By Alex Tarrant
A week is a long time in politics.
From having no government-sponsored benchmark of housing affordability in Auckland, within six days, we had two of them.
Some context:
An extract from the diary of Hon. Nick Smith*:
10-05-17 - The day is finally here! The government now has an official measure of housing affordability.
And isn’t our new HAM (Housing Affordability Measure) series a beauty.
It’s too easy for people to just point to a certain house price level and declare ‘that is or isn’t affordable’.
Economic amateurs. Illiterates.
You can’t just look at the price of a house and declare it’s affordable or not. You need context. The incomes of those looking to buy. What are the interest costs associated with the mortgage? If buying a first home, then what is a person paying in rent while looking for that house?
Figure out their residual income after typical housing costs. Figure out where they live. Remember that first home buyers typically buy a smaller, modest, one- or two-bedroom houses below the median value, with a third of them at the ‘lower quartile’.
Will that residual income allow for purchase of a typical modest house in the area they are living?
Lo and behold, you have a government Housing Affordability Benchmark. A proper one. Not just pointing at some house price and saying, ‘that’s affordable’.
Can’t wait to show everyone how unaffordable housing has become for first home buyers! Or at least, how unaffordable it was up until mid-2015. We know it probably got worse since then, but for some reason we’ve only got data current to 18 months ago.
An extract from the diary of Hon. Amy Adams*:
16-05-17 The day is finally here! The government is going to announce a new house building scheme in Auckland.
We’ve got a headline-grabbing announcement that we’ll build 34,000 new houses over the next ten years in the Queen City.
In reality, that’s going to be 26,000 – we’re knocking down 8,000 first. And I have to admit, quite a few of them we’ve actually already announced, like Tamaki, Hobonsville, The Crown Land Programme…
Anyway, of the new new houses that we’re announcing today, 11,500 are going to be for our social housing stock so we can keep up with the rising need for state housing.
But that still leaves about 12,800 new new houses that we’re going to sell into the market to Aucklanders over the next decade. (Apart from the ones that are already being built and so aren't actually new either.)
Amazing. Can’t wait to get on that digger!
And, if I wasn’t excited enough already, I’m also going to announce that between 20% and 50% of these new units are going to be classed as ‘affordable’ for the type of people we want in them – first home buyers.
We know the first question will be ‘define affordable’. Typical. I’m prepared for that though. Any house we build that can be sold for less than $650,000 in Auckland will be classed as ‘affordable’.
When I took over from Nick Smith he’d left some note on the desk that a broad, basic nominal house price benchmark for ‘affordable’ wouldn’t really fly with some new measure he’s been hamming up.
I put it in my ‘to read in 18 months’ time’ basket.
A week is a long time in politics
From having no government-sponsored benchmark of housing affordability in Auckland, we now apparently have two.
But they don’t exactly sit well together.
Nick Smith’s Housing Affordability Measure (HAM) announced on 10 May was a welcome addition to the conversation.
Yes, it has a bit of a lag, but we’re promised this will be closed over time (although possibly after the election – see Post-script).
It has given us some interesting insights. For instance, most first home buyers (FHBs) - 65% - buy below the median house price as measured by Corelogic. And 32% buy at or below the Lower Quartile value.
For this reason, the HAM Buy measure uses lower quartile values in its formula to see whether a prospective FHB’s residual income (after rent, housing costs etc) is enough to afford a modest, one- or two-bedroom house in the area they’re currently renting in.
It is like Interest.co.nz’s Home Loan Affordability Index for First Home Buyers in that we acknowledge FHBs don’t typically buy a median or average-priced house. These are the people we’re most concerned about, and this is where we should focus affordability measures.
From the HAM work stream, it is quite clear that a blanket nominal price definition for ‘affordable’ across Auckland isn’t the best way to go about it.
The HAM residual income benchmark is different in each ward of Auckland.
The ‘affordable’ (and unaffordable ‘market’) houses set to be built under the Government’s Auckland Housing Plan (AHP) announced by Amy Adams on 16 May are going to be scattered across the city.
So clearly the newer affordability benchmark of $650,000 isn’t going to fit in every ward. It may be too high for some, too low for others.
To be fair, $650,000 is the maximum limit for this definition of affordable.
