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Kiwi dream RIP

Written By: - Date published: 1:36 pm, February 7th, 2011 - 33 comments
Categories: housing, wages - Tags: , ,

We used to be the half gallon quarter acre pavlova paradise. Owning your own home was the foundation of the “Kiwi dream”. Now it seems that we’ve let that dream slip further out of reach than almost anywhere in the world.

Late last month there was plenty of coverage of the international survey that ranked New Zealand housing as severely unaffordable. Houses in some areas, such as Auckland, are less affordable than New York:

The ideal income-to-loan ratio is around three times an annual salary. But in New Zealand it takes 5.3 times the average annual salary to pay for a house. In Tauranga it takes 6.5 times the average annual salary and in Auckland 6.4 times. In New York, it’s 6.1.

When you can’t afford your own home renting becomes the only option. At the same time the recession has triggered a significant slowdown in the rental property supply. Inevitably, a crisis in the rental market is emerging, as this report on the Auckland situation describes:

Rental market madness

Demand for rental property in Auckland is at crisis point, with some houses now attracting as many as 200 would-be tenants.

Desperate tenants are often having to spend months searching for a place to live, and some even engage in bidding wars. Landlords are sitting pretty.

This site for Kiwi landlords sets it out bluntly:

Housing pressures change the face of rental market

The black clouds of widening house affordability look like having a silver lining for landlords as a whole new demographic, priced out of home ownership, moves into private rental accommodation.

How should the government be responding? Taking the advice of the Savings Working Group would be a good start — implement more significant tax changes to remove the distortions that favour housing as an investment. Stop beating about the bush and bring in a capital gains tax (beyond the family home). Expand the state house building program. These measures would help reduce the cost of housing. But the missing piece of the puzzle of course is to address the other component of the affordability ratio. Wages have got to rise. And we’re never going to get that from a National government.

33 comments on “Kiwi dream RIP”

  1. Landlords are indeed sitting pretty.

    As rental prices continue to increase, tenants have less disposable income to save for their own homes. Meanwhile the housing bubble continues, making home ownership an even more impossible dream. Tenants are rendered entirely vulnerable to the whims of their landlords – and should those whims include hiking their rent, or selling the house, there’s precious little they can do about it.

  2. Lanthanide 2

    Actually the real situation is probably even worse.

    New York might have a ratio of 6.1, but the absolute numbers also matter. For example, if the average wage is $150,000, the cost of the house would be $915,000. But most of the rest of cost of living does not scale as dramatically with house prices – food in New York probably isn’t much more expensive than food in Auckland, same with electricity and water etc. So this means that although you are on a higher income and your house cost is also higher, you will also have proportionally more of your income leftover as discretionary income after you’ve paid your basic costs of living which could go towards saving for a deposit or paying the mortgage off more quickly. Also consider that many New Yorkers don’t own cars and therefore don’t pay for petrol, which would go a ways towards lowering their cost of living compared to Aucklanders.

    Then also consider tax – if you end up paying more tax in Auckland, then it squeezes disposable income even further.

    It would nice to see the house unaffordability index based on after-tax after cost-of-living expenses, and we’d probably see Auckland even higher up the list – but other cities like Sydney might rise even faster. This would actually reflect reality a lot better than using a straight average salary does, but is (as usual) much more difficult to compute.

    • Draco T Bastard 2.1

      Also consider that many New Yorkers don’t own cars and therefore don’t pay for petrol,

      No, they pay for public transport instead although that is likely to be cheaper than a car.

      • Lanthanide 2.1.1

        A lot of them simply walk for many trips, as well – very dense infrastructure.

        Mainly I was highlighting the petrol factor though – oil prices generally don’t affect the price of subway tickets in the same way they affect car usage.

  3. Shane Gallagher 3

    Funny – those are all Green policies… 🙂 What is Labour proposing?

    captcha: “desire” – appropriate.

    • George D 3.1

      Not a repeat of year after year of double figure house-price increases, like we saw for the last decade?

      We can live in hope.

  4. patriot_nz 4

    We need a capital gains tax asap. We also need to get the overseas speculators out of our housing market. We can never compete with people from China etc. This is also a problem in Australia- read the comments under this article in the Melbourne Age http://www.theage.com.au/business/property/developers-court-overseas-buyers-amid-fears-of-greater-urban-sprawl-20110206-1aihd.html

    Much anger and fear there.How far away is the revolution? Or will Australia and New Zealand quietly pass into Chinese ownership with no opposition at all.

