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The new coalition government of Labour & NZ First have put forward a policy that will prevent the purchase of existing NZ houses by overseas [foreign] buyers. Residents [permanent] will still be able to do so.

This is in response to the high rise in NZ house prices that has priced many out of the housing market, particularly in Auckland, where prices are quite frankly ridiculous. For example, a two bedroom unit had an asking price of $880,000. I’m not sure whether it sold, but just that the vendor thought he could get that price, or close to it, is an indication of just how far prices have risen.

The commuter belt to Auckland is extending further and further out. Areas that when we first came to NZ were lovely quiet rural villages are now massively expanded with residential housing everywhere.

We were just up north in Whangarei and the population growth, development, etc was really noticeable since we’d moved to Auckland six years ago.

Is there a problem and will this new policy help solve it?

Why do house prices rise?

Obviously there are a number of variables that contribute to rising prices, however they all fall into one of the following: lack or constrained supply and an increased demand.

I haven’t followed world events too closely for a while as I have been busy with other things, but, Europe is a mess and the US under Trump is probably becoming an issue. Both contribute to immigration in NZ. Both however are dwarfed by the immigration from India and most noticeably from China. So relative to the housing stock, immigration is really high.

Building consents, certainly in Auckland, are difficult and slow to get. The new district plan is improving that to an extent, with an increase in high density living, lots of new flats, but opening new land is still quite controlled. So there is still a shortage of housing stock.

Salary and wages have been pretty stagnant for at least 10 years. This though is an argument on economic growth and productivity in NZ.

Interest rates are still very low all around the world. Low interest rates equal high capitalisation rates. It is simple. We have a high deposit requirement ranging from 20% to 40% [depending on the use of the property, investment as against residential occupation] which has made it very difficult for first time buyers. This was supposed to deter investors, rather, it has enabled investors over the first time buyer.

The flip side of interest rates is that, recent purchasers are highly at risk if interest rates rise, so that capital values fall. A rise fro 5% to 6% is a 20% rise in cashflow required on a monthly basis. Most people have little to zero disposable income each month after paying housing costs, especially those that have bought recently and paid high prices. A significant rise in interest rates has the potential of creating a housing collapse and defaults across the country. This is due of course to government monetary policy.

Therefore, controlling foreign speculation may help somewhat, but I doubt it will accomplish what the politicians hope that it will.