This is an addition to an ongoing series of posts on the politics and economics of urban planning reform. In an earlier post, I took a look at the costs, benefits, and distributional impacts of urban development. Basically, enabling more flexible / responsive urban growth is a good idea for society – but many of the gains accrue to new entrants to the housing market. But how large are those gains? In other words, how much lower would housing prices be if we had a totally flexible development market?

Answering this question is challenging because housing markets are complex. In economic terms, housing is both a “consumption good” – something you buy to live in today – and an “investment good” – something you buy in the expectation of future returns. Prices are affected by the current balance of supply and demand, but also by interest rates, expectations about the future, etc.

One simple way to disentangle these factors is to look at the relationship between consumer prices, rents, and house prices:

  • When rents rise faster than general consumer prices, it indicates that housing supply is not keeping up with demand
  • When house prices rise faster than rents, it indicates that financial factors – eg mortgage interest rates and tax preferences for owning residential properties – are driving up prices.

The reality is a bit more complex. For instance, rising prices (relative to rents) can reflect expectations that housing supply will be more limited in the future. So the increase in rents is not likely to fully capture the impact of constraints on housing supply.

With that in mind, here’s some data for Auckland. I’ve sourced mean rents from MBIE’s rental bond tenancy data and median house prices from REINZ data published by interest.co.nz, and deflated both by the consumer price index published by Stats NZ. It covers the period from December 2001 to June 2016. During this time:

  • In nominal (ie non-inflation-adjusted) terms, mean rents rose from $288 per week to $512 per week. If they had kept pace with general consumer prices, they would have only risen to $392 per week.
  • In nominal terms, median house prices rose from $255,000 to $821,000. If they’d kept pace with rents, they would have only risen to $453,000.

In other words, rents have outstripped consumer prices, and house prices have outstripped rents. Here’s a chart:

auckland-real-house-prices-and-rents-2001-2016-chart

A simple take is that supply shortfalls matter, but so do financial factors. At absolute minimum, Auckland’s shortfall in housing supply relative to demand accounts for one-quarter of the rise in house prices over this period. (The true figure is likely to be higher, as recent increases in prices are likely to be driven in part by the expectation that Auckland’s housing shortfalls will continue into the near future.)

However, supply doesn’t explain everything. It’s likely that financial factors, like falling mortgage interest rates and tax preferences for owning residential properties (eg our lack of a comprehensive capital gains tax), account for a fair share of the run-up in house prices since 2001 – possibly even a majority of the increase.

Interest rates seem to have played an important role. According to RBNZ data, the average mortgage interest rate have declined since the 2008 financial crisis – from 8.76% in June 2008 to 5.10% in June 2016. That would have reduced the cost of servicing a mortgage by around 31%, meaning that buyers can afford to borrow a proportionately larger amount.

On the whole, lower interest rates seem to ‘explain’ a bit less than half of the increase in house prices over and above the increase in rents. Between 2000 and 2016, the cost to service a mortgage on a median Auckland home rose by around 87% in real terms – significantly less than the 137% increase in real house prices.

Here’s a chart showing a breakdown of the factors that appear to have contributed to the increase in house prices over this period, based on trends in rents and mortgage interest rates. This suggests that, of the 137% increase in real median house prices from 2000 to 2016:

  • 31 percentage points could be ‘explained’ by rising rents, which reflect a shortfall of housing supply relative to current demands
  • 44 percentage points could be ‘explained’ by falling mortgage interest rates, which lower the cost of borrowing money
  • The remaining 62 percentage points couldn’t be ‘explained’ by either rents or mortgage interest rates – this could be due to expected future shortfalls in housing supply, or other financial factors.

auckland-house-price-increases-breakdown-chart

It’s a bit hard to explain the remaining 62 percentage points in this chart, but some other ‘financial’ explanations could include:

  • New Zealand’s tax treatment of residential property, and in particular investment properties – unlike many of the countries we ‘trade’ capital with, we don’t have any form of capital gains tax on property. All else equal, this means that we should expect structural inflows of cash into our housing market, driving up prices.
  • The impact of ‘cashed-up’ buyers coming in without the need to borrow money to invest in properties – including, but not limited to, foreign buyers.

What does all this mean?

First, we do need to investigate other factors that might be distorting the housing market, like the tax treatment of residential property and the impact of foreign money seeking a safe haven. A large component of the increase in house prices can’t be readily accounted for by rising rents or falling mortgage interest rates. That’s probably a signal to probe deeper.

Second, constraints on housing development still matter quite a lot, even if shortfalls of supply over current demand (as reflected in rising rents) don’t ‘explain’ the majority of the rise in house prices. Increases in rents in Auckland over the last sixteen years have been large in average dollar terms.

If rents had kept pace with general consumer prices, the average renting household would be paying $120 less in rent on a weekly basis. That adds up to $6240 a year, or around 7-8% of the income of the average Auckland household. Large numbers.

That’s a reasonable proxy for the cost to the average renting household of restrictions on housing supply, including zoning policies that don’t allow more homes to be built in locations that are accessible to jobs and amenities. A lot of households would be a lot better off if we took a more enabling approach to development.

What do you make of this data on rents and house prices?

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126 comments

  1. Comment removed for evidence-free accusations. The post above is factual, if you believe these facts to be wrong, you need to provide evidence.

  2. One further thing to note with the rent increase is that I imagine the average income *for renters* is lower than the overall average income so that $120 per week growth over CPI is really hurting.

    1. I imagine the average income would have been lower for renters 15 years ago as well. While you are likely right, given the point of this is to compare over time I’m not sure it is relevant.

    1. Please provide citations for these figures.

      The figures I’ve seen indicate that Auckland has a long-run requirement for around 13,000 new homes a year, taking into account volatility in net migration from year to year. We’re currently consenting a hair under 10,000 dwellings, after recovering from the bottoming-out of development after the GFC. So the annual shortfall in consents is considerably less than 10,000 dwellings.

      The drop-off in development back then is one of the reasons why we now have a backlog that will be difficult to clear. Various people have estimated that at anywhere from 10,000 to 100,000 missing homes that we needed to build. But that has *nothing* to do with immigration, and everything to do with a *global financial crisis* that stalled development.

        1. Yes, that’s approximately the pace we’d need to build at in order to both meet annual growth in demand *and* eat into the accumulated shortfall from previous years. The two are different things.

      1. “But that has *nothing* to do with immigration, and everything to do with a *global financial crisis* that stalled development”

        Immigration controls are the solution. If you have a housing shortfall that roughly matches immigration numbers, then turn off the tap until equalibrium is reached, or re-direct immigration to other parts of the country.

          1. What if we offered some training to people who already live here, maybe some of those who have had there chances at employment crowded out by the big inflow of migrants. What if we then employed those people to build us some houses?

