NZ House Prices Must Fall

Greens Admit What No Other Politicians Will: NZ House Prices Must Fall

Geoff SimmonsEconomics26 Comments

Metiria Turei dropped a bombshell on today’s Morning Report; the Green Party wants house prices to fall substantially to restore housing affordability. It is encouraging to hear a politician display the courage to tackle this issue. Whether or not the Green Party has the right tools to deal with this issue is another question.

Housing Affordability by the Numbers

Metiria Turei has expressed a desire to reduce house prices to 3-4 times the median household income over time. Let’s put this in context. The international benchmark for affordable housing is for house prices to be three times the median household income. Currently in the New Zealand the median house price is $500,000 and the median household income is $86,000, so across the country prices are a multiple of six times income. In Queenstown and Auckland the multiple is much higher at around 10. According to interest.co.nz the only major centres in New Zealand with house price to household income multiples of less than 4 are Rotorua (3.46), Gisborne (3.34), Whanganui (2.21), Palmerston North (3.88) and Invercargill (2.64). As a nation we are a long way from Metiria’s vision of affordability.

This announcement from the Greens is far bolder than the housing affordability targets from other political parties. Both Labour and National have declared that they don’t want to see house prices fall, just for the rate of price growth to reduce. Think about this for a moment; unless incomes are growing faster than house prices then housing affordability won’t improve at all, it will continue to get worse. And even if house prices are held constant, it would take decades for incomes to grow enough to restore housing affordability. Without house prices falling, affordable housing is unlikely for today’s young families until they are nearly retired (if they can afford to retire).

The Green Party’s courageous vision to reduce house prices dramatically – albeit over time – is the one respite in this otherwise bleak outlook for young families. For that they need to be commended. The only question is whether they have the tools to achieve their vision. Let’s have a look in the Green’s toolkit.

Taxes

Up until now the Greens having been pushing a capital gains tax, which won’t be enough to achieve their goal for a number of reasons we have discussed previously. This is particularly the case because the Greens want to exempt the family home from the tax. When it comes to tax, exemptions are the mother of all stuff-ups; anyone who can afford an accountant can use exemptions to their advantage. In our view a Comprehensive Capital Income Tax is the ideal solution to housing speculation, although some economists favour the cruder and simpler land tax.

Building Up

The Green Party has long pushed for an increase in inner city living, mainly because of the environmental benefits. People living closer to town have lower transport costs on average, which translates into lower carbon emissions.

Whether Auckland will go down the path of medium density housing depends on the Unitary Plan, which is released later today. The question facing the Greens is if the Plan doesn’t deliver, what will they do?

 Migration

Like Labour the Greens have long called for a ban, or at least some form of charge (e.g. stamp duty), to be placed on foreign buyers. This is great in theory and plays well politically, but hasn’t cooled the housing boom in Australia. This is most likely because in a modern open economy there are ways for people to avoid such a charge; for example though trusts, businesses or simply by getting locals to do the buying for them.

A much bigger issue than who is buying the houses is the fact that we have more people wanting to live in them. As highlighted by the Reserve Bank the sheer rate of immigration is an issue, particularly in Auckland where the bulk of migrants are headed. The Government is right to point out that the majority of the change in migration has been New Zealanders returning or not leaving. However, that overlooks the fact that there is a substantial influx of migrants that we can control, particularly in low skilled jobs.

In short, it is great to hear a politician enunciating a bold vision on housing affordability. The question is whether the have the tools to achieve their own goal.

 

Greens Admit What No Other Politicians Will: NZ House Prices Must Fall was last modified: August 15th, 2016 by Geoff Simmons
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Geoff Simmons

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Geoff Simmons is an economist working for the Morgan Foundation. Geoff has an Honours degree from Auckland University and over ten years experience working for NZ Treasury and as a manager in the UK civil service. Geoff has co-authored three books alongside Gareth.

26 Comments on “Greens Admit What No Other Politicians Will: NZ House Prices Must Fall”

  1. Thanks Geoff for this. Of course we don’t have all the answers – no one does. I was clear that this is a work in progress and we need to gather all the potential tools together to see how we can best manage this in a way that protects families now and in the future. So I hope we can work together to build that toolbox.

    1. Keith Locke said: “anti-immigration feeling has no place in the Green Party”. has much changed since then? I notice last election Jan Logie said:
      “Let me say clearly now: the housing crisis is not the fault of recent migrants; the unemployment rate is not the fault of recent migrants; and asylum seekers are not a threat to us.

