What is wrong with this picture: double-digit house price inflation when the economy is in a recession?
And what can the Reserve Bank and the Government do about it?
First, some numbers to illuminate the problem: house prices rose 11.1 per cent nationwide and 11.4 per cent in Auckland over the year ended September, according to the REINZ house price index, an acceleration from compound annual growth rates over the past five years of 7 per cent and 4.2 per cent respectively.
New mortgage lending by the banks last month — at a record $7.3 billion — was up 32.8 per cent on September last year. The $1.4b going to first-home buyers was up 44 per cent on a year ago and 42 per cent of it was at a loan-to-value ratio above 80 per cent.
The $1.7b of new lending to investors was up 55 per cent on September last year, 37 per cent of which was at an LVR above 70 per cent.
In these circumstances, all eyes swivel towards the Reserve Bank. Market speculation is more about when, rather than if, it will reimpose LVR restrictions it suspended in May.
Last week governor Adrian Orr, at an INFINZ conference, publicly strummed his fingers impatiently at the banks.
When would the upsurge in housing market activity worry the Reserve Bank? "When we are seeing it being driven by very high leverage loans and when we are seeing it being driven by investors rather than households," he said. "What are we seeing at the moment? Early signs of exactly both of those."
The message to the banks from their regulator was blunt: "Do it yourself or have it done to you." Banks are now reportedly looking more warily at debt-to-income multiples, especially for new borrowers.
Not before time. In June 41 per cent of the new lending to first-home buyers was at multiples of five times income or more. For other owner-occupiers (without investment property collateral) it was 36 per cent of the new lending. In Auckland the ratios were 59 per cent and 51 per cent respectively.
This looks pretty risky. Unemployment, after all, is forecast to get a lot worse before it gets better, and then to get better only slowly, and we can but hope that eventually the economy will recover to the point where extraordinarily low interest rates are no longer required.
The Reserve Bank's dilemma is that right now one of the main channels through which it expects lower interest rates to work is by pushing up house prices, and then for the wealth effect to boost consumption.
But the bank is also the guardian of financial stability and there is at least a potential systemic risk in inflating a housing bubble when 59 per cent of banks' collective loan book is secured against residential mortgages.
When it suspended LVRs in May, the Reserve Bank it said it would be for a year.
But speculation is mounting that it will renege on that and move sooner. Perhaps it will quote Maynard Keynes who, when challenged for reversing his position, famously said: "When the facts change, I change my mind. What do you do sir?" Even so, managing to press both the monetary policy accelerator and the macro-prudential brake pedal to the floor simultaneously, without reducing important parts of the vehicle to a metallic paste, would be quite some trick.
Almost certainly it would involve being harder on property investors than on owner-occupiers.
There are more of the latter than the former but, especially for lower-priced properties, it is liable to be the person looking for an investment rather than a home who is the marginal buyer, whom the person looking for a roof over their own head has to outbid, and who in that sense drives the price.
If the Reserve Bank is the first responder in dealing with the housing crisis, the Government also has a responsibility for averting a housing bubble bursting all over us.
The fundamental problem is the physical imbalance between the supply of, and demand for, housing.
Supply-side measures like replacing the Resource Management Act with something fit for purpose, building more social housing, subsidising apprenticeships, encouraging prefabrication and having the Commerce Commission inquire into why building materials are so expensive, are all well and good but will take years to overcome a housing shortage which has been years in the making.
So that leaves demand-side measures which seek to limit how high house prices or rents go before they burn off and frustrate that excess demand.
Labour has severely limited its options on the tax front, however. A capital gains tax is off the table while Jacinda Ardern is prime minister — at least one broader than the existing five-year bright line test.
She has also ruled out a wealth tax, superimposed on the one we already have called local body rates.
Labour went into the election promising no new taxes for the next three years, which rules out a land tax, stamp duty or something along the lines of the risk-free return method advocated by the McLeod tax review.
But that leaves the possibility of tightening the existing rules governing interest deductions on investment properties.
Auckland tax lawyer Terry Baucher has suggested applying to landlords something akin to the thin capitalisation regime which applies to foreign multinationals setting up shop in New Zealand.
They are free to structure the balance sheet of a New Zealand subsidiary as they see fit, but they can only claim an interest deduction for debt up to 60 per cent of its assets.
Restrictions also apply to the interest rate that can be charged on the debt funding.
This is not just an anti-avoidance measure. It is also seen as pro-competitive in that without it the foreign multinational would have an unfair advantage over New Zealand competitors with normally geared balance sheets.
For residential property investors, the economic returns are twofold: rental income which is taxed and capital growth which is not.
"The present treatment therefore gives an allowable interest deduction for both taxed and untaxed gains. This generous treatment, together with the banks' willingness to lend freely, practically makes property a one-way bet," Baucher argues.
It is much easier to get a bank to lend on the security of residential property than on a business plan, however shrewd and timely it might be.
With mortgage rates as low as they are, tightening up on interest deductibility is no quick fix to the immediate problem, though it might help at the margin.
It is, perhaps, a possible way of reducing a distortion that, in good times and bad, encourages people to go into the landlord business rather than investing in the kind of business that employs people or helps us earn our living as a trading nation.