This is a re-post of an article originally published on pundit.co.nz. It is here with permission.
The Minister of Housing Chris Bishop's ambition is to reduce markedly the ratio of house prices to household incomes. If his strategy works it would transform the housing market, dramatically changing the prospects of housing as an investment.
Leaving aside the Minister’s metaphor of ‘flooding the market’ I do not see how the announced strategy is going to quickly resolve New Zealand’s housing problems.
His strategy seems to have evolved over the last five years following the establishment of the Ministry of Housing and Urban Development and is much the same as a Labour Government would have proposed, point-scoring and minor differences aside.
Supply-side initiatives take time. It is not like the Reserve Bank changing the Official Cash Rate, with an immediate impact on financial markets which works its way quickly into the new mortgages and mortgage renewal markets.
We are currently adding about 30,000-40,000 dwellings a year to the housing stock. (There will be more new ones since some will replace demolished dwellings.) Suppose we add an extra 10,000 a year. That would not only be a strain on the building industry but the Reserve Bank might feel it necessary to further restrain the economy. Given there are over 2 million houses the additions to the total stock would be about 0.5% a year. Is demand so elastic to such a small change in supply? (For a review of the changes in the intercensal housing stock see here.)
In any case, it is unlikely that the announced changes will produce a sharp increase in the supply of new buildings. It is not just a matter of putting up a shed on new piece of land. There is the accompanying infrastructure including water and roading. That in will take time to be installed, even if the local authority is enthusiastic. So the strategy is about the long term and not ‘flooding the market’.
The Minister’s strategy includes a long-term target of the price of houses costing ‘three to five’ times (annual) household incomes. ‘What I want is for house prices to moderate over time, so that in 10 to 20 years’ time, we have essentially gone a long way towards solving our housing affordability problem.’ Currently the multiple is 6.6 nationwide. In Auckland it is 8.1, Wellington 6.1, Christchurch 5.8, Hamilton 6.6, Dunedin 5.7 and Queenstown-Lakes almost 15.
So the Minister wants a cut in the relative price of housing of between 25% and 55%. That does not mean he expects the nominal price of houses to fall 25% to 55%, a reduction which would cause widespread financial distress (particularly if it was to happen rapidly). Rather, the Minister is hoping that nominal incomes will rise faster than housing prices over the long term.
To make rough sense of it all, suppose he envisages a 40% relative cut in house prices in fifteen years (the Minister’s midpoints). Allow inflation at 2 percent per annum and real incomes to rise their long term average of 1.5 percent p.a.. Now suppose the average price of a house is $1m. (Quotable Value thinks it is about $900,000 but the million keeps it simple.) The 6.6 ratio would mean an average household income about $150,000 p.a. (Which is also a bit high – this is an illustration). In fifteen years’ time, under those moderate inflation and growth assumptions the household is likely to be earning about $250,000 p.a. The ministerial ambition for the ‘four’ ratio means the price of housing will still be $1m (i.e. four times $250,000). So the Minister’s target means that there will be no nominal capital gains in house prices for a long time to come.
You can fiddle around with these assumptions, but realistic alternatives suggest that, under the Minister’s ambition, capital gains on housing will be negligible and house ownership will be a poor investment prospect. For most people home ownership will make still make sense, even though they will make no capital gain when they sell (for neither will the next house they buy have gone up in price). However, treating your house as a financial investment or investing in property may not make as much sense.
Of course, it is only the Minister’s ambition. He won’t be the Minister of Housing in fifteen years. But he can be held to account while he is. Will housing prices be stagnant on his watch? In my judgement the proposed measures will not be sufficient to attain the ambition. My guess is that a serious effort to restrain house price rises will also require further fiscal and monetary measures.
Since the cost of building houses and providing infrastructure will go up with inflation, the value of land will fall under the Minister’s scenario. That seems very unlikely. In the more stable past, house prices have rise a few percent annually faster than consumer prices. What the reverse would mean is difficult to analyse but there would be a very different housing and investing world from the one we are, or were, used to.
So will housing prices stagnate to the extent of the Minster’s ambition or will they rise much like they did in the quieter past. Your guess is as good as mine, but I shall be surprised if they stagnate. I am not holding my breath waiting for the flood.
