of the Bill’s rough edges.

The Government’s stated aim is to ban overseas speculators from buying our houses.

As it currently stands there is a good chance the legislation will go further and seriously restrict the ability and interest of overseas investors in contributing to the capital we need to boost housing construction.

The myth that overseas residents are buying up huge numbers of houses, artificially increasing market prices and also denying locals the opportunity to get into a home should, by now, be long dead and buried.

In spite of years of such claims, no reliable data has ever been produced that can verify overseas residents are the buyers of more than at most 4% of the market. Within the terms of the number of homes being sold, it is not a significant.

Also, the rate at which Auckland* house prices were increasing started to slow 13 months ago, and since the start of this year Auckland prices have remained static. At the same time sales numbers have dropped by at least a third.

According to Demographia's 2018 International Housing Affordability Survey (covering 2017 prices) Auckland now ranks as the 9th most unaffordable housing market in terms of median price compared to median household income.

We sit behind Hong Kong, Sydney, Vancouver, San Jose, Melbourne, Los Angeles, Honolulu and San Francisco.

Given what has happened to our prices since the survey was taken, we could well be even further down the list when the 2019 survey covering 2018 prices is published.   

What caused Auckland’s prices and sales numbers to start to slow down in 2017 was the combination of Reserve Bank regulations, trading banks tightening their lending criteria and buyer resistance.

It had nothing to do with restricting access to one group of people from the market.

The Reserve Bank needs to be given credit for its measured, incremental approach to taming prices, and also the fact that it held its nerve and resisted the call for ever more draconian restrictions as its measures took time to produce results.

The location I always look out for in the Demographia survey is Vancouver. In August 2016 Vancouver imposed a 15% surtax on overseas buyers.

It led to house prices falling substantially, which led to many seeing it as a silver bullet to reducing house price increases.

However, within 12 months prices had returned to the pre-tax levels, and as the Demographia survey shows, Vancouver remains the third most expensive housing market.

Also, in spite of Australia also limiting overseas buyers access to its market, Sydney and Melbourne still sit higher on the unaffordable table than Auckland.

For those looking for a detailed understanding the drawbacks with what is currently being proposed by the Government, you can do no better than read the submission made to the select committee by the Auckland District Law Society.

This submission draws out the many serious contained in the present proposal.

Some of the biggest disappointments in the proposed legislation for me are:

  1. Overseas residents who develop new residential property can only retain the property for 12 months, reducing the attraction of investing in a new build. Every house built, regardless of the source of funds, ultimately increases our housing stock.
  2. Overseas residents who currently own a residential property will be encouraged to hold on to their property as they will not be able to re-enter the market (permanently removing the property from being part of the available trading stock).
  3. The status of inner city land that could potentially be developed for residential or commercial purposes, or a combination of both.
  4. The potential detrimental effect it could have on large apartment developments. These often require substantial support from buyers ‘off the plans’ to achieve financial support. By reducing the pool of potential buyers we run the risk of developments not proceeding.
  5. The unrealistic expectations and obligations that will be placed on real estate agents determining who is/isn’t a resident.

The answer to getting first time buyers and those on limited incomes into home ownership lies with building more, and affordable homes, not putting up further barriers to new home builds.

It may be that the IMF officials have summarised the Government’s stance correctly. We are finding answers to a problem which simply doesn’t exist?

*The relevance of the Auckland market is it was the first to see the rapid rise in prices, and the first to experience a slow down. Other regions are likely to follow this price pattern as prices in other regions close the parity gap in relation to Auckland.

Peter Thompson

Managing Director, Barfoot & Thompson

barfoot & Thomspon

 

SEE ALSO: 30,000 homes behind the 8-ball

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