The discussion about Auckland's housing is heated and is at risk of missing the point. The capital gains tax and restricting foreigners from buying houses are solutions in search of a problem.
The most vocal issue is home ownership. It is seen as a cultural norm and birthright. High house prices are making it difficult for young people to buy homes. If that is the case, we need to seriously think about making supply readily available by growing denser, higher or growing out. Taxes and foreigners have little to do with it.
The main risk from rapidly rising house prices is to the financial stability of the banking system. Banks seem to be lending money on the assumption that house prices will rise forever and that, even if they don't, the borrower will pay up.
This is where the Reserve Bank can stop banks from lending too much money against small deposits for people with low incomes or limited wealth. It is true that this will make it hard for those with low income and small deposits from buying houses in the near term. It is supposed to. But this problem will be solved if we allow housing supply to respond to demand, and change our expectations of what it is to live in a city.
Rising house prices, in and of itself, is not a bad thing. It is a transaction between a willing buyer and a willing seller. The price is the value of the house to those involved in the transaction.
If house prices are rising that means there are more buyers than sellers. This is an important market signal.
Rising house prices will price out some buyers, reducing demand. Some may choose to rent. Others may choose to live elsewhere, perhaps a cheaper suburb or cheaper region.
Rising house prices will also increase supply - over time. It will be more profitable to build a new house or sell an existing home.
House building in Auckland has been rather low in the past four to five years as demand has been lacklustre. Now the market is signalling to increase housing supply.
Rising house prices can lead to issues. Lower home ownership and financial instability are two such things.
Home ownership is ingrained in our culture. Home ownership increased steadily from 50 per cent in the 1930s to 75 per cent in 1996. Since then it has stabilised at about 70 per cent. This is despite houses becoming more expensive relative to household incomes.
Rising house prices make it harder to buy a home for younger and lower income households. But rather than kneejerk reaction interventions, we should first ask what the problem is.
There is, for example, no homelessness problem. Younger generations can rent while saving for their deposit, which incidentally is now lower as a proportion of the house price than in the 1990s.
Renting a comparable home typically costs half the outgoings of a mortgage and other costs of home ownership such as rates, insurance and maintenance.
There are benefits to home ownership, but rather than treating it like an end in itself, we are better to address the root causes of house prices rising beyond their fundamental values and then let households make their own decisions.
Ultimately, the solution to high prices is an increase in the supply of housing.
In Auckland this means two things - by growing denser and growing higher, or sprawling out with the attendant costs of new infrastructure and congestion. Neither are costless or easy, so we need to make considered choices.
Opposition to the proposed Auckland Unitary Plan suggests we are happy to see new supply and intensification only as long as it is not in our own backyard. This won't do. A culture shift is needed.
Rather than harking back to some golden age, we need to embrace the benefits from living closer together and sharing spaces. This includes better employment and income opportunities, more innovation and greater consumer choice.
Financial stability is a more pressing issue. Banks are competing aggressively to lend. Many of the new mortgages are with small deposits.
The risk is that, if house prices fall, debt will be larger than the house value.
If there are job losses alongside house price falls, which is common, it could lead to mortgage defaults and difficulties for banks. This would flow on to tighter lending conditions not just in Auckland housing, but households, businesses and farms across the country.
The fear of falling house prices is real.
The experiences of the United States, Britain and many parts of provincial New Zealand are stark.
When house prices are very high relative to rents and incomes, prices can fall violently when there is an economic shock. While things may seem stable now, this can turn around quickly. Shocks by definition can't be predicted.
The Reserve Bank is charged with maintaining resilience and stability of the financial system. This is why rising house prices funded by highly geared borrowing requires a reaction from the Reserve Bank.
Solutions proposed by experts in recent weeks fall into two main camps - capital gains tax and limiting foreign purchases. These fail to identify the problem and the reasons for implementing them.
Jurisdictions with capital gains tax, stamp duties or restrictions on foreign buyers have not avoided higher house prices. Our neighbour Australia has them and their house prices are just as mad.
Our current laws already allow for capital gains to be taxed, if the purchase is made with the intent to profit from capital gains.
Current house prices are so high relative to rents that the reason for house purchases is indubitably to benefit from capital gains. When these houses are sold they will be subject to tax, if the tax man can identify them.
Pointing the finger at foreigners is plain silly. There is little evidence that they are the cause of house prices being bid ever higher. History shows we are more than capable of doing it all by ourselves.
We hear of cashed-up foreigners buying up all the nice bits of Auckland.
Yet the data shows big increase in borrowing from banks to fund house purchases. Who exactly is doing the buying? If we stop foreigners buying houses directly, why won't they buy through a vehicle?
This already happens in listed property vehicles such as Argosy and Kiwi Income Property who own and operate assets such as Sylvia Park mall. Do we stop that too? Foreign investors own 35 per cent of our sharemarket, according to research by Goldman Sachs. Do we want to stop foreigners investing in our equity market too? Will we stop foreigners funding our mortgages? Will we stop ourselves from investing overseas? Where does it stop?
Auckland houses prices are high. That is the price settled between willing buyers and sellers. If house prices fall, those who own houses will be worse off.
The price is not the problem. Policy needs to respond to the root causes to achieve a clearly defined outcome. Hysterical and unfounded policy prescriptions in search of a problem have to stop.
Shamubeel Eaqub is a principal economist at the NZ Institute of Economic Research.