Polity: House of Cards

Written By: - Date published: 11:20 am, May 16th, 2014 - 20 comments
Categories: housing - Tags: ,

polity_square_for_lynnRob Salmond at Polity on the housing crisis:

Budget 2014 figures show that the housing crisis will get much, much worse under National’s do-nothing approach.

For every dollar someone uses to pay a mortgage on an average house in 2014, in 2018 a person will need $1.44 to do exactly the same thing. Pay rises will not come close to covering this.

By 2018/19, it will cost 63% of the average gross full time wage to service a standard1 mortgage on an average2 home. Right now, the figure is 49%. That cost increase is shockingly high. The news is even worse in Auckland, where in 2018 a standard mortgage on an average house will cost 86% of the average New Zealand full time wage. Staggering.

And, even worse, escalating interest payments on current mortgages are set to eat up all of most mortgage-holders’ income gains over the next five years. All these New Zealanders’ standard of living will go backwards until 2018, despite a growing economy, because National is doing nothing on housing affordability.

Here is how the numbers break down (Excel here):

 

First home buyers

Here is a chart showing the projected cost increase for a new standard mortgage on an average home, calculated as a proportion of average full time wages:3

polity_mortgage_cost_forecasts

This huge hike in mortgage costs will kill off the dream of home ownership for tens of thousands more New Zealand families. In 2014, the median house price is around 7.7 times the average full time wage. By 2018, it will rise to be 8.0 times as much. Every time this ratio rises, more and more New Zealanders are forced to abandon home ownership. Even as this government published the figures that show how deep the crisis will get, in the Budget it did absolutely nothing to help first home buyers.

 

Mortgage holders

For those who do buy a home, the news isn’t any better. The soaring mortgage interest rates over the next five years could wipe out all their income gains over the period.

Real average full time earnings are projected to go from around $59,500 in 2014/15 to around $62,100 (2014 dollars) in 2018/19. The gain over the period, in real terms, is around $2,600 a year pre-tax, or about $1,800 after tax.4

But the interest rate increases will wipe out those gains entirely. A standard5 floating mortgage on a $467,000 home – the NZ median price in the first year of the forecast period – has payments that will rise from $29,700 a year in 2014 to a whopping $36,020 a year in 2018. Discounting for compound inflation, that is a real increase of around $2,900 (2014 dollars) a year, much more than an average full-time wage worker’s gains over that period.

income_and_mortgage_estimates

Families in this position will go backwards in their purchasing power, even as the economy grows strongly for five years. Even families with a full-time earner and also a part-time earner will likely go backwards.6

The combined effect of this unchecked house price inflation, and steeply rising interest rates, is as damaging as it is far-reaching:

First home buyers get it in the neck as rising prices and rising interest rates combine to make home ownership even less achievable.

Current mortgage holders get it in the neck because their mortgage payments will eat up an ever increasing portion of their income over the next five years, even though mortgage payments typically fall as a proportion of income over time.

And, to top it off, renters will also get it in the neck because most of them are renting from a landlord who has a ballooning mortgage.

Housing affordability is a crisis for New Zealand, and it is set to get much, much worse unless there is significant intervention in the housing market. As we saw in yesterday’s Budget, there is no danger of any such intervention coming from National, who seem to think that reducing the building cost of new homes by around 1% will solve the crisis. They are dreaming.

At the same time, New Zealanders are facing up to a nightmare.

1. 80%, 25 year
2. Median NZ price
3. These projections use Treasury figures from the BEFU, and when other raw data is needed they use the same sources as the Treasury used in the BEFU. I am using National’s own numbers, and my calculations are available here.
4. I use real wage gains, not nominal gains, as the comparison point here because interest rate changes are not counted in CPI inflation calculations.
5. 80%, 25 year
6. Of course, families with two good incomes may or may not technically go backwards, depending on what kind of house they choose to live in. Instead, they would merely have a large majority of their income gains eaten by mortgage payments.

20 comments on “Polity: House of Cards ”

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  1. geoff 1
    16 May 2014 at 11:37 am

    The only possibly good thing that could come out of a housing crash is if it happened under National government.

