The only way for Auckland housing to become affordable is for house prices to come down - incomes just simply can't catch up, former Reserve Bank governor Don Brash says.
The central bank has stepped in again to try and cool the housing market, announcing a proposal to raise the amount property investors need as a deposit before they can borrow from banks.
Currently, Auckland property investors need a 30 percent deposit to borrow from banks.
But the central bank said it wanted to raise that to 40 percent, and extend the rule to the whole country.
The policy would officially take effect on 1 September but banks were told they should be applying it now.
Dr Brash told Checkpoint with John Campbell it was clear prices had to come down.
An affordable market was one where the median house price was three times the median household income, but in Auckland the ratio was far beyond that, he said.
"I cannot see how we can move to affordable housing without house prices coming down. If you're 10 times average incomes now and you want to get to even five times, you cannot do that within decades by simply allowing incomes to try and catch up."
Don Brash Photo: ACT Party
He had recently met an author in the US who had written a book on retirement planning and said the rule of thumb should be that a house cost 2.5 times the average household income.
"But in Auckland you can't buy chicken coop for that price," Mr Brash said. "So I think it's way overheated."
The country just simply couldn't afford for house prices to rise further, he said.
"The government is on record as saying we want house prices to go up but no more than single figure, single digit increases. Labour on the other hand is saying they want them to go up but no more than 2 or 3 percent a year.
"Both parties are talking about house prices continuing to rise, and I think they're being slightly unrealistic about that."
Politicians react to Reserve Bank's LVR plan
New Zealand First leader Winston Peters, meanwhile, said the latest move by the Reserve Bank would have little effect on rampant house property market.
Mr Peters continued to see high immigration levels as the main contributor, he said.
"[The Reserve Bank] would have to give up a long-held ideology that all immigration is good.
Winston Peters says the government needs to crackdown on immigration for houses to become more affordable. Photo: RNZ / Diego Opatowski
"The fact of the matter is that reports show that so much of immigration is not of skilled people. And actually it's quite sad because it just means the level of homelessness, the level of unaffordability is going to go on for a short while longer," Mr Peters said.
But Labour finance spokesperson Grant Robertson said immigration provided its own tension point.
"Immigration should be good for New Zealand. It should play a part in stimulating the economy.
"But what we've seen is things like temporary work visas, student visas, have been granted in such a way that it seems to be fuelling demand," he said.
Mr Robertson said the Reserve Bank was doing as much as it could, and it was up to the government to pull its weight.
It needed to build more houses, place a ban on offshore buyers and extend the so-called 'bright line test' on capital gains, he said.
Prime Minister John Key, however, said the government did have a plan.
"The Reserve Bank has made the right decision. Look, it is one small part of solving the issue when it comes to housing.
"As we know the government has had a very long plan, it's implementing that plan, there's no one silver bullet," Mr Key said.
ANZ Economist Philip Borken said the new loan-to-value ratio (LVR) restrictions pointed to the Reserve Bank cutting the Official Cash Rate in August.
But whether it would make more cuts beyond that would depend on how effective the restrictions were on cooling the housing market.
And that was too hard to predict, Mr Borken said.
Reserve Bank in a conundrum - Labour
The high New Zealand dollar and rising housing prices had landed the central bank in a conundrum, with the solution to one fuelling the other, Labour's Grant Robertson said.
The Reserve Bank's number one job was to control inflation - but it had struggled to keep that in check, due to the high New Zealand dollar.
Grant Robertson Photo: RNZ / Rebekah Parsons-King
One of the main ways to tackle inflation was to cut interest rates, which would make it less attractive to buy the New Zealand dollar, and therefore drive the currency down.
But cheap money would fuel the housing crisis - the bank's other major problem.
Mr Robertson said the Reserve Bank was caught in a dilemma.
"The currency is unsustainably high, that's got a very negative effect on exporters, and the Reserve Bank would like to see that come down.
"But in doing so, that will also make it easier for people to borrow money, which would fuel the housing crisis," he said.
"Effectively what they've done today, is say we will use other tools... other than the Official Cash Rate to try and manage the housing crisis."
Mr Borken said tweaking restrictions was clearly the easiest thing for the Reserve Bank to do.
The announcement had come as a slight surprise, he said.
"It was only a few weeks ago when [the Reserve Bank] said we're working on something but it's not imminent.
"Two weeks later something has happened, so that says clearly the housing market has become more of a concern, perhaps there was some extra political pressure behind the scenes."
