In 2014, Auckland University of Technology started up a great initiative called “Briefing Papers“. The aim of the project is to contribute to a more informed conversation on major issues facing New Zealand society.

Since July, Briefing Papers has been running a series on housing. They’ve solicited input from almost a dozen researchers and commentators (including me!) to take a look at all angles of the issue.

Briefing Papers has kindly allowed us to syndicate them. The first paper is by Shamubeel and Selena Euqub, based on their book Generation Rent:

Home ownership is a defining characteristic of being a Kiwi. It had been an attainable aspiration for more in each generation, but it ended with the baby boomers. After rising for nearly a century, home ownership has been falling since 1991 and is now at the lowest level since 1951.

Home ownership has fallen because houses have become unaffordable. House prices have risen much faster than incomes. Even for double income families, buying a home can now mean massive sacrifices, including some parents leaving their young children in care for up to 11 hours a day and facing long commutes to work.

Unaffordability is extreme, but it is relatively recent and only in some places.

Until the early 1990s house prices were around 3 times annual household incomes. Today, it is over 6 times. There are differences in interest rates, inflation and other policy settings when comparing generational experiences, but the end result is lower affordability and fewer homeowners.

Unaffordability is uneven across the country. While house prices are very cheap in places like Southland (around 2 times annual incomes), they are exorbitant in Auckland, at over 10 times.

In Auckland, the average house price is nearly $840,000. The average income for a family is around $80,000 a year. At current historically low interest rates, this equates to mortgage payments of nearly 60% of income. If interest rates rose to historical norms, mortgage payments would be two-thirds of a family’s income. The average family cannot buy the average house.

Too often we hear that house prices would be lower only if:

    • we just stop foreigners from buying; and
    • we just stop immigration.

Besides, there is no problem, all global cities are expensive. Right?

If we look at these claims in turn we find some truth in them, but they do not explain the situation in full. Data on foreign ownership is sketchy, but we estimate non-New Zealanders purchase fewer than 10% of homes. Foreign investors are the most prominent of this group. Immigration has certainly added about 20% to housing demand; most of the housing demand growth results from natural population growth and smaller families. In terms of the inevitability of expensive housing if Auckland is to be a truly global city, housing in Auckland is less affordable than housing in Sydney: Auckland’s population is a third of Sydney’s, and while house prices are similar, incomes are a third lower in Auckland.

There are some legitimate concerns:

    • poor tax policies (negative gearing rules are a form of reverse welfare for the rich);
    • a preferential bias to housing in our banking rules (its cheaper and easier for banks to lend to residential mortgages than businesses);
    • and a complete mess in supply of housing, which encompasses planning rules, funding and provision of infrastructure, NIMBYs and an immature construction/development sector.

The drivers of unaffordable housing are political, cultural and regulatory.

Unaffordable housing is locking Kiwis out of a critical part of our culture. But also a critical requirement for many other things, including getting capital to start a business or being able to retire on national superannuation, which is only possible with a fully paid off home.

Rising house prices have been a boon for property owners. But with falling home ownership, the benefits are accruing to fewer and fewer people. For future generations, there is an increasing risk that only those with help or bequest from their parents will own homes. The egalitarian dream of equal access to opportunities, including the opportunity to buy a home, will be a lie. New Zealand is well down the path of a hereditary system of wealth and success, like the ‘old country’. The new landed gentry will do everything they can to preserve their wealth and influence. Generation rent is fragmented and as yet voiceless.

Yet, generation rent is a pretty large and increasing segment of society. In the 2013 Census, 52% of over 15 year olds lived in a rental property (and 57% in Auckland). Renters are typically young (under 40) but people of every age are increasingly more likely to rent. Even though majority of adults rent, renting is a raw deal. Compared to our peers, New Zealand has some of the most restrictive rental policies in the world. Renting is a precarious existence, characterised by low quality buildings, short terms, and often few rights to small alterations or even owning pets.

Unaffordable housing is also pushing the poor further away, risking the kind of ghettoization that is the hallmark of unenviable places like Johannesburg. Being poor is getting more expensive, as gentrification pushes the poor to the least desirable locations with few resources like public transport and amenities.