          2. We should definitely do that as well. I see these as complementary measures, rather than competing ones.

          3. I’m sympathetic to the “young NZers are underemployed” argument, but at the same time I want to be a bit cautious about over-egging it. If you look at OECD Stats, it shows that NZ has:
            * A relatively low unemployment rate – currently under 6%
            * One of the highest labour force participation rates in the OECD – consistently over 80% of people in the 15-64 age category.

            This means that, whatever the true effect of immigration on employment, it hasn’t prevented NZ from looking relatively good.

          4. The problem with recruiting immigrants to fill vacant positions in the construction industry is that immigrants have a demand as well as supply effect. Many economists believe the demand effect on -household purchases, transport purchases, additional public provision -in schooling, health etc is greater, at least in the short term, than the labour supply effect.

        1. Given these immigrants are generally coming here to work and therefore pay tax, have you considered the impact on our ability to pay pensions and benefits, and also how many of these immigrants may be going to work in the building sector?

          While I think our current immigration policies are rather blunt and do nothing for the lower end of the wage spectrum, I don’t think we could turn off the tap without significant downstream impact.

        2. Asian chain migration is a ticking time bomb. 1 child, 2 parents paying tax, 4 grandparents collecting super. Immigration is good, sometimes.

          1. Have you tried to get grandparents in on sponsored visas? It is nowhere near as easy as people think. Unless the grandparents are seriously cashed up and even then it isn’t that easy.

            One factor that can be cultural is that applicants need to show the centre of the family has moved. That is obviously easier if the sponsor is an only child – more common possible in Asia than Europe.

            I would like to see some stats around immigration of family members. I don’t think it would be anywhere near as common as people think. Most immigrants are young people of working age unless they have considerable financial resources.

          2. A quick google shows that 5739 received parent visa last year and that this number has varied between 4401 and 6364 in the last decade. So they make up about 10% of resident visas issued each year.

            There are 3 visa options, the Parent Residence Visa Tier 1 or Tier 2, which were closed for 2 years earlier this month to clear the back log (the wait list for tier 2 was about 7 years). These visas depend on parent and/or child income and the child having been resident in New Zealand for the last 3 years

            Or the Parent Retirement Visa which required that parent to have $60,000 a year in passive income, $1 million to invest in new Zealand and $500,000 for settlement.

            I have been looking at this for my wife’s mother, nothing is easy and I don’t know many people who have $1.5 million lying around to apply for a visa.

          3. “I have been looking at this for my wife’s mother”

            I am quite happy for my wife’s mother to remain in her home country.

  3. It seems that there are a lot of factors that are pushing up house prices. First, near-zero interest rates means assets prices will rise – that’s basic economics. People will chase yield and that means getting out of interest bearing instruments and into assets including the stock market. The NZX50 is at or near record highs and this replicated around the world. The tax treatment also distorts the market and re-enforces the first factor. With rental yields below term deposit rates the only reason to invest into housing (excluding owner-occupiers) is the capital gain – but this is usually tax free. The other factors are emotions – fear and greed. More than USD$100 billion is leaving China a month. The wealthy in China fear that their money could be taken away. Only a small portion of that 100 billion needs to come here to distort our market. Then there is greed in the NZ market – which is actually rational at the moment. Some of these things we can deal with such as the tax treatment and foreign cash while others we cannot such as near-zero interest rates.

    1. A more subtle point is that capital inflows are not necessarily a bad thing *unless* you have distortionary tax policies that encourage people to stash the cash in housing. In NZ, that means a lack of a consistent capital gains tax on housing.

      Consider the counterfactual: If we had a level playing field for inward investment, or a playing field that was tilted away from residential property investment, a greater share of capital inflows would be going towards business investment – new machines, R&D, etc. That would basically be a good thing, as it would improve the productive potential of our economy.

      1. Good point. If the capital out flows from China went into productive areas of the economy we would be better off. Unfortunately a lot of that money seems to be going into housing in a lot of cities (Sydney, Vancouver, LA, London). I think this reflects a preference for housing rather than a pure economic decision.

        1. If that’s the case, and the resulting economic distortions from over-investment in housing are large, then there may be a case to tilt the investment playing field *against* housing. I stress the “if” component of this!

      2. I suggest that it is time for legislation to effectively deem the process of buying housing and renting it out as running a business rather than being an investment; it is certainly not the passive affair that investing in bonds, savings accounts or shares is. The business buys an asset for the prime purpose of providing a service (at least that is what all those property investors “convince” the IRD of, even if they are actually in it for the capital gain).

        If it looks like a duck, walks like a duck and quacks like a duck then it’s a duck.

        The assets would be business assets (the individuals would have to sell the assets to the business at the market rate or the company would have to buy the asset) and when the business is wrapped up the assets are sold and any gain on sale becomes income taxable at the company rate. In addition, for many of these businesses the annual turnover is going to be more than $60k so they will have to be GST registered. GST reclaimed on the purchase of the asset but chargeable on the sale of the asset.

        It would be interesting to see how popular property investing is in comparison to other investments on this basis.

        1. I thought that is what most owners of rentals did already, the simple reason being they pay tax on the profit rather than all of the rental income. Someone who knows the industry better than me could confirm or refute this.

          1. I get that, my point was I thought that what you are suggesting is already common practice, I know the place I currently rent is owned by a company whose sole directors are the couple that are my landlords.

          2. http://www.ird.govt.nz/property/property-selling/selling-property.html

            A quote:

            The tax you pay depends on four things

            Your intent when you purchased.
            Your history of buying and selling.
            Whether you’re in or associated with the property industry.
            Whether you buy and sell a property within two years.

            All it needs is a ruling that by renting out the property (provided that it is not your primary residence) you are , ipso facto, “associated with the property industry”

          3. Right, got you now, you want to go the long way around to having a capital gains tax on all non-owner occupied property. Why not just go the direct route? Also given as far as I know the majority of landlords hold their properties in a company for income tax advantages it is clearly not covered by the third point in that IRD list.

            You mention it’s an active investment. It’s worth noting that another active investment, owning a business, growing the business and then selling it for capital gain also attracts no capital gains tax at the moment.

          4. “As far as I know the majority of landlords hold their properties in a company for income tax advantages”
            How far do you know?

            “It’s worth noting that another active investment, owning a business, growing the business and then selling it for capital gain also attracts no capital gains tax at the moment.”
            And that should be taxed too. I really don’t see the reasoning that someone on mimimum wage is paying income tax but the gain on the sale of a business is not taxable.

            “Why not just go the direct route?”
            Because both National and Labour have ruled out a capital gains tax, to my disappointment. The previous two countries I have lived in had capital gains taxes; they did’t seem onerous or difficult to administer (in spite of John Key’s protestations).

          5. I don’t know for sure, but my last three rentals certainly have been that way, you’d be a mug not to create a company. If you own the house yourself, you pay tax every time you receive rental income (just as I pay tax on my share dividends). If you put it in a company you only pay tax on the profit – rental income less expenses (rates, mortgage payments etc), which will be much less or even a loss.

