Is a housing market crash inevitable?

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Auckland’s superhot housing market could be facing a big crash, the Finance Minister has warned – but others dispute that.

Wednesday, September 30th 2015, 11:04AM 1 Comment

by Miriam Bell

Finance Minister Bill English

In a speech on housing, Finance Minister Bill English said Auckland’s house prices could crash in about eight years’ time when an oversupply, born from current demand, hits the market.

This is because changes to council planning, along with resource consent timelines, can exceed the length of the housing market cycle.

English said it can take eight years for the housing market to respond to a shock in demand.

“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 drive prices higher in the upswing of the housing cycle, he said.

“They also increase the risk that, when additional supply arrives, the demand shock that spurred the additional supply has reversed. The resulting excess supply could produce a price crash.”

This scenario has been borne out in extensive US studies following the GFC, English said.

“I’m yet to find a housing market anywhere in the world where prices go up at over 20% a year without stopping and then starting to come down again. It may be that we are unique – but that seems unlikely.”

However, Property Institute chief executive Ashley Church challenged the price crash warning.

Church said such claims were unhelpful and ignored both history and the root causes of the current Auckland property boom.

“The events which shaped the collapse of the US property sector, prior to the GFC, bear no resemblance to the Kiwi property market and have no value as a guide to what might happen here.

“US banks significantly relaxed their loan criteria and were lending to people who were not in a position to pay back their loans.

“They were also offering balloon payments which meant mortgage payments started low but ratcheted up steeply after a few years.”

The New Zealand property market and bank lending rules could not be more different, he said.

“New Zealand has very tight controls around lending – probably too tight – and the Auckland housing crisis is underpinned by real demand - not an artificial boom created by the banks as was the case in the US”.

Church said the current Auckland property boom will eventually end when supply catches up with demand, but he rejects the claim that a price crash is inevitable.

“The Auckland market has a history of levelling off after boom periods, with prices going nowhere for a few years and then starting to rise again when the next boom kicks off.”

Meanwhile, in the rest of his wide-ranging speech, the Finance Minister focused on the impact of planning processes and regulation on housing and the infrastructure necessary to support the physical growth of cities.

Poor planning was a significant driver of inequality and, when it comes to housing, has a major impact on housing costs and rents, he said.

This was evident in the limited supply of lower cost, affordable housing available – particularly in Auckland.

English said developers had told him that in Auckland they need to build a house worth $600,000 to make a development commercially viable.

“That’s because it is difficult to build cheap housing on expensive land – particularly in view of the planning rules, which include urban limits, minimum lot sizes and maximum site coverage rules.

“Working in combination, these rules reduce opportunities to develop affordable homes.”

While planners are recognising these consequences, they are now creating even more rules to offset these effects, he continued.

“For example, requiring some developments to include up to 20% affordable housing… That is implicit recognition that planning rules have driven the costs up so much that another rule is required to offset it.”

Resolving such issues is a complex process, but it is important that housing is regulated in a way which ensures flexible supply, he said.

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