For the third time in less than 18 months, I’m writing about house prices. And of course the reason is that in New Zealand generally, and in Auckland in particular, house prices have gone from wildly unaffordable to the utterly ridiculous. Just days before writing this, Auckland’s largest real estate agent reported that average house prices had risen by no less than 3.9% during the month of June as compared with the previous month.
Back in January, the international survey of house prices undertaken annually by New Zealander Hugh Pavletich and American Wendell Cox found that, relative to household incomes, median house prices in Auckland in late 2015 were higher than in all but three of the hundreds of cities surveyed in nine countries. Prices in Hong Kong, Vancouver and Sydney were more expensive than in Auckland, and we were on a par with Melbourne. Since that time, house prices in Auckland have continued to escalate and now stand at more than 10 times median household income in Auckland. In the survey, affordable housing is described as that where the median house price is no more than three times median household income.
But that’s absurd, many Aucklanders contend. Buying a house has always been tough. Why, when I was first married…
No, when older New Zealanders say that, they are remembering their history very imperfectly. Thirty years ago, in Auckland as in most other New Zealand cities, median house prices were indeed about three times median household income. Now they are, relative to incomes, more than three times as expensive.
A few weeks ago, I gave a speech in Washington about preparing for retirement. One of the other speakers on the platform had just written a book about preparing for retirement in the US. In that book she pointed out that, as a rule of thumb, you should not buy a house costing more than 2.5 times (that is not a typo) your annual income. Alas, in Auckland you can’t buy a chicken coop for 2.5 times your income!
The consequences of this situation are very serious for a whole generation of younger New Zealanders. It has become quite literally impossible for people on an average wage in Auckland to contemplate buying a house in Auckland unless they are lucky enough to have wealthy parents who can help. That results in over-crowding, with all the social and health consequences of that. It also means that a whole generation will arrive at 65, hoping to be able to live on New Zealand Super, but instead facing an extremely stressful retirement because they’ll still be paying rent.
I met a man recently who was very excited because he had managed to buy a home for $320,000 – but it is 132 kilometres from Queen Street; it takes him two hours to commute into town and he does the journey four times a week.
And of course another consequence is that large numbers of people have been conned into believing that buying residential property with lots of borrowed money is an entirely riskless activity, generating near-certain tax-free profits.
The Prime Minister has suggested that the Reserve Bank should require those investing in residential property to put up much larger deposits, as a way of dampening demand for houses from that class of buyer. And in the middle of July, the Reserve Bank did announce that, with legal effect from 1 September but with practical effect immediately, banks will need to require almost all those buying houses for investment purposes to put up 40% of the purchase price as a deposit. Owner-occupiers will need to put up 20% of the purchase price as a deposit.
Based on the experience with the similar restrictions which the Reserve Bank put in place a year or two ago, there can’t be much confidence that requiring investors to put up still more by way of deposit will have anything more than a relatively short-term effect on slowing house price increases.
The Reserve Bank also announced that it was considering the possibility of requiring banks to lend on mortgage no more than some multiple of household income, as the Irish central bank did early in 2015 – in their case, no more than 3.5 times household income. Such a measure might have more impact – it would certainly prevent all but the most affluent of first-home buyers getting anywhere near home ownership in the current over-heated market.
The fundamental issue is of course one of supply and demand. Housing demand is driven by rapid population growth in Auckland – in turn driven by a high rate of immigration; while housing supply is constrained by Auckland Council planning rules relating to the availability of land zoned for development. Yes, private land owners engage in “land banking” – and that includes people who sit on a large section which might be subdivided but isn’t, because owners like a bit of lawn and understand that every month they don’t sell there is further untaxed capital gain growing in the garden. But land banking would make absolutely no sense if people wanting to develop land for housing could simply drive a bit further down the road and buy land at rural prices.
The harsh reality is that if Auckland is to have affordable housing within, say, 10 years, house prices will need to actually fall by about 50%. Alternatively, prices might remain constant while nominal incomes grow for about 40 years. And of course that means more than a whole generation of New Zealanders denied the opportunity to buy a home in Auckland.
Next time a politician claims to be in favour of affordable housing, ask him over what time period he sees prices falling by 50%. If he tells you he doesn’t want house prices to actually fall, you know that he doesn’t really believe in affordable housing at all.
Copyright © 2024 Don Brash.