The Nation: Ashley Church, Shamubeel Eaqub, and John Bolton
On The Nation: Lisa Owen talks to Ashley Church,
Shamubeel Eaqub, and John
Bolton
Youtube clips from the show
are available here.
Headlines:
CEO
of the Property Institute, Ashley Church, is calling on the
Government, the Reserve Bank, and local councils to bring
down Auckland's property prices without crashing the market
by:
1. Removing LVRs on first
home buyers, so banks can lend based on their ability to
repay
2. Increasing LVRs for
property investors, requiring up to 70% deposit
3. Discouraging land banking by
significantly increasing rates on vacant
land
Lisa Owen: Auckland’s
average house price broke the million-dollar barrier this
week as the Reserve Bank moved to increase lending
restrictions on property investors, and the Housing
Minister, Nick Smith, openly admitted the market is out of
control. So what more needs to happen to put the brakes on?
Well, we’ve got a wealth of expertise here in the studio.
We’ll hear from economist Shamubeel Eaqub and John Bolton
from Squirrel Money shortly. But first the Property
Institute’s Ashley Church is calling on the Government,
the Reserve Bank and local councils to work together to take
action. He’s with me now. Now, you don’t think the
housing market is cooling fast enough, so what would you do
that’s not already being done?
Ashley
Church: Well, I think the problem we’ve got at the moment
is there’s actually two quite distinct views in the market
as to what’s happening. So when we talk about a property
crisis in Auckland, we’re talking about two quite
different opinions. On the one side, we’ve got those who
believe that the market’s about to correct and that
there’s going to be a collapse in prices, and that
view’s held by some pretty heavy hitters, people like the
Reserve Bank. David Hisco from ANZ about a month ago said
the same thing. And those people are basically looking for
solutions that are around mitigating the risks in the market
by doing things like putting in LVR restrictions, et cetera.
But on the other side of that equation are some equally
qualified people who are saying that’s nonsense and, in
fact, all of the fundamentals of the market would indicate
this house price inflation that we’re currently
experiencing is going to continue for quite some period of
time and that the solutions are around increasing supply,
rather than imagining a collapse that probably isn’t going
to happen. So the solutions are around things - in our view,
because we’re in that second camp - the solutions are
around things that are about increasing supply and looking
at the problems as they exist in the market. There’s a
couple of observations that are quite important in that
regard, Lisa. Firstly, house price inflation is not going to
stop increasing until supply is resolved, so we’ve got to
do that. The Government can’t do it on its own, and I
think that they’ve created an unrealistic expectation that
the special housing areas are going to be the solution. We
need lots of private-sector involvement in this, and we need
it quickly. Thirdly, property investors are not the problem;
they’re just putting their money in the wrong place. We
need to redirect that money into the construction of new
dwellings. And fourthly, and this is a political issue for
both the Government and the Labour Party if they take the
wheels of power next year, we’ve got a generation of kids
who can’t buy a first home because of the restrictions
that have been put in place by the Reserve Bank have made it
very very difficult for first-home buyers to buy
property.
So in that respect, what are the
specific things you do to meet those problems
head-on?
Church: So in relation to the first
one, I think there’s actually a pretty easy fix in regard
to that, and that’s the first-home buyers, and that’s
simply to remove the LVR restrictions in their entirety for
first-home buyers.
No minimum deposit
requirement? It’s up to the bank to
decide?
Church: Well, it would be up to the
bank, so incidentally that’s a situation that prevailed up
until about three or four years ago. So the bank’s
actually allowed some people to enter the market with a 5%
deposit. That wouldn’t solve the problem completely, but
it would allow a large chunk of the people that are
currently closed out of the market to get back into it. Now,
that wouldn’t put an undue impost on the market, because
there’s not enough of those people to have much of a
fundamental effect on it.
Okay, and what about
investors, then?
Church: So investors –
two things that we think should happen with investors.
Firstly— In fact, this happened this week. It’s
interesting how these things transpire. We’ve been talking
for the last year or so about removing the LVR restrictions
again in their entirety on anybody, including property
investors, who was prepared to invest in new property,
either buying new property or—
Yeah, and the
Reserve Bank has gone ahead and done
it.
Church: The Reserve Bank’s just done
it, which is fantastic, although it’s interesting the way
that they’ve done it, because they—
But
you think that there should be a second stage to that,
don’t you?
Church: We think there should
be a second stage.
Which
is?
Church: The second stage is to increase
the LVR restrictions on anybody who’s buying an existing
dwelling – sorry, property investors that are buying
it.
To what?
Church:
Well—
To what? Because you’ve got quite a
juicy figure, haven’t you?
Church: Yeah,
well—
You’re thinking, what, 60,
70%?
Church: 50, 60, even
70%.
Even 70%?
Church:
Anything that’s going to basically send a strong, clear
message to property investors – do not buy existing
dwellings; start buying new dwellings because that’s what
the city needs.
And what about the people who
are stockpiling land – land
bankers?
