By Lynn Grieveson
Finance Minister Bill English has warned Auckland's housing boom is one of the economy's biggest risks if it goes bust.
He also warned it was one of the Government's biggest political and fiscal risks because it would face growing pressure to provide more subsidies to low and middle income earners stressed by painfully high housing costs if prices kept rising and interest rates rose.
Speaking to the Community Housing Aotearoa annual conference in Wellington, English said the Government was in a difficult position because many of the decisions around housing were made at a local level, but the fiscal and political consequences were felt at a national level.
"So one of the biggest risks for this economy over the next three to five years is that Auckland will follow the same track as pretty much every other housing market where house prices have risen for 25% for years on end, and that is that they stop rising, and then they come down. And people don't like that," English said.
"And it creates a lot of problems in an economy. And we have seen some economies affected really badly by exactly that phenomenon - Ireland and Spain being two in particular. So the decisions that are made at a neighbourhood level have an impact for the whole economy. But they also have an impact on the government's books, because when housing isn't affordable, government in various ways comes under pressure to fill the gap," he said.
More subsidies?
English said the Government already paid NZ$2 billion in rent subsidies, including subsidies for over 50% of all private rentals through accomodation supplements. Including income related rent subsidies for Housing New Zealand properties, over 60% of all rentals are subsidies by the Government.
"My view is that, if you look at where the big cash transfers have occurred -- by that I mean, interest free student loans, big increases in Working for Families, early childhood education subsidies -- which cost a lot of money, it's pretty tightly related to when house prices took off," English said.
"And I have no doubt that if house prices keep rising in New Zealand, Governments will come under pressure again to increase all of that income assistance to our low and middle income households because they just can't pay the bill for their housing," he said.
Higher interest rates?
English said the Government and borrowers were lucky at the moment because New Zealand currently had the lowest interest rates in 50 years.
"But imagine if interest rates tomorrow were 7%. We would have a very significant political issue on our hands," he said.
"And then another reason we focus on it is because of the inequality - and the change in the proportion of income spent on housing is one of the biggest single drivers of inequality in New Zealand in the last 30 years."
'We wouldn't respond'
Later while speaking to reporters, English said the Government had no intention of responding to political pressure to increase subsidies or Working For Families to offset the pressure of high house prices and higher interest rates.
"I think in the mid-2000s that's one of the things that led to the big increase in Working for Families, interest free student loans and that was just people were paying 8% or 9% interest rates on rising house prices and they felt over-stretched and the government responded," English said.
Asked if the National Government would also respond, he said: "No, we don't want to do that. We prefer to get the market right. I think that the point - that it's in government's and taxpayer's interests to get the housing supply issue sorted out, because if the gap gets too big taxpayers end up having to try and fill that gap for low and middle income households."
"New Zealanders, in the past, have expected the government to fill the gap when housing gets too expensive. So that's why we are, in addition to the shorter term steps we are taking, working with the city councils, getting special housing areas into place and cranking up supply of housing on government land. In addition to that, there's a bit of a longer term job to make sure that the next cycle isn't as volatile as this one," he said.
Asked if he expected interest rates to rise from 4% to 7%, he said: "There is no sign it will get to 7% interest rates. I was just pointing out that with these very high house prices we are having 50 year low interest rates so it looks a bit affordable, but if interest rates rose there would be a bit more risk."
46 Comments
my god are these guys slow or what. what did they think would happen with home ownership rates falling for under 30's, and housing rising far faster than wages.
of course they are going to have to increase the housing supplement, and that is going to be the new hole in the fiscal accounts, it wont be just super to worry about
Look at it from their point of view - they were up in the polls, headed for another term and were able to ignore the housing issue for a few years until they were back in office. Once in they left it for as long as possible until admitting there was/is a problem and it is of concern to them (note there are no solutions offered). Key and English know they won't be in National once this term is over, they'll hand off to someone else and by then they won't care.
I'm not saying it's right, I think it's disgusting, but an all too familiar theme in NZ politics and I suppose world politics too.
Unlimited foreign investment encouraged, highest immigration as a percentage of population, 110,000 International students with Universitites etc going bankrupt without them, no active Govt industry development, Tourism & international education as main industries ramped up by Govt, Housing as the main saving vehicle.
Why does the Govt not address the underlying drivers?
