One of the more sensible published comments I’ve seen in recent months on Auckland house prices is that by the Minister of Finance, Bill English, when he said in effect that the Government should take a "hands off" approach to the issue.
He was applying common sense to a debate which at times has got out of hand.
No one is denying there is an issue, including the Minister, but what he is calling for is a measured response rather than a kneejerk one that potentially creates greater, or serious downstream effects.
Take the introduction of LVRs. This initiative’s major impact has been on first time and young buyers. Already this group is starting to find ways around the barrier (families clubbing together) and in spite of its introduction it has had only a minor effect on the issue (Auckland house prices are still rising).
In seeking to solve one problem, LVRs have created resentment among a large group of first time and young home buyers, the majority of who do not live in Auckland.
In saying “the best thing we [the Government] can do for low to middle income families is to allow the place [Auckland] to grow … either up or out… There is not really anything left undone [that could be done]” the Minister is flagging that further change has the potential to radically change the status quo.
There is a great deal of truth in the saying “be careful of what you wish for”. Implying that we never really know what the outcome will be … and by then it may be too late.
As the Minister pointed out, two thirds of the country’s population does not live in Auckland, and are not impacted by rising housing values to the extent that is occurring in one region.
What the Minister did show in his statement was he is on top of the real issue that is fueling Auckland’s rising house prices. This is there are simply not enough houses to accommodate Auckland’s growing population.
The recently released net immigration figures for the year ending March really drive home the point, with the country’s net population growing by 56,000. The majority of these people will make their home in Auckland.
As Westpac’s senior economist Felix Delbruck noted on the release of the immigration figures, “Auckland’s housing squeeze is likely to get worse before it gets better”.
Virtually all economists are forecasting that home mortgage rates will remain stable and low well into 2016, and that the economy is in good shape.
Combine an existing housing shortage, a rising population, low mortgage rates and a sound economy and you have all the ingredients that make people confident about the soundness of investing in residential housing in Auckland, in spite of price.
I believe there are a number of long-term trends also sitting behind the rise in house prices in Auckland that should be given greater prominence. They include:
Changing attitudes to debt and finance that is taking place within Generations X (born 1960-1980) and Y (born after 1980).
Many in these generations are less concerned about taking on high levels of long-term debt than the baby boomer generation. They place greater emphasis on being able to afford servicing their mortgage. Rather than seeing the need to pay off their mortgage in the shortest time possible, their aim is to grow their wealth over time through the natural growth in property values.
It leads to mortgage servicing becoming the key measure, and the price they have to pay to obtain the home they want is secondary.
Banks have modified their approach to lending.
No longer do they see professional house valuations as a necessity to support mortgage applications, with loan limits being pegged to a percentage of the valuation. Backed by a series of prudential ratios, decision making around mortgages is more closely aligned to the borrower’s ability to service the debt being incurred.
By far the majority of Auckland homes are being sold at auction or by negotiation shortly after auction.
It means people are more prepared to be flexible as to the price they are prepared to pay. There is a growing understanding that over a 5 to 10 year period the price paid will be recouped.
Those with the means are prepared to spend their disposal income on their lifestyle.
This includes regularly upgrading their living environment.
An unenvious position
Wisely, the Government is being cautious about "doing something" when it knows full well that interfering has limited impact on the way people act, has the potential to deliver unintended and unwanted downstream effects, and could well irritate the two thirds majority unaffected by what is occurring in Auckland.
I don’t envy the decision makers on this one.
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