A cunning plan

Roger Partridge
Insights Newsletter
2 September, 2022

Like a slowly downloading webpage, is a whole-of-government strategy to solve the interminable housing crisis starting to take shape?

Recent reports predict house prices nationwide could fall from their late 2021 peaks by up to 20%. Not much compared with the massive increase in the median house price since the start of the pandemic. Or so you might think.

But that’s to forget the Reserve Bank of New Zealand’s contribution to housing affordability (now one of its multiple policy targets). I’m not referring to the house price inflation triggered by the Bank’s massive money printing machine over the last two years. But rather to today’s 32-year high 7.3% inflation rate.

While nominal house prices may be falling, high inflation means real house prices are plunging. A 20% fall in nominal prices equates to an inflation-adjusted fall of more than 25%.

Yet, that’s only after taking into account this year’s inflation. Another year or two at 7% or so and the fall in real house prices would approach 40%. Put that in your median-income to median-house-price multiplier and smoke it!

The cunning plan may have a second strand. The Government’s immigration policies – including the closed border during the peak of the pandemic – have doubtless caused skills shortages across the economy. But immigration settings over the past 2 ½ years also mean demand for new housing from migrants has slowed to a trickle.  

Meanwhile, the number of New Zealanders who believe the country is heading in the wrong direction is contributing to a massive exodus of would-be homeowners overseas, decreasing demand for new houses even further.

At the same time, rising mortgage interest rates and the cost-of-living crisis are tempering potential purchasers’ willingness to pay.

And all this while the supply of new housing is at record levels.

Reserve Bank Governor Adrian Orr has bemoaned the need for monetary policy to be supported by fiscal policy if inflation is to be tamed. But perhaps he’s focussing on the wrong one of his multiple policy targets.

He could hardly complain about the help he is getting from Government policy settings in making housing more affordable.

The only pity will be the decreasing number of Kiwis left in the country to enjoy it.

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