ENGLISH FORSEES AUCKLAND HOUSE PRICE CRASH
By Richard Harman (author)
Finance Minister Bill English in his strongest speech so far on the Auckland housing market is warning of a price crash within the next eight years.
Speaking to a Victoria University of Wellington audience and specifically referring to Auckland he says the Government is concerned about the housing market.
“I’m yet to find a housing market anywhere in the world where prices go up at over 20 per cent a year without stopping and then starting to come down again,” he said.
“It may be that we are unique – but that seems unlikely.”
Mr English said that over the last five years, the Auckland housing market had been the single biggest imbalance in our macro-economic system.
But then adding a new spin to the Government’s consistent claim this year that increased supply would help moderate rising prices in Auckland Mr English said that it took around eight years for the housing market to respond to a shock to demand.
“Resource consents on a housing development regularly take 18 months, including pre-application times excluded from the official statistics,” he said.
“The point is that 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 tend to drive prices higher in the upswing of the housing cycle.
“And those lead times increase the risk that eight years later, when additional supply arrives, the demand shock that spurred the additional supply has reversed.
“The resulting excess supply could produce a price crash.”
He told POLITIK he believes that the Auckland housing market will be in a position of oversupply at some point in the future --- in his speech he nominated within eight years.
“The lags are too long,” he said.
“All the work around the world shows that you have long lags, the market tends to overshoot.
“So it could overshoot on the way down just like it looks like it has overshot on the way up.”
He says that this is the first time he has been this specific.
Ironically that’s partly because the Government has been looking at its own exposure to the Auckland market as it increases its own supply of housing in the city.
Asked if the Government has over-reacted to the Auckland supply situation he said: “We don’t know.
“It still looks like under reaction to some. We get criticised for not doing enough.
“But it’s a good point --- in a couple of years’ time people might be saying you guys have overdone it.”
However the main message in Mr English’s speech is on the need to simplify and lighten up planning requirements, particularly in Auckland.
He argues that poor planning favours "insiders" – homeowners – on high incomes and who have relatively high wealth.
“Developers have told me 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.
He said it is possible to put a fiscal cost on this – “Today we spend $2 billion each year on accommodation subsidies.
“60 per cent of all rentals in New Zealand are subsidised by the Government.”
He concedes that the Council is starting to take some action on its complex planning requirements --- the Unitary Plan alone is 3000 pages.
“Two years ago Auckland wouldn’t have known what I was talking about.
Now they certainly do.”
He says that more developers are now telling him they are getting stuff through.
But even so he also took aim at the Auckland metropolitan boundaries.
He said a study found that the value of land just inside the urban boundary was ten times higher than the value of land just outside it.
“That huge price difference around an arbitrarily-selected line on a map indicates that there are housing opportunities outside that boundary that cannot be taken because of planning restrictions,” he said.
“Consequently, first home buyers trying to access the housing market are being prevented by land prices inflated by an urban boundary.”
Overall his speech was sceptical of the value of town planning – particularly detailed planning.
“As we get more information about what actually happens, often we find planning doesn’t achieve what people think it is achieving,” he said. .
Perhaps a clue to the new priority housing has with the Government came with his admission that Often politicians were accused of being focused on the short term.
“That’s one of the reasons this issue has never been dealt with properly in the past,” he said...
“The Government is taking a long term view.
“All of the things I've talked about today will take 10 to 15 years to sort out.”
Though what the political repercussions of a crash in Auckland house prices might be he did not say.