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Why The Price Of Property In Auckland Is Irrelevant

Last week, I spoke with Kerry McIvor on Newstalk ZB to discuss the “housing crisis”. The “housing crisis” term is used as an excuse for some form of price control or to illustrate the need for more property. In this article, I talk on both.

There is a large media focus on Reserve Bank Governor, Adrian Orr and Finance Minister, Grant Robertson to apply the fiscal and monetary brakes. With the implication that fiscal and monetary policy will somehow bring prices to some ‘correct’ level.

There are a number of models and formulas that are frequently used to show that a house or wider market is overpriced. Median property to median income ratios nearing 10x are often quoted to illustrate Auckland’s un-affordability on a global stage. However, assuming capital is global, property in Auckland is actually undervalued, if we compare median rental yield on the same global stage. Arbitrary models are often used to justify political means and typically, are one sided in their presentation. The price of property reflects market conditions and doesn’t care for our opinion on what a property is ‘worth’.

What we see in Auckland currently, is a lack of supply, with a slowly increasing level of demand, this mismatch results in higher prices. We can see this in the average number of people per household, Auckland has 3.2, while the average for NZ is 2.8.

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So, easing price can only be solved by increasing supply.

Now we have isolated supply as the side of the equation we need to fix, the conversation needs to focus on the most efficient way in which this can be adjusted.

When assessing any housing policy, I assess it with one key lens; is this the most efficient allocation of resources?

There is a lot of discussion on capital gains tax, changes to bright lines tax and other various fiscal and monetary measures to stem the increasing price side of the equation.

To focus on price rather than supply, is to focus on the symptom, not the source of the issue.

Will property taxes increase supply?

They might, if the Government can allocate resources more efficiently and build houses more efficiently than the private sector. However, as we have seen, this is not the case.

There are two key areas the Government of the day can focus on that will immediately affect the price of property. a) increase supply; and b) promote the flow of property in the market.

The most efficient way to build more units is at present, through the private sector. It appears that more support for the private sector will result in the greatest addition of new housing stock to the market.

Making it as easy as possible for people to sell properties will also increase supply to market. Extending the bright line test will likely mean people will avoid selling, instead recycling their equity to avoid tax, buy more property, and there will be an even greater divide between those with assets and those without.

Less circulation means less supply, which we figured out earlier, will only increase price.

One easy strategy the Government can use, is to simply repurpose the billion odd dollars earmarked for Kiwibuild and guarantee further purchase of housing stock off private developers. The infrastructure is already there, there is a massive flow on effect throughout the economy and there will be many millions saved in administration and bureaucracy costs.

To quote Winston Churchill; "For a nation to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.”

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