Houses have become unaffordable over a long period, which is why home ownership has been falling for over two decades. Poor tax policy and easing financial settings have encouraged and abetted housing investment, which has driven out younger first-home buyers. Slow housing supply, encompassing density, height, ‘greenfields’ and all the infrastructure that goes with it, has been the main factor. A small and shallow construction sector cannot respond fast enough to rapid changes in demand from net migration and interest rates.

We propose a number of solutions in our book, Generation Rent. We think some immediate palliative care can be provided, by fixing the rental market (improving security of tenure and making a rental more like a home) and a shift in attitudes towards renting and property investments would stop alienating half of New Zealanders who rent. But the real deal are structural policy changes that are hard. We need to increase the supply of housing (change planning rules, deal effectively with NIMBYs, sustainable and equitable funding model for infrastructure). We need to fix banking sector biases to housing – current rules are inflating the property market and misallocating credit away from productive businesses. Fix tax rules on capital gains on investment property and investigate negative gearing to remove the tax bias to investing in housing. This needs to be hand in hand with improving financial literacy – so that people can invest wisely, not just in housing.

The housing market is broken as a result of broken policies of many decades. Fixing them will take time but we know what needs to happen. What is needed now is leadership from our politicians and policy designers – and intense pressure from the public to make these changes, which are unpopular with a small but powerful vested interest group.

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33 comments

  1. A good article. Just a couple of points. If we look at Auckland, bar some small pockets of land the only way to increase the number of properties available to buy is to go upwards. Auckland is different to many global cities in that there really is nowhere to expand (North, South, East, West) and still be commutable (without massive infrastructure investment – PT, roading, rail, etc).

    On the mention of landlords and negative gearing, I would note that removing any perceived negative gearing advantages will only increase rental costs. The landlord has to get a return somewhere. At the moment it would be foolish to buy property (in Auckland) to rent out. Even with negative gearing the returns are worse than bank deposit rates ($840,000 to get a return of maybe $550 to $650 per week after agency fees doesn’t even cover 60% of the mortgage – let alone insurance, rates, etc). The only way currently that landlords get any return (Auckland) is via capital gains over time. So tread carefully. Removing perceived landlord ‘advantages’ may well simply decrease rental stock as they sell up, and this would push up prices on the remaining rentals around. Like most major cities a lot of the property will end up in the hands of a few, as only a few will have the resources available to purchase at current and future prices. Not much we can do about that, simply an economic reality.

    As regards immigration – the horse has well and truly bolted. Politicians have left it too late to do anything meaningful. The writing was on the wall 5 years ago, and that is when action should have been taken. Entire suburbs now have new cultures already.

    The Auckland situation is a very difficult one to resolve. It won’t be easy as there are additional constraints (geographical) that other nearby cities (any Australian ones for example) just don’t have. I know where we went wrong, but fixing it now will not be easy or simple.

    1. “Removing perceived landlord ‘advantages’ may well simply decrease rental stock as they sell up” – which will either give a first home buyer a chance to buy, or an investor will buy it but only at a much reduced price. The return is only low at the moment because the purchase price is too high

      1. Jimbo it won’t make any difference to prices. The properties will be absorbed by foreign investors to whom the prices are still considered (globally) low, or handy for money laundering. Auckland prices may plateau at some time in the future when they equal what can be bought globally (other major city, etc), but will continue to remain out of reach by regular Kiwis. The influx of foreign money has ensured Auckland is now a player on the global market.

        1. You can’t say that, they’ve explicitly stated that foreign ownership is NOT a significant problem. Surely you believe them

          1. Ha ha ha ha ha ha …Politicians will say anything to avoid having to face and tackle real issues until it becomes so painfully obvious to all that there is a problem.

      2. As you note, there are some complex relationships at work here. Reducing the tax advantages for investment property ownership will induce some landlords to sell, but this doesn’t necessarily affect the overall quantity of housing available! It may just mean that some people will get the opportunity to buy slightly cheaper.

