Can the Budget pull a rabbit out of a hat?

At the heart of the crisis is a severe housing shortage, choking supply and pushing prices through the roof. Photo / Alan Gibson

Soaring house prices spurred by Auckland's rampant real estate market is one of the most pressing problems facing John Key ahead of Thursday's Budget. Property reporter Lane Nichols explores the Government¹s options as it tries to stem the tide.

Crisis point

It has been labelled a crisis that is locking Kiwi families out of home ownership and threatening the financial stability of our country.

The Kiwi housing market juggernaut continues to break new ground and soaring prices are now spreading to the regions. But the problem is driven largely by the nation¹s biggest city, where the average home costs nearly 10 times the median household income.

That makes Auckland among the world's least-affordable cities to buy a home, where an entry-level property will set you back more than $600,000.

But even as first-home buyers battle to save huge deposits, prices are surging even higher.

The problem is driven by record inward migration, historically low interest rates, a severe shortage of homes, and regulatory restrictions holding up desperately needed subdivisions, terraced housing and apartments.

Meanwhile, speculators aregetting rich trading residential properties like they¹re gold bullion or barrels of crude oil, and debate rages on the effect of offshore property investors backed by largely Chinese money.

Supply shortage

At the heart of the crisis is a severe housing shortage, choking supply and pushing prices through the roof.

It is estimated Auckland alone has a historical shortfall of up to 30,000 homes. But record inward migration combined with cheap mortgage lending rates is putting further pressure on our housing stock. An additional 13,000 new houses are needed every year just to keep up with demand.

The median house price across Auckland is now $810,000, according to latest Real Estate Institute sales figures. QV puts the average value at nearly $1 million.

As prices rise, so, too, do average rents, forcing people further from the city and some into homelessness or living in cars.

Auckland Council and the Government are all too aware of the supply crisis. They¹re in a desperate race to build new homes by opening more land through fast-tracked special housing areas.

The Proposed Auckland Unitary Plan could relax planning restrictions that have tied up city fringe land and see more affordable, intensive housing built close to transport links to cater for up to one million new residents expected over the next 30 years.

But the blueprint faces huge opposition from existing homeowners in the city's leafy suburbs, who don't want their neighbourhoods blighted by apartment buildings or terraced homes in a so-called "compact city".

Fed up with "nimbyism", the Government has fired a warning shot across the council's bow. It is set to announce a new policy that will force councils to free up land to cater for housing demand and avoid the madness of Auckland spreading further afield.

The Budget is also expected to see new money made available to free surplus Crown land for private-sector development to boost the supply of new homes and stem double-digit house-price inflation. "Auckland's land supply issue is at a crisis point, which is creating a multiplier effect," Property Council chief executive Connal Townsend says. "This is evidenced in the sharp increases in other cities' prices." Townsend says attention will now turn to Budget Day and how Government initiatives to increase land supply will work in practice.

Large numbers of speculators are buying properties then flicking them off for quick capital gain. Photo / Doug Sherring

Up or out

As prices climb beyond people¹s means, house-hunters are being forced to the far reaches of Auckland to afford their slice of the Kiwi dream.

There is growing pressure on city planners to ditch the city limits, which critics say have artificially constrained growth and driven up the value of scarce land.

"Land inside the boundary is up to 10 times more valuable than rural land," Labour¹s housing spokesman Phil Twyford said this week, announcing his party would abolish the arbitrary limits and calling on the Government to do the same.

"It has contributed to a housing crisis that has allowed speculators to feast off the misery of generation rent and forced thousands of families to live in cars, garages and campgrounds." Yes, allowing more urban sprawl would release much-needed land and help address the supply shortage but it would also put more cars on choked motorways and force homeowners to endure crushing commutes.

The other headache is how to finance the massive cost of connecting remote housing developments to such critical infrastructure as roads, rail, water and sewerage networks.

Councils levy developer contributions to claw back the money for ratepayers, but these are simply passed on by developers to homeowners, making new homes even less affordable.

Labour and others want to introduce a bond financing scheme, like that used successfully in Texas. Infrastructure costs are financed initially by investors and paid off over decades through a targeted rate or tax.

The Government supports changing the city limits policy to help free land and prevent land banking, but it has signalled an announcement around housing infra-structure in this year¹s Budget is unlikely. Its preference is to address supply issues.