    And that would be a very Pyrrhic victory indeed.

    Personally I don’t think they will put interest rates up as far as they project because, as you say, it will bankrupt many many people.

  2. vto 2
    16 May 2014 at 11:57 am

    Invest in tent manufacturers and Caravan Parks.

    But yeah nah there will most definitely be a crash, and a whopper, bigger than seen before.

    Dump your debt.

    • Colonial Viper 2.1
      16 May 2014 at 12:02 pm

      And it’s not a joke. US investment funds have been sinking millions of dollars into buying up…trailer parks for the homeless and the indigent.

      http://www.zerohedge.com/news/2013-10-18/carlyle-group%E2%80%99s-latest-investment-trailer-parks

      • greywarbler 2.1.2
        16 May 2014 at 12:26 pm

        That was interesting CV
        I thought this comment was prophetic –
        “these guys are very late to the game…these parks have always been known as cash cows….but they wil drive the people out when they raise the rents to cover their note…..”

        Also someone commented that the money to reside in them must be coming from government. So businessmen being wealth creators? Their trouble is that they have lost their edge, their entrepreneurship, they can only find something to invest in by mining our everyday needs. Charging us for going to the loo?

        The trouble is that too much money is accumulating in one swollen end of the economy creating explosive pressure. And not enough money is circulating throughout the body. Result leaks and explosions of money that is much needed elsewhere. Is that gout, anyway it’s painful as, and bad health for us all.

        • Colonial Viper 2.1.2.1
          16 May 2014 at 12:35 pm

          It’s rentier-toll gate capitalism and hording of cash in financial assets.

          The crazy thing is that despite causing all this human suffering, there is a very good chance that the real value of those financial assets will crash in the years ahead (witness the housing bubble in Florida or Nevada as examples).

  3. vto 3
    16 May 2014 at 12:03 pm

    This crisis could be averted by a wholesale change to the bank system i.e. ban interest like so many other societies do and have done before.

    It aint bloody rocket science.

    If the problem is debt and its interest then deal to the debt and its interest. The problem lies with the banking system, not the housing sector.

    It is the banks that are the problem.

    The banks are the problem not the housing sector.

    The banks are the problem not the housing sector.

    The banks are the problem not the housing sector.

    It is blatantly obvious from the very nature of the post. Come on Rob Salmond, sharpen up fulla …

    • Colonial Viper 3.1
      16 May 2014 at 12:06 pm

      VTO +1

    • jh 3.2
      17 May 2014 at 10:05 am

      This crisis could be averted by a wholesale change to the bank system i.e. ban interest like so many other societies do and have done before.
      …..
      what about land taxes?

  4. Colonial Viper 4
    16 May 2014 at 12:05 pm

    Q1 – what needs to be done to achieve the ideal home-ownership situation for ordinary New Zealanders.

    Q2 – which political party is offering that solution. (None of them currently)

    • Stuart Munro 4.1
      16 May 2014 at 2:35 pm

      In answer to q1 A benchmark needs to be established.

      The government will intervene to lower real estate prices so that median or entry level house prices do not exceed (a fixed multiplier) of median wage.

      Many government initiatives are focused on families, and while the families certainly need support, single people need places to live also.

      The best intervention is probably building social housing – a proven method going back to Savage. But punitive taxes on rentiers and speculators are run by many countries and may make up part of the solution. State loans – and market access fees & conditions for foreign banks are also worth considering. Aussie banks could quite reasonably be obliged to offer equal interest rates in NZ and Aus for example, as a condition of market access.

      This is a reasonably important economic goal because at present any minor positive economic development in NZ is simply soaked up by the real estate sector. To achieve the kind of growth necessary to catch up with Aus & the OECD, positive effects need to felt in the market – workers need to be seeing more money.

