Bernard Hickey: Prepare for the party to end

That overvaluation has grown more than any other country in the OECD over the past six years. Photo / Michael Craig

Should we all celebrate? Or sink into a great depression, or run for the nearest bunker?

It's hard to know how to react to the news Auckland's average house value rose over $1 million in August.

Auckland's homeowners should in theory be celebrating their good fortune and voting for more of the same.

Anyone who invested just over $53,000 of their money in 2011 to buy an average Auckland house with a 90 per cent mortgage would now be sitting on tax-free capital gains of $486,000.

Indeed, some are celebrating. New car sales are at record highs and spending in Auckland's cafes, bars and restaurants is growing at double-digit rates.

But it's not the sort of go-for-broke debt-fuelled spending binge like the one we saw from 2002-07 when mortgage lending grew at an annual rate of 15 per cent.

Mortgage debt grew 9 per cent in the last year and most people think it has peaked, given the Reserve Bank's latest restrictions on low deposit lending and a limit on debt to income multiples expected next year.

Most Aucklanders don't believe the manna from the great housing gods in the heavens is real enough to go withdrawing from their household ATMs, which is why the lending growth is relatively subdued.

They can also feel in their bones that house prices at 10 times incomes are hyper­ventilated, if not downright over-valued.

New Zealand's house-price-to-income multiple is the second-most-expensive relative to long run averages in the OECD (behind Belgium), and is the most expensive relative to rents in the OECD.

That overvaluation has grown more than any other country in the OECD over the past six years.

This is not the sort of world champion tag we want.

The $1m milestone is clearly a moment of despair for those young Aucklanders aspiring to own a home and start a family, particularly those whose parents were also renters.

The combination of the price rises and the new LVR rules mean they face decades of saving for a deposit, let along being able to borrow the hundreds and hundreds of thousands to buy a home.

The least the Government could do is step up to ensure they help first-home buyers fund these homes.

All they can hope for is to win Lotto or to marry into a rich family.

Another response is to hunker down and prepare for an implosion, which means saving madly to repay debt ahead of the housing market end-times and to diversify into other types of assets.

This isn't so much a celebration as a preparing for the party to be shut down.

There are two other ways to think about the magic million number.

First is the Stockholm Syndrome response where the hostage starts to sympathise with the hostage-taker. The homeowner knows they're being forced against their will to stick with the overvalued asset, but they also think any attempts to end the siege only risk harming hostage and kidnapper.

Our political debate over housing affordability has appeared a lot like a hostage crisis lately, often boiling down to: Nobody moves or the home equity gets it!

Second is the pass-the-parcel approach, best played with the Wiggles' Hot potato, hot potato blaring in the background.

If you think one day the music will stop and you don't want to be holding the bad loan parcel, the best approach is to flick-pass the parcel as fast as you can and hope the music stops for someone else.

The Government could circumvent this game of pass the parcel. It could restrict its KiwiSaver HomeStart grants to new homes.

If the banks and the Reserve Bank are determined to stop landlords from funding these new homes, the least the Government could do is step up to ensure they help first-home buyers fund these homes.

Now is not the time to give in to the hostage takers' demands.

Let's take the long-term view and use the Crown's balance sheet to negotiate our way out by funding and building homes that will be there for many decades and housing cycles to come.