Room for better housing solutions
Where homelessness shocked people five years ago, now it’s the middle classes being locked out of having a home, says Dr Jess Berentson-Shaw. Melanie Carroll reports.
It’s not a bubble, yet, but New Zealand’s surging property market is a big problem that will take big, bold answers to fix, experts say.
House prices were already outpacing earnings, before the coronavirus pandemic hit and a worried Reserve Bank temporarily removed the loan- to- value ratio (LVR) restrictions in May.
There is a growing expectation the central bank will restore the restrictions at its self-imposed 12-month deadline because of the runaway growth in activity in the property market.
The worst-case coronavirus scenarios – a major economic slump, soaring unemployment, a decline in house prices – have not come to pass yet, so rather than nourishing a withering economy, removing the LVRs has instead helped a housing sugar rush.
‘‘In the early stage of the crisis, banks were incredibly worried, and we also saw credit markets tighten up, so they were also worried about their access to longterm funding channels, especially for our smaller banks,’’ said economist Benje Patterson.
First-home buyer Christina Bain said she and her husband were lucky to be able to buy in Auckland in September, particularly when they found a ‘‘ gem’’ without the bank having to come back to them about pre-approval.
She said they got in just as things were ‘‘starting to get crazy’’, but they struggled with long wait times and delays in getting information and approval during the process. ‘‘ The loan to value ratio being removed didn’t really help us in our case, [it] seemingly made it harder to get correspondence from the bank.’’
The couple initially started looking late last year, but put their plans on hold until May to ensure they were ready. The first Covid-19 lockdown really affected their ability to save towards a deposit, but they managed to get 10 per cent. However, they then needed to save to 15 per cent to get them over the line. ‘‘We felt quite disheartened,’’ Bain said.
When they found a ‘‘gem’’ they loved in Papakura, which had failed to sell at auction just a few days earlier, the couple still hadn’t heard back from the bank about pre-approval because of the long wait times, she said.
‘‘We were quite anxious. We didn’t know how much the bank would lend to us.’’
Natalie Dixon and her partner Craig Martin bought a house recently in Christchurch, and were impressed with the value for money in the city.
‘‘We had a look around in the North Island, in places closer to families, and couldn’t believe how expensive the places were up there in comparison.’’
Dixon said that cemented their thinking around buying their first home in Christchurch. ‘‘We had to go to auction for it, which was pretty scary, and we went about $20,000 more than we thought, but we’re really happy with it.’’
Dixon had many friends overseas who were eyeing up a return to the country. ‘‘ I think, sadly, Covid has been a good marketing tool for New Zealand.’’
Patterson said a combination of the Reserve Bank ensuring banks could borrow as much as they needed, and New Zealand’s response to Covid-19, had meant our economy was an attractive proposition for some of the cheap money currently sloshing about in the world.
‘‘It’s quite clear that the rationale for the removal of [LVRs] hasn’t unfolded in the way the Reserve Bank expected at the time, and the reasons they had them before are still very much there – and if anything are becoming more exacerbated again,’’ Patterson said.
The goal of the LVRs when they were introduced in 2013 was to improve financial stability and banking practices, with the Reserve Bank concerned about bank exposure if house price falls tipped homeowners into negative equity. At the time, it wasn’t hard to get a mortgage with a 10 per cent deposit or less.
The LVRs did not stop house prices from rising, or investors from expanding their portfolios, but they were a speed bump.
Momentum in the housing market is being driven by ultra-low interest rates, with even five-year fixed rates below 3 per cent meaning borrowers can service a lot of debt, if they can hold onto their jobs.
Given the fundamentals supporting the property market,
Patterson said it was not really a bubble. The challenge was the widening gap in wealth between the 60-odd per cent of people who are homeowners, and the rest.
‘‘For those that are locked out of the housing market at present, it is problematic. We’ve seen rents have actually still gone up across the country, and those people don’t benefit from the lower interest expense.’’
When Covid-19 hit, the Reserve Bank was worried banks needed more wriggle room to lend money, and at the same time thought relaxing the
LVRs might help some first-home buyers. That turned out to be the case, but there has also been a huge amount of investor activity, Patterson said.
‘‘It’s likely the Reserve Bank is going to have to adopt a more balanced approach as we look towards 2021.
‘‘There will be some pressure, I believe, for them to look at how can they balance low interest rates, plenty of access to money, with a situation that doesn’t just allow investors that are already quite equity rich to go out and
exploit the situation to the detriment of perhaps younger people coming through.’’
The last thing the bank wanted was a wholesale collapse of house prices, which would cause a lot of distress in the economy as spending dried up and confidence fell.
So are the people who can’t afford homes being sacrificed for the wider economy?
‘‘That is one way of looking at it,’’ he said. However, the goal of the central bank is to look at things from a wider economic perspective, ensuring low inflation, high employment and output, and maintaining financial stability.
Infometrics senior economist Brad Olsen said the Reserve Bank had been quite specific about sticking to its word in the past, and would be reluctant to break its 12-month hiatus early.
‘‘I think what we’re likely to see is at the next financial stability report at the end of November that the bank will make it abundantly clear it expects to put LVRs back on, or change restrictions, in May unless it sees a material shift between now and its next statement.’’
The return of LVRs would not stop house prices going up, but would take some heat out of the market, he said. Investors would be a bit more restrained, but they would continue to play a big part. The end of the mortgage deferral scheme in March would help contribute to slowing down the market.
Olsen was also concerned about the rising risk of inequality and the possible effect that would have on the broader economy.
‘‘ Eventually, there is the risk that people start having to make some pretty tough compromises between keeping a roof over their head or other parts of their lives, so that is where, in the end, the extreme risk eventually turns to.’’
Tackling the demand side with shorter-term actions had to be balanced by solving the longerterm problem of a lack of houses.
‘‘I think the Government has in some senses abdicated responsibility for housing over recent years . . . because we do continue to face these sustained issues,’’ Olsen said.
Researcher and author Dr Jess Berentson-Shaw said there was a sense that people were ‘‘absolutely fed up’’ with the country’s housing crisis, and wanted some solutions from the people in power.
LVRs were an important tool, but the lack of affordable houses, and lack of houses in general, was a systemic issue that would not be solved by small fixes, she said.
As existing homeowners leveraged their properties to take advantage of the low interest rates, the ownership of property was becoming more concentrated in the hands of owners, and farther out of reach of the rest. It was a problem that needed to be attacked on multiple fronts, including tax.
Even 30 years ago, more people were making their money just from an earned income, she said, and now capital was where people got their wealth from.
‘‘ So unless we do something about how people with capital pay forward into the public system to create more housing for people, we’re never really going to get on top of this.’’
Where homelessness shocked people five years ago, now it was that the middle classes were being completely locked out of having a home.
The coronavirus pandemic had shown the Government could take big actions, and the election had delivered it a mandate to bring change, she said.