After last month's big policy announcement, what's left for the Government to do on housing affordability?
Plenty, say economists who will be looking to this month's Budget for more action on the supply side of the market equation.
Essentially, there are two ways to affect prices.
You can limit demand by either reducing the number of potential buyers or by making it less attractive to buy more houses.
On that front, the Government appears to have gone about as far as it can without introducing a full capital gains tax (which it has ruled out).
Moves to dampen investor demand for housing sparked a furious reaction from landlords and investors last month.
One part, the extension of the bright-line test, was widely expected. Investors were already required to treat the profits from the sale of properties within five years of buying them as taxable income.
That's now been extended to 10 years.
But the removal of the right to deduct interest payments on investor properties from your tax bill came as a shock to property investors.
The other path is to boost supply, opening more land for development and building more houses.
Westpac acting chief economist Michael Gordon describes the move as "the most meaningful intervention into the housing market in decades."
He believes it will have the desired effect of curbing investor demand.
Debating the right mix of policies to make housing more affordable has become something of a national pastime.
But it's a debate that's somewhat overshadowed by a political reluctance to concede that prices need to actually fall.
Gordon and the Westpac team made headlines by predicting the new policy moves would see house prices drop by around 10 per cent over the long term but with "much greater effects in the short term as some investors exit the market."
Gordon has since softened that view.
"Since then, we've had the chance to work through our conclusions in more detail," he says.
"We have changed our minds on one aspect: we're less concerned now about a sharp drop in prices in the near term. Sales will certainly slow, since leveraged investors are unlikely to be adding to their portfolios from here."
But the phased removal of tax deductibility, plus the already-existing bright-line test, would argue against a rush to sell, he says.
"A better description would be that the tax changes have removed the upside for prices that we were previously expecting."
So while that might be good news for those desperate to break into the housing market it is still a long way from what's required to bring New Zealand houses back to any international benchmark of "affordability".
The latest REINZ house price index showed prices increased by 24 per cent in the year to March.
To get a sense of how affordable we think house prices should be, we need to look back at the long-term trend, says Infometrics economist Brad Olsen.
House prices were between two or three times the average household income from the 1970s through to the late 1990s.
"We still had a multiple of below four until 2001," Olsen says.
But from there it soared, and by mid-2008 it had peaked at 5.7 times income.
The Global Financial Crisis brought a brief pause but as low interest rates and high migration kicked in, it has soared from there to a multiple of about seven times household income.
To get them back to a multiple of three - the international benchmark for affordability - you'd need a 55 per cent reduction in house prices, Olsen says.
You'd need a 25 per cent fall in house prices just to get them back to a more affordable multiple like five.
We can look at it the other way (the way politicians prefer to) and assume prices stabilise and just stop rising for an extended period.
If you want to get back to a median multiple of five you'd need a 34 per cent increase in the median household income, Olsen says.
To get back to the multiple of three you'd need household incomes to go up by 120 per cent.
So if we stick to a more achievable goal of prices at five times household income we still need either a 25 per cent fall or a 34 per cent rise in incomes, or a mix of the two, spread over some time.
Kiwibank senior economist Jeremy Couchman says we have a shot - but that much more action is required on the supply side.
He sees the lack of supply being the dominant driver of the seemingly unstoppable growth in house prices.
We are actually now within striking distance of balancing supply and demand in the housing market, he says.
The reality is that we have the pandemic, not housing policy, to thank for that.
Closed borders have seen the immigration rate drop below the rate of new building for the first time in eight years.
There was actually a surplus of 13,000 new homes built last year, he says.
Unfortunately, that still "only nibbles around the edges" of a housing deficit that has built up over many years.
Couchman estimates that we are still in the order of 67,000 houses short.
So on our current track he estimates that it will take at least three years to balance the market.
And that, of course, is highly dependent on when, and to what extent, our border fully reopens.
He's not optimistic about house prices becoming affordable because it would require a massive oversupply and a big fall in price.
"And we're not forecasting that, but I guess this would alleviate some of the pressure," he says.
So what does he hope to see in the Budget?
"They could add to that $3.8 billion fund, or expand it a bit," he says, referring to the Housing Acceleration Fund announced last month.
That fund will aim to accelerate new house building by providing additional funding to councils for new infrastructure like roads and sewage.
"We still have a massive shortfall for the maintenance of infrastructure in our largest cities. That may hinder the intensification that's really needed because it's not just about building out, it's about building up," Couchman says.
The Government might also look at measures to allow councils to borrow more for infrastructure.
The other area for attention is the Resource Management Act, he says.
Much maligned as a hindrance to new housing development, a full overhaul of the act is planned but the process will take years.
So interim policy measures to reduce the cost of new builds and consent issuance in the short term would help, Couchman says.
ANZ senior economist Miles Workman also believes it will take a big shift on housing supply to change the affordability equation.
"More houses is the only answer in the end," he says.
"The tax changes will help take some of the wind out of the housing market's sails. But they do nothing towards lifting supply."
There's no quick fix, he says.
The Housing Acceleration Fund was a " step towards rectifying the fact that local government is not able nor incentivised to provide investment that enables large-scale green-fields or densification development in a timely manner."
Looking to the upcoming Budget, Workman points out that fiscal policy doesn't always have to be about spending money.
"Fiscal policy also has supply side levers it can pull, such as freeing up land for development and cutting red-tape," he says.
"Well thought-out supply-side reforms have the potential to make the New Zealand housing market a lot less susceptible to such dramatic house price cycles.
"Importantly, the Government is not done," he says. "Let's hope the focus pivots further towards supply from here."
Westpac's Gordon says low interest rates remain the biggest driver of the housing market.
But he acknowledges that addressing supply will help.
"If you want a clear example of where supply does matter you can compare Wellington and Christchurch, two similarly sized cities that have had two very different responses in terms of how many houses they've built in the past few years."
Obviously Christchurch has had the earthquakes and recovery plan.
"But even after that it has been much freer in terms of adding to the supply. Wellington has felt an awful lot like Auckland before the Unitary Plan."
Auckland's Unitary Plan - adopted in 2016 - "has been quietly revolutionary", Gordon says.
"You can see it in almost any street in Auckland that the places that are demolished are replaced with townhouses. You're getting a clear evolution in the housing stock."
In terms of what the Government can do from here, it's "take the lessons from the unitary plan and apply them more broadly to other cities," he says.
Although if the political battles that dogged the unitary plan are any guide, that could involve plenty of conflict, he warns.
He also offers a warning on another issue with slowing the housing market - it could limit New Zealand's economic growth.
A booming housing market tends to drive consumer confidence as home owners feel better off.
The policies announced last month will be enough in themselves to "weigh on domestic demand," Gordon says.
"A full recovery in economic activity and employment is likely to take even longer than previously expected," he says.
ANZ's Workman describes it as "a conundrum" for the Government.
"It wants to make housing attainable to those who have been locked out. From this starting point, that's all but impossible to do without prices going into reverse."
"But at the same time, New Zealand's strong economic recovery has been driven largely by the success of monetary policy in engineering a very strong housing market."
That may be reason to temper expectations that the Government will be in a hurry to unveil more radical proposals on housing until it sees the effect of the ones it has just announced.
