Over the weekend I’ve decided that the Reserve Bank should hire The Mentalist.
They are currently not taking into account the unique psychological problems that home buyers are burdened with.
In fact, their plans to implement LVR restrictions highlight a clear misunderstanding of how inelastic demand for “houses” is here.
The central assumption of my mental model is that the median home buying couple will do anything to get a house.
They will beg, borrow and steal in order to “get on the housing ladder” or some other reason that highlights their inability to think like an economist.
Real estate agents know how emotional home buyers can be. They even refurnish open homes to include children’s toys in nurseries to tug the heart strings and enhance the idea that “this is where we can build a family”.
What we know from the addiction literature is that addicts are quite price-insensitive.
I posit that the majority of New Zealand house buyers are housing addicts.
Therefore, raising the price of houses through making it harder to borrow with a low deposit will have 3 effects on the market for “houses”:
- Borrowing from finance companies will rise to top-up deposits.
- Parents and grandparents will give their kids way more money than necessary.
- Nothing will change the supply (it’s restricted) and demand (it’s growing) story in Auckland so restrictions could actually increase house prices even more than before the policy is implemented.
The Reserve Bank, if it really wanted to do something around making people jump through more hoops in order to obtain mortgage financing for an asset that shifts household consumption onto a whole other level of assorted expenses (rates, insurance, maintenance, kitchen remodelling etc) should hire The Mentalist.
The Mentalist would be tasked with building a clear psychological profile of “house” addicts and figuring out trigger words that could be used to reframe the stupidity of buying a house with a 5% deposit.
Through conducting focus groups and surveys that highlight the similarities between drug addicts and couples desperate to get on the housing ladder “no matter what”, bank risk management and credit control teams will receive a signal that they’re dealing with a very special type of client.
Sadly, The Mentalist is currently doing advertisements for ANZ. And that’s why the public sector regulators will always lose out to the private sector. They pay their experts more.