Bernard Hickey surveys the real estate and political landscape and finds Bill English just lit the fuse for another boom if the Government is re-elected in its current form and a rudderless Reserve Bank loses its nerve

It’s like déjà vu all over again for the Auckland housing market and the conditions are now in place for another post-election surge.

This election campaign carries many echoes of the 2014 campaign.

Three years ago, there was a National leader campaigning for re-election against a Labour-led opposition in favour of a capital gains tax. He was arguing his government was stable and would generate more economic growth that protected the interests of property owners. There was a housing market that had come off the boil about a year before the election because of widely-criticised restrictions introduced by the Reserve Bank.

There was a prime minister who’d quite like to see the back of those restrictions who had started talking about Auckland’s housing market inflation being a “problem of success”, and one where stable house prices had proved the problems of supply were solved. Oh, and migration was bound to fall in a cyclical fashion so that wasn’t a problem either.

Sound familiar?

There was a fevered atmosphere about the election campaign (remember Dirty Politics?) and fears were filtering into the market that a new government might introduce a capital gains tax or ban foreign buyers. National was around the mid 40s in the polls and the result looked in the balance. Activity had cooled more than usual through a quiet winter period. Some real estate agents and property owners were quietly worried that the multi-decade boom might finally have peaked. They started calling for the Reserve Bank’s temporary restrictions to be removed because the ‘problem’ of house price inflation was finished. They worried even more quietly about a change of government.

We’ve seen this movie before.

Then-Prime Minister John Key successfully campaigned against Labour’s Capital Gains Tax proposal in August and September of 2014 and portrayed the Opposition as divided and incompetent. Key’s demolition of an unprepared leader on the issue of capital gains tax in The Press debate was a decisive moment in the campaign, introducing enough doubt into the minds of older property-owning voters that they stayed away from the prospect of a Labour-Green-New Zealand First-Internet Mana coalition. Young renters stayed away from the polling booths altogether and National’s sleek rowing eight powered past the Opposition’s chaotic dinghy to an apparently complete victory on the Saturday night of September 20th, 2014.

The next morning after the celebrations and wakes, it appeared National had won government in an outright victory and would not even need support partners. The worries about a capital gains tax and a foreign buyers ban and a chaotic growth-killing government evaporated in an instant.

That’s when it happened.

The Auckland housing market boomed again through the late spring and summer of 2014 and early 2015. The exact moment the boom started is easy to trace. Real estate agents described the open homes in Auckland on Sunday, September 21 as being jam-packed. Almost immediately, nervous sellers put their houses on the market and buyers jumped to get some of that capital gains action.

The euphoria spread throughout the country in the following weeks and the double-digit inflation seen up and down the country through 2015 and 2016 was a legacy of that Auckland boom.

“As soon as the election was over, my phone went nuts, just bonkers, with vendors raring to sell,” said David Blackwell, acting manager of Total Realty in Christchurch.

“It was mostly the uncertainty about a change of government,” Blackwell told The Press in the days after the 2014 election.

Ray White auctioneer Craig Prier was reported as selling all 10 houses at an auction in the week after the election.

“I didn’t think the election would have that much effect but in hindsight people were a bit unsure leading up to the election and now we’ve had a big uplift,” he said.

The market went boom again

Prices that had been seen as impossibly high just before the 2014 election rose another 30 percent in the next two years in Auckland and rose 20 percent across the country. Falling interest rates, record high net migration and chronic under-building in Auckland in particular (but not Christchurch) helped fuel the boom of late 2014, 2015 and early 2016.

In desperation, the Reserve Bank introduced a second set of restrictions on Loan-to-Value Ratios (LVRs) in November 2015. These targeted rental property investors in Auckland and were designed to limit their loan-to-value ratios to 70 percent with a 30 percent deposit. They slowed the Auckland housing market down for four months and proved a trigger for a nationwide hunt for properties by Auckland investors that spread the real estate joy to the likes of Hamilton, Tauranga, Wellington, Dunedin and even Rotorua.