It might be that AHP houses in Manukau are offered at $400,000, houses in Waitakere at $500,000 and houses in Howick at $650,000.
Of course, that’s once the government-employed private developer has been given the fair profit margin they have been promised.
But there’s no guarantee that they won’t all just be sold for $650,000.
The context:
The government tells us it wants to build and sell ‘affordable’ houses across Auckland via its new Housing Plan.
The government has just introduced a well-researched measure of housing affordability.
The challenge
So, I challenge the government: Hold yourselves to account on the notion of ‘affordable’. Before you build and sell, publish these figures:
Decide where you’re going to build your houses (that’s pretty easy to start off with – it’s where all the Crown land is).
You’ve already identified what type of people you want to sell them to – first home buyers.
Work backwards through the HAM formula to spit out what the lower quartile value in each part of Auckland would have to be for at least 32% of prospective FHBs to be at ‘buying positions’ under the HAM affordability benchmark.
Better still, because you want to improve affordability for FHBs, give us what the lower quartile price would have had to be for 50%, 66%, 75% of FHBs to fit under the affordable benchmark, based on their expected residual incomes as up to date as possible.
At June 2015, 86% of prospective FHBs were unable to sustainably afford a modest, one-or-two-bedroom Auckland home at the lower-quartile value in the area they were renting.
And we’re told that the figure may have got worse since then. That, quite frankly, is despicable.
Aim to turn that around. Let us know what the lower quartile price in each ward would have to be for 86% of FHBs there to be able to afford a modest home.
Then work out how to deliver on that.
* Obviously not real diary entries by the two politicians named.
** For a post-script on the time lag of the HAM measure and the release date, see here.
42 Comments
I'm sure that both of theses calculations have been stress tested, so it would be interesting to see those results in the case of (1) The economy falls in a heap and mortgage rates ( amongst other variables) go to 0% or (2) the economy booms and mortgage rates go to 10%. Of course Option (1) would be the result of poor local/offshore economic performance, whereas Option (2) could be EITHER a booming economy OR a poor one!
Option ( 3 ) would be a proverbial " Black Swan " event coming at us ... perhaps a lunatic bullyboy dictator in North Korea unexpectedly launches a missile with a nuclear tipped warhead into one of his neighbours ...
... or a new flu pandemic sweeps the globe .... a rampantly aggressive Yellow-eyed Penguin Virus ....
It's becoming increasingly obvious to New Zealanders that increasing the 'supply' of houses in Auckland will not solve the problem of hyperinflation of Auckland house prices.
Even if 'supply' is increased - it is no match for the large forces of 8.5 billion people who may immigrate to NZ, the open door 'investment' conditions for any foreign buyer/s, etc.
Anyway, why is 'supply' being discussed as if NZ was running a Command economy whereby x amount of houses can be decreed to be built? Houses are only built when sections are economically worthwhile to be developed, buyers buy sections, and buyers commission a new house or buy an already built house.
I agree entirely - the shortage of supply is well overstated. That's why rents haven't risen in tandem with house prices. Mostly it means there is a shortage of property for people to buy for capital gain or overseas buyers to buy so they can park their money in a tax-free safe haven. An over-supply of actual housing for people wouldn't worry those groups, they'd just leave the properties empty.
In saying that I do think we are now getting into a position of genuine housing shortage in Auckland, which is hardly surprising.
The dark art of deception
The government is simply going to announce "another" new building scheme in Auckland. That can be interpreted to mean several things. 1. They will make the announcement from some location in Auckland. 2. It does not mean that the government is going to create a new Government Department to Build Houses and employ a lot of hammer-hands.
Nothing of the sort
Then it will have to develop the sections and put in roading and power and waters. You watch, the Government is not going to do that. If the planned new developments are inside existing urban boundaries the government will be piggy-backing onto existing roading infrastructure - thanks very much
And for those who are not familiar with the finer details, the government cannot simply import a whole heap of builders into New Zealand because of the governments own LBP rules - unless it can find a few local retired LBP's to take on 100's of foreign employees and supervise them and be resposible for them - unless of course it wishes to make exemptions - I feel a haka coming on followed by another leaky-home style story
"The HAM does not measure the difficulty of saving a deposit, especially when house prices have been rising faster than incomes."