Oh, & by the way people, we seem to have a slight problem with Auckland housing, & the RBNZ can't seem to knock it on the head like previously. Oh and it's your problem, so we'll try to use taxpayers money to run a social welfare program to help people afford a house.
He keeps trying to talk down the housing market - but it will fall upon deaf ears as people do not make decisions based on what might possibly happen on a macro level in the future. They buy what they feel they can afford. The gov need to take measures that will work to tackle demand, as you say Camel's back.
Auckland house prices rise because lots of people want to live there, it's that simple. Let the Auckland property market (like all other property markets) go where it will and stop interfering with it. When people really think it's too expensive to live there, they will start looking elsewhere
Sort of right Yvil. Immigrants from overseas are choosing Auckland. But internally the net flow is out of Auckland. New Zealanders already think already too expensive (there are other reasons) and they are looking elsewhere. But New Zealanders are not the policy priority clearly.
So nothing at all to do with the factoring of expected capital gains into the purchasing decision? The problem is largely with investment, so not directly attributable to people wanting to live in Auckland, especially to the extent prices are so obviously not driven by yield (rental demand, i.e. people wanting to live there). If capital gains are seen as more assured in other areas (as is starting to happen), the investment demand migrates.
Point well made rjn. Demand by people for somewhere to live would drive rentals. But the people demand is not there. Rentals remain static by comparison with house prices. The house price is driven by expectation of capital gain.
However, still, New Zealanders net are choosing to leave Auckland.
That's the one positive I find in all of this - Aucklanders are finally starting to assess their options in other areas - we need not only employees to do this, but their employers. There are significant economic advantages for businesses setting up shop outside Auckland, not the least of them being lower wages. I think it's very good for the country if we are able to sustain this movement and diversify our population. Of course, the flip side is that Auckland becomes even more of an international/multi-cultural city (Locals leaving, migrants continuing to favour settling there) - not necessarily a bad thing, but a thing none-the-less.
There are a few myths around rjn1 and one myth is that jobs are easier to come by in Auckland. True it is patchy and there are difficult patches in the regions, but Auckland has plenty of bad patches as well (zombie suburbs).
But lots of the regions are also high income, and seeking workers. Look at the labour shortage in Clutha County for example. They have to have committees etc figuring out how to get workers for their thriving businesses.
Central Otago is thriving with house building booming. The arrivals who need those nice houses are not coming there into unemployment. There are jobs and people are coming to fill them.
Central Otago is thriving with house building booming. The arrivals who need those nice houses are not coming there into unemployment.
Not so sure about that. A cashed up Aucklander without any dependents and a spare half a million (after purchasing a provincial property with no mortgage) might well decide to up sticks, move to the provinces, and collect the unemployment benefit while looking for work. And it would be a totally rational decision (as the economists would say).
Many, I suspect, opt for lifestyle blocks - often in remote areas where it's going to be hard to find employment, even part time. You could say that AKL house prices might be growing a new generation of (trying to be) self-sufficient lifestylers.
My point is that a lot of Auckland jobs simply don't exist in the regions, increasingly so in some cases (e.g. the demise of Air NZ regional airlines' provincial crew bases). That will remain the case until corporates make the decision to set up some of their head office and technical functions outside of Auckland. There is a big CSR issue here - we seem to be going backwards, if anything.
The Auckland diaspora is certainly being felt here in Northland with refugees buying up large. Many of these are retired or nearing that point or have strong family connections but also many working with children.
Talking with one recent arrival (police) they just couldn't get ahead in Auckland with the high rents making it almost impossible to save a deposit.
There is an element of concern with the huge changes in the ethnic mix underway there as well.
No Kate. It's jobs available in Central Otago and a labour shortage here. What you say is of course partially true, - lots of retiring Southland farmers - but Central Otago Lakes is booming and many of the incoming are young families - tradies etc - who do need to work. And they find it here.
Yes, certainly applies more to other provinces - especially given house/land prices in Central Otago are very pricey anyway - hence that Auckland differential/spread isn't there to the same degree.
We've got new neighbours here who did just that. Cashed up in AKL without jobs here - rented while looking for work. Then bought in the one of the best neighbourhoods (same as they rented in). Kids walk to a D10 primary, city/commercial area also walkable distance; house and land about x4 size they had in AKL. They love it. Family life in general is just so much easier for them.
