How to curb excessive house price rises

Today Michael Cullen revelaed an audacious plan to apply a mortgage levy to fixed rate mortgages. This predicatably went down like a lead balloon. It’s just another tax on property owners and likely to be very regressive in nature.

House prices are expensive especially when related back to wages and rents. The question to ask is why prices have risen so much in the last 5 years. One simple explanation is increased migration. This creates demand for new housing for the new population but it is also the nature of the new arrivals that is important. Many immigrants are skilled and wealth with 60% approved last year under the business or skilled categories. Added to this was a general weakness in the NZ$ back in 2001/2002 which made NZ property look very cheap. This in turn allowed higher prices to be paid for property mainly through the auction process here which created a general revaluation of property across the board.

That revaluation in 2002/2003 lifted prices and generated a whole new group of property investors and developers. Property was suddenly on the move and a great investment. With immigration picking up again it is hard to see how prices can fall from current levels.

By imposing a mortgage levy all the government would achieve is to make people less well off leading to higher wage demands. As the imposition of stamp duty in the UK showed it is hard to restrain a property market when demand is strong.

With so much overseas capital arriving, even with the NZ% so strong (though it should be noted not so strong against A$, Eur or Stg) it is very difficult to control the property market.

One alternative is to look at the actual supply of money otherwise known as credit. There has been mention of LoanToValue ratios and attempting to control them. It may be easier to actually limit or reduce the amount of credit banks can grant, in essence saying “hey there just isn’t any more money out there”.

I will explore the issue of changing the reserve asset ratio another time but it is clear that the mortgage levy is not the answer.