BOOK EXTRACT: Home Truths – Confronting New Zealand’s housing crisis

Philippa Howden-Chapman

Has the government done enough to confront housing affordability?

Yes
29%
No
71%
Total votes: 377

© Philippa Howden-Chapman. Home Truths: Confronting New Zealand’s housing crisis is published by BWB Texts (Bridget Williams Books, Wellington). Reprinted by permission

The author, a leading international housing researcher, reveals how New Zealand has lost its way on housing. She draws on two decades of research to help chart a new way ahead. This extract outlines the economic importance of housing 

The link between housing and the national economy
In developed economies, housing is now the largest store of national wealth and an increasingly important part of the national economy. Household wealth and national wealth are linked. When the housing market is volatile, households are more likely to take on more mortgage debt to finance increasingly expensive houses. This adds to the overall level of private debt, much of which is financed by overseas borrowing. If housing prices fall dramatically, then households are very financially exposed.

The 2008 global financial crisis (GFC) continues to have an impact on the New Zealand housing market. Nonetheless, Thomas Piketty, in his great work Capital in the Twenty-First Century, has drawn global attention to two interconnected phenomena.

The first is that, despite economic cycles, wealth and income inequality are increasing; the second is that housing plays a big part in this concentration of capital among the wealthier members of society. And this is demonstrably true in New Zealand. Most of our national wealth, which used to be bound up in land, is now tied up in housing. This is a situation accentuated by the lack of an effective capital gains tax, a point repeatedly made by visiting OECD specialists:

“New Zealand belongs to a group of five OECD countries with particularly high pre-tax capital-income inequality … As much of this income, especially at the top levels, takes the form of capital gains, the lack of a capital gains tax in New Zealand exacerbates inequality (by reducing the redistributive power of taxation). It also reinforces a bias toward speculative housing investments and undermines housing affordability, as argued in the 2011 Survey.”

The big growth in relative income differences is evident when we look at income after adjusting for housing costs. 

Income poverty levels are relatively high in Australia and New Zealand compared to most other advanced economies, and the risk of poverty is not distributed evenly. People who are unemployed, sole parents, adults with a disability, and Māori and Pacific people face a higher risk of poverty and are more likely to suffer severe housing deprivation.6

Unlike most other OECD countries, New Zealand and Australia have a relatively low level of state-provided housing assistance, over and above the regular social welfare benefits. This is important because home ownership, since the rise of neoliberalism in the 1980s, has been reconfigured as a private rather than a public good, and one that does not require state subsidies. Indeed, market rules have increasingly prevailed for all kinds of housing, including Housing New Zealand houses.

Moreover, high rates of private home ownership have encouraged various other forms of private infrastructure and social structures. The emphasis in New Zealand on standalone home ownership has influenced the urban form, accentuating suburban patterns, particularly the reliance on cars rather than public transport. To some extent it has also influenced lifestyles and gender roles more generally: for example, mothers are still more likely to be mainly responsible for child-rearing, and their access to part-time employment, as well as broader amenities and public places to socialise with others, is a critical but often overlooked consideration for new housing developments.

Arguably, home ownership has also influenced systems of welfare and other dimensions of social structure. It may be that the emphasis on ownership of standalone homes has also generated a general growing resistance to public expenditure on social housing and apartments. This is particularly important when house prices are rising unevenly around the country.

Culture of entitlement
The suburban pattern of standalone home ownership has also helped to build a culture of entitlement to a continuation of this pattern, on the basis that any move to build more apartments might threaten the existing value of stand-alone houses. We asked about this in a recent Horizon Poll and found that indeed there is a divide between what some participants believe is good for cities in general – a compact city with limits defined by councils – and what they want in their own neighbourhood. However, people in the survey in Auckland and Wellington, who were more likely to have lived in or seen townhouses and apartments in their neighbourhoods, were more likely to feel comfortable with a more compact city than people in more low-rise cities and towns elsewhere in New Zealand.

One further concern about encouraging everyone to aspire to owning a stand-alone house is that it takes no account of the circumstances of those whose incomes are barely sufficient to service a mortgage, even when the interest rates are low and employment is high. The Pew Research Center carried out research in the US on the effect of the 2008 GFC. The centre found that those population groups who entered the homeownership market closer to the financial crisis were the most financially stretched and therefore more affected by the crisis.

