The Reserve Bank has started ringing serious alarm bells about skyrocketing house prices in Auckland. They recently noted a real risk of a crash causing major economic instability. The Prime Minister’s response was to shrug his shoulders and say the “ball is in their court”. Last week the Finance Minister Bill English said the Government had “left nothing undone” that could happen fast enough to make a difference. He is wrong.
By solely focusing on housing supply the Government has abdicated its responsibility to provide some sensible and pragmatic economic management of a situation that is getting out of control. Yes Auckland has a supply constraint pushing on house prices. However the situation has moved well beyond economic fundamentals to one of psychology – it is not so much lack of supply as it is inflationary expectations that are propelling the market upward. Prices are rising because of speculative demand from investors and fear from first home buyers terrified of being left behind.
Given the serious implications for both economic stability and social equity, a responsible government would take action not just to increase housing supply in the long term, but also to moderate the psychology driving the market right now. Here seven things they could do immediately:
1) Ring-fence losses on rental properties so that investors cannot off-set these against their other income.
2) Significantly ramp up IRD enforcement efforts on existing requirements to pay tax on properties purchased with the intention of resale.
3) Run a high profile publicity campaign to ensure awareness of the existing law and the ramped up enforcement regime.
4) Make it clear that the Government will consider a capital gains tax if the existing framework fails to address the problem.
5) Restrict purchasing of residential property to New Zealand citizens and permanent residents.
6) Reduce external migration into the Auckland region until housing supply increases.
7) Publicly support the Reserve Bank taking steps to tighten lending criteria on residential property investment in Auckland.
8) Announce all of these measures as part of a a highly publicised package address housing demand in Auckland. This will ensure maximum impact on inflationary expectations.
All of these steps are something the Government could do now. I have often heard the Hon Bill English say New Zealand as a nation is not going to grow wealthy by us all selling houses to each other. I couldn’t agree more, especially when we are borrowing foreign money to do it. Its time he took action to address that delusion.