The news that the Reserve Bank might relax its restrictions on bank lending for house purchase will of course be welcome to those who would then need a smaller deposit than is currently required by the Reserve Bank's loan-to-value ratios.

But how many will pause to reflect that this good news for today's purchasers may simply mean that the problems that have afflicted our housing market could – if they remain unaddressed – reappear and become even more entrenched for the future?

And what lessons will our policymakers learn from the evident success of loan-to-value ratios in restraining the relentless inflation in house prices?

It is widely accepted that New Zealand's housing situation, and the policies applied to deal with it, have been a total mess.


The confusion arises partly because we are faced with two problems – problems that are linked in some respects but are actually quite different.

The first is the problem of homelessness, and the second is the problem of unaffordability. The first problem is the easier to explain and redress; it arises because we have simply failed to build enough houses, but is exacerbated by the incessant rise in house prices and, as a consequence, in rents.

The new Government is gearing up to address the long-term failure to build new houses; they recognise that the missing houses will not be provided by private property developers (whose interests lie at the higher end of the market where big profits are to be made), and that the houses will be built only if the Government steps in.

The constraints the Government faces in taking this on do not arise because of a shortage of money – Michael Joseph Savage showed in the 1930s that a determined government can always find or create the money to build new assets – but because there could be shortages of the necessary materials and skilled labour.

A solution to that problem will require government and private industry to work together on an agreed industrial strategy.

There can be little doubt that building the required houses, at an affordable price, would be a major step towards resolving the homelessness crisis. But, even if more houses are built, what further action will be needed, particularly in respect of the other issue – that of unaffordability?

Homelessness arises, after all, not just because there is a shortage of houses, but because rents have risen so sharply. The rise in rents is often the main factor in leaving young families homeless.

It is at this point that the homelessness and affordability crises coincide.

Rents have risen because speculators have been able to borrow from the banks almost without limit so as to outbid others to buy up houses (often sold at knock-down prices as a consequence of mortgagee sales) and they have then raised rents on those houses to make a fat return on their investment.

The Reserve Bank's loan-to-value ratios, by making it harder for speculators to borrow, have played a valuable part in restraining this unwelcome development.

Interestingly, the new Government agrees with the Reserve Bank's analysis of the problem, as shown by its ban on foreigners buying existing houses.

The effect of this prohibition is to remove a significant element of extra demand from the housing market – just as the Reserve Bank's restrictions on borrowing have done.

Both the Government and the Reserve Bank, in other words, have at last recognised that the problem with our housing situation is not just one of inadequate supply but also one of excessive demand, caused as much by excessive bank lending as by the introduction of additional money from overseas.

When speculators take advantage of the banks' willingness to go on lending to them, and use their purchasing power to bid up prices, their purpose is always the same – to create, and derive untaxed capital gains from, an asset inflation whose effect is to make housing impossibly expensive for our young families.

This self-serving pursuit of profit by both banks and speculators (whether from home or overseas) should no longer be allowed to distort our housing market.

At least the Government and the Reserve Bank seem now agreed on what causes the problem and what needs to be done.