Church: Good question. So
stockpiling at the moment’s a problem, and stockpiling
relates to both individuals – mum and dads who are
subdividing sections and creating a new section and a bit of
equity – right through to large-scale investors. That’s
got to be freed up, and, in fact, that first part I just
talked about to work you’ve got to have that land in
place. Probably needs to be council – double, treble their
rates, whatever you need to do. Give them a
timeframe.
But they’ve got that power now.
They’ve got that power now,…
Church:
They have.
…Ashley, and they’re not using
it, so why aren’t they?
Church: I think
they’re not using— Well, right now they’re not using
it because there’s an election coming up, so I guess the
time to do this would be immediately after an election,
where they’ve got three years to get over the shock of
doing it. But the impact of doing that would be to send a
very clear message to the market – if you don’t develop
within 12 months, you’re going to have an impost on your
rates. That would get people actually either choosing to do
something with that land or selling it on to somebody who
would.
Let’s bring the others into this
conversation. Shamubeel, getting rid of deposits for
first-home buyers, you know, LVRs there, isn’t that just
encouraging young people to leverage themselves up to the
hilt?
Shamubeel Eaqub: It’s not only that.
When you’ve got an average price of a million dollars,
it’s not going to matter what the LVR rates are. You’re
not going to qualify to get a mortgage anyway. So first-home
buyers are completely buggered in the current market
regardless of what you do with the LVRs. The problem is
house prices are too high. You’ve got to fix that, and to
do that, you have to build houses for poor people. You’ve
got a loss of social houses. 3000 over three years is not
enough. And certainly in terms of investors, we need to do
the stuff on stamp duties; we need to do the stuff on
capital gains; we need to do the stuff around negative
gearing. It’s the structural stuff.
But LVRs
of 70 to 80% for people who are buying investment
properties, won’t that turn toes up and send people
packing?
Eaqub: It will certainly have an
impact, but also if you look at the numbers and the numbers
that QV has done is that there’s quite a lot of cash
buyers when it comes to investors, so the impact is going to
be moving the market more in favour of investors who have
got lots of money and lots of
assets.
Yeah.
Eaqub: But the
fundamental problems don’t go away, so these are things
that are cyclical and managing the cycle. The reality is
that the big thing is we have to restrict the amount of
lending that’s going on in the economy, so the regulation
of banks has to be much harder. They have to hold more
capital. Last year we leant $14.5 billion in new mortgages.
That’s far too much. It’s the record highest
ever.
Ashley, that’s a good point. I mean, I
think it was CoreLogic that said 25% of Auckland property
investors were just walking in with the cash. LVRs aren’t
going to have any impact on them.
Church:
That’s a very good point, and that’s a bigger issue, and
Shamubeel’s right. That’s probably going to require
legislation. But with regard to the first point Shamubeel
made, I actually agree with him. I agree with him with
regard to some of those points, but there are two things.
Firstly, if you’re going to build these properties, the
money has to come from somewhere, and it’s clearly not
coming quickly enough from those who are just buying a
dwelling to occupy. Property investors have demonstrated
that they have large amounts of cash that they can spend. If
we push them into this section of the market, we’re going
to get the construction we require. Secondly, the other
thing I disagree with – the other point Shamubeel made –
was that there seems to be an assumption that if we do the
sorts of things that are being talked about, this is going
to lead to a decrease in house prices. I simply cannot see
that happening. What we might be talking about is a
reduction in house price inflation.
Eaqub: How do you
know?
Church: Well, the evidence in the market over the
last 40 years is that that does not happen.
Eaqub:
That’s BS. That’s absolute BS. You look at the data
relative to prices, column in Stuff today — go read it,
you look at the data in terms of international evidence, you
look at house price cycles. If you can tell me that you can
predict asset prices, please, go and start the business and
invest in it, because the reality is
that—
Let’s bring John in on this.
What’s your take on it? Because do you actually want the
housing market to cool? You’re in the mortgage business
— your bread and butter.
Bolton: That’s
a question I always get. I’m not really interested in
increasing the house prices. It’s kind of bad for the
economy. The volume of house sales has actually been
dropping. It’s dropped 20% year on year, and it looks like
it’s probably down another 15% or 20% in the last two or
three months. So the reality is, you know, for my business,
it’s much more about turnover than increasing house
prices. So, look, I think the interesting thing is what’s
happening with the Reserve Bank. My concern is that
they’ve actually tightened too much. But that’s not
obvious yet, because we spend so much time looking in the
rear-vision mirror. You know, house prices are hitting a
million bucks, but the problem
was—
Statistics have a lag, don’t
they?
Bolton: Well, they do, and the problem
was one or two years ago, and we didn’t deal with it at
the time. And, look, that’s going to continue to flow
through in houses prices in the short term. I think the big
driver of that is actually a lack of velocity. The thing
that happens in our market is when people get nervous and
they sit back on the fence, they literally step out of the
market. So in the short term, you’re not going to get a
price correction, because the reality is that there’s no
forced sale situation; people simply withdraw from the
market. House prices are clearly too high, but there’s
nothing in the economy at the moment that’s going to
correct that. But that notwithstanding, you know, generally,
it’s a global-type event that triggers a correction. I
think if you look domestically, there’s nothing here
domestically at the moment.