African-Americans and Latinos had the sharpest reversals in the levels of home ownership, because they had to borrow more and rely more heavily on high-interest sub-prime mortgages, and so were more seriously affected by the slump in house values.10 Our research in New Zealand has also shown that people who lived in areas further out from the central business districts, and therefore were more likely to have long, expensive commutes by car, had a higher rate of mortgagee sales when mortgage interest rates and petrol prices went up.

The housing bubble and social inequality
Residential property booms are often confined to a country’s or state’s largest city, and this is true in New Zealand too. In Auckland, those people who already own houses or apartments are becoming increasingly prosperous. They see their asset appreciating at an exhilarating rate and seem largely unconcerned by the increasing probability that the so-called housing bubble might burst. In the absence of an effective capital gains tax, home owners’ and property investors’ wealth simply increases without them having to do anything more than own a property and watch its value grow. That the annual increase in capital value may be more that the owner’s total annual salary has led to the often-quoted comment that ‘My house earns more than I do.’

People who do not own a house but are looking to buy one in the near future are the losers in this environment. Anyone renting and without sufficient assets to buy a house misses out entirely on this accumulation of wealth. Those looking to buy a first home in Auckland will have particular difficulty, unless their families also own appreciating property and are prepared to offer a family subsidy.

It is generally acknowledged that housing cycles have an impact on the broader economy and the financial system, but property bubbles are interpreted in different ways. The general wisdom is that, as with most things, the longer the imbalances go on, the more likely they are to come to an unpleasant end.

Academic analysis in the US points to the problems of government failure to intervene early enough, a view that is reflected increasingly in the New Zealand media and in 2015 was underlined by the governor of the Reserve Bank, Graeme Wheeler. Minister of Finance Bill English also recently said the Auckland housing market was ‘on fire.’

Supply and demand factors
As well as acknowledging cyclical effects such as migration, ‘ample global liquidity and easy credit’ that drove up house prices before the GFC, a recent Treasury briefing to the Prime Minister on the Macroeconomic Effects of [the] Housing Market analyses the underlying supply and demand factors behind what Treasury judges to be ‘permanently rising house prices’. It paints a more complex picture than that conveyed by the media.

The demand factors included are: the growth in household income; a reduction in mortgage interest rates; and financial deregulation. The Treasury considers the first two factors together have largely caused the rise in house prices. On the supply side, it sees the main factors as being: growth in land prices; increases in construction costs; declining productivity in the construction sector; and the slow response to exogenous factors such as strong inward migration. The Treasury paper, unlike the OECD, does not discuss the impact of the lack of a capital gains tax.

There is an interesting, related question, which is not included in the Treasury briefing, as to whether rents increase proportionally to house prices. The average stay in a rental property is only eleven months in New Zealand, so there are plenty of data available. These data show that there is indeed a link between the two, and that house prices and house rents to some extent move together over the long term. If house prices are growing consistently faster than rents, this would suggest that house prices may be over-valued.

In Auckland, where there has been the greatest increase in house prices over the past five years, house price movements have outstripped increases in rents, according to an MBIE report of September 2015.

The relationship between rents and house prices is also somewhat paradoxical. Research shows that what housing services can be rented (for example, the number of bedrooms, and the location of the house), is disproportionally low in low-income areas, particularly those in decline. In effect, people pay more in such areas for rental services, in relation to local house prices. It may be that rents are relatively more expensive than in higher-income areas because landlords do not expect to realise as much in capital gains when they sell the property. They may also have higher costs, because of shorter tenancies and more maintenance, and this may make landlords disinclined to spend money on improving their properties.

Capital gains exceed rental returns
Conversely, in higher-income areas, rents provide less of the overall return to the landlord, and are more likely to be dwarfed by returns from capital gains. In other words, landlords are trading off rental income against the potential wealth they could realise if they sold the property.

The relationship of rents and house prices can also change, of course, depending on economic cycles. In 2011, in the wake of the GFC, Mr English stated: “The current government’s property tax measures have been so effective, there’s no capital gain in the housing market. It’s quite possible … there will be no capital gain in the next five years.”

By 2015, he was less confident: ‘Houses that rise really fast can potentially drop fast.’

As Thomas Piketty has highlighted, housing is the main store of wealth in New Zealand, as it is in other developed countries. Consequently, those people who own houses are better off financially than those who rent, and this confers intergenerational financial benefits for their children. But the lack of policies put into place to modulate cycles of housing booms and busts may dwarf any other income and housing policies.