        Some Treasury economists put together a nice, simple model of the interactions between rental and owner-occupation markets. It’s well worth reading for the technically inclined: http://www.treasury.govt.nz/publications/research-policy/wp/2009/09-05

        Unfortunately, it assumes a “closed” economy – i.e. no migrant or capital flows. I’m not convinced that affects the broad dynamics though.

        1. Peter I don’t know if anyone would get the properties cheaper, the demand in Auckland is so high, any advantages may well be absorbed by the market (more buyers than sellers). It would need something big to happen globally (maybe the Chinese markets to falter – more so than the recent blip) to upset that balance and put us back to 2007/8 where it was the other way around. But even then prices just plateaued, they didn’t drop in real terms.

        2. The model almost certainly does not include foreigners laundering money. This is a group who do not care how much they pay, as long as at the end they have a legal asset.

    2. “The writing was on the wall 5 years ago, and that is when action should have been taken. Entire suburbs now have new cultures already. ”

      You mean, ENTIRE suburbs where barely anyone speaks Maori?

    3. “the only way to increase the number of properties available to buy is to go upwards”

      or reduce the size of the parcels of land sold. I’d be happy with 120 or 150 m2, so turn my 498m2 in grey lynn into 3 or 4 sections.

      1. How about 50?

        Take a look at the SHA in Manurewa
        39 “houses” (or sometimes “dwellings”) on ~2100 sqm.
        So that’s no driveway, no lawn/garden and either 2+ stories on 50sqm of land, or a 1 bedroom unit.

          1. Well where ever they legally can developers will sell small sections, people will buy them and council can hook up services. Stop concern trolling.

          2. To Sailor Boy, not quite understand your comment. In order to satisfy demand in Auckland we would have to have thousands of new small lots not just isolated blocks here and there. If Council can install the infrastructure that could work. Assuming that everything will just happen because someone suggests the idea – it isn’t that simple. It needs to be done properly.

          3. I think both points are important here.

            The council needs to provide all those new houses with infrastructure without bankrupting itself. I remember a while back that caused a row between the government and the council about greenfield developments.

            But then there’s also the legal side. In the UP large areas have a relatively low limit on density. But there is some exemption if your lot has a minimum size (and I think frontage as well). What that means in practice, with a regular-sized lot you can’t subdivide, you just have a very expensive lot with at most a single free-standing house. But if you’re a developer who can buy some adjacent lots then you can merge them together and do one of those little townhouse developments on it.

            This is very apparent in the area around Birkenhead. You have freestanding houses everywhere, and the odd townhouse cluster randomly dotted on your map. Which is weird, because that increases the density in a way that all those new residents are still dependent on a car to get to work. And it’s not like Onewa road still has a lot of room for those. How come those townhouses are not developed closer to the town centres and along the frequent bus routes?

            Now I know about Hanlon’s razor, but I’m wondering if this is just the result of corruption. Resulting in (1) large lot sizes and restrictive density so the rich people can keep the plebs out of their hood (look on the UP at this low density ring around the CBD—Ponsonby / Epson / Remuera / Devonport), and (2) this weird exception for large lots so only developers or people with enough capital to buy a few lots at once can develop new housing.

    1. Really interesting link. I have to say that I’m shocked, absolutely shocked, that our finance markets aren’t complete!

      I was wondering a while back whether the divergence in trends between house prices and rents that really started around 2002 reflected some kind of change in people’s expectations about retirement. I.E. if people started expecting to live in their own homes for considerably longer after retiring, it would be rational to pay more for a house as they’d benefit from living in it rent-free for more years.

      If that’s what is happening, then it should be possible to pick up similar trends in annuity or life insurance pricing. But we don’t have an annuity market…

      1. 90 day bank bills were 6% in 2002 and are less than 3% now so people accept a much lower yield from housing. Secondly in Auckland most of your return is untaxed capital gain, the rent is just payment for the hassle of putting up with tenants using your property and wearing it out (and of course necessary to convince IRD you are not a speculator)

  2. ” or being able to retire on national superannuation, which is only possible with a fully paid off home”

    Uh, what? Is this true, and if so, how is this justified and what rules are around it?

