Prime Minister John Key launched National's campaign on Sunday with a plan to double first home buyer subsidies at a extra cost of NZ$218 million over four years.
Nick Smith announced the details of the ramped up KiwiSaver HomeStart Grant, which included doubling the Government subsidy for a couple buying a brand new home to NZ$20,000, allowing KiwiSavers to withdraw the Government member tax credit and increasing the house price caps for the scheme in all areas to between NZ$350,000 to NZ$550,000. Here's a summary of the changes and the Q and A for the new policy.
The Government estimated the new Grant scheme would increase the number of recipients in the scheme by 41,501 to 91,824 in the first five years of the scheme and increase the costs of the scheme by NZ$217.8 million to NZ$435.4 million over those five years. It also planned to increase the house price caps for Welcome Home Loans to the same as those for the KiwiSaver HomeStart Grant.
The price cap for Auckland was increased to NZ$550,000 from NZ$485,000, and to NZ$450,000 in other major cities. The biggest increase was in Upper Hutt and Kapiti Coast areas from NZ$300,000 to NZ$450,000.
"The policy will help tens of thousands more first home buyers achieve their dream of home ownership," Key said in his campaign speech at the Vodafone Events centre in Manukau.
"First home buyers have always found it hard, and often that first step is quite a stretch. That is why I believe the changes will be welcomed by potential first home buyers," he said.
A couple buying a new home who received the maximum KiwiSaver tax credit for five years would receive an extra NZ$10,000 in Government subsidies and be able to withdraw an extra NZ$5,210 from their KiwiSaver accounts for a deposit on first home. Key later told reporters he thought the Reserve Bank and Treasury approved of the scheme, given the Government's moves to increase housing supply at the same time.
Smith announced a previous ramping up of the scheme in August last year in response to the Reserve Bank's high LVR speed limit, although the limit has since exempted loans for newly built homes.
'Not one new house built'
David Cunliffe said National's housing announcement would just push up prices.
“House sales to first home buyers have collapsed as a direct result of the Government’s failed housing policies, and now they are offering up a sticking plaster," Cunliffe said.
“They refuse to actually build the many thousands of extra houses that are needed. And they refuse to tax speculators," he said, adding it would not offset the higher deposit requirements under the Reserve Bank's high LVR policy.
“The fundamental problems are lack of supply of housing, planning rules that constrict development, and unrestricted speculation."
Phil Twyford issued a fact sheet on housing saying no one was living in any houses built in Special Housing Areas and the Auckland Accord was running behind its targets.
Russel Norman also criticised the policy as a 'band aid' approach to the problem of rising house prices, particularly in Auckland where the median price had risen more than NZ$220,000 since 2008.
"The only real difference to the current KiwiSaver policy is some home buyers will get up to NZ$5000 more for a mortgage to buy an expensive new home. That extra subsidy doesn't even touch the sides of offsetting the NZ$228,400 increase in the median house price in Auckland," Norman said.
In my view
In my view , the policy has tried to side-step the accusation that the subsidy will simply increase existing property prices by directing the increased subsidy to new home builds. However, there will be questions about how many new home builds will be financed by first home buyers, given most are currently bought by older buyers using equity built up in their first and subsequent homes. The Government is hoping the arrival of first home buyers may 'kick-start' developers into offering new types of developments and thus adding to supply.
However, a couple with a combined income of NZ$100,000 in Auckland who had savings and subsidies of NZ$50,000 for a deposit would have to borrow five times their gross income with a 90% LVR loan to afford a home and land package costing NZ$550,000.
It may have the biggest impact out in the regions, where the caps for the scheme have been dramatically increased. In Upper Hutt, for example, the cap has been increased to NZ$450,000 from NZ$300,000.
The danger remains real, however, that these subsidies simply pump up the price of a limited number of new homes.
A 2012 Australian Government study (pages 26/27) of the many similar first home buyer subsidy schemes there found they were not effective in improving affordability in the long term in areas where supply was constrained.
Why is the New Zealand government undermining the Reserve Bank of New Zealand’s attempt to deflate their housing bubble? Contrary to common sense, New Zealand Prime Minister John Key hopes to ease concerns about housing affordability by increasing demand.
With an election around the corner, sound evidence-based policy is out the window and populist chicanery is back in fashion. Yesterday Key kicked off the National Party’s election campaign by announcing a plan to double subsidies directed towards first home buyers.
Under the proposal, the Nationals will provide an additional $NZ218 million ($A195.7m) over the next five years to low- and middle-income families looking to buy their first home. Currently, the Kiwisaver First Home Deposit Subsidy offers grants of up to $NZ10,000 for couples but that will double to $NZ20,000. The revamped scheme will only extend to newly created homes, with the grant in place for existing homes remaining unchanged.
But the cap on the value of the properties that can be purchased under the scheme for both new and existing properties will rise significantly. The cap in Auckland will rise to $NZ550,000 (from $NZ485,000) and $NZ450,000 in Christchurch and Wellington (from $NZ425,000 and $NZ400,000 respectively).
