Supply boost could fuel prices

A rampant increase of new housing supply in Auckland could well fuel house prices rather than temper them, a property academic has warned.

Wednesday, June 29th 2016, 3:00PM

by Miriam Bell

It is hard to escape evidence of Auckland’s housing supply shortage these days.

From central government directives to ramp up land release to tales of people struggling to find properties to buy or rent, it’s all playing out in the headlines.

But while the city desperately needs an increase in housing stock, Auckland University property lecturer Dr Michael Rehm said an increase is unlikely to be a panacea for sky high house prices.

Following a recent conference presentation, Rehm told landlords.co.nz that a rampant increase of housing supply would be most likely to fuel house price growth rather than bring prices down.

Auckland’s tight supply might place some upward pressure on prices but it does not explain the astronomical prices now being paid for houses in the city, he said.

“In such situations demand proves flexible and alters to match supply – for example, young adults delay leaving home, households take on more flatmates, people leave the city for places like Tauranga and Hamilton.

“My view is that any rampant increase of new housing supply will help improve the housing conditions in Auckland - less overcrowding and potentially lower rents - but it will not make a dent in house prices.”

The arrival of new housing stock on the market represents a minority of the total number of homes sold in a given period of time, Rehm said.

“Therefore house prices in Auckland, and the vast majority of housing markets around the world, are primarily driven by the prices paid for existing homes, not newly built homes.”

Further, establishing how new housing supply impacts on house prices depends on how house prices themselves are measured.

Rehm said if you use median or mean house prices, then the new supply, which tends to be large, high-spec freestanding houses, will lift those median/mean house prices rather than reduce them.

Conversely, if the new supply comprised small, modest homes targeted at first-home buyers, then the prices might be pulled down.

“If policymakers wish to genuinely improve housing affordability, which means a decrease in real house prices, then the only viable solution in my opinion is to curtail lending to residential property.”

In his view, debt-to-income ratios would be the best solution because they would impact on credit expansion.

It is the vast growth in the availability of “easy money” for mortgages over recent years which is driving skyrocketing house prices, Rehm said.

For this reason, he said it would be best to apply any such lending restrictions universally.

“Aside from it being simpler to manage, this would help prevent first-time home buyers from over borrowing and potentially winding up in negative equity when house prices make their inevitable downward journey.”

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