The housing challenge

The Post editorial:

The latest QV property data supported what many around the country are feeling: house prices have fallen another 1.7% nationally since the start of the year.

This now makes the correction from peak to trough a stonking 22.7% in Auckland, 31% in Wellington and 14.2% nationally.

That s a huge decrease in Wellington and Auckland. In my view it was absolutely necessary though. The ratio of the average house price to the average income was a horrific 8.2, and it has fallen to 5.8. In Auckland it peaked at 10.0.

The years to save a 20% deposit has dropped from 13.4 to 9.6 and the share of household income on mortgage dropped from 56% to 42%. These are all great things, especially for younger people.

For the current Government, this has been a blessing, but mostly a short-term curse. On the one hand, with a Minister of Housing, Chris Bishop, who explicitly wanted prices to fall, it is a demonstrable success. On the other hand, the wealth effect of housing – where people feel wealthier because their main asset is worth more money and they can borrow against that increased worth – has not worked in this Government’s favour.

To put the Auckland falls in dollar terms: the average house value has dropped about $350,000. In Wellington it is about $360,000. The amount of vanishing net wealth – even if only short-lived and on paper – is significant.

This is the challenge. The drop in house prices has been necessary, and even essential. However when the average house is worth $350k less than five years ago, households feel poorer (as we don’t factor in our next house is also cheaper). We are less likely to buy say a new car, renovate the house, even go on holiday, when we feel our net worth is lower (on paper).

This is almost certainly part of why economic growth has been subdued. The answer is not to have house prices become unaffordable again though.