ANZ economists say the impact of New Zealand's unaffordable housing might be "much more pervasive" than generally appreciated.
In an article in the latest ANZ Property Focus, chief economist Sharon Zollner, senior economist Liz Kendall and senior macro strategist Philip Borkin say that not only does the high hurdle to purchasing homes have important implications for wealth equality, generational equity and financial stability, but it also affects he economy’s productive potential.
"High house prices make it more difficult for younger households to invest in businesses, limiting the entrepreneurial endeavours of younger people. They also create barriers to labour mobility and social mobility, both of which matter for achieving our productive potential," they say.
"And to the degree that high house prices are a symptom of excess domestic demand pressure, they will be associated with upward pressure on the real exchange rate, stifling exporting and import-competing activity. The challenges of low productivity growth and housing unaffordability are both complex and difficult to solve, but in our view these issues are inextricably linked."
The economists say that to keep house prices in check, a steady stream of new supply and greater responsiveness of housing supply is crucial.
"A long-term solution requires that more supply can be made available in future, not just that more houses are available now. To do this, more land needs to be made available, with a steady future pipeline in train, and measures need to be taken to improve the capacity and flexibility of the construction sector so that it can respond to demand pressures. Productivity improvements in construction would help.
They say that making housing supply more responsive would also have the benefit of making any price adjustment "more orderly, which would be beneficial from a financial stability perspective as supply constrained markets are associated with not only high but also more variable house price inflation.
'Clear plan for migration'
"A clear plan for migration (with well-targeted skill matching) is also an important aspect of managing housing market pressures, with investment in housing supply and infrastructure needed in order to accommodate migration policy settings."
The economists say that the other important aspect of improving housing affordability is improving incomes – and the most important long-term determinant of income growth is productivity.
"Ultimately, the issues of low productivity growth and unaffordable housing are inextricably linked. More affordable housing would be good for productivity, and better productivity could help improve housing affordability, provided the market is responsive and house prices don’t increase in tandem. Measures aimed at tackling both issues would have positive impacts on the long-term performance of the economy and those impacts may be reinforcing."
In going into detail about high house prices affect the productivity of the economy, the economists say that productivity growth is crucially important for our economic performance and prosperity.
"The most significant determinant of differences in per capita incomes between countries is their productivity performance – and productivity growth in New Zealand has been lacklustre in recent decades.
"The Productivity Commission has discussed this issue at length. In their work, they note that productivity growth was strong from the mid-1980s until 2000, following the onset of economic reform. But in more recent decades, productivity growth has slowed – and New Zealand has consistently been an underperformer relative to its OECD peers.
"We estimate that labour productivity grew 1.6% per annum on average through the 1990s, 1.0% per annum through the 2000s, and a very subdued 0.3% on average from 2010 until present."
Zollner, Kendall and Borkin say the impact that high house prices has on the economy’s productivity performance is through a number of channels.
One way is a lack of social mobility.
"In a similar way to wealth inequality, when housing is expensive, it makes it difficult for people to get ahead, and ‘break the cycle’ so to speak. It has been shown that poor housing outcomes are associated with poor health and educational outcomes, which in turn then impacts on productivity. Those effects create the risk that undesirable economic outcomes becoming persistent across generations, with younger cohorts limited in achieving their potential."
The economists say another impact is lack of labour and business mobility.
"High house prices make it difficult for both workers and businesses to move to locations that will prove more productive, meaning that resources are not allocated in the most efficient way possible. This makes the economy less flexible and dynamic, and limits the scope for urbanisation and agglomeration benefits.
"A nice example of the detrimental impact of housing costs on labour mobility is the Canterbury earthquakes. In a perfect world, with the Canterbury rebuild effort maturing, resources would relocate to other regional pressure points, such as Queenstown or Auckland. Now that may be happening to a small degree, but given those workers are most likely to take an effective pay cut to move to these regions given the costs of housing, we suspect many are questioning the incentives to do so."
Barriers
And the economists say that costly housing produces barriers to investing in businesses.
"High house prices and housing costs make it more difficult for some households to invest in businesses.
