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Let’s go out for an English

OPINION: We have serious problems in Auckland housing that do not yield to piecemeal measures. With special feature audio.

John Tookey
Fri, 03 Jun 2016

As a straw poll, what announced measures in last week's government budget will make a real difference in housing affordability here in Auckland?  Anyone? A few apprenticeships that may have an impact in a few years. Support for 750 new social housing places. Incentives to move out of Auckland almost guaranteed to be ‘played’ by their intended recipients.

To summarise – not much.  A symphony in mediocrity. Some nice thoughts but it’s hard not to sense tokenism of purpose. And of course blame someone else – in this case council.  I remembered a parody skit from the TV Show “Kumars at No 42”. An Indian family sit and discuss what they want to eat. The response is priceless – “Let’s go out for an English.  But make it as bland as possible.” They could have been discussing Budget 2016.

We have serious problems in Auckland housing that do not yield to piecemeal measures. We need to increase supply. Great. I can buy that. How? Is it the council’s fault?  Sadly no. 

What politicians don’t address is that the market will not self-correct through production.  Builders will not build at a rate generating surplus numbers of properties – which would reduce prices and thus build themselves out of a job. Neither will they work at a rate to reduce house selling prices.  The number of new builders is irrelevant.  Apparently by granting more consents on special housing areas?  Remove the city limit for Auckland?  Two thousand more consents here, 3500 there.  Absolute rubbish.  This does nothing to absolutely increase supply per se, just the opportunity to supply.  Developers release sections at a fraction of the total number available in an SHA – usually around 10-15% of total titles.

In the parallel the market is acting to make the problem infinitely worse. The othere day I got a phone call, an unsolicited, cold call to my desk from a well-known property investment company.  The conversation spoke volumes about current and future housing problems in Auckland. The rationale was simple – “what would you say to us helping you purchase an investment property in Auckland, no cash deposit with a deal such that the house will pay for itself."  It was attractive but morally and professionally troubling. 

Fundamentally I had issues with this unsolicited offer, geared toward boosting the haves and shafting the have-nots.  It is not foreigners. It is not a lack of land supply.  It is not building materials suppliers. It is not big builders ripping us off. It is not even a big boy that did it and ran away. Property speculation drives down affordability.  How far down the food chain are speculative lenders travelling? How many accept the pitch daily? Stratospheric prices and cheap credit.  Renters in sleepouts and garages … lenders actively inflating prices.  Alarm bells ring – this smells like the global financial crisis in 2008.

Mortgages today enjoy the lowest ever interest rates. Buyers are heavily leveraged, owners encouraged to buy more, leveraging existing holdings. The refrain of Auckland needing to have more ‘affordable homes’ (read investment properties) is one that sickens in the absence of action. 

On one hand there is the wailing and gnashing of teeth from commentators bemoaning the disadvantaged being priced out of housing; on the other, salacious reportage of housing inflation and valuations. Auckland is 57% owner occupied, compared to 68% nationally.  Despite astronomic prices for poor quality homes, apparent costs – mortgage payments – are declining.

The ponzi scheme of selling homes to each other for capital gain continues. Interest rates go down, mortgage affordability stays just attainable, and prices goes up. The housing market will thus continue to be fuelled. There are no other cost efficient (renters pay to use the asset), tax efficient (capital gain is not fully taxed and costs can be offset against tax) high-yielding investments as property in a boom.

Bottom line is there are only two ways out.  The first option is for the government to commission substantial numbers of housing outside of market forces, that is, rapid development of new Housing NZ stock. Alternatively, allow the market to collapse. 

We are between a political rock and hard place. Unpalatable decisions need be taken now.  Bubbles do not gently correct.  Facts do not care about feelings or politics.  This bland English recipe is distasteful.

John Tookey is a AUT professor

Tune into NBR Radio’s Sunday Business with Andrew Patterson on Sunday morning, for analysis and feature-length interviews.

John Tookey
Fri, 03 Jun 2016
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Let’s go out for an English
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