Meanwhile, youth organisation Generation Zero is campaigning for Auckland councillors to sign off on density changes that could see cheaper terraced housing and apartments flourish across the city so younger people are not forced to rent for the rest of their lives.

The Government and Opposition parties agree that allowing the city to grow up is a no-brainer.

"Freeing up growth on the -fringes needs to go hand-in-hand with allowing more dens-ity, so people can build flats and apartments in parts of the city where people want to live, particularly around town centres and transport routes," Twyford says.

The alternative could well see a mass exodus of those unable to afford their own home, putting more pressure on the regions where house prices are now soaring under the "halo effect" of Auckland¹s housing market.

There is growing pressure on city planners to ditch the city limits, which critics say have artificially constrained growth and driven up the value of scarce land. Photo / Michael Craig

Quick buck

As house prices have exploded, so, too, have the opportunities for deep-pocketed investors and -industry insiders to make some fast coin.

Large numbers of speculators are buying properties then flicking them off for quick capital gain.

The Weekend Herald reported this month on the rising fortunes of a humble Papakura house that was bought and sold a staggering five times in just nine months.

None of the buyers appear to have lived in the property, which sat vacant while traders picked meat from the bone, its price escalating from $335,000 to $590,000 in less than 300 days.

Although such obscene buying and selling is a windfall for estate agents and speculators, it is demoralising for first-home hunters now priced out of once affordable suburbs in West and South Auckland.

The other side of the equation is the extent to which offshore buyers are speculating on the New Zealand property market, or buying housing stock and land-banking those assets until the value of their investment soars.

The Government has moved to quash that debate - two weeks before Budget Day, Land Information Minister Louise Upston released data downplaying the significance of foreign buyers.

It claimed figures collected since October showed just 3 per cent of residential property sales were to non-residents. But this claim is questionable. Commentators pointed out the data has omitted a host of transactions, such as sales to companies and trusts.

It was also collected after the market cooled considerably when many cash-hungry investors had dropped out, which has prompted claims the actual number of foreign buyers might have been up to three times higher than the figures suggest.

But it is likely to be enough to mean the Government won't move further on the issue with Budget money.

Instead, Key and Finance Minister Bill English will be hoping the new "bright line" test announced in last year¹s Budget will help discourage the frenzied speculative activity.

Anyone buying and selling an investment property within two years is now forced to pay tax on the capital gain, irrespective of whether it was their intention to make money on the deal.

This will help close a loophole where investors have argued a "change in personal circumstances" when on selling properties for tens of thousands of dollars in tax-free profit.

In 2013, the bank introduced loan-to-value ratio lending restrictions, meaning most borrowers needed a deposit of at least 20 per cent to secure a mortgage. Photo / Brett Phibbs

Stemming the tide

The Reserve Bank has warned that our bubble-esque housing market is a risk to financial stability as the nation¹s housing debt balloons dangerously.

A correction to skyrocketing house prices could see people's equity in their biggest asset plummet and even result in large-scale foreclosures in the event of rising unemployment.

In 2013, the bank introduced loan-to-value ratio lending restrictions, meaning most borrowers needed a deposit of at least 20 per cent to secure a mortgage.

The demand side measures were expanded last year to force Auckland property investors to stump up 30 per cent deposits, and the Government introduced requirements for non-resident buyers to have a New Zealand IRD number and bank account.

The moves temporarily cooled the market's relentless march, but investors have returned and prices are creeping up.

Next on the agenda, it seems, are loan-to-income controls that would cap the amount someone can borrow according to their income.

The Reserve Bank is considering the measures, which are used in Ireland and the UK, and the Government is refusing to rule them out.

And although such measures are sure to reduce demand and financial risk, they would invariably hit first-home buyers hardest, who tend to earn lower wages and who have already been priced out of large segments of the market.

Meanwhile, the Government is toying with a land tax to help counter the effect of non-resident buyers.

But it has refused demands for a comprehensive foreign buyer register, a wider capital gains tax, or an outright ban on foreign investors unless they buy new homes.

A similar system in place across the ditch is designed to free up existing housing stock for local buyers and promote investment in new builds from offshore money.

Other measures that could help alleviate some pain are adjusting pricecap thresholds for KiwiSaver HomeStart grants to better reflect the soaring cost of Auckland housing, and giving tenants more rights and security so renting is seen as a more viable long-term alternative to the home ownership dream.

As the housing crisis deepens, it looks increasingly likely to become a key election year issue next year.

Thursday is the Government's chance to pull a rabbit out of the hat.