            It would be the same National or Labour governments creating the backdoor route so I don’t see why it would be anymore likely to happen.

          6. “The pertinent point is the ownership of the asset(s), not the treatment of revenue.”
            That isn’t my experience. IRD usually tries for neutrality as it doesn’t bother them how you hold an asset. In most cases individuals, partnerships and companies should end up paying the same tax in the end. What matters is why you buy an asset. If you buy to sell at a higher price then that is a taxable income. Doesn’t matter if it is shares, houses or antiques. If you are trading and speculating then you have an income (or loss). If you buy to get the income stream or rents from an asset but after holding it for a long time you find its value has increased then that is just fortuitous and not taxable.
            And Jezza you only pay tax on the profit from rents, you can hold a rental property as an individual and claim the costs. you fill out an IR3R for each rental house you own and file it with your IR3.

          7. One can account for expenses without forming a company; operating as a sole trader or as a partnership come to mind.

          8. “That isn’t my experience”

            Indeed that is the case at the moment. I am arguing that “fortuitous” gains should be subject to tax and proposed a mechanism.

            Is anyone prepared to step up and explain why “fortuitous” gains should be free of tax? It seems, in the New Zealand context, to be an article of faith.

          9. Jezza the two big advantages of a company structure is it creates a separate legal entity and second you get limited liability. If the project goes bad and you lose money you can only lose the amount of the shareholders equity (plus any guarantees you might have given to get finance). If you are doing anything involving risk it is a great idea (seek legal advice etc) but if you are not doing anything risky then there isn’t much point. Also if there are multiple owners it is a good way of making sure everyone is treated properly through formal processes. A lot of people use trusts but they have the potential to go very bad especially if someone running the trust regards the assets as their own and behaves in that way. A company gives you some protection from a potential high liability, there is director liability but that isn’t great in this country. Again I am not a lawyer but I would use a company for a development but just own a rental as a personal asset. Some people use trusts to try and impoverish themselves for government grants. In my view it is immoral.

        2. Good post MFD. New Zealand Inc needs the economic activity generated by a booming property market to avoid a severe recession. Various levers are used to make sure that property prices keep going up including immigration (possibly though not completely a red herring), and most particularly a friendly tax regime to encourage those mum and dad investors to keep accumulating and doing up properties. When I sit in a cafe in Te Atatu or Howick, it is interesting to observe the same conversations. For anyone already owning a house, there is every motivation to pick up a few more and reap the tax benefits for themselves and their children for many years to come.

          It is also interesting to observe the contrast with the tax situation of the owners of the cafes that the property owning class sit in. Because GST cannot be claimed off PAYE and (often) rent, the cafe owner has to get their head around the reality that they have to effectively set aside close to half their gross revenue for tax purposes. GST is a big deal in retail. Of course, if the housing bubble popped tomorrow, all those multiple mortgage owners would very quickly stop coming to those cafes as the economy fell off a cliff.

          Which is why the talk is of moderating the house price increases, not stopping or lowering house prices. All possible, maybe. Meanwhile, for those not on the property ladder, the future is a challenge….

          1. “New Zealand Inc needs the economic activity generated by a booming property market to avoid a severe recession”

            Buying and selling houses to one another generates no wealth; it’s a zero-sum game. For all the property investors making gains there are others taking on massive debt and expenses. The capital gains are at the expense of others…and the gainers, provided they maintain the facade that they are in it for the rental income, not the capital gain are rewarded by paying no tax on the gain. The losers, in the meantime will work for decades to pay for the mortages (or rent) and will be taxed on the fruits of their labour. Just doesn’t seem right to me.

            New Zealand needs wealth-creating economic activity, not zero-sum economic activty.

          2. ‘it’s a zero-sum game’ Is it?
            For those prepared to play the game, it seems to me the banks will print money. What is the value of assets in the world? What is the value of debt in the world? One would hope that assets outweigh debt. Of course the value of those assets keep going up due in part to the property boom which allows debt to keep building up beneath. Literally a great money making scheme for banks. In theory a road to infinite wealth as the money-go-round keeps going. Unless outside factors create a spanner in the works….such as a series of cataclysmic climate change weather events.

          3. “GST cannot be claimed off PAYE and (often) rent” as you will know that Café is a business and doesn’t pay PAYE but if that business operated at a loss the owner would be able to claim the loss against any personal PAYE they were paying just as landlords do with their business.

          4. From advising a lot of hospitality clients, I can tell you the main thing killing hospitality businesses (and many others) is rent that is just too high.

            Tax is a factor but of course you only pay tax if you are making money. One client always tells me he loves paying income tax and GST because it means he made money. Rent is dead money for him though and every dollar it goes up delivers zero value to his business.

            The rising commercial rents are directly related to more money being available to investors from residential rises. Also, big Australian based mall operators that are trying to squeeze every dollar out of the tenants and often have hard ratchets built into the rent review clauses so the rent can never drop no matter what the market does.

            Soft ratchet used to be more common and is the default under the standard ADLS lease but it is usually amended now to a hard ratchet.

            These are real factors that I see bringing hospitality and retail business to their knees every day.

          5. Tulip Speculation – yes, possibly an allegory for our times…of course economic and history scholars argue vehemently over its authenticity.
            So within that context – quoted from the great scribe in the sky –

            ‘Tulip mania reached its peak during the winter of 1636–37, when some bulbs were reportedly changing hands ten times in a day. No deliveries were ever made to fulfil any of these contracts, because in February 1637, tulip bulb contract prices collapsed abruptly and the trade of tulips ground to a halt. The collapse began in Haarlem, when, for the first time, buyers apparently refused to show up at a routine bulb auction. This may have been because Haarlem was then at the height of an outbreak of bubonic plague. While the existence of the plague may have helped create a culture of fatalistic risk-taking that allowed the speculation to skyrocket in the first place, this outbreak might also have helped to burst the bubble.’

      3. Are the policies really distortionary? As far as I know there is no broad capital gains tax on shares or selling a private business in NZ either, or am I wrong?

          1. I don’t believe you pay tax on the capital gain of selling a company or share anymore than you do on selling a house, I’m questioning whether their is actually a difference between tax on gains off these different types of assets that distorts the market towards buying houses.

          2. It certainly distorts the market in favour of the wealthy and rentier class of society. They pay no tax when realising the super profits on selling their business – whether by way of shares (much less common) or sale of the business (much more common for SMEs).

            Business owners can also income split by way of shareholding and of course set off any costs in operating the business, This often includes claiming back mortgage payments, power, internet etc on the basis of a home office.

            Meanwhile, the people who just get up every morning and go to jobs are paying PAYE on every dollar they earn. They can’t income split or claim any expenses such as clothing they need to buy for work.

