Finance companies no longer exist and banks are wary of new apartments and townhouses in the wake of the leaky building debacle and uncertainties about bodies corporate. If banks do lend on these sorts of buildings it is only with big deposits, which puts them out of reach for many first-home buyers and investors.
Then there is the bigger issue of how home buyers would finance their purchases. This is the secret at the heart of our economy. Households are already up to their eyeballs in debt. Governor Wheeler said households remain highly leveraged at 145 per cent of disposable income.
New households (first-home buyers) or existing households (rental property) would have to take on extra debt to buy these 39,000 houses. That's only sustainable if interest rates stay at record lows.
And it's only possible if banks lend most of that with deposits of less than 20 per cent, which is something Wheeler said he wanted to limit. The only balance sheet with the strength to fund a huge increase in Auckland house building is that of the Government, which has no appetite to borrow to build those houses. So we are back where we started. The holy grail of 39,000 consents is just like the one of Arthurian legend - mythical.
The most effective instrument is the official cash rate and if the Reserve Bank is serious about reducing the financial risks of a new housing inflation boom it should put it up substantially - and now. By relying on a mythical supply response to contain house-price inflation, the Reserve Bank risks repeating mistakes of 2003 to 2007, when it let New Zealanders insulate themselves from rate hikes by fixing their mortgages for years, blunting the bank's one good tool.
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