This is the second of a series of guest posts from Lucy JH on Housing affordability

This blog post is part of a series based on a talk I recently attended by some economists about housing affordability in Auckland. I’ve already blogged about their debate over the cause(s) of high house prices in Auckland.

Another interesting issue that came up in the discussion was when Shamubeel Eaqub observed that we (and the government) shouldn’t necessarily just be thinking of high house prices in and of themselves as a bad thing.

Instead, we should be looking at the specific problems that high house prices are causing, deciding which problems we are most concerned about and designing policies to address those problems.

I thought this was quite a perceptive comment because right now there are several different groups involved in the housing debate in New Zealand, who are concerned about very different problems.

On the left you have people like Alan Johnston, arguing that the main problem with high house prices is the social problems they are causing for the very poorest Aucklanders. They believe these people are increasingly being forced into very crowded or poor quality housing that is making them ill.

I have no doubt that this is a real problem. Last year I did some work in South Auckland and met several families who were living in over-crowded conditions. One family had 11 people living in what looked from the outside (I didn’t go inside) to be a 4 bedroom house.

These left-wing commentators have argued that the government’s housing reforms won’t do much at all to improve housing affordability for the poorest New Zealanders. This is actually an area in which Labour’s recently announced housing policy is also quite weak: Although they are proposing to build a huge number of houses, they haven’t really explained whether (or how) that housing will be made available to those earning in the bottom 25% of NZ incomes who can’t afford to buy.

On the other hand, Labour’s reforms do seem well designed to address what they see as one of the bigger problems caused by high house prices: The immigration of lots of skilled young migrants to Australia and other countries.

Transport nerds argue that one of the biggest problems with high house prices is that they tend to be concentrated in central Auckland. This is driving development out to the fringes, creating congestion
and sprawling suburbs that are very hard to serve with quality public transport.

On the right, economists argue that the biggest problem with high house prices is that they are contributing to our high private debt. This is because almost everybody who buys a house takes on a massive mortgage. This huge investment in housing also means that people in New Zealand aren’t investing in other things, such as businesses, that might actually grow the economy.

The worrying thing about this last problem is that it seems that neither Labour nor National are really designing policy to address it. Instead their recent policy announcements mainly seem to be focused on trying to make it easier for young middle class New Zealanders to buy houses.

This might solve problems such as our high levels of immigration to Australia but I’m not sure if it will address the bigger issues with our economy. Even if the government absolutely flooded the Auckland market with houses and managed to bring prices down by, say, $100,000 to a median of $480,000, most first-home owners who bought a house would still be investing a huge proportion of their capital in it. They’d probably also be putting most of their disposable income into the mortgage. And the poorest New Zealanders still couldn’t afford warm, secure homes.

In fact, it seems that a better solution to the main economic problem caused by high house prices (“NZers are spending all their money on houses, not investing it in more productive things”) might be to:

  1. Change some of our tax laws to make investing in property less attractive
  2. Ask (or require) the banks to stop treating lending for housing more favourably than all other types of lending.
  3. Change some of our tenancy laws to make renting in New Zealand more attractive

I actually think this last point, number 3, is really important. I believe that many New Zealanders who are currently buying properties aren’t actually partially, or even mainly, motivated by financial reasons. Instead they are mainly motivated by the desire not to rent.

I have a lot of ideas about how the government could make renting in NZ more attractive but I’ll cover those in another post. Anyway, what do you think? What do you think is the main problem caused by high house prices in Auckland and what policies could we design to address that problem specifically?

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  1. But won’t making renting “more attractive” just draw more people into the pool of renters and thus drive up the cost of renting?… supply and Demand 101

    Or are you talking about things like Rent control?

    1. @ greenwelly. I don’t think making renting more attractive will drive up rental prices if we are also increasing the housing stock overall (which i am assuming we need to do, sorry if that wasn’t clear). I do think that if the default desireable option in NZ stopped being “owning your own house” we might see more nice rental housing being built, rather than most of the nice houses being pretty much designed for people to buy and rental housing treated as some kind of pauper’s option. Besides even if the price of rentals did become slightly higher, that still wouldn’t add to to our private debt to the same extent as a significant increase in house prices AND/OR an increase in levels of home ownership would.

  2. I’ve had enough bad experiences renting in the US which has far stricter tenancy laws than NZ, the idea of renting here and always knowing that I could be booted out with 3 weeks notice or the rent jacked with a similarly pathetic notice period completely puts me off the idea. I far prefer to live as a tenant in Germany where housing isn’t considered something to make as much off as possible and the system is set up to normalise renting and make it a viable long term option.

  3. Not owning a house is no kind of crisis. Having nowhere secure and affordable to live is. I have friends [both working, one child] who would prefer to own but because they also want to live in Freeman’s Bay [kid at local school, both work in CBD] and don’t have capital they rent. They could buy in Favona or Papakura but prefer not to. Crisis? No.

