Former Reserve Bank Chairman Arthur Grimes essentially undressed our politicians in front of us this week when he challenged them to embrace a 40 per cent fall in Auckland house prices.

He exposed them as emperors without clothes.

"What I do is whenever I find a politician who says they want affordable housing, I ask them a very simple question: 'How much do you want house prices to fall by overall?'

"And not one of them has been able to answer that very simple question," Grimes said this week.


He was talking about the extraordinary response to his suggestion 150,000 houses be built in six years to push Auckland prices down.

Prime Minister John Key's response was immediate - and betrayed where he stands on the issue of using a supply shock to make housing affordable.

It was "crazy", would leave people in the market with huge losses and put pressure on developers.

So there we have it. The leader of the Government is more worried about the short-term fates of leveraged-up speculators and developers than the long-term fate of Generation Rent.

Despite years of saying the only way to improve housing affordability is to increase supply, his position is any increase in supply that hurts the investors who have bought in the past couple of years is out of the question.

The Prime Minister who boasts his Government is aspirational had this to say about going for a really big response to the challenge: "Where you'd get 150,000 homes from overnight, I don't know."

Key said he hoped house-price inflation could be slowed by the Government's measures, with the implication affordability would somehow creep up on everyone with wage increases.

The Treasury forecasts wages will rise by an average of 2.2 per cent over the next six years. It also forecasts house prices will rise by an average of 5.7 per cent over the same period.


The Government's own forecasts show this magical affordability catch-up is not going to happen - and is expected to get much worse.

Auckland houses cost nearly 10 times household income. That's double what it was in the early 2000s and almost double the rest of the country. The accepted model for affordability around the world is closer to three times income.

"Where you'd get 150,000 homes from overnight, I don't know."

Auckland Council has an official target of improving affordability in the world's most liveable city to five times income by 2030.

The trouble is the Government has no credible strategy to get there. Under Key's plan to slow it down, even to low single-digit rates, there would have to be an explosion in wage inflation.

Grimes is dead right. Improving affordability will require outright price falls and big ones.

Unfortunately, Labour leader Andrew Little and Greens co-leader James Shaw didn't do much better in the Grimes test this week. Little also refused to countenance the idea of falling prices, even as he flagged a plan to be announced this weekend to address the crisis.


Shaw refused to answer, not wanting to repeat the mistake of co-leader Metiria Turei, who was more honest a few years ago.

Why are politicians so afraid of voters on this issue? They may think the housing market is a "too big to fail" bomb that cannot be defused or dismantled without turning it into a weapon of mass wealth destruction, but that's simply not true.

An overnight 40 per cent fall in Auckland house prices would see a return to early 2012 levels. Most Aucklanders have built up big equity buffers and are living in their own homes, rather than speculating.

Tighter lending rules since 2013 cut out almost all those speculators borrowing with 90 per cent-plus mortgages.

The Reserve Bank conducted a stress test late last year that found banks could cope with a 55 per cent fall in Auckland house prices.

Our banks are not like the brittle, trigger-happy ones that threw Americans out on their ears during the Global Financial Crisis.


Yes, a few property developers might go bust, and yes, a few rental investors who banked on tax-free gains might miss out, but a fall in prices would be accompanied by lower mortgage rates.

Ironically, a 40 per cent drop would make housing more affordable for existing home owners because their mortgages would go down.

Politicians failed Grimes' test and exposed themselves as fighting for leveraged-up property speculators rather than future home owners.

A brave and aspirational politician would take a different view.