  5. Draco T Bastard 5

    Expand the state house building program.

    Into high rise apartment buildings. I suspect that there’s a lot of people who have no need nor want to own a house and so renting is a viable option for them. The problem is that people making a profit from renting is not a viable option for the country as it just results in a massive transfer of wealth into an unproductive sector.

    • clandestino 5.1

      Been saying this for years. NZers have got to get used to apartment living if we are going to have compact and sustainable cities. As the young people and single pro’s move into central areas they lower the cost of housing in suburbs by lowering rental demand and thus rental returns for landlords. This is good news for families who want the backyard for the kids.

      • Lanthanide 5.1.1

        The earthquake may be providing CHCH with a great opportunity to do this, as land is cleared in the central city. With the potential peak-oil future strongly encouraging dense population centres, this earthquake may have been a useful blessing for CHCH.

        • joe90 5.1.1.1

          NZers have got to get used to apartment living if we are going to have compact and sustainable cities.

          meh..!

          The architectural drafts for the public housing estates prepared by the distinguished Austrian architect Ernst Plischke make it clear that Auckland would have been no dreary replica of East Berlin, but an internationally celebrated model of sophisticated urban design.

          The Auckland That Never Was, with its collective lifestyle centred around sturdy, rent-controlled public apartments, and its efficient, publicly-owned rapid-rail networks, would have had a very different political and cultural complexion. Essentially, it would have been a social-democratic city.

  6. Jeremy Harris 6

    Capital Gains Taxes haven’t reduced house prices overseas and they won’t here…

    Increase in the supply of land and reduction of pointless Council regulations such as minimum parking requirements (that force sprawling development) are required…

    • Shane Gallagher 6.1

      That is not the aim – it is best to have the house prices flatten for about 10 years or so. That way you do not get negative equity and trap people.

      The principle aim is to move investment away from property which is non-productive into productive economic enterprises (eg. building windmills, electric vehicles, super efficient boilers – just to name a few Kiwi innovations). So you put your capital into developing the economy, rather than creating property price bubbles.

      • Colonial Viper 6.1.1

        Shane, house prices flattening for 10 years or so means that a NZ’er on the median working wage still has no show of buying a house for many many years, unless they have parents who can cough up a $30K deposit on their behalf.

        Better for house prices to deflate ~2% p.a. over that time year span.

        As for the negative equity situation, don’t worry about it. the regulation that should be undertaken is simple –

        1) Banks are not permitted to create a mortgage where the payments exceed the likely market rental of the property by more than say 1.5x.

        2) All mortgages are without recourse. The home owner can walk away from the mortgage by handing the keys to the bank. There is no such thing as an owner being trapped under water.

        That last point means if the bank has been idiotic enough to allow someone to buy a house for far more than its real worth – or the bank hasn’t done its due diligence on what the underlying value of the asset is, too bad, its screwed.

        NB all Govt bank guarantees shall cover depositers funds only. Not bad bank debts.

        In this environment, watch the debt selling behaviour of the banks turn around.

        • Lanthanide 6.1.1.1

          “1) Banks are not permitted to create a mortgage where the payments exceed the likely market rental of the property by more than say 1.5x.”
          Impossible to implement. Who decides what the rent for any specific house is? Is the process open to appeal? Some houses may be in poor living conditions and just need a lick of paint, or need some extensive remodelling and therefore may not be attractive for renting, but perfectly reasonable to buy for $x price that the bank won’t lend to you because of the bad rent prospect.

          Frankly #2 would be sufficient to solve the problem, but then everyone would simply go out and buy as many houses as possible because there’s no downside – they can’t lose.

          • RedLogix 6.1.1.1.1

            Who decides what the rent for any specific house is?

            Actually no. One of the things property valuers regularly do is appraise ‘imputed rental values’.

    • KJT 6.2

      No, probably not by much, but it would make the tax system fairer and help direct investment away from speculation..

      Jeremy may have to start paying tax.

      Increasing the supply of state housing is the proven and economical way of reducing house prices.

      So is increasing wages so relative prices are lower.

