Bernard Hickey: One-eyed approach to housing

The Govt has been slow to catch on that housing construction in Auckland is far slower than demand. Photo / Getty Images

Ask any optometrist how easy it is to perceive depth with one eye closed and they'll say it's very hard. Depth perception requires binocular vision and it's the same in the study of prices in economics. Price is a function of demand and supply.

Yet our Government is taking an increasingly one-eyed approach to its analysis of Auckland's over-valued housing market, which is driving a good chunk of New Zealand's economic and interest rate outlook.

The mantra recited time and again recently is that the only solution to Auckland's housing unaffordability is more housing, faster. To be fair to the Government, this intense focus from Wellington on accelerating approving and building homes in Auckland is a relatively new and welcome phenomenon.

The machinery of central Government stood back through the disastrous decade until 2010 watching house prices double and land prices triple on the Auckland isthmus, quietly cheering the rising wealth of voters in mortgage belts.

Land bankers sat tight and councils kept ramping up the consent requirements, development contributions and planning restrictions that the Productivity Commission and others have argued are at least partly responsible for the affordability debacle.

Only after the commission's reports on housing affordability were released late 2011 did the machinery of the Government crank into gear. The surge in house prices in Auckland through 2012 and early last year ramped up the pressure.

The Government then passed the Housing Accords and Special Housing Areas legislation last year and has pounded away on the supply side ever since. Anyone listening to Finance Minister Bill English, Housing Minister Nick Smith and Prime Minister John Key would think the only issue in Auckland is supply. That's fine, but it's only a partial view. Demand is the other side of the coin.

A surge of competition between the banks to lend 90 per cent-plus home loans in Auckland through late 2012 and into last year compounded the pressure on house prices, along with record low interest rates. This year's surge in net migration added the final ingredient to a combustible mix that also includes a sprinkling of foreign buying.

If the Reserve Bank had not acted last year to impose its high LVR speed limit, Auckland's house prices would have launched into the stratosphere.

The banking regulator's moves have only reinforced the effect a demand-side measure can have on the housing market. The limit has slashed house sale volumes by as much as 20 per cent in the past six months and sliced about 2.5 per cent off the annual house price inflation rate.

Deputy Governor Grant Spencer also reminded everyone how important the demand side was in a select committee hearing this month, when rejecting claims that cash foreign buyers were driving the market.

NZIER principal economist Shamubeel Eaqub also pushed back against the supply-side myopia this week when he sheeted the blame for Auckland's housing crisis squarely on rampant demand from rental property investors, who are still targeting tax-free capital gains powered with cheap credit from banks keen to lend to buyers with plenty of equity.

"If there's a real shortage of houses you would see house and rental prices rising. In Auckland, that's not happening," he said.

Yet the Government continues to put its fingers in its ears and intone the supply-side mantra when confronted with Treasury and Reserve Bank research showing a rising population puts pressure on infrastructure, house prices and interest rates.

New Zealand First and Labour are now beating the drums for migration controls and bans on foreign buying, both of which at least partially address the demand side of the housing crisis. The longer the Government covers its demand side eye, the more out of touch it appears and the more it risks losing its electoral depth perception.