*Brian Easton, an independent scholar, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014. This is a re-post of an article originally published on pundit.co.nz. It is here with permission.
42 Comments
Good set of thoughts.
Firstly, Labour/Greens should have been in this space. In reality, stopping the capital gains by supply negates the need for a Capital Gains Tax. CGT was only a tool where you don't have this part of a market economy working.
Secondly, housing price increases less than the rate of inflation was the pattern between 1960 and 2000. The growth above the rate of inflation has only happened since 2000, during the period of cheap interest rates. And should have corrected at the time of the GFC, except we got back into cheap interest and growing public debt.
And land prices should fall - they keep denying gravity but land-bankers keep thinking the prices will increase again. Actually pushing the value of their assets down is the best thing that could happen to the market
It’s such an important topic. It delivers financial outcomes, good and bad. Shelter and well being of all citizens, renting or owners. Employment for many direct and indirect. Yet we are still battling with direction and desired outcomes that we can all buy into. Are we asking too much of ourselves that we could agree and map out a clear path with set expectations, considering capital gains, tax benefits, infrastructure, population growth, material and building, banking monopolies, RE industry monitoring and reporting etc how about a referendum, cross party select committee, a process that exposed and confronts our issues and at least start to open up the discussion. Even our biggest building contractor/material supplier makes a fist of making money in this broken industry. Anyway I’m going for a coffee.
This will simply not happen. There is no motivation in the market to build cheaper housing. The government can only fix things that require sign off with a pen for them to happen, building houses needs resources, man power and a whole host of other factors to make it happen. Come back here in 4 years and nothing will have changed.
You are correct Brian, nothing happens fast in NZ, so I won't be holding my breath waiting for those new subdivisions with thousands of houses in them.
You are also correct to state that the value of land is unlikely to fall under the Minister's scenario. Tinkering with insulation and other building materials is also going to add more to the cost of new builds.
I've just spent 6 months getting a building consent for a house through Auckland Council red tape, so how long will it take to get a subdivision through?
Not a chance.
By the time there's reports on ecology, visual amenities, infrastructure, transport, maoris, natural hazards, character and landscape, contamination, stormwater, legal challenges, objections, heritage and archaeology and a plethora of other considerations, it'll be years away.
Wingman, try and remain positive. More affordable homes is what is what we need. I can see it happening over time. The societal cost allowing things to continue the way they're going is just unviable.
Just think of the plethora of construction and related jobs that could otherwise be lost.
This Coalition has certainly served Spruikers a whopper up the rear with this policy.
Affordable homes? It's all been done before you know, in subdivisions like Otara, Henderson and Massey.
Would you like to have one next door? There will be more subdivisions under this govt., but not Otara-style. John Key turned Hobsonville from a low cost future slum to a desirable suburb.
You're suggesting that houses be compulsorily acquired by the state. It's a fact that Comrade Ardern's failed promise of tens of thousands of new houses for the masses delivered next to nothing.
Governments are the worst builders, investors, administrators, you name it, they're incompetent at almost everything. Closely followed by local bodies.
Arguably, there is no shortage of housing in New Zealand. By and large, everyone went to sleep under a roof last night. What there is, is an inequitable distribution of ownership. Many have none, and some have 100.
Fix that (and it's easy to do through any number of regulatory/taxation changes) and the problem diminishes.
Keep building away by all means. But if the finished product goes into the portfolios of those that have 100, what have we really achieved?
I'm not conflating anything.
Is there a place a for a private rental market in New Zealand? Yes.
But not one solely targeted at, and supported by speculation.
Anyone who has a spare $million or two on Term Deposit and wants to buy-and-rent, go for it! But use your own money.
The problem we have is that 'home-owners' have to compete for Debt with 'spectators' and it's a battle they have been losing for decades.
The answer? Everey individual IRD number can access ONE mortgage at Home Owner Rates - make it 1% if you like, and after that, any secondary property has to access loans at a set minimum above that rate. Let's call it the Business Loan Rate for ease of terminology; that 1% plus 15%, for instance. You know, the same rate any other productive business has to pay that doesn't have their loan backed by.... residential property.
Where do we draw the line between what's an effective rental market and what's an overabundance of people being displaced from a genuine shot at home ownership in other's pursuit of an investment vehicle using 100% bank finance to bid up existing houses?