Key believes that this policy will ease the housing affordability concerns facing younger home buyers, but he is mistaken. With supply largely fixed in the short-term, these policies (similar to existing first home owner grants) are quickly incorporated into house price expectations, resulting in higher prices. Consequently, these policies merely create the illusion of greater affordability and will fool younger New Zealanders into taking on a considerable debt burden.
The main beneficiaries of the program will be property developers, who can now expect to receive higher prices for the properties that they complete over the next five years. Key would argue that this will result in a stronger supply response -- that developers will build more properties due to higher prices. But is that plausible?
In normal times, perhaps, but New Zealand already faces an unprecedented construction boom as it attempts to rebuild Canterbury and Christchurch. How much spare capacity really exists in the construction sector?
In that light, the policy is little more than a generous handout to property developers -- a sector which will benefit handsomely from the Canterbury rebuild. It’s hard to imagine a sector in New Zealand that is less in need of a handout over the next few years. Surely that $NZ218 million can be better spent on health care, education or fighting poverty?
Furthermore, the policy undermines attempts by the RBNZ to deflate their housing bubble. New Zealand has some of the most expensive property in the world compared to incomes and rents, which prompted the RBNZ to place ‘speed limits’ on lending activity.
Last October, the RBNZ introduced temporary measures to curb residential mortgage lending with high loan-to-valuation ratios. Banks were required to restrict new residential mortgages, with LVRs over 80 per cent (meaning a deposit under 20 per cent of the property value) to no more than 10 per cent of the value of their total residential mortgage lending.
These steps were taken to cool a rapidly overheating housing market and manage the systemic risks that can develop during boom periods. The Bank of England introduced similar measures not long after to curb their own excesses and there have been calls for the Reserve Bank of Australia to follow suit.
More importantly, those measures were working. According to recent modelling, “house price inflation is 3.3 percentage points lower” and “household credit growth is 0.9 percentage points lower” in March than would have been the case in the absence of the LVR restrictions.
If Key is serious about addressing housing affordability -- and he should be -- there are better ways to pursue it. Unfortunately he has placed his faith in a policy that is a proven failure; a policy that has been a disaster no matter the time or place (A worrisome debt trap for first-home buyers, July 29).
If he wants to boost construction, why doesn’t he ease the supply-side restrictions that artificially reduce land supply and increase prices? That won’t have a big effect now due to the Canterbury rebuild, but would increase supply considerable over the medium term.
If he wants to ease housing affordability, why won’t he touch New Zealand’s generous negative gearing scheme? Alternatively, he could simply get the hell out of the RBNZ’s way.
The National Party’s proposal to address housing affordability is poorly conceived and will simply result in first home buyers paying a higher price and taking on a greater debt burden. The supply response (if any) will be undermined by the Canterbury rebuild, leaving limited spare capacity across the construction sector. Unfortunately, this represents another victory for bad housing policy and a further blow for younger Kiwis.
It's just inflation, unfortunately the average (AVERAGE) kiwi wage has probably gone nowhere over the last 5 years. I wish they would call it by its proper name though. First home vendors grant.
Shadow was hopelessly wrong about the Gold Bull Market. What else is he wrong about?
The Aussie housing market is currently valued at in excess of $A5 trillion with at least $A2.5 trillion of bubble value in it … to be wiped out at some stage.
In New Zealand the housing market is about $NZ700 billion with about $NZ400 billion of bubble value to be wiped out at some stage.
This incorporates about $NZ100 billion of bubble mortgages … with the Banks Capital Base just $NZ29 billion.
Irelands metros Median Multiples collapsed from 4.7 to 2.7 … wiping out a quarter trillion euros of bubble value … putting the Banks to the wall … unemployment 14% … residential construction vols collapsed 90% … massive emigration by the young and the Polish construction workers … and so it goes on … and on …
New Zealand and Australias major metros are currently sitting at about 5.5 Median Multiple … significantly more Multiple Stretch that Ireland.
The Aussie housing market is currently valued at in excess of $A5 trillion with at least $A2.5 trillion of bubble value in it … to be wiped out at some stage.
In New Zealand the housing market is about $NZ700 billion with about $NZ400 billion of bubble value to be wiped out at some stage.
This incorporates about $NZ100 billion of bubble mortgages … with the Banks Capital Base just $NZ29 billion.
Irelands metros Median Multiples collapsed from 4.7 to 2.7 … wiping out a quarter trillion euros of bubble value … putting the Banks to the wall … unemployment 14% … residential construction vols collapsed 90% … massive emigration by the young and the Polish construction workers … and so it goes on … and on …
New Zealand and Australias major metros are currently sitting at about 5.5 Median Multiple … significantly more Multiple Stretch that Ireland.
The trouble with making financial decisions based on a belief is that the belief may be completely wrong.
Best of luck with it.
Any expressed market opinion is my own and is not to be taken as financial advice
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