Finance Minister Bill English has warned in a speech on Auckland housing there is a risk of a house price crash because of an over-supply of housing, eight years from the initial shock in demand.
The eight-year crash scenario had been borne out by extensive studies in the United States following the global financial crisis, he said.
He made his comments in a private speech to Victoria University last week but which he has only just released.
He said the housing market was "probably the largest market in New Zealand where the rules need to be reshaped" and the most evident indication of a problem was Auckland house prices.
"I'm yet to find a housing market anywhere in the world where prices go up at over 20 per cent a year without stopping and then [without] starting to come down again," he said with reference to Auckland.
"It may be that we are unique but that seems unlikely. So we're concerned about the housing market."
Over the past five years, the Auckland housing market had been the single biggest imbalance in the macro-economic system.
"It takes around eight years for the housing market to respond to a shock to demand," he said.
In part, that was because changes to council plans could take years and resource consents on a housing development regularly took 18 months, including pre-application times that were excluded from the official statistics.
When combined, those very real delays could exceed the length of the house price cycle, Mr English said.
"The point is that when the supply of housing is relatively fixed, shocks to demand - like migration flows increasing sharply as they have recently - are absorbed through higher prices rather than the supply of more houses."
Long lead times in the planning process tended to drive prices higher in the upswing of the housing cycle.
"And those lead time increase the risk that eight years later, when additional supply arrives, the demand shock that spurred the additional supply has reversed.
"The resulting excess supply could produce a price crash."
He did not say when the demand shock started but assuming it began in 2013, eight years later is 2021.
Mr English said that it has been only recently that economists and politicians have understood the scale of effects of planning rules on the macro-economy.
For example when planning rules prevented workers shifting to higher-productivity locations, there was a cost in terms of foregone gdp.
The Government was also focusing on planning because poor urban planning was significant driver of inequality.
The people who stood to lose the most from poor decisions and who stood to gain the most from fixing those decisions were those on the lowest incomes.
"Housing costs are become a larger proportion of income and that matters the most at the bottom end of income among people who have few choices."
Mr English said that planning was often seen as public-good activity that should address the needs of those who were most vulnerable and had the lowest income.
"In fact there is strong argument to say it does exactly the opposite.
"Poor planning favours 'insiders' - homeowners - on high incomes and who have relatively high wealth."
Twenty-five years ago, around 30 per cent of new homes were priced in the lowest quartile and another 30 per cent were priced in the upper quartile.
"Today only five per cent of new homes are priced in the lowest quartile. Nearly 60 per cent of new homes are priced in the upper quartile.
"The new supply of lower-priced, affordable housing has dried up."
"it is not surprising to see process and rents rising disproportionately at the bottom end given this lack of supply."
Several measures have been imposed by the Government and the Reserve Bank in a bid to slow Auckland house price inflation, including:
• The creation of special housing areas under an accord with Auckland Council to make it easier to consent 39,000 new houses by the end of 2016.
• A capital gains test on investment properties sold within two years of acquisition.
• Requirements for overseas tax residents to supply their overseas IRD number.
• The release of excess crown land in Auckland for affordable housing developments.
• Residential property investors in Auckland using a bank loan will need at least 30 per cent deposit.
• Boosts to Kiwisaver First home deposit subsidy and Welcome Home Loan Schemes for first home buyers.
• Reserve Bank putting restrictions on low-deposit house loans.