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English warns of new housing bubble

Deputy Prime Minister Bill English is warning of a new house price bubble as interest rates remain below historic levels.

But he also says the government is unlikely to take interventionist measures such as rent controls or develop more public housing.

Mr English cites all the well-known causes for house price inflation – strangled land supply, red tape, higher building costs and the low cost of capital.

He made the comments in the introduction to the annual Demographia survey released this week which finds New Zealand prices are 5.3 times annual household earnings, slightly higher than last year's 5.2.

This compares with Australia at 5.6. Hong Kong rates most unaffordable at 13.5 times annual household earnings, with the UK at 5.12 and the United States at 3.1.

Houses in New Zealand are now nearly 80% expensive than the early 1990s, when the figure was 3 times annual household earnings.

Within New Zealand, Auckland is the least affordable market, with a median multiple of 6.7. Christchurch is 6.6, Tauranga-Western Bay of Plenty 5.9, Wellington 5.4 and Dunedin 5.1.

All were said to be “severely unaffordable”.

Read more details in the NBR NZPI report due out tomorrow.

More by Chris Hutching

Comments and questions

As usual, much talk, but no action.

Hey Bill, what about interest rate settings?

A major factor is an incorrect interest rate setting.
Perhaps, one day, the government and the Reserve Bank will realise the damage this is doing?

Another year, another warning.

The problem is New Zealander's belief that a higher price for non-productive assets means that somehow they and the country are better off. This is only true if you are an investor, and the tax system should treat it as any other form of income. Or you are selling here and moving to somewhere cheaper. House price increases do nothing to help NZ actually pay its way in the world. Our debt goes up and our current account deteriorates further. Greece here we come. This fasination with house prices will be a disaster for this country and probably our kids, who will also be saddled with massive student debt and a pension scheme that is out of control. Well done us ... not!

Absolutely, EW, we should have a CGT, not the half-baked labour proposal but rather one that actually includes the family home (albeit perhaps over an arbitrary threshhold), works of art, precious metals, etc. It shouldn't simply be an add-on to the taxes we currently pay either. Damn goverments (of all ilks) have enough money to waste as it is...

What a load of rubbish. In a free-market economy investors will rightfully invest where they can get the highest absolute return. While NZ remains a low-wage economy, the best opportunity for most people to make some money is speculating on their home/investment property or to go and work in Australia.

But NZ doesn't have a free market economy, despite what you have been told, and a house is not an investment. It is a place to live.

What a weak character Bill English appears to be. All talk and no action. Very typical. Why isn't he media pressing him about why he's playing useless?

And, yes, what about the interest rate settings?

Why, too, is ANZ making a huge billion dollar-plus profit a year, yet increasing its loan costs to personal borrowers and keeping its interest rates so low?

Why is the public being cheated and squeezed on both sides?

Fantastic to see some rational comments about the ridiculous interest setting. Unfortunately, the behavioral damage is done and will be very painful to unwind. Bubbles always eventually burst.

Liberte and Willie. Oh, of course "interest rate settings" is the answer. It's that simple, isn't it. What a good thing it is that we have luminaries such as yourselves as mouthpieces for the simpletons on the left.

Moral of the story: Greed will imprison us all.

The main problem here is NZers' fascination with residential property as an investment. If there was a capital gain on your rental investments then the price of property in cities like Auckland would drop dramatically. The USA does not have the problems we have, even though you can get a 25-year mortgage fixed at 4%. Americans are more likely to put their money into stocks and bonds when the market is right.

That is because the USA stock market has real penalities for insider trading, not like here.
No one in their right mind invests their hard-earned savings in the NZ sharemarket.

Really? The NZ stock market returned over 25% last year and anyone could gain from that benefit regardless of where they lived. Talk to some people in Blenheim who bought property they now can't sell becuase there is no one there to buy it. On top of that, there are much more incentives for Americans to buy a house they can't afford to live in because they can write off the interest payments on their mortgage against their personal tax liability. The reason they invest in stocks is because they are more financially literate than most in NZ.

A 25% sharemarket return driven mainly by KiwiSaver funds looking for a home. The return is only realised if you sell - short term v housing long term.

That aside, too many of us remember Feltex, Lombard even back to Equicorp and Ariadne, etc. The cowboys still run the market for their benefit - the small investor is consistently caned every 15 or so years.

Property is the only thing that endures. And, yes, it is the baby boomers who are buying rental properties to secure their retirement. Our parents who brought shares for that purpose are now paupers dependent on the state. The cowboys of the stock market have seen to that.

USA definitely does not have the problems we have, but they have many problems we don't...

