Govt meddling puts economy at risk
It's been a fortnight since the Government released its response to the Productivity Commission's report on housing affordability.
Tuesday, November 13th 2012, 12:00AM 
3 Comments
by The Landlord
Since then, there have been kilometres of newspaper columns written on the subject, much of it questionable.
What you can deduce, though, is that it's a complex business working out what factors go into determining house prices.
Myriad factors go into the equation; some are economic, some are political and others are just emotional. One thing that strikes me, though, is that this tag of "affordable housing" has become meaningless.
Look at the housing statistics out this week. Clearly, a lot of housing is affordable to many people as sales volumes in October are up 33 per cent compared to the same month last year and median prices are above where they were in 2007.
Houses are affordable right now because the cost of the money someone has to borrow to buy is at an historic low. Simply put, the cost of interest on your loan is far more affordable than it was when floating-rate home loans were in double digits in 2007.
Now they are half that.
Property owners and investors will tell you a couple of key things that make housing expensive.
The first is council costs of getting anything done. These levies add a significant amount to the cost of new homes or, for that matter, alterations.
A second factor is the cost of materials. How come you can nearly substitute steel framing for timber in a house when we have so many trees in this country?
Lots of reasons for the current situation have been put forward, but many are wrong.
Some people argue that property investors have an unfair tax advantage. That is patently untrue. Property investors are treated just like other people who set up and run businesses.
There is this idea that the Reserve Bank should limit bank lending with a high loan-to-valuation ratio. However, the latest ANZ/NZ Property Investors Federation survey shows that just 7 per cent of investors have debt that is over 90 per cent of their properties' value.
There is little the Government can do about house prices, and it has little incentive to interfere in the market (hence its lukewarm response to the Productivity Commission).
Most New Zealanders have their wealth tied up in real estate. They have done it not because of any perceived tax breaks, but because it is a rational decision.
There is no way the Government is going to drive down house prices as it will have a flow-on effect on the economy. When people feel wealthier they spend more. It's a simple fact that helps keep the economy ticking over.
Just like government spending. It's well known that the state's spending plays an important part in economic activity. One of the fears in Europe at the moment is that the austerity programmes being run by governments is actually detrimental to economic growth.
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If we want the economy to avoid tanking, we must tank the housing market quickly over 6 months or let it drag out for 10 years while inflation deals to it. Either way mortgagor home-owners lose because they borrowed and paid too much.
It was mostly local government zoning restraints over many years that started us on this road. The credit binge just fuelled it more in the last decade with the whole industry taking advantage of many peoples’ ignorance of economic issues. Now that the mess is made by the industry and not constrained by government, they are wimping out of dealing with it. Talk about Nero fiddling while Rome burns. If ever there was an incentive to move offshore, this is a huge one. Who wants to spend much of their income giving it to the banks for 25 years while the rest of the economy struggles and their income suffers. This is the biggest issue of our economy.