  5. Keiv 5
    16 May 2014 at 12:32 pm

    Isn’t the Average FT Wage quoted as Gross before tax ? If so, Rob’s figures are going to be out.

    eg. 2014 – $60416 FT nominal would be more like $4020 per month after tax (Ann $48.2K) , which would make the mortgage as a % around 61.56% (29700/48240)

  6. Jim 6
    16 May 2014 at 3:14 pm

    The housing market runs in 7 year cycles, with the last cycle finishing in 2007. The amount of correction at the end of the cycle depends on the influencing factors at the time. At the moment we have rising interest rates and LVR’s put in place by the reserve bank to inhibit house price increases. These will be removed should house prices drop.
    We have booming net immigration mostly in Auckland, and a housing shortage in Christchurch due to the earth quake and slow government response through EQC and not bringing insurance companies into line. We also have a pent up need from an historical low in house building in the last 6 years. The result of all these factors will probably be only a slight correction in Auckland and Christchurch in the next 2 years and a slightly larger dip in other areas.
    How could have the current situation been prepared for better by the current government? In Auckland the housing accord agreed on by the government 8 months ago is almost identical to the one rubbished and not agreed to by the government 3 years ago. We will pay for this over the next two years as the land being freed up and intensification approved will take a long time to turn into houses. In Christchurch Big Gerry has a lot to answer for!

  7. A VOTER 7
    16 May 2014 at 6:03 pm

    Well now, after the budget pock star economy report and prediction for what the Natzees are planning for us in the future takeover of NZ by the speculator engine which Key by his own history cannot escape being the promoter of leaves a worker less able to see a future in a country run by overseas interests that will take our democracy that we built and screw us into a third world country status by taking the profits away and pay next to no tax to the country because this govt cannot protect us from Key and his assignment from the corporate internationale that he owes his success to.
    Mind you one must forget the other two major culprits, RD Muldoon and Roger Douglas who both lead us down a path of rack and ruin with the destructive attitude towards socialism his country
    The current govt are a bunch of yappers selling the countries assets prolonging the inevitable result of what is happening in Australia which will hit here and Key will high tail it to one of his havens because the truth will be so obvious where as Roger the bugger Douglas stayed to inflict as much pain as possible by providing cover for the establishment of the Keydom
    IE if you were looking from the left in 1986 you were lookin from the right by the end of 1987 which is how you get a PM like Key.
    The 90,s was a happy time for the brainless labour contracts act the evil of all evils the destruction of unions the rise of Fascism aka JS A false sense of identity capitalists becoming insanely rich and the poor becoming despirately poor dog eat dog
    This present state of the nation is a bit like the mid 60’s full of false hope till the election of the labour govt in 1972 if your care to read history lets hope thats how it pans out.But dont forget the racism and EXTREME SOCIAL crime of the 70’s under Muldoon
    Nationals resources are so huge that they can forward plan their political candidates way past what the population are aware of .
    It not politicians who put confidence in people its people being aware and knowing the politicians MO that parties put up that gives the people confidence in the political system but so often THIS IS LOST IN THE ELECTION RA RA HOOPLAR.

    BE AWARE OF WHO YOU ARE VOTING IN TO POWER

  8. jh 8
    17 May 2014 at 10:08 am

    Winston says:

    Roads are made, streets are made, services are improved, electric light turns night
    into day, water is brought from reservoirs a hundred miles off in the mountains —
    and all the while the landlord sits still. Every one of those improvements is effected
    by the labour and cost of other people and the taxpayers. To not one of those
    improvements does the land monopolist, as a land monopolist, contribute, and yet by
    every one of them the value of his land is enhanced. He renders no service to the
    community, he contributes nothing to the general welfare, he contributes nothing to
    the process from which his own enrichment is derived. (Winston Churchill, 1909,
    quoted by Barker 2003, p. 116).

    http://www.nuff.ox.ac.uk/politics/papers/…/McLean%20Land%20tax.pdf

  9. jh 9
    17 May 2014 at 10:20 am

    you can’t blame it all on an evil out side the people (capitalism, banking sytem etc).
    Within politics there is a strong humanitarian sentiment which translates to solving problems by absorbing them (NZ, US, Europe, Canada, Australia: the great sponges). This is unrealistic; our first responsibility is to ourselves.

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