Liam Dann: Time-lag a risk in housing supply boost

The Auckland market has been on a golden run for at least 15 years, pausing only briefly during the peak of the global financial crisis. Photo / Greg Bowker

The Government might have it right, betting big on the supply side of the curve in its efforts to tackle Auckland house prices and preserve this place as a liveable city for ordinary working New Zealanders. I hope it has.

It is not an unreasonable plan. But it suffers in being a slow solution.

Speed's a problem not just because it would be nicer if any outcomes that aid those who most need them came sooner. Another flaw is that any measurable solution is likely to arrive into unknown market conditions some three to five years from now.

If the market does turn down in that period - however much Aucklanders struggle to accept that possibility - then the increased supply would exacerbate any slowdown and potentially cause a price slump.

Of course that's sort of what we want, right. Auckland houses our children will be able to afford. But not too much of a good thing ... right?

We don't want to throw anyone into a negative equity situation. Many also view houses as retirement funds. Big falls would be problematic.

So there's a sweet spot. But what it is exactly is wildly subjective.

It's really not quite clear what we're shooting for here - lower growth, a flat market, falls of 5 per cent, 10 per cent?

Markets just aren't that easy to control. Governments right across the political spectrum have a poor track record of making them do what they are told.

The trouble is that they tend to over-correct.

There's no better example than oil right now. It is ridiculous that the price of oil is falling given its scarcity and the costs of getting it out of the ground. Yet somehow humans have once again managed to overproduce and in doing so are disrupting the global economy.

You can almost hear the Americans backing up the pick-up truck. "Whoa, easy now, we were only trying to knock the top off the oil price there buddy."

The trouble with markets is they have no speedometer, no thermostat. We can influence the direction but we lack efficient brakes.

Stories in the Herald last week that cited senior market and economic figures talking about price falls will have surprised some people.

But if we are to have some serious discussion about housing we need to retain a sense of realism about how markets behave.

We certainly don't have a Reserve Bank governor that suffers from any delusions that property markets can only go up. Graeme Wheeler has garnered something of a reputation for keeping housing bubbles top of mind after witnessing their impact in the United States during the global financial crisis.

Of course, right now it genuinely is hard to imagine a serious downturn in Auckland property prices. The Auckland market has been on a golden run for at least 15 years, pausing only briefly during the peak of the global financial crisis.

But macro-economic conditions can change, events can surprise.

How about a scenario where RMA reforms and special housing zones actually work well? What if the big boost in housing supply coincides with a capital gains tax introduced by a new Government? Meanwhile, the Australian economy booms and immigration trends reverse.

Stranger things have happened and very often do. Prices could fall and that might not be a bad thing - as long as we are prepared for it.

If homeowners and property industry people are relaxed about efforts to curb house prices that is probably because there is so little confidence that Government efforts will be successful.

Right in the peak of a property boom might seem like a strange time to be talking about falling house prices. But when a market seems to be at its most certain is a very good time to challenge our thinking.

With the Government about to embark on a populist move to cool the market, it doesn't hurt to consider the full range of possible outcomes.