Housing Crisis? Affordability Crisis more like

The “Housing Crisis” is somewhat of a misnomer. What New Zealand, and Auckland in particular has is not a shortage of dwellings but a lack of affordable housing, and two main political parties dead set on keeping it that way.

For all their talk, Labour does not want to see any price correction for existing home owners anymore than National. Both Cunliffe and Key have opening stated they do not want prices to fall. Yet without a substantial reduction in property values, Auckland prices in particular will never return to widely accepted affordable levels of 3 times annual household income or price to rent ratios. The widely held political desire for prices to remain static and wages to catch up is a pipe dream and would take decades even if it were possible, so out of kilter with incomes have Auckland prices become.

National’s policy, if you can call it that, is to tinker with the RMA and cajole local councils to speed up the consenting process. They believe, or at least pretend to believe, that the market will provide, that if enough land is made available, builders will build, and buyers will buy. In other words it is a supply issue. At best this approach will take years to increase the supply of land for residential development. They have completely ignored the demand issues.

Few people dispute there is a section supply issue in Auckland. Even large scale developments like Flat Bush and Hobsonville Point fail to keep up with population growth, and the prices they command, $600,000+ for 3-4 bedroom homes, is well beyond the means of most mature two income households, let alone first home buyers. Where are the properties that household incomes of $40, 50 or 60,000 can afford? You’d be hard pushed to service the mortgage on a tiny inner city apartment on those incomes, let alone a 3 bedroom house in South or West Auckland.

Christchurch based developer and author of the widely quoted Demographia annual survey, Hugh Pavletich, is the most prolific advocate for increased supply and affordable price to income ratios. Can they be built at the right price? Yes, but not without detrimentally affecting the values of existing properties, which is regarded as political suicide. Only the government has the resources to buy land, brownfield or rural fringe, by compulsory acquisition if necessary, and build large numbers of entry level “state” type houses on it. But as the Christchurch City rebuild shows, this government is mainly concerned about maintaining property values for existing owners, not providing for low income or younger buyers.

On top of this Nimbyism is rife in Auckland, as opposition to the council’s high density plans showed. Not that the high density options would be any more affordable in this bubble market. The Greens in particular have a problem because they have a vision of high density and no sprawl, but no way of doing this in Auckland at an affordable level and they seem curiously ambivalent about immigration and population growth. They remain the only Green Party in the world not to be actively advocating a Steady State economy.

Affordable housing cannot be built until the entire market has had a significant downward adjustment. The land values preclude it. A developer won’t put a $100,000 house on a $500,000 section. And even if house and section packages could be sold for $200-250,000, absent lower overall prices, speculators would snap them up and on sell them for a big profit.

Labour made a big splash with its Kiwi Build commitment to building 100,000 homes in ten years. Problem is; a) no one really believes it is possible; b) the houses are not “affordable” in today’s market; and c) if the widely quoted “shortage” of 30,000 dwellings in Auckland turns out to be far less (and there is evidence including no rental shortage or rental price inflation) and is instead 5-8,000, they risk a glut and the property crash they wish to avoid. As Ireland, Spain and parts of the US showed recently, over supply of housing exacerbates a housing correction.

Indeed in Ireland and Spain they are talking about bulldozing half completed or empty developments to save on maintenance but also to stabilize the prices of occupied dwellings, even though there are many low income people who would buy them if the market was allowed to clear with fire sales or the government could acquire them for state rentals. However this would send existing prices into another downward spiral and their still over leveraged banks into insolvency.

This is the rarely stated but very real risk that both the political and financial elite in this country wish to avoid. The new Reserve Bank governor, Graeme Wheeler, is far more vocal and proactive than his predecessor, Alan Bollard, on the risk to the country’s financial system from over leverage in property. The RB’s Loan to Value Ratio measures are evidence of this. I noted this when they were introduced;

The stated intention of the rule changes is banking system stability, saving the banks and low deposit borrowers from themselves. This is a fine balancing act as New Zealand and Australian banks have extended so much mortgage credit to their respective property markets that any significant falls in property values could bring about the very instability governor Wheeler is trying to prevent by attempting to stop the property market running full speed into a brick wall. Property in New Zealand, and by extension the banks that are exposed to it, are too big to fail, but also too big to be left alone. Successive governors and governments, by allowing such a massive mortgage debt burden to accumulate, have created the most appalling Catch 22 situation. Whichever way it plays out, someone is going to get hurt.