            So our current system definitely favours the already wealthy capital class over the already poor income class.

      4. Tilting investment away from property is very unlikely to benefit industry. Most of the local money going into housing is borrowed – usually with other housing as equity. The major banks are happy to lend on this basis. They are less happy to lend for the purpose of purchasing shares – especially in start-ups and the like. Buying existing shares is no different from buying existing property.

      5. Are you across the board in favour of double taxing income? Why should there be a capital gains tax on property bought with taxed savings? Where do you start and stop? Should there be a capital gain on all transactions, ie; the sale of used cars? Then why not an across the board sales tax (instead of GST). If there is a capital gains tax, shouldn’t there also be a capital loss tax credit? If the Government wants a slice of the housing profits, they should be prepared to accept that occasionally there could be losses.
        I will share capital gains tomorrow, so long as the Government shares in the cost of negative equity, if (when) the bubble bursts.

        1. “Why should there be a capital gains tax on property bought with taxed savings?”

          For the same reason that there is tax on interest on taxed savings in a savings account and there is income tax on wages, salaries, dividends etc. All are income. A capital gains tax applies to the difference between sale price and purchase price so there is no “double taxation”. Do you have a compelling argument as to why the income derived from selling property at a higher price than it was bought at should be free of tax while the income derived from working (creating wealth) is taxed from the first dollar?

          In the countries with capital gains taxes that I have lived in there are tax credits for capital losses.

          “I will share capital gains tomorrow, so long as the Government shares in the cost of negative equity”
          Nobody is asking you to share capital gains, just pay tax on your income like those who work for a living.
          Negative equity occurs because buyers do not use their tax paid savings to buy a property but borrow most of the money. Under a US or UK style capital gains tax structure a property “investor” forced to sell in a falling property market would receive a tax credit for their capital loss (provided it is not their primary residence since it was not subject to capital gains tax in the first place) so would be better off than in a system without such taxes.

  4. The problem of wildly rising house prices is not just confined to Auckland, but is prevalent in many hot-spots around the world. Therefore the problem is not just related to Auckland issues, but is related to similar fiscal policies in place around the world. I’d put forward that the problem actually lies with excess liquidity in the world economic markets – i.e. banks have lots of cash, and with low inflation, the only way they are getting good profits is to loan the money out on mortgages. Too much money chasing too few houses.

    1. All else equal, excess liquidity translates into lower interest rates – ie if there’s more money to lend, it earns a lower return. That’s picked up in my analysis of the effect of lower mortgage interest rates on mortgage servicing costs, which ‘explains’ around 44 percentage points of the rise in real house prices. Probably a bit more once you account for the fact that some people can access other sources of cheap cash.

  5. As you note Peter, exogenous money, money entering from outside the economy is an issue, but I suspect so is money from retiring baby boomers searching for security an issue too. Every year since 2011 another year of this demographic bubble turns 65, the nominal age of retirement, some have maturing super schemes, others are downsizing big from family homes, they can anticipate a couple more decades of life to fund and currently neither bank deposits nor the sharemarket have the unique tax advantages nor possible capital gains of the residential property market.

    Anecdotally we know some are moving to apartments for example in Wynyard Quarter, Grey Lynn or Alexander Park, and others are cashing up and heading to greener pastures in the rest of the country. And some of these are also keeping or acquiring more properties in the Auckland market. I wonder if this is a significant source of capital entering the market?

    Incidentally these movements are pushing up the median age in attractive regional areas like Coromandel, which will no doubt lead to an increase in demand for medical services etc in these regions…

    And, come 2026, when the first of the bubble hit 80 there will be another change in the direction of their wealth; back to consumption. We consume, on average, 50% of our lifelong drawdown in public health services in our last year…
    yikes!

  6. Nice work Peter.

    One thing that could account for the difference between rents and house prices is the future development potential of a site. If a site has one dwelling on it now but could be redeveloped to have 5 dwellings in the future this would be reflected in the price but not the rent. In a way you are paying for two different things when renting or buying. You largely rent a dwelling but you buy land.

    I think the big takeaway here and the thing that doesn’t get enough attention is that rents are rising above inflation albeit at a lower rate than price increases. This is due supply constraints and not speculative demand.

  7. It is interesting that the price index busted through 150 around the time the Auckland Plan was adopted and rocketed upwards since. Thanks Penny and Len.

      1. On a more serious note, I certainly wouldn’t try and pick the peak of a market but when interest rates are at historic lows and people are going to extremes to buy you have to wonder. Maybe the price of housing is high simply because so many people are joining in and hoping to make money. We unloaded both Auckland rentals on the basis that nobody ever went broke taking a profit.

        1. +2, I think a reasonable chunk of the 62 % is a combination of market sentiment, panic ‘got to get in now’, this time is different etc and a belief that because there is a supply shortage it can only go up, which is not necessarily true.

  8. Is it possible that rents have gone up, because all of the affordable housing has been snapped up by investors/speculators? And that has removed the ability for the people who are renting that would nominally be able to afford a house (if prices hadn’t gone up faster than incomes for multiple years).

    1. It shouldn’t as more houses owned by investors both increases the pool of rental houses available but also the number of people needing a rental house, which in a static population would cancel each other out. Problem is the population isn’t static and housing supply – both overall and in areas with the best access to employment – has not kept up.

    2. Yes, and investors are trying their hardest to claw back yield. e.g. A kinda sad house in Glen Eden (near the train station) sold for just under $1.1 mill recently, the new owners expectation of rent is accordingly totally unreasonable.

  9. The above analysis looks at a 15 year period and I would think that this distorts the picture somewhat. i.e something like Simpsons paradox is at play. Recently, rents have decreased in AK which strongly suggests that supply is not currently an issue, rather interest rates/speculation/ lending practices etc.

    I think that within the next 5 years we will see the market collapse as unneeded supply hits the market at/about the same time as interest rate rises. Banks have been reckless in their lending *in terms of income/debt serviceability ratios which means that almost everyone who bought properties in the last 3-4 years is going to experience difficulty when rates return to somewhere near long term averages.

    This will likely result in a collapse in house prices. For everyone who can continue to service their debt (ironically) this collapse will bring better properties within their price range which will result in better quality of life. i.e. despite what everyone thinks, rising prices are bad for quality of life with the exception of investors, people that leave NZ and the benefactors of dead people. That is, proportional increases put nicer homes further out of reach of everyone as the $$ gap get bigger and bigger.

    I also expect that this housing collapse will coincide with increased debt serviceability costs for the govt as the interest rates on the $100 billion or so of public debt also increases. Luckily for the National govt these economic difficulties will probably coincide with a change in govt, so it won’t be their problem. IMO.

    1. “Recently, rents have decreased in AK which strongly suggests that supply is not currently an issue”

      Rents have decreased? what? That is not even remotely true

          1. “Rents dropped from $520 median in May to $500 this month, and only risen $1 in an entire year, according to an online real estate listings web site.”

            Depends what you mean by ‘decreased’ but if you consider inflation, ‘flat’ is functionally a decrease. Regardless, flat prices indicate that supply is not the issue.

            Also, if you start restricting what you mean buy ‘Auckland’ (i.e excluding bits of AKL that is inconsistent with your argument, AKA Puke etc.), then you rapidly loose any objectivity of your argument.

            Regardless, I point you to the final sentence in your post “What do you make of this data on rents and house prices?” My reply is only my view, and only time will reveal the ‘truth’ of the matter.

            Cheers

    2. But you *need* to look at the long-term trend to capture the cumulative effect of policies and market outcomes that play out over a longer period. There will always be fluctuations up and down around the underlying trend, and focusing on those can lead to you ignore the major event.

      Looking at recent monthly changes in rents and concluding that we don’t have a supply shortfall is like saying that climate change isn’t happening because the weather was cold last week.

      1. I agree that it is important to look long term, but I would argue that recent trends are important too. Certainly, my view is that a 15 year spread would impair any reasonable inference. Also, when you think about it, given immigration, it is weird that rents are not increasing. My view would be that recent immigration would drive rental prices more than house prices (for a bunch of reasons).

        My concern is (as stated above) that the govt/council is engaging in a lot of incentivising of new builds, but that this approach is based on an overestimation of the role of supply (my feeling is that they are doing this because it provides a rationale for sprawl, which is what the govt wants). My personal view is that bank lending practices are the key factor here…in that, banks have provided the noose (basing loans on current interest rates etc. ) and people are willingly hanging themselves (borrowing the maximum they can). If banks did not lend to the extent that they lend, house prices would not have got out of control (IMO). When this new supply comes on board, it will likely coincide with increasing interest rates (and there you have the perfect storm).

        Also, respectfully, I don’t accept the climate change weather analogy, as climate is not weather.

        1. I don’t get why people are so desperate to believe that something other than a supply shortage is the most significant driver of the housing crisis. The facts are:

          – Auckland has added households at a faster rate than it has added dwellings for at least the last 5 years
          – Auckland has had significant rent rises over the last 5 years
          – Rents have risen above inflation over the last year according to Tenancy bond data which is more comprehensive than trademe data http://www.mbie.govt.nz/info-services/housing-property/sector-information-and-statistics/rental-bond-data

          You seem to have found one data set which says that Auckland has had flat or slightly below inflation rents over the last year and concluded that means there is a downward trend. I wish it were the case that rents were falling (I know anecdote isn’t data but I have had 10% rent rises for each of the last 2 years) but I just don’t think it’s true.

          1. Because looking at the grey and orange areas in the graph above it is very clear that supply is not the primary driver of the rapid increase in house prices, it is clear there are many other factors at play as well.

          2. “Because looking at the grey and orange areas in the graph above it is very clear that supply is not the primary driver of the rapid increase in house prices”

            Not really. That graph just shows that there is a ton of uncertainty (the 62%) about what is causing price rises. This uncertain 62% could be caused by an expectation of future rent rises or future intensification of sites which would both be consistent with a current supply shortage.

            As for the 44% caused by cheaper interest rates this wouldn’t be a problem on its own because it simultaneously lowers the costs of buying (the nominal price of a house has increased but the cost of borrowing money has decreased).

          3. You are quite possibly right that the factors accounted for in the orange box, such as panic, got to get in now, $$$ from capital gains are initially driven by the supply situation. It somewhat depends on what is meant by the housing crisis. If it is people being able to find somewhere to live then you are spot on. If it is people being able to buy their own house then it is clearly much more and these prices could come down without an increase in overall housing supply if the market is spooked at any point.

          4. Frank’s got the interpretation correct.

            The problem with a lot of analysis of housing markets is that people focus on their own pet explanation of why prices are rising (or not rising), ignoring all other possible explanations. What this post shows is that *multiple* factors matter, with no single factor explaining all of the rise in house prices.

            Saying “it’s all supply!” is obviously wrong, because falling interest rates would have pushed up asset prices even in the absence of constraints on the production of housing. But saying “supply’s not a problem!” is equally wrong, because then why have rents risen faster than consumer price inflation?

          5. ‘The problem with a lot of analysis of housing markets is that people focus on their own pet explanation of why prices are rising (or not rising), ignoring all other possible explanations.’

            Couldn’t have said it better myself!

          6. Frank, rents have increased more than inflation, but house prices have not increased commensurate with rent increases. Current rental yields on houses recently purchased in AKL are sub 3% in the majority of cases, and rental yields are worse in areas that have experienced that largest proportional price increases. Based on this it is clear to see that supply is part of the picture, but not the only factor (and I would argue not the major factor).

  10. Current price is an indiction of future expected price.

    As auckland would expected to be in short supply for s long time plus huge demand from migrants.

    People would expect house price to rise, hense a over valued price compare to what is currently worth.

  11. I own 2 rentals and my own house. I tried to build another house on my property, but it ending up being such a costly headache that I just bought an existing house instead. It’s too hard to build.

    Also I think we need to tax all capital to encourage better use of it instead of tying it all up in a housing bubble.

  12. Tax Land Value rather than Capital, as Capital punishes wealth creation & development while taxing land punishes speculation & land banking.

        1. so…more pasture, more fences and more buildings will improve the productivity of agriculture? I think not. A land tax will penalise low-intensity agriculture in favour of high-intensity agriculture; more fertiliser, more irrigation, GM crops etc. Maybe even American-style feedlots where cattle are fed cheap imported food.

          What could possibly go wrong?

          1. The land for low intensity agriculture will generally be of lower value as it’s ability to return income will be lower. Therefore if the land tax as based on value this land will pay a lower tax, so it shouldn’t penalise low-intensity ag.

          2. The comparison being made is for a tax (or rates) based on unimproved value vs the current improved value. Agriculture, by its nature, is generally land intensive and hence will be faced with a relative increase in the burden of taxes. The (poorly thought out) theory of such taxes is that they will encourage greater land productivity. The mitigation available to an agricultural land owner (ceasing business and turning the land over to other uses notwithstanding) is to increase the income per unit area, aka more intensive agriculture. The fact that the guy 10 km away with more valuable land is paing more tax is somewhat academic to the person who has seen a step change increase in the tax that they are paying. The question to be answered is what is the behaviour that increasing the fixed costs of an agricultural operation is intended to encourage? (or discourage)?