© Philippa Howden-Chapman. Home Truths: Confronting New Zealand’s housing crisis is published by BWB Texts (Bridget Williams Books, Wellington). Reprinted by permission


19 · Got a question about this story? Leave it in Comments & Questions below.


This article is tagged with the following keywords. Find out more about MyNBR Tags

Post Comment

19 Comments & Questions

Commenter icon key: Subscriber Verified

Thanks to the reader who pointed out Figure 3.1 is missing. We're trying to source it from BWB.

Reply
Share
  • 0
  • 0

First, the data tell us that inequality hasn't actually risen in NZ over the last 20 years. Second, the presence of a capital gains tax in other countries doesn't seem to have done anything to prevent the concerntration of wealth in housing. If anything, it seems to be associated with greater concentration.

Seeing these kinds of fallacies stated as stylised facts in the first few paras didn't encourage me to read further.

Reply
Share
  • 3
  • 0

Me neither. In fact when I see this, I instantly smell an agenda, a bias both political and socioeconomic.

As you point out the contradiction in the above work is as stark as it is a fatal flaw to the author's overall argument. A capital gains tax has failed to stop the so-called concentration of wealth in housing, anywhere in the world where such a tax exists.

Ms Howden-Chapman herself writes that in developed countries wealth has become increasingly concentrated in housing, (where capital gains taxes exist) and she goes on to write that this also happening in New Zealand, where they do not. She then argues that New Zealand's lack of a CGT is what is driving the increasing concentration of wealth in housing here, even though she has just pointed out that in those countries that have a CGT, wealth is still being concentrated in housing - in spite of the CGT! She's not making any sense.

I detect a clear bias in her work here underpinning the book, a neo-marxist post-modern world view if you will.

Reply
Share
  • 2
  • 0

As per usual lots of rhetoric and few solutions - other than the perennial lack of a C G Tax as being a prime contributor to soaring house prices. But Aussie together with most if not all of the other developed countries experiencing burgeoning house prices do have C G taxes - and Aussie additionally has annual Land Taxes and Stamp Duties on purchases none of which seem to rein inprice escalation in the prime cities. Also the increasing wealth gap is self perpetuating as increasingly people aspire to wealth/comfort and usually achieve thoir goals whereas those lacking ambition will of course continue to get further behind. The only solution is education but then the reasons need to be sold to those most in need who are generally those most difficult to inspire.

Reply
Share
  • 2
  • 1

There is no evidence in this segment to support the claim the author is a leading international researcher on the subject. She seems even unaware of the Productivity Commission's work and reports nor interested in why unaffordability rocketed during the late and unlamented Labour government's disastrous term in office. Rather she merely draws an endless string of red herrings across the evidential trail.

Reply
Share
  • 6
  • 0

The problem with housing is basically a serious lack of supply.

The demand is there but the town planners refuse to supply enough greenfield land to meet the demand. This drives up the price of land – most houses are now worth very much less than the land they sit on. In our case, the land value has been jacked up until it is now seven times as much as the building.

Construction costs have gone up for three reasons: the first is that you cannot afford to put a low-cost house on a hugely expensive section. The second is that intensification results in houses being shoehorned onto small sections which means that they are nearly always two-storey and nearly always need to be architect designed. The third is the huge cost of getting through the town planning bureaucracy riding high on the RMA.

Another factor is that, very often, a perfectly good house worth maybe $200,000 or $300,000 is knocked over and replaced with two or three townhouses. So the houses that replace it have to be even more expensive.

All these factors make Auckland increasingly unaffordable.

Yet huge amounts of land is available for housing. For instance, lifestyle blocks occupy almost as much area as suburban Auckland and land around Albany and Riverhead is virtually worthless agriculturally. Both could easily be zoned for development.

Sadly, the mayor and the town planners are driven by a dream of a railway line so they rigidly constrain greenfield development in the hope that the people living in what will become tenement blocks in what once was environmentally friendly suburbia will work in the central city and ride on their heavily subsidised and hugely expensive train.

It is time that town planners and academics realised that their job is to help people live how and where they want, and stop jacking up the price of land to force them to live how and where they think they should. They should be encouraging satellite development rather than crowding everyone into the central isthmus with its volcanic risk and limited transport corridors.