      The housing crisis is primarily a predictable result of successive government’s decisions to leave housing to the free market and refusing to institute a capital gains tax. The Green Party does however want to put restrictions on home ownership for people who are not permanent residents because offshore speculation in our housing market has contributed to the increased price. We didn’t support the National government’s decision introduce (25th July 2011) “Residential Property Development” to the list of acceptable investment types for wealthy overseas investors to apply for visas here.”
      This seems to suggest that house prices are unrelated to levels of immigration?

  2. I agree with you Geoff, the Greens have had the bottle to say it like it is. It is so refreshing to hear. I heard Andrew Little on the news at midday saying that Labour had no such plan. In reality all Little was doing was looking at the bottom line of votes at next year’s election. In effect they are no different to National, and with those two swapping in and out of power, we can expect no change soon. Sometimes courageous things need to be said, and what a shame it didn’t come from one of the major parties.

    1. Hi John well said. The Greens in the main stick to their core values. Labour and National change their ideas to suit their audiences with the aim of capturing swing voters especially in the lead up to an election. The Greens attempt to keep them both honest.

  3. The Greens take the political risk of telling the truth and you question if they have the tools. They don’t have the tools as the major parties are still mucking about trying to trick voters into accepting excuses and empty promises.

    You know that the major parties will not do the right thing, so push them and continue to encourage people to realise that the best bet for housing affordability comes from the Greens. Yes we need major changes and the Greens have the vision and skills to work with all parties to deliver it.

  4. Good on the Greens for stating boldly and clearly what needs to happen. Can it happen though? I doubt it, even though I’d really like it to for a whole range of reasons. One reason is that new building costs keep going up, even though the rate of inflation is (supposedly) very low. Fletchers shares have increased markedly over the past year, coincidentally as building costs go up by around 5% per annum (7% or more in Auckland). Why is this? Until we have radically new approaches to building, little will change. How radical? VERY radical, enough to drop costs by 40% or so! How will this happen? How about no one owns the land anymore (perpetual lease from NZ inc)? Super efficient new technologies are introduced (there are new technologies, but they don’t seem to result in lower building costs)? Import heaps of cheap labour & materials & capacity (e.g. Chinese construction firms)? Maybe not, as quality issues will invariably arise. Basically until our basic human natures of greed, insecurity, NIMBYism, and lack of compassion change on a BIG scale, nothing is going to happen. f course, if there is a massive exodus from NZ (again), so demand dries up, that could bring about a 40% drop … ? Random thoughts and a bit of a rave. Cheers

    1. Cost of building is a biggie!
      Materials here are simply too expensive – somebody is raking it in

      1. Must be, hence Fletchers boom? Even in the provinces, building costs are going up. Can’t be because of costs in Auckland, wages aren’t going up much (as far as I know), so something else is. Someone (probably lots of people along the food chain) are clipping the ticket in response to greater demand. Market forces philosophy fails yet again.

        1. Import enough people you won’t get a wage rise. Wages rise when bosses want to keep workers. If theres a pool of workers waiting for that position why pay more?

    2. I strongly support the idea of “no one owns land anymore.” Rather than a perpetual lease, what about a 99 year lease that each new buyer has to pay to extend back out to 99 years every time the land is sold? That would provide income to the council/central government/both on every transaction. It would also mean that people could not claim ownership of the land with the consequential belief that they have the right to do anything they like on it, regardless of the impact on others or the wider community.

      1. Yep good idea. Land is there for the collective “use” or “benefit” not for accrual of power or gain for the individual. “Collective” includes consideration of environment as well as social effects.

        1. Well at the moment it’s only leased anyway. Stop paying your rates and see what happens

          To truly own land you need to shift rates to where it should be. In taxes. Every one relies on the services the councils provide. Roads that trucks use to deliver our grub to supermarkets. Sewage even for the constipated few need it occasionally 🙂 Not just the house owner’s.

          For permits etc then it’s whoever wants the permit. Although for freedom camping I want a referendum about charges in each council area. Just to make sure it’s the will of the people you understand :-).

  5. Its easy to say things like this when you know you’ll never have to actually do anything. Maybe we should all just accept – just a thought – that its time NZ had a decent rental market for quality, long term rental properties. Not everybody can or will want to own a house. The main reasons i finally caved and bought were (i) so i cld have a dog and (ii) so I cld have longer term stability. You can get these in rentals in Europe where renting is normal.