          3. First point: Most of the negative environmental consequences of more intensive agriculture are *already* occurring. So arguing that a land tax would lead to environmental destruction seems like a red herring: https://www.nzgeo.com/stories/liquidation/

            Second point: Many dairy farmers are running up huge debts to service higher farm prices, and (implicitly if not explicitly) achieving returns through capital gains rather than farmgate profits. Unless you think that’s a healthy dynamic for the long-term sustainability of agriculture, perhaps it’s worth looking at policies to deflate rural land prices, like land taxes: http://www.radionz.co.nz/news/on-the-inside/299339/growing-capital-gains-on-the-farm
            http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10690919

  13. Thanks Peter for a balanced article. Certainly supply restrictions is a significant cause of house price inflation but there are other causes too.

    Looking at the cost of building new housing compared to the value of existing housing is another way to measure if housing is over valued. Michael Reddell discusses this in a discussion about an article of mine about the politics/history of government imposed restrictions causing unaffordability. https://croakingcassandra.com/2016/10/29/housing-reform-the-corn-laws-and-possibilities-for-new-zealand/

    Another proof that housing has become progressively unaffordable to first home buyers is by looking at the home ownership rate -which peaked in 1990 and has been falling ever since.

  14. “Most of the negative environmental consequences of more intensive agriculture are *already* occurring.”

    Really? It’s not a binary issue but one of degree. I am sure that you have seen intensive cropping. Heavy herbicide and pesticide use and intensive irrigation. It could be a whole lot worse than it is right now.

    Dairy farms are not the only agricultural use of land and IMO there are way to many eggs in that basket. A land tax sufficient to reduce land prices would also deter investment in crops (such as tree crops) that involve years of expense before there is any income. Better to go for the quick returns. In addition a land tax sufficient to reduce land values and which is based on land values raises the interesting question of how would one determine the value of the land on which to base the tax? Heisenberg writ large.

    And now another question to ruminate on: If land taxes encourage intensification in the city why would they not do likewise in rural areas?

    1. All of this is an argument for more effective environmental regulation, not distortionary tax policies. Why insist on solving problems with the wrong tools?

      1. So do I take it that your answer to the question “If land taxes encourage intensification in the city why would they not do likewise in rural areas?” is that legislation would forbid it?
        I repeat the question: What is the behaviour that increasing the fixed costs of an agricultural operation is intended to encourage? (or discourage)?

        My contention that land taxes would penalise those involved in agriculture stands. Maybe a land tax of sufficent magnitude would lower land values but it would require those currently owning agricultural land to sell it at this lower value for any benefit to others to be realised….and, according to the same source that you quoted, dairy land prices are falling without a land tax:

        http://www.radionz.co.nz/news/rural/299302/dairy-farm-values-set-to-keep-falling
        http://www.radionz.co.nz/news/national/298453/'they-are-going-to-see-land-values-drop

        1. Land taxes “punish” agriculture in the same way that pay-as-you-earn income tax “punishes” businesses that employ staff or GST “punishes” retail and restaurants. And yet somehow, we still have businesses willing to employ staff, and people willing to sell us sandwiches and electronic widgets. This whole notion of taxes being “punishment” is a bizarre one.

          And yes, I think that we should solve environmental issues through appropriate regulatory policies, not by doing unrelated things (tax subsidies for farms) that are likely to be ineffective. If you can figure out how to increase the productivity of agriculture without terrible environmental outcomes, I’m all for it.

        2. “This whole notion of taxes being “punishment” is a bizarre one.”

          Agreed. Harriet’s statement that “taxing land punishes speculation & land banking” introduced the concept of tax as punishment so you really need to refer to her for the reasoning behind her choice of the word. I have chosen the words penalise and discourage to make it clear that taxes don’t incentivise behaviours but can act to disincentivise. The particular context is not the tax per se but the effect of the introduction of a new tax on existing economic activity and existing participants in that activity.

          To equate a land tax with GST or PAYE is a stretch. The latter 2 are a proportion of revenue whereas a land tax is independent of revenue and raises issues of liquidity and financial risk associated with investing in land-intensive activities. The statement has been made (by whom I don’t know) that they are pleased to pay income tax because it means that they have income. The same cannot be said for a land tax.

          “If you can figure out how to increase the productivity of agriculture without terrible environmental outcomes, I’m all for it.”
          That depends on how productivity is measured and what value the consumer places on nutritional value and healthy diets and the inevitable supply and demand issues. How about more horticulture (organic or at least spray-free) and less pastoral agriculture? How about more fruit and vegetables in our diet instead of meat? I suggest that a hectare of mature organic avocado trees in the past year would have a monetary return significantly greater than the same hectare in dairy production, for example, and I know that the monetary yield per hectare on spray-free mandarins is way better then the same area in dairy or beef or sheep. I have specific ideas on tree crop propagation techniques (hence the comments re tree crops) which I don’t intend sharing on a public forum.

          1. Actually, PAYE is levied on wage/salary payments, not revenues. A business that is not profitable still has to set aside money for PAYE (and salaries as well). If they find that they can’t *pay* salaries and the taxes thereof, they have to cut staff. I don’t see why the same principle shouldn’t apply to land. At the moment, a money-losing or marginally profitable business can hold land in unproductive uses, because they (a) face no direct financial incentives to use it better and (b) they may simply be holding out for capital gains. Difficult to see why you see that as a good thing.

            “I suggest that a hectare of mature organic avocado trees in the past year would have a monetary return significantly greater than the same hectare in dairy production, for example, and I know that the monetary yield per hectare on spray-free mandarins is way better then the same area in dairy or beef or sheep.”

            That seems like an argument for land tax, not against it.

          2. PAYE is not a tax on a business. The business collects income tax on behalf of the IRD. Income tax is a tax based on the annual income of the employee…but I suspect that you know this.

            “That seems like an argument for land tax, not against it.”
            How? Why would a grower argue for the imposition of an additional expense on their business?

          3. Your starting argument was that land tax would be a bad thing because it would encourage farmers to intensify (ie raise the productivity of) agricultural activities, which would presumably increase environmental impacts. (Unless we regulate to limit environmental damage, which you seem to arbitrarily discount.)

            One of the ways in which you can raise productivity is by switching to higher-yielding crops. According to you, this could mean converting from dairy (high environmental impact, lower per-ha returns) to avocados and mandarins (lower environmental impact, higher per-ha returns).

            Basically, I’m not sure you’re making a coherent argument.

          4. My starting argument was that if “ taxing land punishes speculation & land banking” then it similarly affects agriculture.
            I have further stated that the imposition of taxes will “penalise low-intensity agriculture in favour of high-intensity agriculture”
            I have suggested a variety of ways in which individuals and companies may attempt to mitigate the effect of the additional expense.
            I have outlined (at your request) how I would achieve greater agricultural intensity (without negative environmental effects) with a series of caveats and provisos (eg how intensity is defined, supply and demand etc). Personally I cannot raise my agricultural density by such means because I am already doing it (but I could resort to using fungicides and pesticides) and if many others were to convert from dairy to such products and techniques the market price would probably callapse (my supply and demand caveats).
            The possibility of mitigation is not an argument for an additional tax – such actions could be undertaken without the imposition of the tax and some individuals and companies have done just that.