It is important to keep this debate simple. It is very easy to get buried in detail and semantics. The bottom line is that Bill English, the current Government's 2i/c has admitted that to date they have subsidised property investment to the tune of $2 billion! If this is not corruption then what is?
Adding to my earlier comment, I now believe even more strongly that not only should the Government stop accommodation supplements, but at the same time put rent controls in place that limits rent to a portion of no more than 20% of the average wage. By doing this in one blow they will deal to the availability, and therefore house prices as investor unload property they can no longer afford, Poverty as people will have a lot more left over once their rent has been paid and the increasing problem of homelessness.
There is a recent case in Venezuela where because of Inflation the Govn mandated a price freeze, result no eggs on shelves, ie the farmers could not and did not produce eggs at a loss.
The second point is that any hasty and severe actions could pop the property market in NZ. Frankly that is not something we will be happy to see. So I think the accommodation supplement is frozen right now? so let it stay frozen. I also think we are seeing a concoction of events/actions that is feeding the price boom in SOME suburbs. The most expensive at that, so these wont care about the supplement.
I also think we need to separate out being a genuine landlord and being a speculator. So the FHB, genuine landlord, tax payer and tenant are all being dis-advantaged by theses parasites. So the parasites need to be targeted but in such a way that the long term owners/occupiers are not (or minimally) impacted. I mean we need landlords and they need to make a living/return that reflects the risk and work, so things like a land tax and a sensible Capital gains tax. Such that short term ownership is hammered but long term it only pays its fair share.
Stephen how does that relate to rent controls? In our property problem house prices are out of control in some areas and this is showing signs of spreading to many others. Having owned (I don't anymore) several rentals, I firmly believe that many landlords will be banking on the rental returns as a significant part of if not all the yeild on their properties, particularly away from Jaffa ville. Rent controls will simply limit the yield, thus making inflated prices unaffordable causing prices to come back into the more affordable territory, While many investors will lose out on capital value, younger kiwis will have more opportunity to be able to afford their own home. Additionally English's admission of accommodation supplements means the the Government have effectively admitted to subsidising the housing price problem with tax payer funds for a minority of the population (investors) at the expense of the majority. I don't believe it will destroy any city, but the screams of the over extended and greedy investors could well reverberate around the world! The only peopel who will be hurt by rent controls will be those currently in receipt of the Governments $2 billion subsidy of the housing crisis
So as to give everyone time to adjust - I thought (years ago) what they should have done was announce that accommodation supplements would be reduced in two stages over a 2 year period with a rent price freeze throughout coupled with a requirement to give at least a years notice of termination of rental contracts to tenants. Had they done that then we wouldn't be here now.
I dont think this is the main driver of the Auckland housing boom silliness as that is in high value housing. Certainly for lower end rental housing the supplement seems to have been (in hindsight) nothing more than a landlord subsidy that has pushed up that housing. Interestingly there is still complaints that it should be increased from tenants so they do not have to move, hardly surprising on one level.
lol - depends on what you mean by 'high' value. You might have missed my recent comment about the Supercity council's recent diagram about rates - the 'lowest' price property used in their example given of four different rates brackets - was the rates for a $500K property. That was the 'lowest' value in the range.
Which says to me, all Auckland property values are 'high'.
It's no wonder 60% of all rental tenants are in receipt of the accommodation supplement.
There is an answer for all opposed to rentier based accommodation.
But it takes a truckload of obstinate temperament and abstinance.
http://www.aol.com/article/2015/10/21/a-23-year-old-google-employee-liv…
But then I suppose he does not qualify for rental support, even if he objects to the rentier markets.
Also Google can hide his ablutions among their other tax deductible attributions.
Is there any way to Google, just what is the right motivation to work and prosper, get ahead, get a house and have a family 0ne day.
Or is it just cooee, QE. for the top 1%.
And a truck load of crap for the objectors.
This is the result of clamping down on investors in the first place.
As such, all the tradesmen left the country or change their professions.
Now the cost of building is so high that undoubtedly all "old" house prices also go up.
What about land prices one would ask? Hasn't this gone up too? Council is not stupid. When there is an excuse to increase the rates revenue in the light of all these higher cost of building why not jump on the wagon? If the building cost has not gone by up such ridiculous amount then Council will have no justifications to raise the land value by that much. So a decision made years ago to clamp down on property investors has come back to bite us.
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