Since October 2013, the Loan-to-Value (LVR) Restriction has been in place but there is no respite on rise in property prices.
There are reasons why we are in this situation.
When the global financial crisis hit in 2007, most the builders went broke or became decimated. Since then, we are building few thousand houses annually, whereas demand, which was about 10,000 ten years ago has registered a sharp rise.
One may recall that a number finance companies went bust.
They were funding builders on short-term basis. When some builders went into liquidation, some finance companies folded up due to poor cash flow. New Zealand suffered low level of construction activities for about four years.
Christchurch earthquakes created building activities.
Migrant numbers have been steadily rising since 2011. This created more demand for houses against a heavy shortage of houses, especially in Auckland. At the same time, we suffered paucity of skilled workers in the building industry.
Consent for new houses to meet the ever-growing demand for houses has not been forthcoming. The restrictions posed by the Resource Management Act in obtaining building consents and the reluctance of the Auckland Council in releasing more land compounded the problem.
Joint efforts help
Although the Council continues to restrict fresh land for house construction until appropriate infrastructure is in place, its ‘Unitary Plan’ will see more houses built within restricted areas.
RBNZ took its own action through LVR to restrict investors from buying houses.
However, this did not help in preventing rise in house prices. The earlier restriction of 30% equity was easily overcome with the increase in value of the houses.
There is now 40% deposit requirement in place targeting investors and foreign buyers. The new regulation, which came into force in October 2015, will make sale of property within two years taxable.
The requirement of foreign buyers to obtain IRD numbers has not helped to restrict demand on property.
Figures released last fortnight show that the number of building consents issued was 13,000 units. This will go a long way to alleviate housing shortage. To meet the current demand, we need 40,000 new dwellings.
The government is willing to fund up to $1 billion for infrastructure.
Cause for concern
I am really concerned that ordinary New Zealanders cannot afford to buy a decent house for less than $500,000.
I do not think this is right. I believe that the ultimate responsibility rests with the Central Government.
Currently, only 66% of New Zealanders own homes, down from 75% a few years ago. I will not be surprised if the gulf between those in their homes and those in rented properties widens, triggered by inaction of the government.
There are three areas in which the government, the Auckland Council and RBNZ can help to alleviate the situation.
The government should reduce the number of migrants until we have the resources including appropriate infrastructure are available.
The Council should fast tract the process of issuing building consents and the Unitary Plan.
RBNZ should help in converting the shortage into surplus by restraining further cuts in interest rates. We need a cooling period.
Providing more houses to meet the growing demand is easily said than done.
But I remain confident.
I know that patience always has its rewards.
Nathan Saminathan is an Authorised Financial Adviser and Director, Mortgage Masters based in Auckland. He is also featured in our Real Estate & Mortgage Special in this issue.
Editor’s Note: In the 20 years to 2011, total housing and consumer loan debt increased around six-fold in dollar terms. As a ratio of household disposable income, the percentage at June 2011 of 147% is about two and a half times that of 58% at March 1991. Through the mid-2000s, household debt grew strongly, at an average annual rate of over 14% in the five years to June 2007. The rate of growth slowed sharply from 2007, averaging well under 4% per annum in the four years to June 2011. This deceleration in the rate of growth of household debt arrested the growth in the debt to income ratio from 2007. Falling interest rates have been the main driver of falling interest servicing as a percentage of disposable income from 2008 (Source: Reserve Bank of New Zealand).