"Why is that important? Well, for one, businesses require capital to expand, and the marginal cost of capital will be higher than it would have been otherwise if a greater share of the domestic pool of saving is being pulled in to fund housing to meet excess demand pressures.
"Those that already own houses can use wealth gains to invest in businesses. But because they are typically older and instead are looking to use this equity to fund retirement, we suspect this is not happening to the degree it would otherwise."
The economists say that the issue goes further than that as well. They say the ongoing establishment of new businesses has an important influence on productivity as new firms tend to be more innovative.
"And while accessing figures on this is difficult, we suspect new businesses are more likely to be created and owned by younger people, which as mentioned above, are facing more and more capital constraints these days due to housing costs.
"In addition, our discussions with businesses reveal that succession planning is also an issue for existing businesses, and we suspect housing affordability and the impact this is having on younger generations is a factor. Succession issues can constrain profitable businesses from continuing to operate. And to the extent that business interests are inherited through families while others are locked out, wealth inequality is prolonged and exacerbated as a result.
"It is difficult to find definitive evidence of the impact expensive housing may be happening on business ownership in the New Zealand data. But one observation that may be a consequence of this phenomenon is a declining rate of self-employment amongst the population."
The economists say that the Productivity Commission has noted that improving the responsiveness of housing supply is an important element to addressing excess demand pressures, particularly given strong population growth. More responsive housing supply would improve productivity by dampening interest rates and by improving housing affordability.
"We agree that improving the responsiveness of housing supply would be beneficial for productivity growth. Indeed, we would emphasise more broadly that improving housing affordability is an important part of any solution to tackle our productivity problem.
"Like other aspects of our low productivity, improving housing affordability is difficult. People have made long-term plans based on house prices where they are, or on the assumption that they will continue rising. Rising house prices are bad, or at least they are when they rise strongly over a prolonged period. But for those who own homes, falling house prices are also problematic, especially when debt levels are high. It appears to be an irreconcilable tension, which means that any policy action needs to balance impacts on a range of different people."
120 Comments
"...any policy action needs to balance impacts on a range of different people." As long as it doesn't impact Sharon Zollner, Liz Kendall or Philip Borkin of course, then "go for it!". It's too late to impact Sir John because he was lucky enough to get out. What a clever, well-connected fellow he is....
"It appears to be an irreconcilable tension" is bang on. Only two options - an asset reset which will nail the banks the heavily in debt (the few) or inflationary wage and price spiral that will nail everyone, especially the retired.
New government was voted in to modify and restrain demand side factors, and increase supply side support. They are making play to do both (Overseas Investment Amendment Bill and tax changes) and (kiwi-build).
So what they're saying high house prices make our economy inflexible and unable to adapt.
Also if people want to start a business just rent don't buy a house. However that does require accumulating the money to invest in the business as loans are too expensive and a lot of service businesses can be set up for less than a house deposit.
Better to create an income stream than take on 6 digits of debt.
Incorrect. If you are borrowing to buy assets, which you can then depreciate, while earning an income, then it's very sensible. I had to finance the start of my business through overdraft/UDC. Therre is this HUGE disconnect in this country between productive and unproductive (houses) debt.
I've referred to service business start ups as they require little in the way of assets (if done right). A business with tangible assets is very different if you own plant or machinery (and requires a lot more capital).
House debt is very cheap compared to a commercial loan. For someone wanting to start up a business using their house doesn't make any sense to me. Paying the deposit plus paying the money that you want to borrow in the future seems stupid. Why not just invest in a business instead? If the business makes money then you can afford to rent.
The neoliberal perspective that people will leverage their house for productive use is a good fairy tale but it's rare in practice. I only know one business owner that used a house as security for business loans, but they sold the house to take the recent capital gains. While helpful it was essentially speculation.
Well that's exactly what I did. I took my deposit for my house in Auckland and leveraged my house up north. Which, as I did this 7 years ago was the most stupid thing I could have ever done. Despite paying tens of thousands of dollars in tax, I should have just leveraged myself up to the hilt on houses and paid no tax. Which I guess is my point. But also why this country is so unproductive by design.