Put up interest rates because of Auckland and penalise all the regular Joe Blows in NZ, creating even more pressure and stress. Yeah, makes great sense. There are other ways to more surgically deal with this before it's another train wreck. But the stuck record chorus are still singing and don't give me that cr#p about the free market - it only reacts after the tipping point. The trouble is, the house speculators enjoying the lack of a CGT vote for Billy and his mates.

Why are people saying "interest rate setting"?

Manufacturers are calling for interest rates to be dropped to make the dollar fall, but you are asking for interest rates to be increased to stop the property bubble.

Interest rates are not the answer! I am not sure what is (and I assume the RB is working on it) but some form of other macro prudential tools may be needed.

Yes, Harvey, you have it. We have a divergence of motive and result - the RB as driven by English and Wheeler is a two-edge sword.
Lift the interest rates and property in Auckland is maybe held and the export and productive sector contract, and banks get richer.
Auckland wins, provinces lose.

Or drop the interest rates, which brings down the dollar, the export and productive sector prosper and house inflation in Auckland advances.
Provinces win, Auckland loses.

It's one or the other. My money is on them running true to form - doing nothing!

I agree. However, there is a third option which deals with the lack of liquidity of the New Zealand dollar (because of a sudden and rapid increase in the supply of comparable overseas dollars). That option is, unfortunately, a favourite of the green shirts so it can't be seriously discussed and/or considered (insert insults here). Things are getting crunchy and we need a little lube.... IMHO. And don't give me that bollocks about inflation. Let's just keep it on the sidelines and keep our gunpowder in reserve(s).

The arbitary nature of just taxing "investors" is not only ill-conceived, it's plain idotic. What constitutes an "investor"? Is it an individual who owns a property in some stucture other than personally? Is it someone who rents a house out? What if you went overseas for two years and rented out your house while away and then resumed living in it on your return. Are you then an investor? What if you own a second house that you let your kid live rent-free. Are you an investor? What about baches or time shares? What if you have a semi-detached flat on your house that you rent out? Is the whole house subject to capital gains now?

The whole issue is just standard "dog whistle" politics by Labour. Unintended consequences abound.

Re interest rates, what do you expect when you price one of the most important things in an economy (the cost of money ... interest) the way the Soviets priced their bread. via bureaucrat. Of course it is mis-priced but that has been the standard around the globe for many years and one of the major reasons for the GFC.

I'm not so sure a Capital Gains Tax will do anything. America has a CG on rental properties and it didn't stop them from blowing up a massive bubble. It's more cheap credit or low interest rates and just plain supply and demand.
Auckland is consistently rated as one of the best cities in the world. If anything a Cap Gains tax will push up prices. Some people will choose to hold on to properties rather than sell them, decreasing supply.
Also, further to JP's point, Americans are much more investment savvy. Most companies have 401Ks (similar to a Kiwisaver) and many Americans know what compounding interest means and what index funds are, for example.
Kiwis are years behind when it comes to financial or investment literacy. I suppose it all comes back to Kiwis depending on the government for everything, including retirement.

Yep, financial literacy / budgeting "classes" should be a compulsary part of either being a taxpayer and/or a recepient of welfare, so even those a few sandwiches short of a picnic can understand fact from fiction. Putting those predatory loan sharks out of business, as well as educating those too lazy to learn for themselves what compounding interest actually means.
Plus, it would also give all the Labour / Greens sycophants the tools they need to question Labour's and the Green's economic policies and trying to find credibility in them somewhere.

A $500,000 note anyone? It will be able to buy you one of Shearer's 10,000 homes a year he will somehow build.

Bill English is just pretending to be concerned. There are plenty of instruments he can use to cool the market apart from interest rates.
Of course, if house prices in Auckland drop to where they should be, then his rich mates and supporters will not make as much out of their tax-free capital gains.

Same story again. Warn that a property bubble is in the making but do nothing about it!
If and when the bubble does burst the government, as usual, will save the banks which allowed the bubble to inflate in the first place.

All of the National Party are afraid to upset the apple cart and strike a blow. It's across the board with everything - lip service for another couple of years.

Crying wolf again. Well, as long as most MPs have investment properties in their portfolio we only expect housing inflation to accelerate.

It's amazing that taxpayers are paying these MPs to play crying wolf games year after year.

How about some concrete action for a change?

If you can't really figure out what to do just ring up Gareth Morgan and donate half your MP salary as consultant fee - since if you can't figure out what to do you don't deserve to be paid that well.

Bill should simply remove taxes on other investment classes, like stocks, bonds, annuities and other interest-bearing investments.

