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Embrace falling home affordability, says NZIER

Despair over the inability to afford a house is misplaced and should be embraced as an opportunity to invest in more wealth-creating activity, says the principal economist at the New Zealand Institute of Economic Research, Shamubeel Eaqub.

"The fixation with home ownership is causing social inequity and despair," said Eaqub, releasing a new study on New Zealand's "crippling" home affordability problem.

"People fear being locked out of a traditional route to financial security, as almost 70 percent of New Zealand's household net wealth is stored in housing. At today's prices, an average Auckland home will take 50 years to pay off on an average Auckland salary. In the early 1990s, the average Auckland home took 30 years to pay off."

"Home ownership rates are at their lowest since 1951," said Eaqub, "but rather than obsessing about that, it is a trend New Zealanders should embrace.

"Economies prosper when people invest in business, not just housing. We need to create level-playing fields for different types of investment, and parity between renting and owning, to support a much needed cultural change around housing."

New Zealand had one of the least "renter-friendly" regimes in the world, reform is needed to stop banks favouring home mortgages over other forms of lending, and the tax system contains advantages for real estate that don't exist for other classes of investment.

Planning rules also need to improve the supply of land and housing supply, which is currently slow to respond to signals that more housing is required to meet population growth and household composition changes.

"There is no easy or quick fix to New Zealand's over-valued housing market," the report, titled "The Home Affordability Challenge", concludes. "Not one single change will be enough. The solutions need to be a complementary set - it's like taking a Swiss Army knife to a knotty problem."

The report identifies a "culture of home ownership and housing investment" as being one of the factors causing the affordability problem.

However, over-exposure to property values carries risks for financial, economic and social stability in the event that house prices drop dramatically, with some measures showing New Zealand houses are over-valued on a globally comparable basis by about 26 percent. Auckland's siting on a narrow isthmus tends to push land prices higher because it is physically constrained, making efficient investment in roading and public transport difficult, the report suggests.

It also says "Australia and New Zealand are some of the most 'restrictive' rental jurisdictions from the viewpoint of the renter. Lease terms are short, tenants can be asked to move with short notice, leases can be terminated on almost any condition as long as notice is given, and personal customisation is often difficult."

Changes to prevailing lease conditions would make renting less unattractive, and the report notes that rents have remained stable while the cost of buying a home has increased in recent years.

Fears that an influx of foreign investors is boosting house prices are "unfounded," the report says.

"The most commonly described foreign investor is someone who comes with a wad of cash or has borrowed large chunks of money offshore to buy a house in a posh suburb and leave it empty. The data simply do not support these anecdotal observations."


Comments and questions

While we have politicians investing most of their money in rental properties, nothing will change to reduce house prices..
For any young person I would suggest they borrow as much as they can and invest their money in rental housing.
Returns on housing in Auckland was on average in excess of 14% and much safer than any other forms of investment. Also no capital gains tax to pay.,
Why even consider equities or bank deposits?

Whilst Shamubeel once again provides some very intelligent insight into this issue, you can't help thinking there is significant bias due to the fact he doesn't now a house ( as he has publicly stated). Shamubeel's theories are correct, except for one thing- markets are irrational- and whilst a prevailing majority feeling of fear exists ( fear of missing out), house prices will continue their upward path, or at the very least hold at or about their current levels. The drive from young kiwis to own their own home cannot be overstated.

Another economist who perpetuates the myth that investment into residential housing is somehow "tax preferred" over other forms of investment. It is not. Interest deductibility on capital employed in the production of assessable income (i.e. all other forms of income yielding investment) is universal, irrespective of what the investment is. There are no longer any depreciation advantages in residential property investment; and capital gains are as free from tax when made on an equity investment (which was not acquired with an intention of disposal) as they are when derived from investment in residential housing.
Let's cut the BS and start focussing on the real reason people invest in residential property. The fact is it is a solid investment with opportunity for both income yield and capital growth, that Kiwi's can see and touch and, if they are so inclined, manage themselves. It won't dissappear with dodgy investment advisers who run ponzi schemes, nor finance companies whose directors happily make related party advances on speculative investments.
When NZ's listed companies provide comparable returns on a risk/reward basis, perhaps they will attract their fair share of NZ investors' investment dollars.

Housing will continue to be the preferred investment for Kiwis for the reasons spelt out above.No other investment avenues come close in terms of security,fraud avoidance,certainty of return.
Economists can theorise all they like,but local conditions will always rule.

I'm not wanting to Invest in property. I just want to live in one house without fear of it going on the the market and having to move, where I can make the inside a peaceful sanctuary for when I get home, and occassionally get excited and kick in a wall or two without feeling guilt. At the moment this means I have to own a house, but if we went to long-term leases like Europe, I'd be a starter.

Long-term residential leases in Europe invariably mean that the tenant has to supply all the cabinetary and appliancies in the kitchen, supply install and maintain all floor coverings, supply all electrical fittings, pay for all interior maintenance and repairs, and directly pay for overheads like rates insurance and utilities.
While in NZ the tenant is free of these responsibilities, the landlord is not.