John Key didn't ignore it, he called out the urgent need to do something about it lest it spiral further out of control and have various adverse effects: http://www.scoop.co.nz/stories/PA0708/S00336.htm
But the ring betrayed Isildur...the lure of gold was too strong.
RickStrauss...I love a Tolkein reference, but being a shocking pedant, I can't let this one stand. The ring betrayed Isildur by slipping off his finger, exposing him to some orks as he was trying to escape via the river. The ring betrayed Isildur as an act of vengeance on behalf of its Master (Sauron) who had poured some of his soul into the ring. We could maybe say that Isildur betrayed the race of man by taking the ring in the first place though. And poor old Aragorn was moping about being an Edge Lord about that forever after.
John Key The Deceiver has a good ring to it though, whaddya think?
Fair enough. I stand corrected. Misuse of a LOTR reference.
That last ring is definitely more appropriate. Although as someone who voted for him twice I'm torn between whether he went in with deceptive intent, or simply decided once in that being PM was quite nice and making hard choices was going to be polarising and momentous, thus better to put them off and just enjoy being PM while growing one's not entirely blind porfolio wealth.
It's hard to know the inner working of a politicians mind, if they are even aware of it themselves. I am still slightly nauseous after the Max Key vlog where his Dad is wandering around in shirt, shorts and wellies. Nobody needed to see that. I don't get the appeal of John Key and never will.
I think he came in on a negative sense in that everyone was finding the Clark Cullen lot too controlling, too intrusive, dour and sour. Key did sort of modernise and refresh National and took them clear of the old hat personal attack politics of Labour. So then in turn 9 years later ironically a virtual replay. A new fresh Labour leader and bingo. Like Rick I too voted that way for Key’s first two terms.
I wonder why they didn't release statements like this through the years that house prices were booming. >
Because they were making out like bandits. They still are.
I find these proclamations by the banks quite disingenuous. The root cause for the property bubble (if not all property bubbles in modern history) is the availability of credit. Furthermore, who cares about productivity and enterprise when consumer spending is bubbling along? These would be far more useful issues for Zollner and co to address. Of course they won't, because the spotlight will be shifted towards their own industry and paymaster. While I don't disagree with what they're saying, it's important to remember that part of any corporate communication is to project the right image. Banks will never accept responsibility for blowing up bubbles.
"A clear plan for migration (with well-targeted skill matching) is also an important aspect of managing housing market pressures, with investment in housing supply and infrastructure needed in order to accommodate migration policy settings."
Why on earth has no government yet done the above. It's common sense, yet it's been completely ignored.
The low-interest rate environment was never intended to create wealth equality but instead a wealth effect which it has done to great success. According to the neoliberal playbook, all of the new paper millionaires should be releasing equity in order to start businesses, foster innovation and create jobs. Of course, they might have gone for the less risky options of just keeping that money in property and why wouldn't you when all the levers of state favour it?
Just a reminder to everyone who wants to claim that only Auckland is unaffordable - anything more than 3.1x median household income is classed as unafforadble. 5.1x that is severely unafforadable.
So no, $300,000 for an uninsulated unit in a small city is not affordable.
HO no I do not suggest house prices to keep climbing at the ridiculous pace but at a gentle pace. I don't want the housing market to crash because it destroys the economy and takes your job away as well, so even though properties are cheaper, you still can't afford them coz you are now a broken arse HO.
Wouldn't the ideal scenario be a gradual drop of house prices in the long term? Something like a small year-on-year decline for the forseeable future would be sustainable.
It might not alleviate productivity issues now, but if it became ingrained that the new norm was a small drop each year then investment would naturally shift to innovation over time.
Don't you love the way those people with very long job titles working for very large companies know all the answers in their very long winded articles they produce for the media/polis. They are, of course, well written and very well researched papers explaining in detail how things could work and should work and would work if everyone just did as they said. Mean while, back on the streets, many thousands of us are doing what we can to keep our businesses afloat, amongst a mountain of conflicting legal advise and changing world of regulations designed to make us all better people and a better nation, right? Great. Thanks.
