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.

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