            In contrast you have not outlined how or why a land tax is a good thing for existing agriculturalists, just a suggestion that it will lower land costs for new entrants (presumably by an amount commensurate with the increased annual cost of owning that land). The farmer is a loser or comes out even. You have made a truly absurd claim that a money-losing or marginally profitable business can hold land in unproductive uses, because they face no direct financial incentives to use it better. Increased income from the land is not a financial incentive but a tax will be? Seriously?

            I may be incorrect in my interpretation of your standpoint; if so feel free put forward a constructive argument.

    1. You’ve come to the right place, then! The only comment on the thread that was specific to China related to capital outflows, not migrants.

    2. Interesting comment Daphne. Perhaps you might explain why you think the housing debate shouldn’t canvas the demand side as well? Maybe you could tell us why immigration rules not part of public policy that we should be allowed to discuss or debate? Maybe you could also explain why you think an immigrant selection system based on points that selects people, of all races, likely to vote national and appears to be a means for the National government to gerrymander our democratic system and keep themselves in power seemingly indefinitely is ok?

      1. There’s no reason we shouldn’t discuss immigration. However, it’s difficult to have a sane and non-offensive discussion on the topic because:

        1. Some people seem to maintain a reflexive opposition to immigration, regardless of what empirical evidence gets put forward on its costs and benefits. I’m persuadable, given evidence, but many people don’t want to *engage* with the evidence, or provide any.

        2. Some people want to make it about race/culture, rather than about magnitudes and individuals. I don’t think this is helpful to the debate, especially considering that a large share of Auckland’s population (and hence Transportblog’s target audience) is from diverse backgrounds.

        1. It’s a bit tedious how these arguments will degenerate in the same way over and over again. One side argues that anyone even mentioning immigration is automatically a xenophobe / racist. The other side argues that immigration / foreigners are to blame for everything.

          The first consequence is that it becomes impossible to figure out what’s going on. In this case, whenever someone brings up a number, one can only guess what is included / excluded. For a start, how many of those 50% of temporary workers or students end up staying anyway?

          Obviously it doesn’t make sense to allow a large number of people to immigrate, and then not allow building any houses where those immigrants can settle.

      2. The demand side is being driven overwhelmingly by returning kiwis and those locals of a certain generation and/or wealth wanting to enter into the speculative market (I make no judgement on the latter). Added to that is the open ability for non-residents to purchase (I, however, have a problem with that).

        Non-NZers migrating permanently here? The actual number buying a house in Auckland is probably of minimal impact in the grand scheme of things.

        The immigration argument for many is about immigration of people that don’t look like them. Its just convenient to dress it up as a housing issue.

        1. Citation (of sorts): http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11690369

          NZ Immigration saying 25% of all migrants are returning kiwis (or Australians) while 50% are temporary workers or foreign students, neither I assume making a material impact on the housing market (sales, not rents).

          That just leaves 25% attributable to permanent, non-NZers migrating. That’s family units, not all individuals, not all are buying and not all you would presume stay in Auckland.

          Yeah. Blame immigration.

          1. Right so if you divide something into many small parts, none of which you say are significant then the whole is also insignificant. Well done KLK by your logic there is no problem.

        2. Well, I didn’t divide the numbers up, Immigration did.. If the facts aren’t convenient for the argument at hand, don’t blame me for that. Perhaps reassess your argument or discredit the numbers. Slagging me off for bringing them to light isn’t going to change them.

          And I clearly never said there isn’t a housing problem. Just that the barrow many are pushing as one of the main factors doesn’t seem to bear out in the numbers.

          I am not surprised by those numbers at all. Others may be the opposite. Hopefully It leads to more informed debate.

          1. I don’t think any doubts that people are returning or that people are having kids or that our population is growing. The point is we can control immigration and international students but they are not doing so. If there is a problem you can either try and change the bits that can be changed or you can trivialise it. Your argument appears to be that if you chop everything into small pieces you can then say ‘look each piece is now too small to be bothered doing anything about”
            But when you look at the data you are using only 25% are returning kiwis. The other 75% are people coming in who need somewhere to live at a time when we have a shortage of homes.

          2. It may not have been clear, but my comments were in relation to house affordability and availability for purchase. Not rent. And it was specifically in the context of the all-too-common “immigration is to blame”, presumably from seeing too many Asian faces (kiwi ones at that) at the Saturday morning auctions..

            I think the actual numbers of non-NZ immigrants (those last 25%) and the impact on housing is low, particularly when you apply some reasonable assumptions about how many houses would actually need to be purchased for that group, how many cannot buy or choose to rent and how many ultimately leave (Auckland or NZ).

            So my argument was not to chop things into pieces to trivialise them, but to have a realistic look at what that impact might actually be (but you knew that). Do you think those assumptions are unreasonable? Because they seem the same sort of assumptions about any group of people coming to the city (e.g. internal migration). The alternative is to say “8000 immigrants arrive each year, so that is 8000 extra houses needed – there is your problem”. I know which sounds more reasonable.

            And really? “Control” immigration and temporary workers? 0.8 percent of population growth, without talking about the positives they bring. Its not exactly a tidal wave, given half are temporary and will be going home/elsewhere. Talk about throwing the baby out with the bathwater.

            Its a supply side issue more than anything if you ask me. Auckland should be able to deal with that easily as well as all the others coming to buy/rent.

          3. Saying it is a supply side issue misses half the problem. Even trained economists fall into that sort of thinking. Price is determined by the point supply and demand meet. Greg Mankiw describes it like the blades of scissors. If there are 600 migrants a week means we need an additional 200 houses a week just to keep the shortage we already have. You have said above that only 25% are kiwis returning. The rest are temporary workers and students 50% and foreign permanent residents 25%. All of those people contribute to making the housing shortage worse. Whether they are renting or buying they are having an impact. If they rent they create a market for landlords who then buy another house from the existing pool. I think we should simply stop until we have addressed the housing issue. Also the Auckland thing is a red herring. The problem exists whether people come to Auckland or elsewhere. Someone somewhere is priced out of a home. Even racist right wing radicals like Phil Goff and the Salvation Army think we need to do something.

  15. Sydney house market became unaffordable in early 2000. They have tried everything to control prices. Only the GFC slowed it down. The current tightening of NZ banks credit will not slow demand. It is likely to slow down building and drive up rents.

  16. Sydney house market became unaffordable in early 2000. They have tried everything to control it. The current tightening of NZ banks credit will not slow demand. It is likely to slow down building and drive up rents.

  17. Good piece Peter. It highlights the multi-factoral impacts on housing affordability – and hence the need for a broad suite of policy responses.