Home ownership might not effect you or I, but guaranteed if there's a market being cornered that you are effected by you'd complain.
Here's how it works.
- The 'flood' remark is a heads up to land bankers, that they won't be able to do that anymore as developers will have the ability to bypass them to cheaper, and in many cases, land more suitable for development.
- There are many opportunities to develop now (if only the council allowed), without the need for any further infrastructure requirements from the Council, just by being able to go to areas that aren't contained, or individual developments using modern STEP type infrastructure systems. The Granny Flat legislation is an example. A Council by-pass mechanism is in the new legislation as Councils will drag their feet on this to create an artificial supply and demand imbalance from which they can extort fees.
- Homeowners will reduce their mortgage over time so will have that equity to put into the next house, which hasn't speculatively inflated. On which going forward less debt is required and with wage increases, more is available to reduce debt quicker.
- Rents still increase but at a lower rate than presently but will represent a higher yield to investors because the purchase price as a ratio is less. Thus investment will flip over from being speculative capital gains driven to yield-based. Renters will be left with more money in pocket to save for a house deposit or put into other investments.
- Developers will make their margins by providing valued added amenity thus housing will become more affordable because the non-value waste costs have been removed, and will have more amenity (if Minister Penk hasn't removed all the insulation by then).
- Council will have to justify costs like developer levies, and will have to compete with private infrastructure suppliers, and once the costs are allowed to truly fall where they should, existing homeowners using infrastructure that needs upgrading will be in for a shock.
- The Govts. the biggest issue will be having its plans stymied by the time it gets to the coal face by vested interests, and failed ideologies.
Anyone who thinks things are going to happen fast in little ol' NZ needs to take a close look at the colossal size of the Resource Management Act 1991.
So far all that's happened is a talkfest by the Minister...has any fast-tracking or new legislation actually occurred?
a) We need address housing demand as well by managing the rolling 12-month net inbound immigration rate down to a sustainable level. This will also help slow down that massive infrastructure deficit we have.
b) Rezoning lots of land is not going to address the immediate crisis. KO & community providers need the govt funding to build as many social houses as fast as possible (rather than govt fiddling while Rome burns). Also need more "temporary" housing while the govt & market build permanent housing solutions.
i) NZ has one of the highest rent/income ratios in the OECD
ii) 100,000 homeless (wide HUD definition)
iii) circa 25,000 on social housing wait list & circa 1,500 in emergency housing
iv) as in the article a house price/income ratio roughly double what it needs to be
Unleashing this pent-up demand for housing should give a major boost to construction and the wider economy as well as substantially lowering inflation in the interim. Given the industry is in a down cycle it's a race between government getting this done and builders going under.
The granny flat change alone will deliver a lot of cheap rental accommodation, and it most certainly is not what the Labour Govt would have done, as the Labour Govt actually banned the letting out of granny flats in their RTA legislation changes. They deliberately removed these small homes from the rental market which contributed to the severe shortage of cheap accommodation options for tenants. Owners were then forced to rent them out on AirBnB instead (as AirBnB is exempt from RTA laws) - and now everyone blames AirBnB for "taking all the housing". But it was the Labour Govt who did that.
Forcing investors to buy expensive new builds, and adding a tax deduction premium on to the price of them (which then penalised any owner occupier who wanted to buy a new build) while low income tenants couldnt possibly afford to pay the higher rents for these brand new places, resulted in quintupling of the public housing waitlist and the homelessness we see everywhere.
Labour got it completely backwards - well off owner occupiers should have been incentivised to build new, while investors should have bought older, cheaper homes and made them available for renters, the majority of whom are low income. Now that National have corrected this, rental supply is increasing rapidly and rents are falling. Its not, and never was, rocket science.
‘Flooding the market’ has not worked in the past (its be bipartisan policy since at least the Key govt) and almost certainly won't work time. Bishop is just get to look like he doing thing providing favourable conditions to developers. If by some chance it does start working and developers start thinking they might loose money the whole thing locks up and new supply gets paused until demand catches up. Anyone promising to reduce prices this way is not serious.
You would need a full ministry of works with one standard design for free-standing and commie blocks for the city centre and just keep building while the whole market crashes and the banks go bust. The industry (developers and banks) will protect its self otherwise.
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