Editorial: Let's hope Government has learned from errors

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Further restrictions on house buying must be applied swiftly and nationwide.
After a brief lull, house prices resumed their rapid escalation in February and this week the Reserve Bank announced it was considering something new. Photo / Mark Mitchell
After a brief lull, house prices resumed their rapid escalation in February and this week the Reserve Bank announced it was considering something new. Photo / Mark Mitchell

It was at this time last year, approaching the Budget, that the Reserve Bank announced its intention to impose a discriminatory deposit requirement on loans for investment in Auckland housing. The Government, having approved the proposal, quickly announced measures of its own to try to slow the rise of house prices.

The Government's "bright line" test for capital gains tax and registration of foreigners buying houses came into force in October. The bank's higher loan to value ratio took effect in November. It is clear those measures have not worked.

After a brief lull, house prices resumed their rapid escalation in February and this week the Reserve Bank announced it was considering something new. This time it may limit loans to a maximum ration of the borrower's income, possibly not more than 4.5 times their annual earnings, as is already the limit in the UK.

In Auckland that would mean a household on the average income could not get a mortgage of much more than $400,000, which would probably shut the door on those seeking their first home.

It is not the job of the Reserve Bank to worry about them. The bank's statutory duties are to contain general inflation and maintain the stability of the banking system.

It is mainly the second task that causes it to worry about the scale of banks' home mortgage lending and its security.

It believes its proposed income test will mainly affect speculative investors, which may well be the case. If they have been using assets rather than income as security for acquiring ever more investment properties, their days of doing so may be numbered.

But somebody needs to worry about the first-home seekers. That is the Government's job. So far the Prime Minister has said it would not rule out income limits if the bank asks for them. But just as it did last year, it might consider the bank's proposal as a sign of sufficient concern at runaway house prices for the Government to take steps of its own. It should do so in the Budget, if not before.

It is clearly looking for something more it could do to contain a market that is pricing too many Aucklanders out of an opportunity own a home. And not just Aucklanders any more. The demand has been driving up prices in other cities over the past summer, probably as a consequence of the Reserve Bank's selective restrictions on Auckland lending.

It will have learned that lesson, hence its income limit is likely to apply nationwide.

Another consequence of the steps announced by the bank and the Government last May was an unusual winter surge in house prices as investors got in before October 1.

Auckland had four months of more rapidly rising prices followed by a four-month hiatus before prices resumed rising from a higher base. It is possible the notice to the market meant the new regulations did more harm than good. It is to be hoped that lesson has been learned too.

If the bank and the Government mean to take further steps to slow the housing market, they should do so with much less warning. And the Government should tilt the market in favour of those still waiting for the Kiwi dream.

- NZ Herald

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