Dr Don Brash says house prices in Auckland have to fall if they are to get back to affordable levels but politicians of both the left and right are terrified of saying so.
"I cannot see how indefinitely we can continue in cloud cuckoo land. That's where we are now."
Brash said it was impossible to go from the current situation in which Auckland median house prices were 10 times the median household income to a more affordable ratio of three or five without a fall in prices.
"Politicians on the right and left are terrified of spelling out the implications of that."
Brash, a former Reserve Bank Governor and a former National Party leader, said the house prices in Auckland were a huge problem, both economically and socially.
"People on average wages in Auckland simply cannot remotely aspire to own a house," he said.
"That is a very damaging situation socially - overcrowding, health problems, people not having enough income after rent or mortgage interests are paid to keep body and soul together."
Both National and Labour have rolled out further housing policies in the past 10 days to address house price inflation in Auckland.Data from the Real Estate Institute shows Auckland's median house price was $820,000 in March this year - a 66 per cent increase in only four years, Labour leader Andrew Little said he wanted to get to a situation in which house prices rose only 2 or 3 per cent a year.
Brash said Little was "obviously terrified" of saying house prices needed to fall.
"But that is the reality."Former Reserve Bank chief economist Arthur Grimes last week said the Government should try to crash house prices in Auckland by 40 per cent over five years, something Prime Minister John Key said was "crazy".
Brash backed Grimes.
"Arthur spelt it out very bluntly but what he was saying was absolutely right - you cannot get affordable housing arithmetically, if you like, without a fall in prices - or wait half a century," Brash said.
"If you could hold house prices static for half a century and have nominal incomes growing at say 3 per cent, you might get back to a reasonable relationship over half a century.
"In the meantime, two generations are locked out of housing."
Commenting on the public spat between the Government and the Reserve Bank, Brash said the overt disagreement being aired was "a bit unusual".
Last week Key was annoyed that Deputy Governor Grant Spencer mused aloud about possible further restrictions on residential investor lending instead of just doing it, suggesting it could increase speculative activity to beat the new rules.
Spencer suggested the Government should curb immigration and look at other ways to reduce tax advantages of investing in residential housing.
Finance Minister Bill English hit back at the weekend saying: "The Reserve Bank does not have a detailed understanding of how the tax system or the migration system works."
Brash said he did not think English had been justified in making that comment.
But he sympathised with Key's view that signalling further restrictions could increase the level of speculation in the market.He said the Reserve Bank had no statutory responsibility for Auckland house prices or any house prices at all.
Its responsibility was the stability of the financial system and monetary policy.
"I'm told that there really isn't any risk to the stability of the financial system at this stage, that even if there was a very substantial fall in house prices the banking system would be pretty robust in the face of that."