      Banning foreign ownership and adding transaction/land taxes will also help.

      • Colonial Viper 6.2.1

        A significant stamp duty on houses which are flipped will push speculators out of the market. That will cool pricing down significantly.

        Say 7.5% duty on any house sold within 12 months of purchase. One such duty free transaction allowed every five years.

        I’m not sure how people can say that a CGT will not reduce the rate of house price increases as it can significantly weaken the business case/ROI for investing in property.

        • Lanthanide 6.2.1.1

          If you are determined to be selling houses for a living, that is you’re a property trader, you’re already obliged to pay GST. IRD have been cracking down on it for the last couple of years.

          • Herodotus 6.2.1.1.1

            There are legislation already in place to catch manty traders in prop. There just is no urgency in ther IRD to chase or pollys to fix up the short commings in properity.
            e.g. Buy house and landfrom owner occupier for $500k as a rental, value house at $300 and land $200k. then at a later date Sell to another owner occupier for $600k. The new owner does not care about the split (as did original owner), so signs S&P agreeemnt specifing that house is $250k and land $350k. Speculator writes off $50k depn and pockets $100k capital gain. So in fact makes after tax $115k. This happens more than many here are aware. And this is just 1 fiddle, there are many others. Nat has achieved more than Lab in reducing the rorts.For me there is far more work to be done, and Nat did not go far enough, but they did venture further than Labour !!!
            A month or 2 on LINZ database would very quickly see trends of trading by cross ref names and addresses with frequency of land sold. Wrote to Cullen oin this and at the time got the stand ministers flob off, and that we(Lab) are doing something . Yeah we all know turning a blind eye.

      • Jeremy Harris 6.2.2

        Jeremy may have to start paying tax.

        I would if I was stupid enough to invest in real estate (and non-commercial real estate at that)…

        Already pay more than my fair share…

    • prism 6.3

      Jeremy Harris – The usual recipe, pity it doesn’t rise.

  7. Herodotus 7

    The house affordability index since Nat has become the govt improved. Mainly from the drop of interest rates 08 floating rate 10.4% today it is 6.1-6.8% depending on the institution
    http://commerce.massey.ac.nz/publications/property/115856HomeAffordSept2010.pdf
    So Rob I am confused as that this was of little concern when such stats were trending up pre 08? And that some in the industry were worried as far back as 04 that the housing bubble was of concern, then it continued unabated for another 3+ years, and the marginal correction in price had not really occurred to the extent as that of Great Britain and US.
    The greates road block within the uindustry is to get land zoned for development. Within the 99 ARC planned expansion of Auck, land designated for zoning still was taking 8-9 years to pass all the requirements. And for unzoned land to be granted zoning 10 years before a sod is moved. To the uninitiated 10 years of holding costs on the land + costs to attend hearings is extremely large, let alone development cont and the cost to construct stormwater quality ponds etc.
    No easy fix

    • Colonial Viper 7.1

      No need to be too confused Herod. as I am sure you know. The answer is that LAB didn’t do very much to stop the inflation of the property asset bubble, nor the decline in home affordability.

      And frankly, why is no one asking if it makes any sense at all for NZ to have 40% of its population living within 50km of Queen St, AKL. Because that’s the way it is going.

  8. MrSmith 8

    Some random thoughts.

    So where to make cuts in the cost of housing.

    Labour? builders get shit money now for this back braking work, anyway it is only a small percentage of the overall cost of a house.

    Materials/ commodities ? the cost of Materials is and will only keep increasing especially as oil is going up.

    Land ? well in-case you haven’t noticed they stopped making this a while ago plus there are huge risks & costs involved in developing land, sewer/power/stormwater/roads/consents.

    Cheap money at 30 year fixed rates is what we need, bring the banks to heel now.

    P/s
    after thought:
    Also houses in new zealand are mostly cheap crap, they only have to last 50 years minimum so in true capitalist stile they start falling apart at 51 years.

    • Colonial Viper 8.1

      Now, why would you want to make cuts in the cost of building a new house?

      Better to have the state own and build a quality house which is going to last for 75 years, and to set a rental on it which breaks even, including depreciation/maintenance over a similar time.

      Agree with you re: cheap fixed rate mortgages but where the total sum which can be loaned has to be directly related to the likely rental value of the house (stops huge loans being given out for shit housing during property bubbles). KiwiBank would be the perfect conduit.