    1. No it is not a rule of getting National Super. He means that if you don’t already own your own home then National Superannuation will not be enough for you to live on.

  3. In the planning space would be good for each Council to be set a housing target based on projected population and to mandate that District Plans must allow for this development, irrespective of what NIMBYs think. SHAs have been good at setting Auckland targets, just a shame so much if that has been greenfield due to shonky process.

    1. Great ideal, but having worked in the UK system where such targets were being set I would comment that they _can_ be pretty useless if just one or two impediments arise. NIMBY behaviour, strategic land banking, financial constraints or incentives – any of these can both upset the “model” that predicts supply and stop delivery.

      Once any governance body sets targets or raised expectations of a programme of delivery in this space they have to intervene and make delivery volumes happen IMHO. That can be done any number of ways, but hands off the wheel / leave it to the market is not one of them.

  4. So, what “you” (the paper authors) are saying is that 10% of housing gets sold to foreign investors (A guess, since we “don’t think it’s enough of a problem to bother collecting data for it”), and a further 20% to immigrants.
    So let’s look at a typical housing supply demand curve:
    http://2012books.lardbucket.org/books/theory-and-applications-of-economics/s23-01-housing-supply-and-demand.html

    And then let’s guess that reducing existing demand by 30% would result in an actual reduction of ~15% because suddenly a bunch of other people would think they could afford housing.

    What does that do to the pricing?

    Hmm, looks like that might drop the price, oh say 15 – 20%, maybe more depending on where on the curve we are.

    Oh well, I guess that 8x income is really THAT much better than 10x income, right?

    1. Sadly the government and council liked to downplay the numbers by spreading the foreign ownership percentage across all of NZ. Truth is most of it is in Auckland, which until recently they had been very mischevious about admitting.

      1. Exactly Ricardo. Most of the foreign investment in housing is in Auckland. Same goes with immigrants; most of them move to Auckland and the minority that don’t tend to be Aussies or Brits.
        A few things need to happen: 1) immediately reduce immigration numbers by half and in particular reduce numbers of low quality immigrants (lack of skills, qualifications, language skills, assets etc).
        2) ban sales of property to foreign buyers (like many countries do).
        3) relax height/density restrictions in public transport corridors.
        4) require 40% equity for rental property investors.
        5) introduce targeted property tax of 0.5% pa in cities with a housing shortage to be used for infrastructure spending (to help lower costs for new building). 2% pa for undeveloped land to discourage land banking unless there is a good reason (in which case bonded so that if sold later the capital gains are removed).
        6) introduce a stamp duty on sale of property by non-residents of 20%.
        7) government inquiry into building costs and wats to lower them without reducing quality.
        8) more focus on moderate homes (3 bedroom basic houses rather than 5 bedroom McMansions) along with reasonable apartments/condos.

        The above you take heat out of the market from both international (which doesn’t benefit NZ) and domestic (which ties up capital in the wrong place) while helping to improve housing affordability and facilitating development of new housing.

        1. For 15 years now, longer maybe, Auckland supply has not been enough for the demand.

          If we can’t increase the supply enough, and it’s fairly clear we can’t the other sensible option is to slow the demand until the supply can catch up. Through a long Red govt and a long Blue govt that hasn’t happened.

          So who’s looking out for us- Winston? The Greens?

  5. Hilarious watching the usual reactionaries calling for “cutting immigration” at precisely the same time even John Key understands that helping refugees is a simple matter of human decency.

    1. A refugee, in contrast to a migrant, is according to the Geneva Convention on Refugees applied to a person who is outside their home country of citizenship because they have well-founded grounds for fear of persecution because of their race, religion, nationality, membership of a particular social group or political opinion, and is unable to obtain sanctuary from their home country or, owing to such fear, is unwilling to avail themselves of the protection of that country; or in the case of not having a nationality and being outside their country of former habitual residence as a result of such event, is unable or, owing to such fear, is unwilling to return to their country of former habitual residence.
      https://en.wikipedia.org/wiki/Refugee

  6. The only thing that’s different between today and three weeks ago, is one photograph.

    The actual facts have been the same for a long time and in many other countries, and few gave a shit. Fascinating really.

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