Grey Power would love it and it would surely slurp the monetary froth off the top of the property market.

Cut taxes to level the playing field of investment options. Bill, it is obvious. And grrrreat for the economy.

People invest in residential property when they're young because there's no viable alternative. If we put $50k on the sharemarket, the best we can hope for is that it'll turn into say $75k at the end of the year.

Worst case, it's completely gone. On the other hand, put $50k down as a deposit on a house and stand to make $200k-300k leveraging off the bank's money by this time next year. Or, worst case, wait a few years until the market bounces back, which, at least until now, it always has.

Old people invest in term deposits for no return or property for speculative return because it's still comparatively safe. There are no immoral property developers or finance company sharks lurking in the shadows.

If the government wants to change that mentality, it needs to legislate to make it impossible for these creeps to be doing business in NZ, wait 25 years for the public's trust in alternative investments to return, and then ensure that offer documents are understandable to normal people.

At present, even those educated enough to prepare the documents don't properly understand the risk.

Have you got your maths right? $50 as a 20% deposit means a $250k house which is going to increase to $450-$550k in a year.

Even with a 10% deposit a $500k house isn't going to go to $700-800k in one year. Tell him he's dreaming.

The capital gains tax for houses in the USA is relatively simple. Everyone pays tax on any gain on sale of a house. The deductions are: home improvement costs and a 0-tax rate for gains of up to $250K (single) or $500K (married) if you have lived in the house for at least two of the last five years.

There is also a means that you can transfer the investment value to a new house, but it has to be increased in value and done within 12 months, and the tax in this case is only delayed to the next house, of course.

A lot of people do not pay for houses solely out of their current NZ income. Many have deposits from working overseas, or from baby-boomer parents who offer money to their children out of a mixture of love and guilt over how comparatively easy it was for them to buy a house 35-40 years ago.

Hipster hasn't got a clue. 30 or 40 years ago it was much much harder to buy a house. Maximum loans were two thirds, and it was common to wait up to five years to qualify for a loan by way of a ballot system. It was this crazy system that created finance companies and nominee companies with sky high interest rates. Buying a house today is a doddle by comparison.

#16 above has it right.
It is still in the banks'/money loaners' hands. In NZ the worst of the problems a few years back were loans from finance companies. My understanding is that banks in NZ have recently started 100% (no deposit) loans and herein lies the problem to me. People need to prove they can truely save. Borrowing against a supposed capital gain on another property is also an issue for the average taxpayer.
The NZ government is regulating what it can, and that is the NZ finance sector, but it is up to the governments where the banks call their home country to regulate them for all of our sakes.
There will always be some gullible or greedy person who will borrow money beyond their real capacity. The so-called free market still requires regulation in some overiding forms.

Just confirmed today on a three-bedroom house in Christchurch western suburb. Nothing flash, average 1950s plaster/conc block but Green zone TC1 grey (best category), good area and close to good schools. Sold $55K over RV. Almost went pear-shaped trying to arrange fresh insurance (ended up sticking with current insurer).
The scary thing was the agent informed me she had counted 86 people wanting call-backs if it fell over. Sales tactic? I don't think so. I asked later face to face and she said: "It's true, look at the views on-line, around 5000." Allowing for mutiple views it's till a hell of a lot of interest. Three offers before it got to the first open home. A friend looking at three-bedroom rental today and 30-plus people through. It's bedlam out there at the moment.

I cannot see how a CGT is going to solve anything as it does not create property supply, and, secondly, there are two property investors. There are traders who buy, renovate and sell property who are (should be already taxed) as they are actively trading a product. The other investors buy and hold property so a CGT would only be paid in some distant future. CGT will not create property supply, and this is the Auckland problem.

As a former property owner and one who now rents, I have seen both sides of the issue. The current tax system gives unreasonable advantage to property investment. Yes, the US does give a tax credit for mortgage interest, but you only get a credit equal to your nominal tax rate (ie, a 30% tax rate gives you a 30% credit for every $ you pay in interest).

We do need a CGT. Investors already write off their costs of investing and then get a tax holiday on the profits to boot. That is effectively a transfer of wealth from the renters, who are typically lower socio-demographic workers. I do believe there need to be rent controls and there are cities around the world where this is the case. It will provide a disincentive to new slum lords and keep rents at a reasonable level.

But if you want to see property prices come down, just wait until interest rates climb. Then all those people who thought property was a sweet deal will see their values decline as no one can qualify for the new mortgages. NZ is not immune to the basics of business, no more than the dot com bubble of the late 1990s reinvented the way business is done. To think otherwise is delusional.