    ‘Second, constraints on housing development still matter quite a lot’.
    Yes, indeed. And the more I have looked at it, the more I think the PAUP hasn’t got it right at all. It’s about 30-40% short on effected density in the MHS and MHU zones, if a goal was to realise greater affordability (I talk of ‘effected density’ in terms of density/ yield that is able to be effected by the cumulative rules, noting there are no density rules per se). The rules are fine if people are comfortable with two bedroom townhouses hitting the market at 650/700K in low-moderate value locations….an alternative, denser rule regime could realise 2 bed units for circa 500/550K.

  18. Excellent post Peter, puts a bit more science on what I said here: http://joelcayford.blogspot.co.nz/2016/04/why-are-house-prices-rising.html
    and appropriately argues for a more nuanced supply & demand analysis. There is a major debate about all this going on at national level which is filtering down through the MfE NPS on Urban Development Capacity and the Productivity Commission’s “Better Urban Planning” work. And it’s important that good data and sound analysis provides an improving evidence base to round out the policy settings. A couple of contributions that Peter might be able to comment upon:
    1) The 2013 census showed that 9% of all residential dwellings were unoccupied. I don’t know how many would be empty because people were away on holiday etc – ie temporarily empty – vs the kind of empty that I understand informally is happening across Auckland as investors (including the mom and pop investors mentioned by Patrick) are happy to forgo rent revenues because of the perceived costs and hassles of being a landlord, focusing on the capital gain only. The previous census showed 6% of dwellings in Auckland were unoccupied. If – as a thought experiment – 5% of dwellings in Auckland were effectively “house-banked” (like “land-banked”) and empty, that equates to about 30,000 dwellings that could be used for housing. I note that Vancouver’s Mayor has recently introduced a targetted rate on unoccupied dwellings to “encourage” owners to make them available for housing.
    2) The comments of Gimp about what might be the outcome here in Ak are intertesting. Various colleagues I know who have homes in Brisbane and who are currently trying to sell them report that there has been a reasonable sharp and recent downtown in the market there. They can’t sell their houses for the prices suggested by previous annual increase patterns. The suggestion is that the combination of Brisbane’s economy taking a dip with declining commodities prices, and the coming to market of what appears to be a glut of new apartments – built to fuel a boom said to be caused by a supply shortage, is leading to an almost perfect storm which will be difficult to halt.

    Joel Cayford

    1. Hi Joel, I always think of Omaha when the unoccupied homes issue comes up. Omaha is an entire suburb of second homes, it is truly surreal to go there midweek; there are rabbits on the roads and very little else, except the occasional tradesman. Thousands of permanently unoccupied dwellings, that will pretty much always be unoccupied on census night, and this status won’t change and isn’t a sign of anything except wealth, inequality, and our culture’s bias towards both building fixed assets and herding….

      1. Yeah. Same at Mangawhai.. And it’s a bit kiwi – the family bach. The unoccupied houses in Auckland suburbs are not baches. Like the house next door to me in Devonport. A small 4 bedroom villa, great back section, close to schools and the shops, walkable to the ferry. The purchaser approached me while I was mowing the lawn. She said, “I am the new owner of the house. I won’t be living in it as I live and work in Beijing.” And she gave me a card with her email address. It’s been empty now for 15 months. I am aware this issue is much more prevalent in Howick. Apparently a good measure of this is the metered electricity consumption – in terms of a database that could provide bettere information about the extent of this issue.

    2. Hi Joel

      Glad you liked the post!

      The big orange bit in the bottom graph – the 62% increase that can’t easily be correlated with rising rents or falling interest rates – is a bit of a Rorschach blot. Different people see different things in it. Some people will probably look at it and say that it’s definitely a supply issue, while others will call housing bubble. (My view is that it’s a bit of both.)

      The “empty houses” thing is difficult to assess – we won’t really know whether things truly have changed until the 2018 Census. However, as Patrick suggests we can learn a bit from the geographical distribution of empty houses in 2013. Based on the 2013 Census data, for Auckland as a whole:
      * 4.4% of dwellings were recorded as empty on Census day, with no usual residents
      * A further 2.2% were recorded as unoccupied due to the fact that their residents were away – eg on holiday or overseas assignment.

      There were five local board areas with an above-average share of empty homes: Rodney (13.8% of homes were empty), Great Barrier (41.3%), Waiheke (23.5%), Waitemata (5.8%), and Franklin (5.9%). Taken together, they account for around 40% of empty homes in Auckland. So regardless of what’s happened since then, a quite large share of the empty home narrative can be explained by either people on holiday (the 2.2% with residents who were away) or holiday homes (most of the empties in those five local boards).

      On Gimp’s point: The same thing *could* happen in Auckland if we manage to sustain a high rate of construction for a few years in the midst of a significant turnaround in net migration. How likely that is, I don’t know. What I *will* say, though, is that politicians will happily extol the virtues of affordable housing right up to the moment when prices actually start falling and thus becoming more affordable! (With the apparent exception of Metiria Turei.)

  19. Joel did you ask your neighbours why they aren’t renting it in their absence? I wonder if it’s a cultural thing, a carry-over of occupants’ right in other societies that we don’t have here? Do they fear they may be unable to get the property back from tennents after a length of occupancy? Squatters’ rights? I mean there are not that many people in any culture that are so rich they don’t like passive income, especially as even a house with no mortgage has non trivial ongoing costs….? Rates alone in your area are non insubstantial: Seems odd to me, may be more going on here that can be easily understood from the outside…

    1. I can really only speculate. For example, I understand from real estate connections that Asian families prefer masonry style houses over wooden villas to live in. Thus the likelihood of finding an Asian family to rent a Devonport villa would be low. However the capital gain potential – based on past performance – is significant – far exceeding the rental revenues that could be anticipated. So the likelihood would be European or Pacific Island tenants – and the need to negotiate and manage those arrangements across a cultural gap – while living in Beijing. My understanding of the incentives for Chinese investors in NZ residential property includes: reliable economy; supportive regulations and governance; good record on crime so investment is safe (if you choose the right neighbourhood); high performing asset class; no capital gains tax; combined with negative interest on bank deposits in China! Excluding the last matter, the others all apply equally to NZ Mom and Pop investors – who don’t want the hassle and worry of tenants – and who are banking on the high inflation rate of residential property. And of course they apply to investors and their agents.

      I would also comment that one of the drivers for increasing rents is the idea that the return/yield on investment – say property – should be around 5%. I am aware that commercial property investors are still driven by the need to attain that kind of return (irrespective of capital gain possibilities). I wonder whether that thinking is driving some residential property owners to increase their rents – rather than any perception of a shortage of rental residential supply. In any case – as the discussion has shown, on average rental charges are barely increasing in Auckland.

      The house price discussion can be conducted in two parts: first there is the matter of houses – for a variety of reasons – being a major part of NZ’s asset and financial investment economy; and secondly there is the matter of housing provision to meet the accommodation and shelter needs of the population which is more appropriately viewed as part of NZ’s cost of living economy.

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