    I might add that whatever they pay in rent they are saving a huge amount in travel cost as they have one car that sits at home all week as all three walk to their day jobs [or bus]. Also that while rents are clearly related to dwelling value in theory there is a huge disconnect in practice. Most renters certainly in central Auckland pay much less than they would if they were paying a mortgage with no deposit on the market value of property they occupy. In other words the return for the property owners on capital is low.

    1. Agree. All these stories of affordable seem to be about people who can’t afford buying in Herne Bay. I have no sympathy for them. There is affordable housing in Auckland if they choose it. The issue is to stabilise prices and create more affordable housing. People seem to want prices to go backwards which would be a disaster for all.

  4. Lucy I think that one way that Labour’s house building scheme would help those at the very bottom is by increasing supply for those leaving renting for the first time, which would also free up the entry rental market. 100k additional dwellings at the 300-400k end isn’t going to make living Epsom or Herne Bay any cheaper but it’s sure to free up the other end of the scale. Don’t you think?

    1. hi Patrick. i think it MIGHT achieve that so long as it was introduced at the same time as a CGT. But it’s a pretty indirect way to help the people at the bottom. Which I guess is the point that Shamubeel was making – that we’re probably going to get results quicker if we are designing housing policies specifically to address certain problems, rather than just a more broad brush approach of trying to lower or hold house prices constant relative to inflation…. I think the part of Labour’s policy which would most specifically help the poorest Aucklanders in the short term is the warrant of fitness for rental housing. That I think is exciting and I’m hoping to talk about that in a future post. I guess I might see their Kiwibuild policy as being more likely to help those people if it had some kind of clause like “We will build 80,000 homes to sell on the open market and then we will build 20,000 homes that we will rent to buy to people under a certain income/have managed by NGOs as community housing with 10 year fixed rental leases” or whatever… Not saying that it would be easy to design a policy like this, but I do think it would be more likely to be of immediate benefit to the poorest Aucklanders. I also question whether for those on very low incomes renting in NZ actually does provide a secure, affordable option. Hoping to talk more about that in a future post.

      1. Hi Lucy. As it stands, CGT, in my understanding, would have very little influence on long term house prices. This is because if a person has rental properties and is set up as a company a trust or so on and claiming GST, deductions (like interest payments) etc. and then if the property is sold at a profit, that profit is liable for inclusion as company tax so CGT will actually be aimed at a very small percentage of ‘investors’ – those who buy and sell a property every 2 years or so. It is a grey area but any more than that and IRD start to look at them as investors and they will be taxed accordingly. A stamp duty that reduces over a 3 year period (or what is deemed appropriate) would seem to be more effective and easier to administrate in my non-professional opinion.

        1. So I had a bit of a read on the IRD website and if you buy and hold rental property and dispose of it down the track there is no tax on it as long as the intention was to keep it as a rental. However, if you buy and sell regularly, you can be deemed to be a ‘trader’ and if IRD define you as a trader, you will be liable for tax on sale of any property. Once you are deemed to be a ‘trader’ the status holds for 10 years.

  5. The Auckland plan has no helped cool prices, how is “significant change” in certain areas meant to drop prices?…Its like GST increases, the theory should cool prices but in fact they went up! Allowing owners to subdivide into terrace houses is only going to push prices higher. Thanks Len!

    1. Oh that’s a long bow…. you really think the plan has pushed up the market? As opposed to more people wanting something in relatively finite supply: inner suburb dwellings.

      If the plan is so powerful, and remember it is criticised for limiting Auckland’s expansion, then why haven’t outer suburbs also shown huge growth in value?

  6. Excellent post Lucy :-). I think that “high house prices… contributing to our high private debt” is a concern for people on both the left and the right, but the point you make that neither Labour or National are really doing much about it is very valid.

    The problem is, of course, that if houses were to drop in value suddenly, most of that value would come off New Zealand’s wealth, and the banks wouldn’t take much of the fall because a $200,000 loan is still a $200,000 loan whatever happens to the value of the underlying home. Banks would take a bit of a haircut on the few mortgagees that did default, but by and large the money would come out of homeowners’ pockets. This would be politically unpopular and not necessarily good for the country.

    Perhaps the best outcome is for house prices to stay roughly flat in nominal terms, declining somewhat in real terms, avoiding any kind of “short sharp shock” outcome but easing our way out of the affordability problem. More development, stricter LVRs etc could help with this but it is of course a tricky thing to try and steer.

    It would certainly be great to see renting more attractive, it really does suck when you have to move out because the landlord wants to move in or demolish the place (I’ve had both happen to me!). A related issue is that landlords don’t have the same incentive to bring houses up to a good standard as owner-occupiers do: case in point, very few landlords have taken up the government subsidies for insulation/ energy-efficient heating appliances, because they don’t think that they will get a return in terms of higher rent (even with the subsidy). The Greens have got some interesting policy around this.

    1. Personally I think that we could manage the situation just fine through the use of differing building forms. We don’t necessarily need to make land cheaper to make housing cheaper, just the housing that sits on in, and most property value is in the land.

