Red Alert

Real reason for housing unaffordability

Posted by on February 1st, 2013

 A brilliant article by Bryan Gould in the NZ Herald (http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10862381):

 It actually deals with the real reason for housing unaffordability in NZ. 

A free market is supposed to match need with resources, but it’s pushed up house prices to insane levels.

 The huge increase in the money supply caused by inflated bank lending for non-productive housing seriously skews the whole economy.

The contrast between 1960 and today in terms of housing affordability is the result of a fundamental shift in policy.

 Yes, that says it all.

 In 1960, decent housing for all was seen as a social responsibility to be discharged by the community through its government or through co-operative arrangements. Today, confidence is reposed in the market to achieve this same outcome.

The evidence as to which is the better approach is surely conclusive; the market has – in this respect at least – failed.

 He is quite correct when he says that the banker PM’s Government blames everyone but the real culprit. 

In the case of unemployment, in other words, the fault is said to lie with the trade unions, notwithstanding their “small influence” – described by the Prime Minister as a principal reason (together with a tax gift of $67 million) for Warner Bros deigning to come here to make The Hobbit.

In the case of affordable housing, the villains are supposedly the local authorities. Again, the Government – and “free-market” theory – cannot, it seems, be blamed. In both cases, not only does the Government deny responsibility but they have conveniently found a scapegoat in those who do not share their political view.


26 Responses to “Real reason for housing unaffordability”

  1. Matt says:

    It’s still a govt decision… CGT won’t do much to sort such things out. They are public utilities you know?

  2. bbfloyd says:

    Yet another reason to talk up the utter failure of our “fourth estate”… I will take a punt, on the level of willful ignorance, and bigotry being not as widespread as it seems on the telly, and say,… that the only way the kind of blatant scapegoating the current raiding party has resorted to, repeatedly,…..can be effective is if our “fourth estate” talks it up as the truth…

    Control of this fundamental principle of properly functioning democracy simply can’t be entrusted to corporates who exist to amass, and perpetrate wealth, and power..

    The people who should be called out over this type of obnoxious, reactionary politicking is not those who are incapable of doing anything else….but those who are in the perfect position to show it up for the lies they are…. and choose to cheer instead…..

  3. Jack Ramaka says:

    It is a simple supply and demand situation, there is very strong demand in Auckland from Asian buyers mainly Chinese & Indian who actually have funds available from offshore.

    NZ is seen as a very desirable country to live and retire, hence wealthy Chinese and Indian buyers are buying real estate for their families to reside in, their young families can live here in NZ where they can educate their children.

    There is a demand for 12,000 new houses per year to be built in Auckland to satisfy existing demand however only 4,000 are being built. We also need to relook at the Auckland City Council Plan and the zoning to encourage some building activity.
    Evidently John Key has put the Auckland City Council on notice that if they don’t sort it he will.

    Monopolistic or limited suppliers of building materials also influences build costs, and a limited supply of land available also influences land pricing.

  4. The Frontrower says:

    Prices rise because supply exceeds demand. Blaming immigration or councils or a lack of CGT is too simplistic because the reasons are many.

    1. The 1980s equity market experience of the baby boomers swore them off the sharemarket.
    2. NZ’s climate means we have to build to a high standard.
    3. The successful inflation containment means interest rates are no longer beating house inflation.
    4. Restrictions on land availability.
    5. A number of factors (some real, some imagined) that make first home buyers not willing to buy in cheaper suburbs.

    If any political party can claim that they will solve the housing crisis with the stroke of a pen then they should come see me as I have a bridge in New York for sale.

  5. Grant Hay says:

    @ Frontrower. I’m sure you meant to say “Prices rise because demand exceeds supply”? Surely building entry level homes will increase supply, which should cause prices to fall in at least the cheaper end of the market? Easing supply may also cause rents to fall for those who can’t afford to buy. Of course the problems in housing extend back in time well before the period of this Government. Labour did have nine years in office to address the issue…

    Ideology in the form of a reluctance to “skew the market” and a touching faith in the “ïnvisible hand”, seem to have made them hold back a little??

  6. Red Guard (Te Kauwhata) says:

    Well summed up Raymond!
    As a retired Councillor of nine years, it was interesting to hear colleagues (and national party members!) deride the then Shippley government for the lack of support for Local Govenment and using us as a dumping ground, literally passing the buck.
    In fact it wasn’t until the appointment of the Hon. Chris Carter as Minister of Local Government did we see consistancy of leadership and approach.
    The last time national fiddled with housing resulted in the abortion of leak homes, Local Government (ratepayers) by and large are having to clean up. So what will be the results of their latest planned dumping on our local Councils?

