30 Sep 2015

What goes up must come down

1:27 pm on 30 September 2015

Finance Minister Bill English says the Auckland housing market is the biggest single imbalance in the wider economy, and is consequently a concern for the government.

In a speech at Victoria University Mr English said he had yet to see a housing market anywhere in the world where prices went up at over 20 percent a year without stopping and then coming down again.

House with parachute

Bill English says he's never seen a housing market where prices rocketed up without then coming down Photo: 123RF

He said it took about eight years for the housing market to respond to a shock to demand, which he said was in part because changes to council plans could take years.

That was why it was so important to get planning right, he said.

"Resource consents on a housing development regularly take 18 months, including pre-application times excluded from the official statistics.

"When combined, those very real delays can exceed the length of the house price cycle," he said.

He said when house supply was relatively fixed, shocks to demand - like the recent strong migration flows - were absorbed through higher prices rather than the supply of more houses.

Bill English giving his Post Budget 2015 speech.

Bill English Photo: RNZ / Alexander Robertson

"Long lead times in the planning process tend to drive prices higher in the upswing of the housing cycle," he said.

He said those lead times increased the risk that eight years later, when additional supply arrived, the demand shock that spurred the additional supply had reversed.

The resulting excess supply, he said, could produce a price crash.

Mr English said that was not a prediction, but an explanation of why the government was working so closely with Auckland Council to avoid such a scenario by getting the right houses to market sooner.

He told the conference international research showed that the steepest house price increases and the sharpest falls were in areas where regulation was strongest.

He said getting urban planning wrong also increased inequality.

"Twenty-five years ago, around 30 percent of new homes coming into the market were priced in the lowest quartile. Another 30 percent of new homes were priced in the upper quartile.

Today, only 5 percent of new homes are priced in the lowest quartile. Nearly 60 percent of new homes are priced in the upper quartile."

He said supply of affordable housing had dried up.

"It is not surprising to see prices and rents rising disproportionately at the bottom end given this lack of supply."

Mr English said developers had told him that in Auckland they needed to build a house worth $600,000 to make a development commercially viable.

"That's because it is difficult to build cheap housing on expensive land - particularly in view of the planning rules."

He said progress was being made to make regulations more efficient but it would take time, and the government took a long-term view.

"All of the things I've talked about today will take 10 to 15 years to sort out," he said.