Super-charged house prices 'can't continue': BNZ economist
Friday, 26 February 2021
Hot on the heels of a Government initiative to cool the housing market, BNZ’s chief economist has backed calls to make house prices more affordable.
Paul Conway says whether prices simply trade sideways for a while or somehow fall, the housing market is getting too expensive for the country’s wellbeing.
But he says the solution must also involve creating strong alternatives other than housing for people to invest into.
‘’Housing affordability is a massive challenge in New Zealand and we have to do something about it.
**READ MORE:
* Reserve Bank ordered to consider housing in decision-making
**
‘’If you look at inequality in New Zealand, for example, that’s been less about income inequality blowing out … it’s been the housing market that has been the key driver in the increase in inequality that’s in front of our eyes in New Zealand, and it’s just been exacerbated by the Covid pandemic.
‘’We have to fix it. We have to do something about it. The current situation is unsustainable, in that it just can’t continue because it is such a drag on the wellbeing of New Zealanders.’’
On Thursday, Finance Minister Grant Robertson instructed the Reserve Bank to consider the impact on housing when it makes monetary and fiscal policy decisions, such as setting the official cash rate.
The controversial move is an attempt to stem house price inflation which has risen by nearly 20 per cent year-on-year, due in part to historic low interest rates.
Conway said the problem with housing was that it was both a basic need and had become many people’s key source of investment, so a two-pronged approach was needed.
People had been “quite rational’’ to invest in housing, and Conway said he did not blame people for wanting to protect their investment.
But the strong returns had come at a high cost and until supply caught up, the only ways to fix it was to either by lowering prices or increasing incomes.
It took a long time to increase incomes, “so the question becomes do house prices need to fall? I think it’s a legitimate question and my personal view is, a fall in house prices would be beneficial for affordability”.
“Obviously we don’t want the housing market to fall to the extent that housing stability becomes an issue, that's not going to happen. But by the same token, we do want New Zealanders earning a decent return on their retirement savings.
“So how can I square that personal view of mine, that [lower] house prices would be better from an affordability perspective, with the fact I don’t want to see the wealth of New Zealanders eroding? And the way to square that is to have more diversified types of wealth.”
There was great hope that technology would help New Zealand overcome its traditional barriers of distance and scale, he said.
‘’Technology is fundamentally changing the global economy in ways that suit New Zealand … so we are starting to see exciting options or investment opportunities.
‘’We need to discover other growth engines in our economy … besides diversifying their investment portfolio by buying their neighbour’s house.’’
Other solutions being presented by the banking sector and government were also very necessary, Conway said.
‘’I’m all in favour of LVRs and … of the Reserve Bank investigating other options like house prices to income ratios. There are things we can do on the demand side. I lament the fact there isn't a capital gains tax on housing in New Zealand.
‘’I like what’s happening with the RMA (Resource Management Act) getting reimagined, I think the Auckland Unitary Plan changes a few years ago are part of the solution. So there’s plenty going on.
‘’Population growth has fallen off a cliff, we’re building heaps of houses at the moment. So I do think things are moving back in the direction of better affordability. It’s just a bit of an oil tanker, it takes a while to turn it around.’’
This week Stuff showed data revealing that the wealthiest people pay just 12 per cent of their total income in tax, on average, compared to an effective tax rate of about 16 to 18 per cent on people earning a median income of between $55,000 and $60,000.
Economists have said the difference is that capital gains are taxed lightly while those earning all their money from an employer are taxed on all of their income.
Tax expert Terry Baucher has said that basic inequality would not stand for much longer. “The current position is not sustainable, there’s broad consensus that is true.”