Don't you love the way those people with very long job titles working for very large companies know all the answers in their very long winded articles they produce for the media/polis. They are, of course, well written and very well researched papers explaining in detail how things could work and should work and would work if everyone just did as they said.
Yes. And as I pointed out, they represent and are a key driver of the problem that they identify!
""The most significant determinant of differences in per capita incomes between countries is their productivity performance – and productivity growth in New Zealand has been lacklustre in recent decades""
So they blame housing costs. Certainly housing costs are bad for New Zealanders living in Auckland & Queenstown but for most of the country housing costs are not bad - for example just search for houses in Oamaru or Taranaki and compare to Auckland equivalents.
The authors argue that "housing costs affect our economy's productive potential"; this is not a bad argument for say UK and France where wealth is generated in London and Paris. But NZ is rather odd - we have most weath generated outside our cities (agriculture & tourism) and the only reason Auckland has a slightly higher productivity per capita than most small town NZ is the large number of very well paid but parasitic jobs: most lawyers, Fonterra headquarters, the extra 2,000 highly paid council staff, etc.
So fix housing prices for the well-being of Kiwis but don't anticipate a productivity miracle.
I blame an out - of - control , unplanned , not thought through immigration policy ( starting with Helen Clark ) for this mess , prior to that we had enough houses for everyone
So whats the solution ?
Cut back on immigration ?
The problem is that the costs of building a home are what they are , there is no moving that hurdle .
So what is the solution to making housing affordable ?
Much as I hate our current immigration policy with all its associated rorts and corruption and exploitation and its pernicious attack on the low waged I think you are wrong. Firstly immigration has been high for about 70 years; and for 70 years our economy has failed to keep up with other countries but house prices have changed dramatically over that period (I arrived in 2003 and in Jan 2003 prices were silly low and by December getting pricey).
When Helen was in charge roughly as many left as arrived. Then they made the act of building much harder with consenting becoming a major hurdle but National came in and left the bureaucracy in place and upped the number of immigrants while dropping the quality of immigrant. At the same time the number of Kiwis leaving declined. Both labour and National are to blame but in my opinion (may be wrong) Helen's govt was naive and virtue signalling whereas John Key's was cynical knowingly using immigration to pump up the price of houses and push down workers wages.
Now we have a minister that makes the right noises about our immigration woes [ https://www.newsroom.co.nz/2018/07/17/156811/cellphone-repair-flagged-o… ] but is too scared to act forcefully because the media will scream 'racist' whatever he does.
Has anyone seen the Herald leader in the past 10 minutes ........... QV has cocked up the rates valuations .
Some idiots ( half actually ) actually want their rateable value to be INCREASED !!!
Why on earth would anyone want to do that unless they regarded their home as a speculative investment ?
They are certainly not doing it for altruistic reasons
Of course the rates values are cocked up, some by more than 20%. Yet that was already known to be true for years, hence using rates values as an indicator of housing value & for identifying market health is ludicrous. I mentioned this in many previous comments. QV just divvy out for council invoicing a suburb at a certain rate. The algorithm is so broken it does not even take location, land area, topology or building data into account so discrepancies are really easy to spot. At best the estimates just use a few data points from recent sales year on year, but if one property sold for a certain amount it does not mean all properties within 2km have similar values (or even will sell around that value), esp considering things like new builds have more value than existing homes, flat land able to be subdivided more valuable than sloped with difficult service locations etc. Even the amount of council services & cost for an area mean the distribution of rates is way out of wack.
Boatman every square inch of NZ is a high EQ risk. The sequence in Canterbury caught many out because the lax council had stuffed up getting the valuations of 2010 out on time. Therefore for the 2011 really bad EQs which introduced the red zoning the government reverted to the 2007 valuations for all up cash offers to those affected. Now Mr Brownlee went on record to say that some made money out of that which is true enough but the vast majority did not get what their house was worth pre EQs and therefore had a shortfall when trying to replace elsewhere. So there is actually quite a good reason to have your Q.V. at realistic market price.
We don't know how lucky we are to live in this country. Just be grateful that we haven't got much bigger problems to deal with like Syria and Afghan. Houses are still very affordable in the outskirt of Auckland e.g. Weymouth, Tuakau, Pukeno etc. FHB's shouldn't be looking to buy in DGZ or Ponsonby it makes no sense.
