Who are the real victims of New Zealand’s rising house prices?

The term “housing crisis” has gained increasing traction as a way of describing the problems with the Kiwi housing market, but the definition of this term is far from universal and opinions on its causes are divided.

The two most common views are that the crisis is one of supply, and is characterised by a shortage of housing and a desperate need to build another 100,000 houses right away. Or that the crisis is one of affordability and is characterised by the everincreasing difficulty in being able to afford to buy a home, particularly in Auckland.

Better research over the past couple of years has suggested that we’ve actually been building more than enough homes and that what we once thought to be a shortage is actually a mismatch of fit-for-purpose housing, particularly for the most vulnerable.

Affordability is determined not just by price but also by a range of other factors such as income, interest rates, and the ability to put together a deposit.

If I buy a painting for $500 and that painting increases in value to $1000, then I sell the first painting to buy a second one — also for $1000 — the new painting isn’t any less affordable than the first one because I’m simply transferring value for value. This illustration helps explain why steeply increasing house prices don’t necessarily make housing any less affordable for those who already have homes.

Of course, if I sell my home to buy a more expensive one then I incur additional cost, even if my own home has increased in value. But there is now ample evidence to show that the dramatic drop in mortgage interest rates over the past 30 years has more than offset the additional price you might pay for a home.

At the same time, this increase in the value of our homes has enabled us to do a wide range of things which wouldn’t have otherwise been possible, such as using that equity to buy businesses, educate our kids, travel, invest and feed back into the economy. In fact, the dominance of the middle class in Western societies is the result of home ownership going hand-in-hand with democratic values.

But if someone who already owns a home isn’t a victim of rising house prices, who is? The answer to that question must be those who want to buy a home but can’t get into the market. But even here, things aren’t as clear-cut as we might imagine. We now know that first-home buyers constituted the largest single group of house buyers between 2013 and 2018 in every part of New Zealand except Auckland.

And why was Auckland different? The data doesn’t tell us that, but I’d suggest to you that the difference was the fact that the median house price, in Auckland, was up over $800,000 and required a deposit of around $160,000, a prohibitive sum for many young people.

Why was it so high? Because in 2013 the Reserve Bank introduced the loan-to-value ratio deposit restrictions which, in most circumstances, required a 20 per cent deposit in order to buy a house.

And therein lies the primary cause of the crisis. If we accept that house-price inflation has been overwhelmingly positive for home owners and that the household cost of servicing a mortgage has been declining, then logic dictates that the only real barrier to home ownership has been the size of the deposit required to get into a home.

So there you have it. The “housing crisis” was the inability of first-home buyers, to put together a deposit to buy a home — particularly in Auckland — a situation which has now been resolved given that the Reserve Bank has dispensed with this muddleheaded policy for at least a year.

In a very real sense, the housing crisis can be regarded as over for now.

The necessary deposit for a home was the real cause of the housing crisis, but this obstacle has been removed for now