  7. Grant Hay says:

    Of course, it’s the Greens suggested additions and modifications to the Kiwi-build policy that has really excited many on the left who’ve been waiting for a socially progressive housing policy. Their suggestions are what makes a poorly thought out idea which is unaffordable to many in the working class, into something that could really work for large numbers of people in the bottom quartile.

  8. bbfloyd says:

    Stating the “bleeding obvious”, as in the fact that supply isn’t keeping pace with demand is the easy part…

    When are people outside the “beltway” going to add two and two together, which adds up to the “four” of the current raiding party stopping the building of state housing in Auckland right after gaining the treasury benches?

    THAT is when the current housing crisis began…

    “labour did have nine years to address the issue”.. And can anyone here state credibly that they didn’t address the issue?

    This appalling situation had been coming back into some sort of balance by 2008, after the utterly irresponsible, and self serving depletion of tens of thousands of state houses by the last raiding party in the nineties…

    I sometimes wonder if New Zealand exists in a bubble… One that stops rational, commonsense thought from getting through to our cerebrums….

    Is it just too difficult to grasp the enormity of the task left to the the Clarke government? Housing shortages, huge unemployment, health, welfare, education ministries almost incapable of operating in the real world…A generation of newly created career criminals, courtesy of Ruth Richardsons “mother of all budgets”….The list goes on, and on…and on…

    And, once again, we can look to an utterly corrupted “fourth estate” for not just cheering this idiocy on, but strenuously undermining the very people who were always going to have to fix the appalling mess left behind… as they always have had to, once enough people realised that their own livelyhoods were under threat from the incompetence, and corruption that pervades the national party…and voted sensibly for once….

  9. Grant Hay says:

    We can keep blaming various administrations back into history for as long as you like bbfloyd, after all Richardson @ Co. only took up the good work from where Douglas left off and he would say that he was forced into that by Muldoon etc. etc…

    But the last major housing bubble happened smack bang in the middle of the Clark Govt’s watch and the Govt. at that time was most reluctant to adjust policy settings to intervene in “the market”. You can’t tell me that Labour’s drift from Socialist / Progressive pre 1984, to something I can’t even classify under Douglas’ watch, and settling into a centrist “Social Liberal” setting under Clark, hasn’t had some bearing on life as it experienced by the growing number of people who are unable to improve their lot. You obviously have absolute faith in Labour’s ability to do a better job for these people than anyone else. I don’t.

  10. Grant Hay says:

    Bryan Gould’s article is actually a bit of a cop out when it comes to looking for root causes:

    “Many young families were enabled to bring up their children in the secure environment provided by ownership of their own homes. It is hard to know why that was possible 50 years ago but is said to be beyond our reach today”.

    What I do know is that when I was 23, living in Muldoon’s Wellington in 1981, it was already looking next to impossible for most young people to get into the housing market anywhere near central Wellington. Even a two up two down dump in Newtown was selling for horrendous money. In the mid 70′s it was still possible to buy a “do-up” for less than 20k but by the mid-late 80′s most of those had been hoovered up and been given what was often a quick and dirty DIY job and then sold off at a huge capital gain. So, certainly in major urban settings this problem has been around for at least thirty years. I personally think Bob Jones and friends showed the way and the rest of the nation who had the wherewithal followed on in more modest fashion :) .

    Whatever the reasons, successive Governments have not done enought to take the pressure of young families and the permanently poor who struggle with both the cost and poor quality of accomodation, whether it is ownership or rental.

  11. phillip ure says:

    “..“labour did have nine years to address the issue”.. And can anyone here state credibly that they didn’t address the issue?..”

    ..that one has me rolling on the floor..laughing..

    ..(laughter tinged with tears/incredulity..but laughter nonetheless..)

    ..phillip ure..

  12. Sam says:

    But the housing market is NOT a free market. There are artificial constraints relating to the supply of land, in the form of council zoning. If it was a free market, land owners would be free to develop their land or sell it for any purpose that they see fit.

    This would most likely result in more farmers on the rural-urban fringe selling their land for residential property development.

    It is is the restricted land supply that has driven up property prices in New Zealand. Free up the land supply and house prices will fall.

  13. phillip ure says:

    is policy-theft a crime..?..misdemeanor..?

    ..mike williams on national radio this morn claimed that labour policy is to revive the low-interest state advances loans from the past..

    ..to help the non-rich into their own homes..

    ..now..correct me if i’m wrong/having a memory-lapse here..

    ..but isn’t that the green party policy recently announced by turei..?

    phillip ure..

  14. phillip ure says:

    i have honoured williams with his very own ‘fake-tweet’..

    ..shearer and bennett also get their own ‘fake-tweets’ today…

    ..it’s been a fake-tweet kinda morning..

    here is the tail-end of williams’ ‘fake-tweet’:

    “…(and isn’t it funny how nat-rad nine-to-noon claims i speak for ‘the left’..?..heh..!

