The proposal to deliberately ‘crash’ the Auckland housing market by 40% has been slammed by Property Institute of New Zealand chief executive, Ashley Church.
Last week, former Reserve Bank chairman, Arthur Grimes, now a senior fellow at Motu Research and an associate professor at Victoria University, announced the idea in a speech to an Auckland audience last week.
Prime Minister John Key has since given his opinion, saying "I think it is crazy. Go and ask the average Aucklander who has got a mortgage with a bank if they want to see 40% of their equity disappear,” he told the NZ Herald.
"What Auckland and the rest of New Zealand needs, where it is in high growth, is sustainable supply of housing to meet the demand.”
Grimes also posted his opinion on a public website and wrote, “My call for policies to drive a house price collapse is driven by my personal value judgement that it’s great for young families and families on lower incomes, to be able to afford to buy a house if they wish to do so. My concern is not for older, richer families, couples or individuals who already own their own (highly appreciated) house.
“Others may have a different value judgement to mine – but rarely do they make such a judgement explicit. Or, they may argue that such a collapse would cause financial instability given banks’ loans to mortgage-holders. Luckily, New Zealand’s banks are well-capitalised and stress tests have shown that they can survive a large fall in house prices – mostly because the bulk of their loans pertain to older mortgages with plenty of equity behind them.”
But Property Institute’s Church says mum and dad mortgage holders who have steadily been paying off their mortgages for years would see the value of their major retirement asset decimated.
“Thousands (possibly tens of thousands) of small businesses which rely on the equity in their owner’s homes to maintain bank funding would come under intense bank scrutiny – with some being forced to close and sell up,” said Church.
“Property Investors would see the value of their assets plunge – potentially kicking off a banking sector crisis as banks moved to foreclose on assets worth less than the mortgages they held.
“The rental market would quickly reach crisis point as a result of Property Investors leaving the market and their rental properties being sold off by banks seeking to recover their funds.
“Billions of dollars of the collective wealth of the nation would be wiped out overnight – extending the wealth gap between New Zealanders and Australians and reversing two decades of hard work by kiwis”.
Church said that Grimes’ proposal would destroy, rather than fix, the market and described it as a ‘suicide pact’.
“I think we all broadly agree on the need to do something to bring down house price inflation and tackle affordability – but this is just cloud-cuckoo stuff. By the time we emerged from the carnage there would be nothing left”.