Dealing with Housing Demand and Bank Lending

Any relaxation of the Reserve Bank’s restrictions on bank lending for house purchase will be welcome to those who would then need a smaller deposit than is currently required by the Reserve Bank’s loan-to-value ratios.

But how many will pause to reflect that this good news for today’s purchasers may simply mean that the problems that have afflicted our housing market could – if unrestrained – become even more entrenched for the future?   And will our policy-makers learn from the evident success of loan-to-value ratios in restraining the relentless inflation in house prices?

It is widely accepted that New Zealand’s housing situation, and the policies applied to deal with it, are a total mess.  The confusion arises partly because we are faced with two problems – problems that are linked in some respects but are actually two quite different phenomena.

The first is the problem of homelessness, and the second is the problem of unaffordability.  The first problem is the easier to explain and redress; it arises by virtue of a simple failure to build enough houses, but is exacerbated by the incessant rise in house prices and, as a consequence, in rents.

The new government is gearing up, quite rightly, to deal with the long-term failure to build new houses; they recognise that the missing houses will not be provided by private property developers (whose interests lie at the higher end of the market where big profits are to be made), and that the houses will be built only if the government steps in.

The constraints the government faces in taking this on do not arise because they don’t have the money – Michael Joseph Savage showed in the 1930s that a determined government can always find or create the money to build new assets – but because there could be shortages of the necessary materials and skilled labour.

A solution to this problem will require government and private industry to work together on an agreed industrial strategy.  There can be little doubt that building the required houses, at an affordable price, would be a major step towards resolving the homelessness crisis.

But, even if more houses are built, what further action is required, particularly in respect of the other issue – that of unaffordability?  Homelessness arises not just because there is a shortage of houses, but because rents have risen so sharply.  It is often the rise in rents that has left young families homeless.

It is at this point that the homelessness and affordability crises coincide.  Rents have risen because speculators have been able to borrow from the banks almost without limit in order to buy up houses (often sold at knock-down prices as a consequence of mortgagee sales) and they have then raised rents on those houses so as to make a fat return on their investment.

The Reserve Bank’s loan-to-value ratios, by making it harder for speculators to borrow, have played a valuable part in restraining this unwelcome development.  Interestingly, the new government has made a similar analysis of the problem, as shown by its prohibition of foreigners buying existing houses.

The effect of this prohibition is to remove an important element of extra demand from the housing market – it has, in other words, exactly the same effect as the Reserve Bank’s restrictions on borrowing.  Both the government and the Reserve Bank, in other words, have at last recognised that the problem with our housing situation is not just one of inadequate supply but also one of excessive demand, caused as much by excessive bank lending as by the introduction of additional money from overseas.

When speculators take advantage of the banks’ willingness to go on lending to them, and bring this excessive demand to the housing market, their aim is always the same – to create, and derive untaxed capital gains from, an asset inflation whose effect is to make housing impossibly expensive for our young families.  This self-serving pursuit of profit by the banks and speculators (whether from home or overseas) should no longer be allowed to distort our housing market, to the great disadvantage of Kiwis seeking a home of their own. At least the government and the Reserve Bank are agreed on what the problem is and what needs to be done.

Bryan Gould

1 December 2017