The Housing Crisis

Over the last few years there has been a lot of talk and very little action on fixing the housing crisis. This is mainly due to a lot of hot air from both local and central Government politicians, and people with a vested interest – however, I don’t believe the actual problem is well understood.

Let’s start by defining the term ‘Housing Crisis’ - here is one definition from the media recently.

“New Zealand is in the midst of a housing crisis. House prices are sky-rocketing, affordability is increasingly stretched and there's still a huge imbalance between supply and demand. While 64.5 per cent of households own their home, home ownership is at the lowest level since 1951.”

A high home ownership rate is important, as it gives people security, a sense of belonging and fosters strong communities. By buying a home you putting down roots, getting involved in, and caring about, the local community.

Affordability refers to the ratio of the house purchase price to the income of the purchasers - usually in reference to first home buyers. Simply put, houses at a price that the average Kiwi can buy and still have some lifestyle. This is not to be confused with ‘Affordable Housing’, which refers to houses that are affordable by those whose income is below the median household income.

The first ingredient to fixing the housing crisis is to remove the politics from it. The housing crisis has been at least 30 years in the making, so it will take more than 3 years in the fixing! You cannot regulate or tax your way out of it, at least in the short term! It’s a complex problem. What is needed is a multi-party accord that can focus on long term solutions over multiple election cycles and stops making the crisis a political football.

The second ingredient is honesty. Stop telling everyone that it is their right to own a home - it is not. Face up to the fact that a percentage of Kiwis, I would estimate around 20%, will never own a home because they do not have the income to service a mortgage or the ability to save a deposit. For these people long term good quality rental solutions are required.

The third ingredient is realism, on behalf of some first home buyers. Their first house is not their “forever home”, nor will it be the same as their parents’ house who have worked for 30 years to acquire it - it is your first home not your last, so start modestly and work your way up.

The fourth ingredient is to recognize that the crisis is two sided, one being the imbalance between supply and demand, but the other, and in my opinion the most important and least talked about, is the ratio of the purchase price to income. Why is it that income has only gone up about 25% in the last decade when house prices have doubled! The elephant in the room here is NZ’s very low per capita productivity rates (on an OECD scale) which no one seems to want to talk about. If income had kept pace with house price inflation, we would not be in this crises.

Let’s focus on the Demand / Supply imbalance and leave productivity and the factors affecting the cost of a new home for another time.

When you have more people wanting to buy a home that the market can supply, prices will go up. There are many components in the supply side of the equation, but it is my experience that supply mostly follows demand and not the other way around.

To correct the balance you first need to achieve a long-term population policy which New Zealand currently does not have. We need consensus on these questions;

· How many people do we want living here - 4 million, 5 million or 50 million? Given the lifestyle we desire, our carbon commitments and the environments ability to sustainably support that population, whilst retaining our agricultural production and natural tourism potential.

· When do we want to reach this target - 2025, 2050 or beyond? We will have to think in terms of natural population fluctuations and immigration policy.

· Where do we want these people to live - all in Auckland? It would be better to spread the population, but people will go where the work is, thus regional development initiatives are required. Why is every Government department centered in Wellington, and sitting on a major fault line? Why is Fonterra’s head office in the Auckland CBD? There are not a lot of cows roaming Queen Street!

Once you have got a broad handle on what demand will be, and where and when, planning the supply response becomes a lot easier.

You could then project years in advance the rezoning of land and / or the redevelopment of existing land, the construction and funding of infrastructure and train the required work force. Long term planning will help to keep land prices under control and one would think that both central and local government can also use it to start to address their cost structures.

I can however suggest a few things that can be done now to help ease the housing crisis;

1. Introduce a capital gains tax on property, excluding the family home. It is true that a capital gains tax will not stop house price inflation or property cycles - accept that. Instead, view it as a form of inter-generational equity transfer - over the last 30 years or so, home owners have enjoyed good capital gains whilst first home buyers are finding it increasingly harder to get on the property ladder.

2. Double the KiwiSaver first home buyer grant and increase the income threshold and house cap limits to say $1m. The current limit in Auckland for an existing home is $600k - dream on! Not one of my clients in recent years has qualified – and use the income from the Capital Gains tax to fund this.

3. As we have a shortage of property available to rent and also a housing shortage - why not kill two birds with one stone by allowing property investors who buy or build brand new properties for rentals, the ability to offset rental losses against other income. If property investors were encouraged to focus on new-builds then first home buyers would have a better chance of purchasing a less expensive used property. In addition, as these properties tend to be older, first home buyers can steadily upgrade the property and get ahead through ‘sweat equity’.