      • prism 8.1.1

        CV Really good point about having a stable rising cost – is it called amortisation? and concentrating on breaking even for rentals. The calculations of value of house would also be kept realistic. Much of the cost of housing is from numerous sales with each person taking a profit.

        I started off with a 5% mortgage, could have been 3% but we were working at second jobs so pushed our earnings up. Nice house. Was a good start. An excellent savings project. If we had rented we would have spent too much money on consumer stuff, alcohol etc. and found it hard to accumulate cash.

      • Tel 8.1.2

        I agree totally with the idea of a quality constructed state owned rental, especially if this were to be medium to high density development in the inner parts of our cities. I’m not confident we have the capability within the private sector architectural community to do high density development, certainly not to an acceptable standard to last 75 years. Funding would be easy enough for a couple of projects, simply by canning the Jkeyll Expressway to Puhoi.

        What is needed is for a state run group of architects similar to the old Ministry of Works to carry out the work. Relying on the private sector to carry out state work has been a miserable expensive failure of the highest order, and nothing has changed (regardless of all the talking up of The Licensed Building Practioner Scheme) that is going to make any difference. Look no further than the 1.5 billion dollar leaky school bill to understand this. I trained within the Education Board Architects division before they were all wound up, so I’m only too aware of how badly designed and constructed school buildings have been since the private sector took over. End result: Profit is put ahead of common sense and standards plummet.

        “Kiwi Dream RIP”… the reality is I don’t think it will rest peacefully.

  9. As the initiator and co author of the Annual Demographia International Housing Affordability Survey (7th edition released 24 January) http://www.demographia.com , it is clear to me, the author of this article and the posters have not bothered to read it.

    Sadly – this is called the “Clark / Cullen Housing Bubble” because the previous government stood idly by, allowing it to happen unnecessarily. Pumped housing up from around the $300 billion mark to $640 billion late 2007, when it all started to tank. And its still tanking, wiping jobs out big time. And this is only the start of it.

    The last Labour Government loved the inflating housing bubble, so they could take Kiwis to the cleaners for another $30 billion a year in taxes as well. Have Government services improved by $30 billion?

    Do read Michael Lewis recent Vanity Fair article on Ireland “When Irish eyes are crying” – just so that you all know what you can look forward to, thanks to Clark and Cullen.

    Do read Leith van Onselen http://www.unconventionaleconomist.com article today “Disparate groups slam Australia’s housing affordability’. There is real fear in Australia now. Even the Greens and Church groups are waking up there.

    Hugh Pavletich
    Co author – Annual Demographia International Housing Affordability Survey
    http://www.PerformanceUrbanPlanning.org
    Christchurch

  10. SPC 10

    When the private sector market is not working – is failing to meet housing demand rising with migration (actually slower emigration to Oz), the public sector is supposed to respond – to keep the market functional and to maintain an equibibrium in the building sector to protect jobs (and prevent future inflationary impact of shortages) and maintain economic activity to sustain its own tax revenue flows. It’s such an obvious win win, it’s scarecly credible that a government so incompetent as to fail to work this out could ever be electable in the first place.

    There needs to be government borrowing to build new homes in Auckland, once the homes are built they can be sold and the debt repaid. The revenue flows to government outweigh the cost of the loans. There is then no actual cost to this investment in retaining skilled workers and holding down house prices so that they remain affordable to local workers.

    • SPC 10.1

      I just realised, maybe an Auckland housing shortage is supposed to apply rising rent cost pressure on people to look for work in Oz – this is Keys employment programme transfer surplus workers across the Tasman …. No wonder he raises the issue of Australian growth being hit by adverse climate events in relation to our own (his governments) well-being.

  11. millsy 11

    It will get worse when the government brings in time limited tenances for state houses in July.

    Already it is near on impossible to even *get* a rental in the Auckland area, let alone afford rent, or even buy a house, with a land agent in the Herald yesterday admitting that finding a rental house is more or less like finding a job, process wise.

    With the rugby world cup coming up, combine with state housing tenants being pushed into the private market, its not going to be pretty.

  12. SPC 12

    I wonder if Housing Corp has been asked to profit from the lucrative World Cup market to increase their return on cpaital?

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