Gums have been flappin' aplenty this week over the dangers of a housing boom. The Reserve Bank, the Government and ratings agency Fitch have opined about how dangerous a housing bubble is for household debt, our banking system and economic stability. It was a chorus of tub thumping and finger-wagging.
Reserve Bank Deputy Governor Grant Spencer was first, warning that avoiding a housing boom was critical for economic and financial stability. He even went as far as suggesting the Reserve Bank could increase the Official Cash Rate if the housing boom morphed into a surge in consumer price inflation. He also reiterated the bank was looking at increasing capital requirements for banks issuing mortgages, particularly the riskier high-loan-to-value ones, and at limiting the loans as part of its new macroprudential policy toolkit.
Then Fitch piped up with a warning that strong house price inflation could turn into a bubble that hurts banks when it bursts.
Then as if to confirm the fears, the Real Estate Institute reported house prices surging to record highs in March and house price volumes galloping back to the levels seen in March 2007 at the peak of the last boom. House prices in Auckland rose 16.1 per cent in the past year and $4.1 billion worth of property deals were done in March alone.
Finance Minister Bill English was the biggest finger-wagger at the end of the week, saying real progress in increasing long term savings was within New Zealanders' grasp: "It would be a shame to throw it away on another risky housing cycle."
So much talk, but so little action. And it's been that way for a decade.
The Reserve Bank has been warning since at least 2004 about housing booms and borrowing. Yet its actions betray its complete lack of success in stopping it or even controlling it. It had a chance between 2004 and 2007 to raise rates, but failed because of its strict mandate to target consumer price inflation and to ignore both asset prices and lending growth.
New Governor Graeme Wheeler even said as recently as December that even if he had the tools he wouldn't use them. A careful reading of Spencer's speech also shows the Reserve Bank has assumed this housing boom won't translate into higher consumer price inflation. The high dollar is controlling inflation anyway.
The Government has talked up a storm, but has done nothing to solve the supply or demand issues driving the latest boom in Auckland. It has even blocked the Auckland Council's attempt to get its unitary plan in place early, insisting instead on a three-year delay. It has done nothing to encourage the private sector to build the 13,000 houses needed every year in Auckland, rather than the less than 5000 a year over the past decade. Housing NZ is planning to build 1441 houses net in Auckland in the five years to 2016, or fewer than 300 a year. In the past two years it has actually subtracted a net 13 houses from the Auckland housing market.
As Jerry Maguire was told in the movie of the same name: "Show me the money!" In this case it should be: Show me the houses!
By Bernard Hickey-
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