An article by Shamubeel Eaqub: The grim reality of NZ's housing unaffordability is hidden
http://www.stuff.co.nz/business/opinion-analysis/92768343/shamubeel-eaq…
Surely the purpose of these indices should be to show what is unaffordable not affordable, why sugercoat the obvious, call it an unaffordable index The Auckland housing market has overshot fundamentals so significantly ,that unfortunately arguing about what index should be used becomes irrelevant. Q1 2017 is a mirror image of Ireland Q1 2007, not only in regards to economic metrics but particularly in regards to the psychology that pervades this market, and the positioning of various groups, politicians , banks and every vested group , that trumpeted the rise of housing , and when seeing the obvious are running for cover, being chased by the very trumpet breathing with flared nostrils.
Alex, it should be put to the Interest. co team, that their own affordability index is flawed and should be changed .Using the lower quartile ,as a measure of affordability when 68 percent of FHB buy at levels above, and indeed 35 percent buy above the median , simply skews the data to 'improve' the measure of buying a home.The question is WHY Interest.co persists . The obvious missing data is that any given current point 85-90 percent of all potential Auckland FHB cannot buy irrespective of whatever current affordabilty index is used. Ironically , the majority of all current Auckland homeowners could not afford to purchase their own home, nor obtain the debt to do so.
If this 85-90% statistic is the actual truth of the matter (which I suspect it is) - then it further supports the point that the ONLY thing a government should be concerned to provide is state/social housing.
Just when and why the housing policy narrative shifted to government-funded initiatives/public private partnerships in the building of assets in the private residential real estate sector should be critically considered.
I see both the Labour Party (and the National Party parroting of it) on FHB housing development as a major shift away from the rightful concern for social policy and into commercial sector activities. And if Landcorp's performance is anything to go by - we certainly don't want to go there. Bad enough we all now have a stake in that shambles... just like Solid Energy; just like Chorus/Crown Fibre Holdings . How many of these forays into government-owned/led businesses have to go under before we get the lesson-learnt?
It may be because NZ has a history of working to increase housing supply, a la Germany's efforts too? Multiple government house build programs in the past. I suspect that like Germany did and earlier governments in NZ did, they're starting to see housing as a major social issue, not merely a commercial one.
The problem is that none of the options are anywhere near sufficient to cater to the record immigration numbers. We either have to cut the numbers right down, or they should be required to build new houses.
The need to introduce some real competition to the building materials market, to bring the cost of building down. Or parallel import building materials. We shouldn't be paying significantly more for the same building materials.
Force land bankers hand. Either rate them the same for developed land, or work with them some other way to get the land released for residential use.
Stop overseas buyers buying existing housing stock. Only let them build new.
Governments shouldn't be allowed to have policies for 10 years out, as it will likely be outside of their term as government.
No, vote for policies, not just change for change sake, otherwise we will end up like the USA. The problem is that I haven't seen any good policies from anyone. Even cutting negative gearing is a bad one, because it will just push up the price of rent, and also potentially the capital values.
At the moment many landlords claim they are not making enough from rent to cover their expenses, including rates. They have up until now been relying on capital gains. But that will change when prices flatline or drop longer term.
Jeez perhaps at some point they might need to realise their business model sucks..
'At the moment many landlords claim they are not making enough from rent to cover their expenses, including rates'
Why would we worry about changing policy because we're worried a bunch of 'business owners' might struggle when that exact industry is adding no value (in fact its probably negative value) to NZ as a whole? We're carrying a dead weight. The market isn't efficient.
Change the policy - if they try to put up rents they'll realise they can't because the people can't afford to pay for their product....they go out of business like any other industry where people can't afford to pay for their over priced offering. If you then say that people will have to pay the increased rent because they need a roof over their head - I then say that the landlord business is based on exploitation (our own people) and that must change.
If this situation truly is supply and demand - tell landlords to collectively increase their rents when they can no longer use their negative gearing and lets see what happens....I'll call that bluff...
Here's a feel good story... some friends of ours, with a special needs daughter and who are already struggling financially, have just received a call from the landlord's property agent, saying he is putting up the rent by 40 bucks a week. He is an absent landlord, does nothing on the property and now puts up the rent by almost 200 bucks a month on an overpriced shitbox. The only thing it has going for it is the wheelchair ramp for the little girl. Why raise the rent you may ask? Because he can and apparently he's running a business...
