The graph of house affordability wonderfully clearly illustrates the way in which Ms Market end-runs stupid politicians.
The immediate cause of the 2002-3 jump in unaffordability was a choice by the newly elected Labour Gubmint to 'help' poor people into their homes. The Welcome Home scheme was a typical politician's gesture to cement its electability.
Unfortunately, this was achieved (to the extent possible - the number of WHL's eventually taken up is in the low thousands) at the much wider price - gently hinted at in this 2007 article http://www.stuff.co.nz/southland-times/news/34275/Southlanders-welcome-h... - of cementing in price floors all over the country.
As the article suggests but does not pursue, if a guaranteed loan (criterion for issue - can ya Fog a Mirror?) of say $100K is plugged into a market where low-end prices are well below that, then what's a vendor gonna do?
That's right, folks, tack a '1' in front of what they were asking for the shack in question.
And once ya starts this boondoggle a'rollin', it gathers speed (higher prices), it affects most of all the exact constituency it purported to assist (the poor Labour voter) and the only way out of the mess is to raise the value of the loans on offer. Which promptly sets off another round of asking-price inflation.
After all, what vendor is not going to sell for the available guaranteed-loan value plus a Modest Margin?
The secondary cause of the price inflation was the familiar one thrashed about on these here august pages for a decade: the dreadful co-incidence of spatial planning (supply limits) and more regulation (Building Act, revised in 2004, Elfin Safety mania). The planning debacle conferred a Planning Gain to developable land (paid for by the buyer, who else) and the Regulation mania increased construction costs substantially. But that only affects new builds - the price explosion I am focussing on here is for existing older stock.
A personal example will suffice - I would invite an Auckland example (where the whole thing has exploded most spectacularly) to sit alongside my experience.
We bought a shack in 2001 for my son, just around the corner, in an eastern suburb of Christchurch, for $47K. Yes, Virginia, prices like that for 'needing TLC' properties were not uncommon. We straightened it up (it had a pronounced lean to the Left as viewed from the front - ironic, innit) tarted it up with paint, ply, grass and improved the stormwater drainage plus added a foundation to replace the rotted stumps that greeted us. All Like-for-Like, all done by my son and yours truly, a nice if small unit (around 70-80 squares, we never did measure it up) basically in our spare time.
We spend around the same amount - $40-odd K - to achieve of all this, so it owed us perhaps $85-90K.
Then, mirabile dictu, the Welcome Home scheme came along.
Overnight, it was impossible in the whole of Christchurch to buy anything that did not start with a '1'. Vendors treated the WH scheme as a universal pricing signal.
We cashed the little house in for $123K and split the proceeds 50/50. This proves the point about screwing up the low-end market by a naive and economically dopey funding scheme.
Only 18 months prior, a deserving young FHB could have gotten it at auction for $47K - it was quite livable as is provided one trod lightly over the missing-stumps bit.
That difference - $47 to $123K or 161% in original cost - is exactly what the stoopid politicians wrought by introducing a massive re-pricing incentive. And, of course, offset by the improved condition that we provided.
And the real pity is that as noted, the pricing structure this triggered off was universal, whereas the WH Loan applied only to a comparative few.
If one had the figures and divided the overall price adjustment NZ-wide by the number of WH beneficiaries all time to date, the figure would shock and horrify - it is most probably in the hundreds of millions or even low billions per such WHL recipient.
Ms Market is a stern mistress.....
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