Ryan Greenaway-McGrevy: Relaxing LVRs will not make housing affordable again

Here's a better way to help first-time home buyers: Bring house prices down. Photo / Greg Bowker

Opinion

• Ryan Greenaway-McGrevy is a senior lecturer in economics at the University of Auckland business school.

There is a growing chorus for the Reserve Bank to lift its loan-to-value restrictions on the property market, with the Prime Minister recently stating that LVRs are ideally not a permanent fixture of the market.

He is right. But I would have thought that a housing stock priced at 10 times annual household income would not, ideally, be a permanent fixture of the market either.

By now every man and his dog knows that Auckland is more expensive than London or San Francisco when measured by what you can earn - and house prices elsewhere in New Zealand are catching up.

Real Estate chief executive have led the charge, calling for the RBNZ to ease up on LVRs for first-time home buyers.

Here's a better way to help first-time home buyers: Bring house prices down. Have that deposit buy you much more of a house - and say goodbye to 30 years of mortgage slavery. Sure, the banks and real estate agents won't like it, but they have been living large for a while now.

Given the choice between scrapping the 20 per cent LVR and cutting house prices down to size, I know which option I would take if I were looking to buy.

But housing affordability matters for more than just first-time home buyers. In fact, it's hard to understate that importance of restoring affordability in Auckland and our other main centres.

Cities exist for a reason - they are very productive places. And cities are the engine room of the modern economy - it is in the big metropolises that we find the hi-tech firms operating in the Stem, IT and creative industries.

But high property prices and restrictive land use regulation are a sure-fire way to restrict growth. And although there is a mountain of peer-reviewed research to back up that claim, it is not rocket science: High house prices discourage people from moving to the big city. Firms consequently find it hard to fill new roles as they try to expand, and they can also lose employees as the younger generations out-migrate in search of a home at a reasonable price.

This means that if we are to ever have a hope of weaning our economy off low value-added, volatile commodities, and encourage further growth in our home-grown Stem and IT sectors, we must first ensure that cities like Auckland are affordable.

Put simply, our leaders must declare a war on house prices. This does not necessarily mean that all property investors have to lose: Done properly, increased urban density could maintain the value of land under the house while bringing additional housing supply to the market. Fingers crossed, then, that the Auckland Unitary Plan delivers.

But if push comes to shove, our politicians must favour first-time home buyers over investors. Unfortunately, it took them so long to even acknowledge the problem that correcting the mistake now increases the likelihood of some short-term economic pain.

That is the price we will pay as a country for trying to foster economic growth on the back of inflated asset prices. Rock star economy? Please, spare me. We've pinned our hopes to a one-hit-wonder: Property.

The priority when it comes to housing must be affordability. So, unless there is a convincing argument spelling out how lifting the LVRs will somehow restore affordability, the restrictions should remain until house prices come back down to earth.