    ..the only time i go left is when i am going out of my driveway..

    ..and that’s ‘cos i live in a one-way street…called ‘neo-lib way’ (and always have..)..”

    phillip ure..

  15. SPC says:

    Sam, if it was land restricted for housing that is causing the rise in land price for building on, then what is causing the rise in value of farmland? Not enough land taken from farming for housing? No? Then what?

    A clue.

    1. population increase has an impact on land value for building.
    2. the relative fall in state housing numbers per head of population
    3. the accomodation supplement increases the returns in providing rental property – combined with the lack of a CGT this makes speculation in this area attractive
    4. the lack of loan to value controls exacerbating the ability of investors to leverage off other rental property ownership without paying any CGT
    5. the access to unlimited amounts of offshore finance for speculation in property

  16. SPC says:

    The current scenario.

    With the GFC, there was a collapse of finance companies and some property developers also went under.

    Now financing properrty development is more difficult, so in recent years there has been limited building.

    This resulted in a shortage in Auckland. This leads to rising property values – it is the land component that rises (not the improvement). The property value raise arises from the shortage of buildings but it is the land value for the property that rises. This raises the value of land that is not yet built on – and raises the cost of new property development (when finance is harder to raise).

    Our valuation system makes it harder for the market to adjust to rising demand for new supply – because the rising demand is reflected in rising land values/rising cost to make more property available.

    This is why the market is dependent on government led investment in new property. It should not have to be, but unless the valuation system changes this is the way it is.

  17. John W says:

    Population world wide is a massive and terminal problem. We don’t seem to have a visible policy on restricting our population.

    We are importing heads to consume more and keep the business/ finance world happy while the rest of NZ pay with dearer costs, competition ramping up prices with banks having a field day in housing and farmland.

    As population and “development” continues we loose our environment and see greater inequity.

    To make matters worse, off shore speculation and ownership here is unlimited.

  18. Grant Hay says:

    @John W. Agree!

  19. Pete says:

    Actually, I thought Bryan Gould’s article was long on rhetoric and short on substance. He made some assertions that are just plain wrong. It is the land component that drives affordability (not the building component), and principally, it is the very tight control and expense of the consenting process that is the issue.
    I did a rough calc recently and found that GST, development levies and council fees account for $90k in a $250k section. Add land land purchase at around $60k per lot, and another $60k for construction costs and you are at $210k before cost of sale, risk, and return. No wonder developers in the Auckland region are taking a breather!
    A partner and I did a development recently and although the land was fully zoned, and our application was totally compliant (i.e. without conditions) it took council 18mths to issue a consent. There was nothing complex or controversial about this development, and it was not subject to any objections by interest groups. In the course of the application council increased their levies by approx 120%. There is no way a developer can plan for this type of extortionate practice.
    It is just unacceptable that it takes 18mths to issue a consent, especially when the application is quite straightforward and council have already zoned the land. This delay added over $500k of holding cost (about $5k per lot).
    Hand on heart I can tell you that council staff were inefficient, incompetent, and also downright dishonest. On a number of occasions council deviated from their published and widely consulted plan to force other ideas on us that had never been before council, were unapproved and had no public consultation. it left me wondering how a ratepayer could make a complying application when council officers were making ad hoc decisions along the way.
    I also found that council staff would quite happily invent reasons to keep the project on hold and if a complaint was made to an elected official then council staff were adept at misleading the official.
    So when Bryan Gould talks about a free market he is just plain wrong. This is a controlled and tightly regulated market. When he talks about councils subsidising developers he is again plain wrong- developers build the infrastructure, pass it on to council at no cost, provide a new rating stream, and also provide hefty development levies. The issue is that councils do not spend their income in the right areas.
    When he talks about the 60′s he has a rosy glow. Who wants to return to the days of going cap in hand to a bank manager. Remember when first mortgage rates were 10, 11, and 12% and when you were forced to get a second mortgage at up to 14 or 15% because the banks wouldn’t lend enough? these were the times when the top tax rate was 67%. So it just doesn’t work to compare different time periods in this way.
    Bryan Gould’s comments were for me, representative of the uninformed and ignorant public comments offered by a wide range of ‘officials’ who actually have no idea what is going wrong nor any idea how to correct it.
    And before anyone hangs me for these comments, I stand for responsible, managed and environmentally sensible development. I support council control, but it is now ‘out of control’.
    One of the major contributing factors is the lack of experience of council staff-too many folk recruited from off shore and too many recent grads. Recently two young women turned up at my farm asking for me and said they were from a ‘planning group’ and were here to review my resource consent application. I said ‘excuse me, but are you out of Uni yet?’. I found that they were both students on holiday jobs ( lovely young women) but they literally hadn’t a clue and they were going to recommend what was to be done on this consent. Says it all really.