Well, can I ask
you what you think would be an appropriate price range here?
Because we’re talking at the moment, what, 10 times the
average income in Auckland. And the former Reserve Bank
economist Arthur Grimes, he said lower it 40%, crack it down
40%. What’s a realistic figure in your
view?
Bolton: In terms of?
Of
average house prices in Auckland. You know, if we’re
talking about a levelling off here, where should we be
levelling off to?
Bolton:
Well…
Or dropping
to?
Church: I think the suggestion by Grimes
was actually really irresponsible, because the implications
of that sort of measure, the impact that that would have on
the greater economy would be disastrous, so the idea of
dropping house prices artificially, I think, is one that
needs to be discarded really quickly. I think John’s
right—
Eaqub: No, no. But there is a really wrong view
that somehow these high prices are not having a negative
impact on the economy. This is hugely negative for Auckland.
You’ve got Auckland housing market that is making
Auckland, as a city, uncompetitive.
Church: No one doubts
that, Shamubeel. The question is — can you bring them down
in a way that’s sustainable and is not going to damage
other aspects of the economy?
Eaqub: Yeah, but you look
at the States. You can have cycles. You’re pretending that
somehow we can manage the cycle. We couldn’t manage it on
the upcycle; why do you think—?
Church: I’m not
pretending we can manage the cycle.
Eaqub: We can’t
manage the downside either, so it’s a moot point whether
or not house prices are going to go up or down. But the
question is — should you have policies that are correct?
And I disagree that it’s only three years. The reality is
house prices relative to incomes have been rising for 30
years. This is a crisis that’s been building for many
decades. It’s a structural problem.
Bolton: It’s a
global, problem, though.
Eaqub: No, no. It’s specific
to certain markets. It’s not a global problem for
everybody.
Church: Fundamentally disagree. The
implication there is that we can somehow just pull levers
and prices will go up and down. That’s just nonsense.
Eaqub: No, that’s what you’re
saying.
So what do you want to achieve with
those things? What is your end goal?
Church:
To slow down house price inflation as quickly as possible
and get to a point where property prices do stabilise
because supply has been met, and that’s got to be the
solution.
So Nick Smith talks about
single-figure inflation house prices. Is that what you’re
talking about achieving?
Church: In the
short term, yes. In the medium term, get them down to a
point where they’re not moving at all. And we have long
periods of that in Auckland. We have periods of five or six
years where property prices don’t move. So that is
achievable, but you’re only going to do that, Lisa, if you
increase supply.
Well, Shamubeel, yeah, the
government has consistently told us the problem is supply
related, driven largely by poor local body
planning.
Eaqub: So how many decades do we
have to wait for incomes to catch up? Right? So what we’re
talking about is policies that are so screwed up, that
it’s not working; it’s dysfunctional. So when it comes
to the supply of housing the Unitary Plan’s gone through,
now we have to build the infrastructure to be able to build
the houses, and we have to reform the local government
funding side of things, because Auckland Council can’t
build the infrastructure to build the houses. So we can do
all of these kinds of things, but the policies are much more
complex and much more structural in nature, and these are
big things that we have to work on. And the big thing that
we can do straight away is, in fact, in the bottom end of
the market where social housing, we can build tens of
thousands very easily if we want to.
John,
some of these things that Ashley is talking about could have
unintended consequences. If you start rating people at three
times the rate on their empty land, we might not get more
houses.
Bolton: Well, look, my view on it is
there’s a lot going on behind the scenes at the moment
with the Reserve Bank, and I think they’ve actually done a
lot more than people realise, and that will gradually flow
through over the next three to six months.
Church:
Debt-to-income ratios?
Bolton: Well, we’ll probably
have some sort of debt-to-income ratio, but the reality is
that that’s happening in the background at the moment. So
from a public perspective, you’ve seen 40% LVR
restrictions on investors, you’ve got the speed limit on
first-home buyers with, you know, 10% over 80% LVRs, but in
the background there’s been other changes happening.
There’s the tightening up of the anti-money laundering
rules, and we’ve got phase two coming through probably
later this year, next year. All of these things work. I
think a huge part of the problem in the last five or six
years is there’s been the amount of foreign capital coming
into New Zealand that’s largely gone unchecked and has
flown significantly into the property market. I guess we see
that as property investors, but behind that property
investment cycle is a huge amount of money coming in from
overseas. What I can tell you is that the Reserve Bank’s
been quietly working with the banks and tightening up the
rules around that. So you’ve seen the banks come
out—
So it’s correcting itself
already?
Bolton: I think so. Basically, you
can’t borrow in New Zealand now against residential
property if you’ve got any reliance on off-shore income.
That was a small change that was put through about three
months ago. We haven’t seen the impact of that yet,
because it takes three to four months for this stuff to,
sort of, flow through.
All right, we’re
going to have to leave it there. We could carry on talking.
The housing market gets everyone going.
Transcript provided by Able. www.able.co.nz