      So if we started to build plenty of terraces and townhouses and flats, I wouldn’t expect the price of a large house on a full section to change, the value is still in the land. You’d just hope that someone might consider replacing their single dwelling with three terraces. One of terraces would be miles cheaper than the house they replaced, but the whole landholding would still be as valuable, perhaps more so.

      I wouldn’t expect a short sharp shock at all, because the only realistic way out of the housing affordability crisis is to build more cheaper and land-efficient units in the places people want to live. That market hardly exists, so flooding it with thousands of new dwellings isn’t going to affect anyone. It’s a case of opening a new market.

      1. Hey JohnP. Yes, I think that we are unlikely to see a dramatic drop in house prices, even if we did get a government that embarked on a dramatic house building programme. Instead it would probably be more like house prices stayed still but inflation and (hopefully) incomes rose until they became more affordable. I don’t know if Labour did any modelling of what the impact of building 100,000 houses would be but I suspect that’s the kind of outcome they were hoping for/expecting. Good points re renting – hoping to cover those in a future post.

        Nick R – yes, we do need denser housing but do you think building it would lower house prices if we didn’t also simultaneously introduce a capital gains tax AND convince the banks to treat units/apartments more favourably in terms of lending (right now they ask for 20% to 30% deposit on these types of housing, but only 5 to 10% on a normal house)?

        1. I think they would be cheaper yes, because they would require say one third or one fourth the land and the land is the majority component in price. Plus things like terraces and low rise flats are cheapest to build in bulk, so you have cheaper construction costs on much cheaper land. So it would drop the average house price by adding many more cheaper housing units to the market to the market, however it wouldn’t lower the price of the existing houses on large sections.

          We don’t have a problem with high house prices, or even a problem with the value of land in desirable areas. We have a planning problem that stops valuable land in desirable areas being used efficiently.

          I don’t know about CGT really, so not sure. CGT is a tax on capital profit, so you only pay it if you make a profit… is that supposed to stop people investing in housing? Is not investing in housing good for increasing the housing stock? Wouldn’t the need to pay a tax on capital gains cause landlords to seek higher rents to achieve the same return, or more likely to hang on to properties rather than sell them?

          They bank criteria is a stumbling block to overcome. I’ve just been through the process of buying a unit title place and it’s frustrating. You have people that can’t buy a compact apartment they could afford the mortgage on because it requires a deposit larger than a house twice the price. For someone saving a deposit it’s initially easier to spend half a million on a house in the boonies than $200k on a flat… however the banks are starting to ease up on that, and several will now lend at 5% or 10% on apartments to good borrowers. I think the bank policy is a symptom of the planning failure, not a cause. If we start building a lot of quality affordable places in good areas that younger working people can afford then the banks will change. They make all their money out of mortgages, and the second the risk is taken out of unit title lending they will want to make money off them too.

  7. “One family had 11 people living in what looked from the outside (I didn’t go inside) to be a 4 bedroom house.” Your example belies part of the issue – expectations. And funnily enough that you think this is necessarily an issue also shows somewhat of a NIMBY attitude to intensification – that it’s fine to happen to others.

    I have parents and grandparents that came from smaller houses with more children (my mother can still relate how one of her aunts was in the same year at school) yet this wasn’t considered a crisis of poverty. Just we’ve all now got too stuck up to consider having multiple kids in one bedroom.

      1. Yes – but living in unsanitary conditions isn’t a necessity related to having 11 in a 4 bed house. As I was pointing out – many of our parents and grandparents were able to live cleanly in less room; but yes it did take a bit more work and graft

  8. Why is no consideration being given to restrictions on ownership by non residents of rental properties under say $500k? There is a body of evidence in Auckland that non residents can buy rental housing which means that obviously the local residents become priced out of the market. Why has housing in New Zealand become so expensive….don’t think it is all on the supply side!

  9. High cost of housing has lots of key effects that don’t often make it into the popular debate:

    – it becomes a barrier to people freely relocating for work. This has a range of implications for a wide range of economic measures and the general efficiency of the country’s economy as a whole.

    – it increases social segregation, as capacity for lower income housing gets squeezed out of higher value neighbourhoods. This -can- create a range of undesirable social dynamics – intolerance, concentrations of poverty, reduced economic opportunity to improve personal circumstances.

    – high prices compared to the true amenity / robustness of a building asset deters replacement – even if a parallel high value could be returned from an intensification project, the cost barrier to starting the project is enough in many cases to deter it. This, I think, applies to lots of our inner subirbs, and has major implications for a city strategy based on intensification. I think it also creates flow-on health issues, separate to overcrowding, arising from old stock being retained longer than it perhaps should. We’re only just getting to the point that energy efficiency is taken seriously in refurbs, so this is improving, but not fast enough.

    – it generally encourages an inflationary approach to an economy. This is the excuse for hgh private debt levels in NZ – it might hurt to start with, but the debt quickly deflates as everything else inflates. Problem is, it hurts our international competitiveness, which for an export-based economy is a real problem.

    – it reinforces the perception that property is the only worthwhile investment in town. First rule of investment… don’t put your eggs in one basket.

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