First home buyer help – lets repeat others’ mistakes

By Shamubeel Eaqub 11/08/2013

National has announced policy to support first home buyers to take on more debt. It will have an entirely predictable outcome: higher house prices and higher debt.

The only good thing about this policy is that it is relatively small: $64m over four years. That’s $16m per year and assuming 90% gearing, $160m of house sales. That’s just under 0.5% of $36b of housing turnover in the year to July 2013.

To National’s credit they couch it in terms of a short term response and in the backdrop of other work to look at housing and land supply. But it is still a bad policy that inflames demand for housing even further, before they have tangible impact on increasing supply.

First home ownership subsidy/support policies have been tried in USA, Australia and UK. This led to a high amount of borrowing by those who could not afford it. It was also at the heart of the sub-prime crisis in the USA and the subsequent GFC.

Following is a comment from UK after the 2013 first home buyer policy was announced (from FT):

Andrew Bridgen, senior economist for Fathom Consulting, a forecasting firm run by former Bank of England economists. Bridgen said: “Help to Buy is a reckless scheme that uses public money to incentivise the banks to lend precisely to those individuals who should not be offered credit. Had we been asked to design a policy that would guarantee maximum damage to the UK’s long-term growth prospects and its fragile credit rating, this would be it.”

Pretty much the same situation here. The predictable outcome is that demand will increase without increasing supply. This will increase house prices.

The borrowing will be done by those who are on low incomes and they will commit a large portion of their incomes to debt repayment. If economic circumstances change (say redundancy) or family circumstances (say an illness or an additional child) could force them to financial difficulty.

This policy also flies in the face of what the RBNZ is trying to do with macroprudential tools – which the government turned into legislation recently. The macroprudential tools are meant to reduce the amount of risk in the financial system by not lending out too much to high risk people (low income, low job security, etc) and high risk debt (low deposit, over-priced asset, etc).

The underlying issues are around debt and supply.

Households are borrowing again and a large chunk of it is in low deposit borrowing (take a look at the bank GDSs). Why do we have such a favoured status for housing, where it can have gearing of well over 80%, but few businesses, including those with commercial property portfolios, cannot? Maybe we should have a grown up conversation about banking regulation.

Planning rules require some work too. Archaic and ossified planning regulations mean that there are many barriers to the supply of housing where it is needed (including bizarre lot size requirements in suburbs even when they are in transport nodes).

The housing debate and ‘solutions’ are about the next election. It will have the entirely predictable outcome of higher prices and more debt.