  20. John W says:

    “Responsible Developers”

    I have no doubt there are some.

    Also I have experience with Environment court appeals where large bank rolls were driving attempted plan changes by developers who are most irresponsible.

    You are right about the GST increase damaging the chances of young home owner catching up with escalating house prices.

    Meanwhile the taxation of the developers and suppliers have been lowered.

    Nacts little boost to aid trickle down.

    In the days of State Advance loans at a few percent many houses were built by builders with developers and speculators have a very much smaller part.

    Sub division is a costly business with more responsible management of storm water, sewage, power supply and communications but the subdivider pays for local facilities and not the infrastructure they feed into.

    As further privatisation is enabled these cost will rise sharply.

  21. Jack Ramaka says:

    The Government and Local Body Government picks up about 22% of the money spent on a new house build in the way of GST and levies. The problem is we have built a bureacracy here in NZ which requires great sums of money to keep the wheels of society moving, no wonder the average person can not afford a house here in NZ.

  22. George says:

    @Grant Hay says:
    “What I do know is that when I was 23, living in Muldoon’s Wellington in 1981, it was already looking next to impossible for most young people to get into the housing market anywhere near central Wellington.”

    Try putting your figures into the RBNZ Inflation Calculator and you will find that that “impossible” then was about half of what is said to be “affordable” now.

  23. Grant Hay says:

    Hi George. Yes I’m sure you’re right that the raw data would show that the cost of new housing is even more unaffordable now than it was 30 yrs ago. I believe it’s nearly doubled in the last decade. In fact the whole mix of factors affecting house price inflation has probably changed a lot since then. I only mentioned my little anecdote earlier to try and demonstrate that housing for the young and / or the poor has never been easy, but good housing in the modern world is a reasonable expectation for all citizens of countries which have the wealth to provide it. It’s just a question of political will and social priorities. I seem to remember that in the early 80′s not only were house prices going up due to supply / demand and the kind of irresponsible and exploitative speculation I referenced in my earlier comment, but loans were hard to come by, large deposits were required by the banks before they would lend and they were very fussy about who they would lend to. Interest rates were high and growing rapidly, topping out at over 20% by 1987 if I remember correctly. I think the last State Advances type loans were issued to first home owners who qualified in abt that year and by the early 1990′s Housing Corp had sold those loans or privatised them in some way and the cheaper interest rates attached to them rose to meet the market rate of close to 20%, which was a nasty shock for those who’d taken them out and started their families thinking they would be able to survive on one income for a while until the first child started school. This is all from memory and we all know how reliable that can be so don’t shoot me…

  24. Lou Peters says:

    “Real reason for housing unaffordability” Labour 1999-2008. Price rises like none seen before or since. You must have forgotten Raymond.

  25. Grant Hay says:

    @Lou. I’d have to agree. We bought a basic 1950′s weatherboard bungalow in ’95 for $145k and sold it in 2010 for $285k and that was after some loss in nominal value due to the GFC. Nearly all of the difference in price happened during the nine years of the fifth Labour Government.

  26. bbfloyd says:

    I so get tired of hearing, or reading oversimplifications used to justify ones own bigotries…..

    The fact that the economy had been artificially suppressed for nine years gives no excuses for the new administration shifting immediately to a “command economy” mode??

    The open slather approach of the bolger/Shipley govt immigration policy, and patchy administration of said policy can’t be allowed to figure in any consideration of the driving forces behind the “housing bubble”??

    I well remember the free for all in whitford, which has become “botany”… By the summer of the election year(1993)buyers from asia were offering 30% on average over govt valuation in cash for houses in howick,… and the building frenzy going on out there was keeping house prices from falling in line with downward tracking economic activity…(boom/bust economics anyone?)

    And who can forget the masterstroke of selling off how many state houses? Thirty thousand is a figure I remember from earlier debates…. All by 1999….

    My word, what a great way to set up for another free for all! And to add icing to the cake, it’s entirely legal to respond to “market forces” as long as one pays their tax…

    It certainly isn’t the done thing to point out how little control our government had over the behavior of our overseas controlled banking sector by 1999….

    Any easy to do answers as to how that could have been instantly fixed?…….

    Scapegoating has never been the answer…If history teaches us anything, it should teach us to recognise the repeating cycles throughout the last century self governance…

    Whenever we have had periods of reactionary governance, imbalances have resulted… Every period of conservative rule has left social/economic damage in it’s wake…

    Rule of thumb; the symptoms always FOLLOW the initial infection…not the other way around…Surprising how few seem to get that…

    The word for today is …..”timelines”….