Lending rules won't freeze prices, but will freeze out buyers
At a conference earlier this year I said that the Central Bank's new mortgage rules would ultimately not dampen house price growth. Tighter lending might initially freeze out some owner-occupiers - particularly in our cities where prices are highest. However, the idea that this would reduce housing demand is a fallacy. People have to live somewhere, and, if they are prevented from buying in town, only three principal options are available.
A minority might be able to bunk up in the family home. But most would have to choose between buying further out or staying in town and renting. The former would simply displace price inflation from the cities to the suburbs. The latter would cause rents to rise, driving up yields and attracting investors. This too would eventually cause price inflation, albeit via the scenic route.
This may be a contrarian view. But, so far, the only cogent argument I have heard against it runs as follows: By taking decisive action the Central Bank has sent out a signal that it will do whatever is necessary to prevent house prices from spiralling out of control. In so far as this dampens expectations of future capital appreciation, it should reduce speculative investment in housing. The result, it is argued, would be less demand and more sustainable price growth.