Boobster: Pokeno - Your Entry To The Good Life
https://web.facebook.com/barfootandthompson/app/?app_data=%7B%22locatio…
What about 3-4 and 5th home buyer looking to buy there but deciding that a extra premium risk is just not worth it. Just wait till the absentee owners are forced to sell with he new legislation, or become a tax resident against their global incomes. Might take a year or two, but like good cheese "it just takes time"
It's disingenuous to compare NZ to those places which are at the bottom of the heap.
NZ should be compared to other first world democracies.
If you do that, you will find that we have some strengths (mainly scenery and lifestyle), but also some weaknesses.
I revert to my wife's view - which is that it's all nice and good to have NZ's scenic beauty, but at the end of the day in terms of general day to day existence, income and cost of living really matters in terms of quality of life. And NZ fares quite poorly in that respect.
1) Its not house prices, its LAND prices. Funding higher & higher land prices has to be the most unproductive and stupid use of capital. Over time as this unwinds & land prices normalize it will simply destroy capital (wealth).
2) Worldwide low interest rates pushing up asset prices
3) Incredibly poorly implemented RMA - its meant to be effects based
4) High immigration rate - high demand for houses (mainly Auckland), schools, roading, hospitals etc & probable diseconomies of scale in Auckland.
5) Developer contributions pushing up the up-front cost of houses (rather than user pays - targeted rates etc)
6) Building material supplies duopoly
Both National (Nick Smith) and Labour (Phil Twyford) sing from the same song sheet. They both unharmoniously yodel that housing is not a productive investment. ANZ is just about onto it but have not said so directly. Every society in the world since we moved out of caves has put value on housing. If you have good housing the countries productivity improves. What country in the world has good productivity and low grade cheap housing? What sort of politician wants their citizens to be poorly housed. I do not want to live in a country where people think so little of their homes they do not spend almost every cent they own on their own home be it owner occupied or rental.
Really? thought it was the banks sucking $5Billion a year out of NZ's economy, by way of repatriated profits to Australia, that was affecting the economy's productive potential.
If that $5Bn per year had stayed in NZ's economy for the last decade we would right now have another $50Bn in our economy, the economists could think on that for a whilst before placing the blame on high house prices.
An example of how high house prices are reducing investments in other parts of the economy: I've got two children to put through university - one in university now, another starting in 3 years. It is likely they will find the jobs that suit them in a major city - where house prices are high - and I worry about their ability to buy a house when they start work. Thus, I am paying for the fees and living costs so that they do not have student debt hanging over them when they start work and are looking for a house to buy. This is going to cost me a lot of money - money that I could put in a bank, invest in the stock market, mutual fund, pension fund etc - which could then be used to support investments that increase productivity. E.g. Value added processing of our natural resources and smaller, innovative business.
I am probably being overly cynical but...
Realising capital gains are likely to be far less going forward, banks are telling a sob sob story about high house prices. The new tactic being to promote much more housing supply to address the issue because, guess what? More housing supply equals more mortgage business.
Article stating the obvious. What is this govt doing about it? What is happening with the foreign buyer ban? Probably still getting watered down and be ineffective. Govt not addressing ridiculous build costs and inefficient Auckland council. Aucklanders will get no respite
Hey mate have you read this article? https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12…
31 Ponsonby Tce sold for $2,316,000 ($230,000 over the CV).
https://www.barfoot.co.nz/759157
Article stating the obvious. What is this govt doing about it? What is happening with the foreign buyer ban? Probably still getting watered down and be ineffective. Govt not addressing ridiculous build costs and inefficient Auckland council. Aucklanders will get no respite
Not to worry. The horse (China) has already bolted. It's not just the expensive parts on NZ that are on the decline but most of the rest of the popular property investment areas around the global.
Oz: Real estate auction clearance rates and prices may drop in spring selling season, analyst warns
http://www.abc.net.au/news/2018-07-16/auction-clearance-rates-could-fal…
Canada: Canadian Real Estate Prices Make The Smallest Advance Since 2009
https://betterdwelling.com/canadian-real-estate-prices-make-the-smalles…
Seems that the spending party is over.