The trading banks here have gorged themselves on mortgage credit, not just residential but rural too. They, the Reserve Bank and successive Labour and National governments, have like their western counterparts overseas, facilitated the biggest speculative play in history. For an idea on how it will eventually play out on the New Zealand economy, consider the effect of the share market and commercial property bust here in the late 1980’s, and magnify it many times over. More money and more people involved. The psychology of the wealth effect from residential property, that is now so ingrained in many kiwis, will be dealt a crushing blow that will take a generation or more to recover from.

Restrictions on mortgage credit are only one of the possible demand measures that could be implemented almost overnight to cool the property market if it was so desired. To give Labour its credit they have talked about introducing several of them if elected. Given the part many of Labour’s current ministers played in the Clark/Cullen governments tacit encouragement of property inflation and mortgage debt, you’d have to be skeptical however.

The easiest and most popular one would be banning overseas buyers who weren’t residents. Given the shabby way recent Australian governments have treated New Zealanders resident there, I would include Australians in this ban, especially as they are a significant “buy to rent” force. There is the potential to extend this further and make it only possible for New Zealand citizens to purchase property eg students studying here couldn’t buy on behalf of family or people on work visas. Only those who really commit to the nation get the right to buy. This should apply to rural and commercial property too.

Associated with this is the “big” one. Immigration. Another post will look at this issue more closely. But suffice to say, contrary to what the Prime Minister and others are claiming, the effect of immigration on the housing market is demonstrable, both statistically and anecdotally. Key has ignored or dismissed both Treasury and Reserve Bank research on this. An RB paper for instance noted an 8% increase in house prices over three years following a 1% increase in population from immigration. Perhaps surprisingly the biggest effect was from British and European immigrants rather than Asian.

There needs to be an immigration/population debate in this country, a consensus reached on an optimum population level and targets set for immigration and infrastructure, including housing, and regional development outside Auckland for that matter. The market fails in all of these.

Taxes are another fraught area of debate. Labour and the Greens are promoting a Capital Gains Tax of 15%. However there is already a CGT set at the taxpayer’s marginal tax rate, it just hasn’t been strictly enforced. In theory property traders will be better off under Labour’s proposal as they will be paying 15% instead of 33%! CGT is also very difficult to administer and will be a godsend for accountants and lawyers. There are better ways to raise taxation and dampen speculation that I will discuss in another post.

But perhaps the biggest demand issue is  buyer psychology, foreign or kiwi, and the future expectations of price rises. Once this disappears, when the market enters Charles Kindleberger’s “panic” and “revulsion” phases, or reaches its Minsky Moment, a housing bubble collapses. Of all the widely quoted “experts” only Westpac economist Dominick Stephens mentions expectation of future capital gains as the main reason for the inflating Auckland market. “The key to changing the trajectory of prices is to change buyer expectations.”

This would be fairly straight forward for a government to do if it wanted too. It would simply have to ban foreign buyers and announce that it was going to take every step necessary, through tax and other measures, to stamp out property inflation. Or it could reinclude house prices in the CPI and make it part of the Reserve Bank’s inflation mandate.

Once buyers realise they are serious, that any capital gains is going to be hard to come by, prices will flatten then fall. Who would commit to an astronomical Auckland mortgage if they expected their property’s value to flatten or decline?

But no government, National or Labour will do so because of voter backlash from current owners and lobbying from the financial sector.  So the property bubble will play out to its inevitable conclusion. Kick the can and hope the bubble will pop on someone else’s watch. For decades both Labour and National have mirrored governments overseas, happy to let property inflation run away and regard it as an economically and politically beneficial “wealth effect”.

But at this stage of the mania, and it is a financial mania, it starts to dawn how detrimental, socially and financially, excessive property inflation can be to a nation. Not only does mortgage finance crowd out other areas of economic activity, inequitable property ownership creates a society of haves and have nots and risks creating a sub class of young and low income people with few roots, apathetic or disillusioned about the country they were born in. Perhaps apathy is the intention. Property prices and immigration are shaping as the two biggest issues of the election. Not before time.

One comment

  1. […] The failure of the Auckland Council to agree to submit new plans for intensification of certain additional areas of Auckland is a red herring. It assumes increasing density of housing and more townhouses and apartments will make housing more affordable. It won’t. If it did Hong Kong and Shanghai would be cheap instead of twice as expensive as Auckland. It will make more expensive townhouses and apartments. The crazy valuations of the land underneath the buildings will preclude low cost building on top of it. None of them be “affordable” to low income households. National, Labour and others talk about $500,000 “affordable” homes like the ones recent… […]

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: