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Property Institute cautions against price-to-income cap


Thursday 28 April 2016

Property Institute cautions against price-to-income cap


Property Institute of New Zealand Chief Executive, Ashley Church, has responded with concern to suggestions that the Government may be considering the introduction of a price-to-income cap to address house price inflation.


Yesterday, Finance Minister Bill English floated the idea that the Government could set a house price-to-income ratio for local bodies to "ensure councils release the right amount of land to keep housing affordable".

The proposal differs from a similar idea, floated last year, where the cap would have applied to Banks and would have restricted the amount they could lend to a multiple of the borrower's income.

Under this new proposal the cap would, instead, apply to Councils and would require them to open up more land for development in a given area if the average price of houses in that area exceeded an as-yet unspecified multiple of the average income in the same area. The theory behind the idea is based on the expectation that land prices would drop as more land was freed up - and there was also an implicit expectation that relative building costs would reduce over time.

However, Mr Church cautioned that both assumptions were tenuous and suggested that a price-to-income cap controlled by Council would almost certainly have the opposite effect to that which was intended.

"Council would inevitably use such a cap as an excuse to constrain growth - rather than allowing the market to find its own balance".

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He said this would happen because Councils would have a ready-made excuse to limit greenfields development to only those areas required by the legislation - rather than a need to open up large new areas as is currently the case.

"Auckland Council has been resistant to opening up large tracts of land for new residential development for ideological and economic reasons and this proposal would actually reinforce their ability to drag the chain".

Mr Church also suggested that other 'unintended consequences' of such a policy would be a lack of interest by private developers and the creation of 'pop-up slums'.

"Few developers are likely to be interested in projects where the potential for profit is marginal, at best - so the very nature of low-cost housing means that houses would need to be built cheaply to be commercially profitable. That has consequences for the style of the homes that would be built and the nature of the communities which would emerge".

He also cautioned that the principle underlying the proposal pre-supposed that land prices in a defined area would respond differently to those in the rest of the city.

"There's every likelihood that land prices in the newly opened up areas would simply rise to the levels of other parts of the city.

Mr Church said that the Government is doing some great work to help to solve the supply in issue in Auckland - but that its attempts to dampen demand were proving to be counter-productive.

"The best way to address house price inflation in the Auckland housing market is to back measures which quickly increase supply rather than trying to find ever more bizarre ways to artificially reduce prices".

Mr Church said that the current boom is being fuelled by a mixture of a real need for new homes and an element of investor speculation which could be as high as 30% to 40% of the demand.

"Either way - prices will stabilise when the market finds its own equilibrium. House prices will level off when supply matches demand".


Ends

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