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Hot Topic NBR Focus: GMO
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BOOK EXTRACT: Home Truths – Confronting New Zealand’s housing crisis

The author, a leading international housing researcher, reveals how New Zealand has lost its way on housing.

Philippa Howden-Chapman
Wed, 30 Dec 2016

© 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

Philippa Howden-Chapman
Wed, 30 Dec 2016
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BOOK EXTRACT: Home Truths – Confronting New Zealand’s housing crisis