They should realise that the coming revolution in personal transport – self driving cars, ride sharing and computer-controlled minibuses – will make suburban rail obsolete before the tunnel is finished.

Reply
Share
  • 3
  • 0

Franklin council is the same, very restrictive planning. A 15 acre plot allowed only one house, rediculous when it is only 20 min from the central city. This land is too small to be farmed due to a lack of water.

Reply
Share
  • 1
  • 0

Do a Singapore and set up a Housing Development Board with a focus and mandate to develop and provide affordable housing to everyone. NZ thinks free market can fix the problem when it is very clear that the free market has dismally failed.

Proof that the free market does not work - the finance companies debacle and disaster. From free for all, the government now regulates with everything it can throw at the sector. Too late and billions of dollars are long lost.

Reply
Share
  • 0
  • 0

The free market has been stifled by restrictive planning and the RMA! If the land and housing market really was free then affordability would be much less of an issue!

The solution for too much intervention in the market is not yet more intervention!

Reply
Share
  • 0
  • 0

That's the problem, when it comes to affordable housing in New Zealand and in Auckland in particular, there hasn't been enough free market. The Left and the Greens won't allow it.

Reply
Share
  • 2
  • 0

Funny that both the author AND Treasury suggest what is driving prices north, and suggested ways to ease this (which have failed overseas...), yet miss out key drivers such as immigration, GDP growth, inflation and unemployment levels.

Is our country really that clueless in how to identify key indicators and the measures needed to regulate a market which is out of control???

Reply
Share
  • 0
  • 0

Yes immigration and non resident purchasers have been the key drivers in Auckland coupled with no CGT .
This huge demand increase cannot be remedied by supply which has a long lead in time. The R b had fuelled the issue with continued lowering of int rates. The jury is out on the Oct 1 measures but probably too timid although auction clearance rates have dropped which seems to confirm the non resident issue.

Reply
Share
  • 0
  • 2

I'm not convinced a CGT would have any impact on house pricing.

I am convinced that it is mighty unjust that my staff who work 40-50 hours a week, some for under $50k, are taxed on their entire income and again on their consumption (which given the cost of living in Auckland is almost 100% of their income), while the $400k I've made on my 6 houses in 12 months is completely tax free.

The system was designed by the asset rich, for the asset rich, to protect their wealth.

There's no doubt in my mind that it increases inequality by allowing people with assets to funnel income into tax free capital gains.

Reply
Share
  • 0
  • 1

1. Pay your staff more. There's nothing stopping you.

2. Unless you have sold your six houses and collected the $400,000 in cash from their increase in value over the last 12 months, you have not 'made' $400,000 on those houses at all. Their value has increased by $400,000 over the last six months that is all, for all any of us know their value may decrease by $400,000 over the next 12 months. Do not mistake a gain in paper value for the real thing. Cash in the bank.

Reply
Share
  • 2
  • 0

Couldn't have said it better myself!

Paper gains are not a profit until they are banked. That won't stop Lenny boy taxing you more for the increased value though ;)

Reply
Share
  • 0
  • 0

'concern about encouraging everyone to aspire to owning a stand-alone house.'

No one is encouraging people to own a stand-alone house, if people are buying stand alone housing then that is because that is what they want, given the choice of it being affordable. Ms Howden-Chapman seems to be implying that if people were 'encouraged' to buy non stand alone then this would be a solution for high house prices.

This is a red herring, housing is unaffordable in NZ, by international definition, across all housing types.

Reply
Share
  • 0
  • 0

Same biased, self-serving comments all the time. No action, no practical plan, government will not do a damn thing. CGT is fair, period! No more whining that you'll take you investments elsewhere due to CGT. You've had the gain now pay some tax on it you greedy people. Just watch the come backs on this comment from some self-justifying capitalists, always happens :-)

Reply
Share
  • 0
  • 0

Another biased "report" / propogenda from Philippa Howden-Chapman. She is pushing her agenda for increased taxation on the people who actually try and create wealth.

Reply
Share
  • 0
  • 0

Immigration needs to be eased.people owning numerous properties should be taxed on capital gains . change is necessary for socially happy people. My landlady is going to sell.where will we go?8 people in a 3 bedroom flat.landlady will cash up nicely and her tenants will be homeless

Reply
Share
  • 0
  • 0

Post New comment or question

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
CAPTCHA
This question is for testing whether or not you are a human visitor and to prevent automated spam submissions.