By March of 2016 it was clear the housing market had taken off all around the country as rental property investors took advantage of the tax benefits of leveraged investments in a fast-rising market. By July of 2016, the Reserve Bank was forced to act for a third time. It announced landlords would need a 40 percent deposit nationwide. This move, along with a small rise in mortgage rates and tougher lending criteria by wary banks, was enough to cool the Auckland market and send a chill through the rest of the country. The Reserve Bank’s open consideration of a debt-to-income (DTIs) multiple added some extra wind to that chill in the open homes and auction rooms.

Fast forward to August 2017 and National Prime Minister Bill English faces a divided and chaotic opposition that is again open to the idea of a Capital Gains Tax and bans on foreign buyers of existing houses. National is around the mid 40s in the polls and the housing market has been cooling for about a year.

QV’s measure of average dwelling values. Chart by CoreLogic with labels by Lynn Grieveson.

Labour revisits a capital gains tax

New Labour Leader Jacinda Ardern acknowledged on Tuesday she could bring in a capital gains tax in her first term if a Tax Working Group set up by her new government recommended it. That’s a departure from previous Leader Andrew Little’s blanket refusal to introduce a capital gains tax in his first term.

National Campaign Manager Steven Joyce leapt on the admission.

“The Labour Party is once again being shifty on tax, and needs to come clean with voters on its policy on capital gains tax and land tax before the election,” he said on Tuesday.

Voters look to be set for a re-run of the 2014 debate when Key goaded then-Labour Leader David Cunliffe into suggesting (incorrectly) that estate sales might be subject to the tax – effectively taxing family inheritances. Even the suggestion of such a ‘death tax’ was enough to scare the property owning horses. English will be rehearsing his lines in the days to come that get Ardern to fill in the blanks around both a CGT and a land tax, which will be considered by Ardern’s Tax Working Group.

English practised those lines on reporters on Tuesday, wrapping together Labour’s tax moves to warn the mere prospect of them had been enough to cool the housing market down in recent months.

“I think the big uncertainty at the moment is Labour’s tax policies, so they are trying to stop themselves from saying they want to do a capital gains tax and they are talking about putting up income tax, those things would have an effect on the housing market, everyone paying petrol tax has some impact on their income – so there would be a lot more uncertainty if the Government changes,” English said.

English wants the Reserve Bank to relax LVRs and not do DTIs

Then came the lighting of the fuse, when he picked up his jawbone to tell the Reserve Bank and its yet-to-be-decided new Governor that he wanted to see the LVRs relaxed.

English was asked whether he agreed with the Real Estate Institute’s call this week for a relaxation of the LVRs.

He said he expected the Reserve Bank would now be considering when conditions would be right to lift the restrictions.

“It’s encouraging to see that at least one political party is waking up to the damage they’re doing and we can only hope that the incoming Reserve Bank Governor will take notice and exercise a more informed approach to the market.”

– Property Institute CEO Ashley Church

“I think it is pretty clear that that policy, along with a number of others, has got prices flattening off. It takes a bit of pressure out of the market. The Reserve Bank makes those decisions according to their views about financial stability, so I would expect that they are doing work on what conditions would have to be met to remove them, but there is no indication yet that they are going to,” English said.

Questioned again, English then revealed he had indicated to the bank they needed to be planning for the removal of LVRs, saying a “good regulator” would be clear about what conditions needed to be met for the removal of a macroprudential measure that was intended to be temporary.

“In my meetings with them I have said that I would expect that they would be thinking through what the conditions would be, but it’s their decision about how they deal with it,” he said.

Asked if DTIs were now off the table, English said he saw no need for further macroprudential tools to be added to the Reserve Bank’s toolkit.

“We don’t see the need for further tools. Those are being examined, and if there was a need for it, we would be open to it, but we don’t see the need at the moment. No, we won’t be looking at it before the election,” he said.