We've invented the modern day form of slavery...
And landlords are feeding off the fact that people need a roof over their head so believe they can do whatever they want with rent, so they always win, regardless of what regulation/policy is passed by government.
They're exploiting their own people....great business.
The law doesn’t limit the amount of a rent increase, but does say how it must be done, and what can be done if the tenant doesn’t agree with the new rent amount.
If a landlord is charging significantly more than for other similar properties, the Tenancy Tribunal could make an order for it to be reduced.
https://www.tenancy.govt.nz/rent-bond-and-bills/rent/increasing-rent/
And....Coming here, as well?.
"Westpac Banking Corp is set to increase rates on new fixed, investor interest-only loans...This column understands higher fixed-rates will be announced for new investor interest-only loans in coming days. The changes do not include variable rate mortgages. A Westpac spokesman on Sunday said the bank did not comment on interest rate movements. "
thanks bw... hard to find homes with wheelchair ramps. Also, not easy to fight unscrupulous price-gougers who wield all the power in the contract, especially when your main struggle is for the survival of your child... But I guess I shouldn't be surprised that some landlords lack empathy and common decency, when I see the likes of ZachDoubleGZ's comment above. Iris Chang (who wrote the book, The Rape of Nanjing), called civilization, "tissue thin." And a recent article in a scientific journal documents the fact the richer people become, the less empathy they have for people who are poorer than them. Having traveled extensively, I have seen this first hand.
National policies : Policy of Denial, Lie, Manipulation and if nothing works blame others.
National Thinking : Increase immigration to prosper.
If can only prosper by increasing number and if more demand more money with 70000 than with 150000 more prosperity and than........
Think and Vote.
Affordability can't be restored until prices fall. Lower interest rates make the problem worse along with demand from record immigration, together they have pushed prices to current levels. Which variable is within the Governments control? Better reduce immigration soon for NZ FHB's to stand a chance in Auckland.
This is the last chance to buy a house in Auckland for less than a million bucks. Interest rates world wide will soon plummet and Auckland is the last safe heaven on earth. Just because house/income ratio is at record high does not mean it can't go higher, interest rate can drop to 0% and an average house will be worth 3M+ by then.
Anything below 1.5M is a bargain, not to mention the welcomed influx of overseas people and their $$$.
I'd suggest it's gonna be a scary place if that happens. We'll have every chance of seeing the rise of nationalism, actual xenophobia (not just the investor catch-cry kind) and Trump-like leaders.
We may also see the non landed class start to search for and vote for leaders who will shift some of the tax burden off income and on to land, again. NZ's history, coming round again.
It'll be very awesome with large cultural diversity, the existing land owners will become super rich, YAY!! Imagine all the wealth effect that will trickle down to benefit everyone, if the richest 1% spend 1% of their wealth effect, the rest of the slaves can get a small bite of the bread crumb too.
Ignore the noise and just buy, onwards & upwards Auckland!!! :) Interest rates are unable to rise in any meaningful way, because it'll bring down the financial system and the wealth of the rich will crash, well guess what, the rich is in the driving seats of policies. Do you see them shooting their own fat feet?
Trump is just a BS-er, he has already betrayed his voters. Fear not the NZ version of Trump, the financial elites will keep him/her inline regardless of what he/she says during the campaign.
Is what we are seeing the natural outcome of encouraging diversity to come into a homogeneous and egalitarian society? People need to understand that many people arriving on our shores come from very unequal societies. To them the large gap between rich and poor is not unusual. In China, India, Africa and the Philippines there are millions of people living on just a few dollars a day. In comparison New Zealand even with its high housing costs is still very attractive. They will have no memory of how New Zealand was.
The increased diversity will make it impossible for there to be any unified response to the loss of New Zealand's way of life. Especially so now that even born and bred New Zealanders are far more diverse in their thinking and living habits than ever before. Alternative lifestyles, serial monogamy, remaining single for your entire life, secularism, scorning nationalism and patriotism, not having children and so on, means that there really is no 'common people'. They have lost any sense of connection with their past and are merely consumers with no identifiable national culture
And what does diversity mean? It means differences, different ways of doing things, different histories. Well, wont some ways be better than others? Wont some ways of doing things give people advantages and others disadvantages? Wont that naturally result in inequality?
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.