Kiwi home dream broken
The Government should stop flogging the dead horse of home ownership for all, argues Shamubeel Eaqub.
New Zealand is in the middle of yet another massive surge in house prices. That’s despite a global pandemic, practically no net migration, foreign investors banned and record rates of house building.
There is little political appetite to provide fixes that will bring house prices down. The housing market and the politics of it are irrevocably broken.
House prices rose by nearly 20 per cent in the year to January. Can anything be done to stop another year of 20 per cent increase in house prices? Only if the politicians have the guts to cut off the flow of bank lending to housing, limit mortgage sizes relative to incomes for owner-occupiers and link them to the income of only the property for investors.
Even then, this is only the temporary reprieve. We still need to fix the underlying issues around housing supply of the right type, tenure and location.
House price increase 50 times income growth
In the past year the median house price has risen by $121,000. The median household income has grown by around $2400 – so house prices have risen by 50 times more.
The deposit needed to buy a median house has increased from $125,600 to $149,800 – the increase is 10 times the increase in incomes.
Mortgage rates are at record lows, but scraping together the deposit is getting harder and harder for more and more Kiwis. For those who have the deposit, or can call on the bank of mum and dad, buying makes a lot of sense. Interest rates are so low that the cost of servicing a mortgage are lower than rents in many parts of New Zealand now.
Lending the fuel
So, why have prices surged in the middle of a global pandemic? Demand from net migration has stalled. But demand for people wanting to buy houses – to live in, and to invest in – has gone through the roof.
Very low mortgage rates and easing of restrictions on investors helped. So did New Zealand’s resilient economy and
world-leading public health response to Covid-19, which has made it a safe haven.
Surprisingly, supply continues to accelerate. There were disruptions during the lockdowns, but building consents are running at record levels. Construction activity is very healthy, and it is getting harder to find workers in the industry. Yes, we need to keep building at these record rates for many years, but supply has accelerated.
So the increase in house prices is largely about demand. It’s partly about much lower interest rates and partly about mortgage lending, which continues to grow at record rates, while lending to businesses and farms has come to a grinding halt.
The housing narrative remains deeply entrenched in how to help more people to buy more homes. But this aspiration of increasing homeownership rates is unrealistic. Homeownership rates in New Zealand peaked in 1991 and have been falling since. Three decades of decline is proof enough that the Kiwi dream of homeownership is fading.
The waitlist for public housing is also at a record high. More than 22,000 households are waiting – in verified immediate and urgent need for social housing. There are not enough public houses and the current plan to increase them, while the biggest in many decades, will still not be enough. We are planning to fail.
The reason the waitlist is growing is because so many people can no longer
independently sustain their tenancies. Around two-thirds of renting households receive some sort of housing support, from emergency housing to the accommodation supplement. These housing support policies are costing around $3.5 billion a year, but this spending is the ambulance at the bottom of cliff.
What can the Government do?
The housing dream has been broken for 30 years. Fixing it will take time. But there are two immediate steps that would stop another year of 20 per cent house price growth.
The immediate priority should be to stem the flow of even more money into buying and selling houses from each other. This needs the Reserve Bank to impose loan-to-income limits. So, people can only borrow, say, five times their income.
For investors, the mortgage needs to be ringfenced, so that only the rental income of the mortgaged property is assessable.
The second thing should be stop flogging the dead horse of getting people into ownership. The housing stress and the cause of a the ballooning waitlist for public housing is an inadequate rental market.
Doing everything in the Government’s power to get a build-to-rent sector will have more lasting impact. It can do that easily and relatively cheaply. For example, it could underwrite some of the vacancy risk for early build-to-rent projects to act as a catalyst, give tax concession to KiwiSaver funds that invest in long-term residential rentals, and in return make sure the landlords provide more secure and better-quality rentals.
These two are in addition to all the other stuff that needs to happen around infrastructure, land supply, intensification, and so on. Those will take many years to take effect. For immediate relief, it needs to deliver these two prongs pronto.
Interest rates are so low that the cost of servicing a mortgage are lower than rents in many parts of New Zealand now.