Wheeler still sees a post-election boom risk

The tone of his comments are vastly different to those of the outgoing Governor Graeme Wheeler, who said last week he was still worried about the Auckland housing market taking off again. The Reserve Bank is still consulting with the public on whether to introduce limits on DTIs to its toolkit, with submissions due by this Friday. The Reserve Bank is far from having backed off needing DTI limits and is not talking about relaxing the LVRs.

“We did see house price inflation start to fall quite significantly before the last election and then it picked up afterwards, so that’s always possible,” Wheeler said at his last Monetary Policy Statement conference after being asked about the prospect of a post-election surge.

The Reserve Bank may well be able to douse the fuse that Bill English lit this week, but any loss of nerve by the Reserve Bank and talk of more interest rate cuts would blow on that fuse and set it running towards another boom.

He later told MPs that it was not clear to him that house prices would not pick up again. He pointed to how house price inflation had fallen to around 6 percent ahead of the 2014 election.

“Then it took off again after the last election so we’re cautious in that regard.”

He pointed to the imbalances that still remained in the housing market, with new housing supply still lagging behind population growth in Auckland and net migration at record highs and rising.

The trouble for him and the Reserve Bank is that Wheeler finishes on September 27. He will be around just long enough to see an auction result or two. His successor may see things differently, particularly if he is being selected by a re-elected National-led government without Winston Peters in tow.

Would a new Governor defy English?

Wheeler’s relative unpopularity with the ninth floor of the Beehive over the last five years has been due in part to his dogged pursuit of the LVRs despite the behind-the-scenes opposition of Key. The former currency trader was also sceptical of Wheeler’s decision to hike interest rates between March and July of 2014. Key’s scepticism was proven justified through 2015 when they had to be unwound, and then cut further in 2016.

But Wheeler will not be there to push back against any re-elected National Government. His deputy Grant Spencer, who is seen as a conservative and no huge champion of such LVR and DTI restrictions, will hold the fort for six months from September 27 until a new Governor is appointed, probably in early 2018.

Candidates vying for the job will need to listen to English’s jawboning and may be vulnerable to a change of direction away from LVRs and DTIs. Home buyers waiting for the result on the night of September 23 now also now know there is a higher chance the restrictions will be relaxed with Wheeler gone and a fresh new face eager to keep the Government happy. 

Any newcomer will know that Wheeler’s forceful introduction of three rounds of restrictions was at least partly responsible for Wheeler being a one-term Governor. There is a risk that a new Governor loses his or her nerve and is convinced by the real estate agents, the landlords and Government to relax the rules. English’s jawboning has at least created an early potential conflict with a theoretically independent central bank.

Property Institute CEO Ashley Church described English’s comments about relaxing the LVRs and ruling out DTIs as “fantastic news for Kiwis” and a sign “common sense was prevailing”.

“It’s encouraging to see that at least one political party is waking up to the damage they’re doing and we can only hope that the incoming Reserve Bank Governor will take notice and exercise a more informed approach to the market,” he said.

Sunday September 24 could be a busy day for open homes in Auckland. The bidding and the clearance rates at the auctions in the following weeks will provide the tell-tale signs of whether any National victory has sparked another boom.

Ready to go boom again

The tinder in the undergrowth of Auckland’s housing market is dry. Net migration is at record highs and rising. New Zealand’s migration rate is three times’ faster than Britain’s, five times’ faster than America’s and twice as fast as Australia’s.

Auckland is building less than half the houses it needs to keep up with population growth, let alone eat into the shortage of 40,000 that already exists. Interest rates have stopped rising and bank economists have talked in the last week about the Reserve Bank leaving interest rates on hold well into 2019.

The Reserve Bank may well be able to douse the fuse that Bill English lit this week, but any loss of nerve by the Reserve Bank and talk of more interest rate cuts would blow on that fuse and set it running towards another boom.

We could be in for an action replay of 2014. The 2017 election campaign already shares the frenzied pace and sense of uncertainty. It may yet share the same boom that followed John Key’s victory speech shortly before midnight on the night of September 20, 2014.

The real estate agents will certainly be staying up late on the night of September 23.

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