Rapid drop a disaster

Jeremy Tauri.

Did you hear the one about how the Government should cause house prices to crash by 40 per cent?

It would be funny if it weren't so scary.

Former Reserve Bank chairman Arthur Grimes said this week that Auckland property prices needed to drop by that much - and set out some ideas of how that could be achieved. Largely, it came down to more intensification and a huge amount of new building.

I can understand the sentiment. No one looks at $1 million house prices and rejoices. We all know young people who feel as if they will never be able to own the roof over their heads.

Rapidly rising house prices really only benefit those who want to downsize. Everyone else is either struggling to get in to a first home or is buying and selling in the same market, so the equity they might have amassed is fairly academic. But to suggest a price drop, and such a huge one, is problematic.

Imagine you were a first-home buyer who just took out a $500,000 mortgage on an Auckland property worth $650,000. Grimes' solutions kick in and your property is now worth $390,000. You're going to spend many, many years paying down the mortgage just to get to the level where you don't owe more than your house is worth.

Best case, that's a soul-destroying payment going out of your bank balance every month. Or you're stuck in a house that was only ever meant to be a stepping stone on the way to a family home, because you cannot afford to move.

But maybe you lose your job, you divorce, you get sick. You can't pay the mortgage. You sell the house or the bank does it for you and you're left with no house and a huge debt. Would we see a wave of bankruptcies?

I'm all for slowing rampant housing inflation to a steady, sustainable rate. But a rapid drop in prices would be an economic disaster.

- Jeremy Tauri is an associate at Plus Chartered Accountants.