By Simon Angelo, editor, Wealth Morning. 
There weren’t enough homes to go around. So prices, especially in Auckland, reached ridiculous levels. As much as 11 times the median income.
By definition, to buy a home, you need to already have one to sell, be a cashed-up migrant from offshore, or have access to a family bank.
Last quarter, the average Auckland home price fell by $140,000. A decline of about $1500 a day. As we warned last year, this was bound to happen. This could be just the start of things as the property super-cycle turns. Now we are thrust into a new crisis.
The mass building of ‘medium-density’ town houses across our cities. Some are not houses by any normal stretch of the imagination. They look like military bunkers. Lined up alongside each other, with any view potentially blocked by the bunker next door.
Of course, Auckland could do with more density in the right places. The Unitary Plan allowed for much of that before it was superseded by the new National-Labour bipartisan accord on enabling housing supply.
The trouble with enabling housing supply in this way is that it could lead to unexpected outcomes. And that’s the key to any strategy. Indeed, to any investment. Predicting what the real outcome of an incentive may be.
Sadly, this understanding seems lacking in New Zealand politics. Before I returned to this country, I spent most of my holidays driving across France, and sometimes down to Italy.
My observation was that the French do infrastructure and housing rather well despite a much larger population. There are medium to high-rise apartment blocks around town centres. And larger homes in the suburbs or countryside.
Planning is tight in France. You can be fined up to 300,000 Euros for works without consent, or spend two years in jail. Rules are also localised to suit particular areas and not directed by government. And council mayors have further powers to impose fines of up to 500 Euros a day for unauthorised construction work. If that’s not enough, neighbours often alert concerning works to their local authorities, who may also bring civil actions for damages.
In spite of all this, good quality housing seems remarkably affordable across much of France. As is some of the world’s best food and wine.
Towns and cities are also pretty well connected. Uncluttered motorways let you zoom across the country at speeds of 130 km/h.
A rail network links up urban areas. And electricity supply is more robust than other European neighbours, thanks to 67 percent generation by nuclear.
Suffice to say, when I see the desperate ‘uglification’ of pockets of Auckland, I miss Europe. But I also wonder if the incentives for Kiwi investors are now totally wrong.
The French, I guess, have had a long time to learn about misplaced incentives …
Goodhart’s law
In the early 1900s, France controlled Hanoi in Vietnam where the wealthier suburbs had a French sewer system. They also had a rat problem.
The authorities set up an incentive they thought would resolve the problem. Bring in the tail of a slaughtered rat and you’d be paid for it. Once the scheme was up and running, they started to notice a peculiar happening – there were even more rats breeding in the tunnels. Some without tails!
Goodhart’s law states that ‘when a measure becomes a target, it ceases to be a good measure’.
Charles Goodhart was an economist who, surprise, surprise, came up with this critique when analysing monetary policy.
Interestingly, he advised on, and supported the Reserve Bank of New Zealand Act 1989.
This gave the Bank sole responsibility to vary interest rates to meet agreed inflation targets. And up until recently, it worked rather well.
However, in 2018, the Bank was given a new policy target by the Government of promoting maximum sustainable employment and, in 2021, a new remit to consider sustainable house prices.
During Covid, the bank swayed across targets to ease money supply. And the Government stepped in to fund employment attrition due to the lockdowns it enforced.
If you pay for rat tails, that doesn’t necessarily mean you’ll decrease the rat population. If you flood economies with cheap money following the short, sharp shock of Covid; you’ll end up with asset bubbles that set off a painful lag of correction.
And if you then ask your central bank to try and juggle employment, house prices, the [colonial 1840] Treaty of Waitangi, and inflation – well, I’d suggest you grab some popcorn. There could be many twists and turns.
Further, Labour and National seem to now believe they can solve Auckland’s housing crisis by forcing new rules most residents don’t want.
Let’s face it. Developers — to put it kindly — vary in quality.
If you allow them to build rows of housing that fail to match the demands of a lifestyle city, you’ll end up with new problems. Developers want to maximise their margins. Sell out the project. Move on to the next one.
Surely, some of the worst designs in this intensification will only contribute to the mental health problems that are already evident across our communities? People may be stuck in sunless units looking into one another. Neighbours become anguished as bunker rows steal their light and street parking.
But this is a fight for the people of Auckland and perhaps for their new mayor. Central government should not be interfering with local planning on the ground.
Sustainable house pricing is a fraught measure and target for a central bank trying to contain inflation, on top of employment considerations. This incentive mix could risk a further painful drawdown on house prices. Or inflation running out of control. And a serious degradation of living standards.
This article should not be construed as any financial or investment advice. www.WealthMorning.com.