KEY POINTS:
The Reserve Bank of New Zealand is tipped to cut the official cash rate this month, but mortgage holders and first home buyers are warned not to expect lower interest rates yet.
ASB chief economist Nick Tuffley expects the Reserve Bank to drop the OCR 100 points to 6.5 per cent at the scheduled meeting on October 23. He says it is unlikely to act before then.
By the end of the year, Tuffley expects the rate will be reduced to 6 per cent and a further cut in the early part of next year will drop it to 5.5 per cent by March.
ANZ senior economist Khoon Goh says under normal circumstances a drop in the OCR would translate into lower mortgage rates and improve home affordability.
But given the credit crisis and the cost of banks borrowing offshore, the way mortgage rates are set is becoming more complicated. If the economic situation does not improve overseas, banks' increased borrowing costs could offset any relief from a lower OCR.
BNZ chief economist Tony Alexander says conditions are improving affordability for first home buyers - there's tax cuts, a steady labour market, cheaper house prices and easing interest rates.
But he warned of uncertainty over the speed and the extent to which interest rates would fall.
"Just because the official cash rate is cut half a per cent, it doesn't mean mortgage rates will go down half a per cent."
Andrew King, of Andrew King Property Management Services, says the recent drop in house prices, with greater reductions to come, proves home affordability is cyclical.
Property investors and developers had been saying prices would fall this year and King is pleased the Government held off on some of its steps to control affordability.
"I think the fact that it held off is to the Government's credit," he says.
"When house prices are rising there's a lot of political pressure from people to help first home buyers and do something about it."
Labour and National's affordable housing policies are unnecessary now that prices are dropping by themselves, says King - in fact they could upset the market.
"I think they should just keep their hands off and if the market has to fall the market has to fall," he says.
First home buyers are just part of the market - they are part of the problem and they will also be part of the solution, King says.
The population controls the property market by deciding how much it is prepared to pay or accept for property - "and government shouldn't interfere with those decisions because they tend to bring in long-term policy changes for a short-term problem and that's not a good idea," King says.
He suggested a major reason house prices reached such high levels in the first place was the large amounts of "red tape" that local and central government had imposed on developers.
David Whitburn, director of property development firm Fuzo, says there's less of a commercial aspect to the property market than the sharemarket because it's built on emotion. Housing affordability will come naturally, but he agrees it could be sped up by cutting the red tape.
His firm has seen compliance costs balloon over the past four years - they are now averaging slightly more than $30,000 extra per house and that cost is transferred to the home owner, he says.
Red tape puts developers off doing a project at all, therefore reducing the supply of housing and driving up house prices, Whitburn says.
Four years ago someone with 1000sq m of subdividable land in Auckland would have been looking at costs of about $50,000 to chop it up and create a title.
Now it would cost more like $100,000. That, compounded with tightened lending criteria, has caused many developers to turn on their heels, he says.
Authorities are also forcing developers to set aside part of their development for low-cost homes. King and Whitburn believe this is unfair and detrimental to the property market.
Not only does the legislation hit developers in the pocket, and deter them from going ahead with the project, it "basically gives some people a cheaper home at the cost of other people in the subdivision," King says.
Property Council of New Zealand's chief executive Connal Townsend agrees the onerous compliance procedures and costs should be stripped in order to further correct the property market.
The time it takes for an authority to process an approval goes on the purchase price "and even a dip in house prices isn't going to solve the fact that there are problems in the system that have to be put right," Townsend says.
But King worries people have adjusted to those costs, and reducing them now could potentially increase the supply of property which would further drop property prices - hitting new first homeowners in the pocket.
"And that's probably not in the majority of people's best interest," he says.
WHAT FUTURE FOR AFFORDABLE HOUSING?
We asked National and Labour if New Zealand needs affordable housing policies now that house prices are dropping.
National housing spokesman Phil Heatley: Even though property prices have stabilised and now dropped in most centres, they are still at levels well over and above what most first home buyers can afford.
This points to how big the gap between income and property values has become and that's why National is still determined to address the affordability issue.
Our team has worked hard to put a tax package together that will improve the take-home pay of Kiwis so they can better meet their fortnightly mortgage commitments.
We will be taking a more responsible approach to managing the economy in order to get interest rates under control. Interest rate rises are seriously hurting families at the moment, either directly through mortgage costs or indirectly through rent rises where landlords themselves are trying to meet higher mortgage payments.
National will definitely target the Resource Management Act and the Building Act, streamlining them both. The experts tell us this regulation, on top of the Local Government Act red tape, still adds up to $55,000 to the cost of building a new home.
This bureaucratic cost of new-builds is unacceptable regardless of the current housing climate.
Labour Housing Minister Maryan Street: Real house prices increased by 80 per cent between 2002 and 2006, locking large numbers of people who could have previously bought a first home out of the market. While forecasts continue to suggest house prices are decreasing or will do so, no one is predicting a return to 2002 prices.
The Government is monitoring the situation but unless there is a very dramatic drop, there remains a real need for policies to arrest our declining home ownership rates. That's the feedback I get from New Zealanders on a very regular basis.