But what makes me really crazy is to see the NZ banks implementing the very same practices that buried the US housing industry five years ago. Driven by greed, but ultimately a house of cards.

Careful what you wish for. There are rent controls in many cities around the world. And it has proven to create a whole new set of problems. Again, it has decreased supply of housing as in the case of the US cities of New York and San Francisco and created more "slumlords" (landlords who won't invest any more than they have to, especially if they can't recoup costs with higher rent).
Also, it de-incentivises the building of new housing. People stop building since they can't actually pay for the investment because the rent is artifically held low. It's all documented and well researched.
Please, let's not reinvent the wheel - a square wheel in the rent control case - here in NZ. I would agree that interest rates would certainly have an impact. But then you get a higher NZD with all its implications, benefits, problems. And so on...

Good comment. Higher interest rates could well spell the end for some of the banks, most of whom are heavily exposed to the manic NZ and Australian property markets. I wonder if the rottweilers of the right, who regularly savage those on benefits, will squeal when their mortgage interest rates rise or when the banks' top brass ask for public bailouts a la South Canterbury Finance to stay afloat?

It's said that house builders are the natural enemy of property investors, as they create the supply that meets the "demand", factors driving up prices.

Building costs are the key. If we can reduce the cost of a new home significantly - perhaps domestic processing of all those logs we send overseas, reduce the compliance costs and stop paying builders $50-60 per hour - we can get new house costs under $1300 a square metre and it actually makes it worthwhile to create new housing stock.

Build smaller homes. The model house 60 years ago was 110 square metre, not the current new build at over 200sqm + garage.

Inexpensive spec build @ $1400 psm x 143sqm = $200K build, + section @ $150K. Bingo, you have a $350K brand spanding new house.

An ordinary 2-3 bdrm pre-fabricated modular house should not cost more than $60K. Figures like $200K are thrown about for a number of reasons: people want bespoke homes with flashy overpriced kitchens, bathrooms and carpets; NZ building practices are slow and inefficient; building consents are far too expensive; few buildings cater to the radically changing demographic needs of NZ; building and trade supplies businesses tend to be monopolies and cartels so price competition is eliminated and tradespeople make good money by selling, not just their labour, but supplies as well. They get components at tradesman rates, but rather than work for their house owner customer who is employing them and passing these savings on to them they add 50%+ to the price and pass the cost on to the house-owner. NZers have become so inured to high prices in every facet of their lives despite little to no serious wealth creation over the past three decades that $200K for a plain house in a land of low salaries and high taxes no longer registers surprise. Kiwis need to wise up fast if they want to stop being taken for a ride and start demanding value for money the way Americans do, but I fear this is probably expecting too much.

This research blames land supply restrictions are the driver of increasing median multiples in housing affordability. Commentators blame other things: interest rates, taxes, regulation.

I think the key driver of house prices is demographic. In 1980, the "median multiple" was 3.0, now in 2012 in Auckland it is 6.7. In other words, it takes two median incomes to buy a house in Auckland (and all other centres of NZ, with some variation around the multiple). And isn't this exactly what is happening? 30 years ago, most households only had one income (the husband's), now most have two. The same demographic changes have occurred in the other "severely unaffordable" countries.

Tinkering with taxes, building productivity and land supply may have some effect at the margins. However, the underlying demographic trends seem unlikely to change in the near future. So I expect the median multiples to remain the same or substantially similar despite whatever reforms are made in this sector.

In a more productive and dynamic country called America house prices in many cities have returned to their traditional 2 to 3 X median pre-tax income multiple, so it takes a brave (or foolish) person to bet that house price-income multiples in this tiny country at the bottom of the Pacific won't return to their traditional mean ratio that existed until about 1980. Vested interests in NZ are currently doing everything to keep the biggest asset price bubble in NZ's 160 year history inflated. Can you imagine the impact a sharp hike in interest rates would have? Consider, also, that NZ has more available building land per capita than most countries on the planet (not that I advocate wasteful and unsustainable urban sprawl) as well as abundant, renewable building materials.

It takes 20 years to build a high-quality export business and to continue to invest in new markets takes an enormous amount of energy and money. When you pull back from a market due to returns getting squeezed (ie, a strengthening dollar) competitors jump right in and you are almost back to square one.
You wonder why people sell out when they can? Working under the roller-coaster NZD gets to everyone in the end. Maybe we should let those investors suffer the consequences and then the message might get through.

The government can't raise interest rates yet or risk stalling the recovery. A housing bubble is an unintended consequence of trying to steer NZ out of a deep recession utilising the only real tool available - maintaining low interest rates.