Bryan Gould: Lending restraints shed light

Tauranga from the sky. Photo/file

THE news that the number of houses being sold is falling and that prices are rising more slowly has been greeted in some quarters with responses that are in my view - sadly - all too predictable.

It seems clear to me that these shifts have been brought about by the Reserve Bank's restraints on bank lending on mortgages.

The real estate industry has been the first to complain at this threat to its rising profits, but in my opinion it has no doubt been supported by all those others - speculators, landlords, banks - who have prospered as they have created the unaffordability crisis that has afflicted so many of our fellow citizens.

The critics have urged the Reserve Bank to relax the loan-to-value ratios that have succeeded in cooling the housing market - and even the Government, in the person of the Prime Minister, has weighed in with advice that the Reserve Bank should back off.

This is a bit rich coming from politicians who have not themselves had the courage to do anything at all about unaffordability, and who now do no more than snipe from the sidelines when the Reserve Bank takes steps that have proved effective.

The critics, in my opinion, have camouflaged their obvious self-interest in rising house prices - a self-interest, in the case of the property industry, in profits, and in the case of the Government, in votes - by shedding what I consider crocodile tears for first-time buyers who find it difficult to raise the deposit that is now necessary.

There may well be a case for relaxing the constraints for first-time buyers who want to buy a (comparatively) inexpensive house in which they intend to live; but the case would be even stronger if the critics showed some awareness that the problems for first-time buyers - as for others - have been caused by the excessive bank lending that the Reserve Bank is now acting to restrain.

A failure to act now could only mean that prices will continue to rise and future first-time buyers would be even more thoroughly priced out of the housing market.

We can at least celebrate one significant step forward. The debate about what has really caused house prices to rise so fast can now be assessed in the light of these latest developments.

The conventional view, shared by the opposition as well as government politicians, is that the problem is one of market failure - the failure of supply to keep pace with demand.
But that is to ignore the fact that the housing market is not like other markets.

What makes it different is that, for as long as bank lending on mortgages is unconstrained, there is virtually unlimited purchasing power in the hands of purchasers.

It is that tidal wave of unlimited new money created by the banks that floods into the housing market every day and that makes it inevitable that house prices will rise and rise.

The only way of slowing it down is to restrict the amount of bank lending, and that is what the Reserve Bank has now done.

It is to the credit of the bank and its governor that they have acted on their understanding of what is really happening, and that they have been able, with the effectiveness of the measures they have introduced, to demonstrate the correctness of their analysis.

But why leave it to the Reserve Bank? Why should we continue to allow our politicians to disclaim the responsibility that is truly theirs?

If the Government won't take action, how refreshing and wonderful it would be if Labour's new leader were to emulate the great Michael Joseph Savage who, in the late 1930s, used "quantitative easing" - not to bail out the banks - but to build tens of thousands of new state houses.

He thereby created a long-term and income-producing asset for his Government, and provided in addition not only good jobs for building workers but also low-rent, good quality housing for young families.

I know about this from first-hand experience.

My parents married as World War II was about to break out.

When I was born, they moved with their new baby from private rented accommodation into a new state house, which is where I grew up and enjoyed a happy and secure childhood - to which every child is surely entitled.

Bryan Gould is a former British MP and Waikato University Vice-Chancellor.