Worry a lot, in fact start to worry even more.
Prior to that horse bolting there were a lot of homes constructed in Aussie and Canada. Unfortunately in NZ, thanks to the idiots at Auckland Council, there were hardly any built. We sit in the transition period with it highly likely that Aussie will shortly have more affordable, modern housing than NZ.
Soon every young Aucklander will be much better off leaving Auckland.
The Western world offshored it's productive activities, but want to keep consuming the results of that production.
So they went into debt - fooling themselves that their existing assets were becoming more valuable. When in fact they were just getting older/closer to increasing maintenance issues or even to demolition.
But the debt had to be inflated away or the bubble would burst. Happened globally enough that there's nowhere to run. And this good ship of fools ran into the iceberg that is a finite planet - peak energy, peak work, peak future ability to repay. So interest rates trended to zero, some central ones even below zero, reflecting real degrowth.
But even without interest, there is a limit to how much can be repaid and we're well past that. So either a crash of the system as per 2008 but unrescuable, or a massive devauation of money. The attempt to continue may well produce the latter. Either way the party's over.
Next, we have to become long-term sustainable, which means a steady-state economy (as per Daly et al) and in that scenario there is no room for interest. Others have this form - a one-off up-front fee for borrowing but no compound interest. Compound interest could never fit a finite planet - as we're witnessing.
So it's time to ask whether banks as we have briefly come to know them, have to be legislated into a form which fits long-term human survival. Which may well mean their ceasing to exist. It won't solve all our woes, but it will be a big step down the road.
Are you against the Overseas Investment Bill or are you not a fan of Labour?
Most sane people will just wait for the day to come and see what happens, but for some reason you're jumping up and down suggesting that people who voted Red instead of Blue are going to get their Comeuppance next week. Edge of your seat action at Stuarts place this month.
OMG this property is in the market again. It was sold in March last year for $5,320,000 (current CV $3,900,000) - do you really think they will get the money back?? Talk about expensive housing...
https://youtu.be/Bhoob1JTU7M
And expensive exterior maintenance... For that price I would expect a temperature & humidity controlled wine cellar, not a cheap bit of shelving, and a spa bath that can fit at least a few people comfortably. The bathroom with the shower is not even a full wet area! they cheaped out on the tiling & shower heads and made the effective space smaller. If you cannot have a person or a couple people adequately spread out & using the shower comfortably you are missing out (especially in later years). In the end as well it has 3 living areas but only one kitchen? You might as well be buying in the Australian market for that price range, get 4 times the quality for 1/4 of the price & with the extra cash Australia would gladly have them. One of my earlier acquaintances set up his mansion with at least 2 kitchens so that one was typical european and another set up to cook proper Chinese & Mongolian style cooking. Great as well to have two so that families can spread out and entertain more adequately. It really does boogle the mind what NZ values it's homes at. Especially since a common feature in NZ housing is known to severely affect the health of residents to the point of severe neurological & breathing issues (all thanks to lower regs in building causing the leaky homes crisis). https://www.youtube.com/watch?v=AjNfAozdT50 https://www.youtube.com/watch?v=AhvAdnhX2y4 Anything made in NZ lately needs serious review before purchase. Otherwise yes we will have many more families suffering exactly like in those forensic files with early onset dementia & children suffering 3rd world breathing issues and some even dying. "buildings never get better by themselves, in fact if you leave a building alone that has mold infestation it gets worse".
If early man treated the treated the value of his cave with the same reverence/priority Kiwi's do with housing, he would have either died out or still be in that same cave. I.e gone nowhere or backwards.
I think the same still applies....as we are about to find out.
When you have a population from the third world you have production techniques from the third world. People assume their normal and that is the third world normal. It means construction of third world infrastructure and living conditions. Those garages turned into housing all over Auckland are the normal of the third world!
When you have a population from the third world you have production techniques from the third world. People assume their normal and that is the third world normal. It means construction of third world infrastructure and living conditions. Those garages turned into housing all over Auckland are the normal of the third world!
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.