    1. Large scale institutional investment and government policy intervention to control prices is required, as I believe is normal in places like Germany. Here we have a large number of (mostly) amateur landlords, whose primary aim is tax free capital gain, basically controlling the lives of inferior beings who haven’t been blessed with familial wealth & privilege (which gets them into property or enables higher education etc so they can achieve it themselves). Maybe a gross generalisation, but from what we read and see and hear from talking with others, this does seem to be the case. Major government intervention is long overdue – remove all incentives for property investment (speculation) and reduce unnecessary immigration/overseas buying. Harsh? Maybe, but so are the intergenerational consequences of what’s been allowed to occur.

      1. Good points Geoff…if things continue as they are the majority will become marginalized…and then revolution will br inevitable. Has history not taught our so called experts/clowns anything?

  6. Just another thought on this property issue. Both local and national government have a large number of intelligent, highly paid advisors, supposedly acting on our behalves to ensure the beneficial outcomes our country needs. One therefore must conclude that the outcomes we have are, in fact, what these bodies have wanted. That is, a generation of (largely) wealthy landed gentry, and future generations destined to poverty (or a move elsewhere). Back to England of a century or so ago – this is progress? So … what should we do? Revolution is a distinct possibility (since the voting numbers don’t yet stack up). Or how about they (government and Auckland Council for example) take responsibility for the mess they’ve made and initiate real change to fix things up? Maybe the “experts” who have provided all the policy advice should fall on their swords (or take a massive pay cut)? It must be Friday afternoon, but really our country is now in dire straits and it hasn’t been done by us Joe and Joanne averages.

    1. All good fact-based points. So why do 50% of Kiwis vote National even though its policies only support the 1% and then the top 20%, leaving the rest floundering?

  7. Houses should not be the best yielding blue chip investment but a necessity. They shouldnt be tax free investment vehicles but a place to habitat and purchase for an affordable price. They have become so expensive that it has created a division of equality down the lines of those that have property and those that dont and cant afford to ever buy one.

    The health of our economy would be much better if house prices were 3 times the average wage. The problem with devoting more and more of income to housing is that the rest of the economy has to suffer. Imagine the benefits to the wider Auckland economy if people in Auckland had to service a $300,000 house instead of $1,000,000 houses. In an economy where productivity growth is almost non existence this is a real way to increase the wealth of people by dramatically increasing their disposable income.

    Turei is saying what our major parties should be. Both Key and Little flatly rejected her idea because they are worried about their home owner voters.

    I believe our political system leads to poor decision making. Areas like unaffordable housing need cross party policy consensus rather than being an election football as long term it has such negative effects on the wider society.

    So agree with the Greens affordable houses for a better society!!

    1. Agreed. A terrible waste of scant resources having young folks (and their parents in many cases) donating most of their future income to ANZ, BNZ, Westpac and ASB via mortgage interest. At least in USA, they could walk from the debt, we’ll have it as a blight on our economy for decades to come.

  8. However, that overlooks the fact that there is a substantial influx of migrants that we can control, particularly in low skilled jobs.
    …….
    And yet Hike Hosking interviews Professor Paul Spoonley and Spoonley (“a migration expert”) says you can’t reduce the numbers.

  9. The Greens can say what they want. May look bold. In reality they may if they are lucky force one of the major parties to to their will.
    At present they don’t have the power to change what is needed to change.

    Houses new and old for NZ citizens and residents only. You buy it, you live in NZ.

    No more immigration.

    Help immigrants from the current National run in power, to go back to where they came from. With compensation. Courtesy of National party politicians and party members pockets. A percentage on their earnings.

    Yep nasty Bob. But until pressure on housing is diminished. Housing will be too expensive for many Kiwi. But to address that. The minimum weekly take home pay to be no less than the cost of living in any area around NZ. As it differs from place to place the minimum will differ.

    There isn’t a politician in this world that would agree to what I’ve written. And just like the greens I to can make bold statements. Probably like the greens I to believe what I’ve written would make a difference in the quickest possible way.

    YES NZ needs immigration. But we don’t need our entire history of them right now. In one massive immigrant migration. We are experiencing too many too quickly.

    The idiots that say it will fall, may even be right. But until they all win lotto each game from now until Xmas. I won’t believe their crystal ball. It is a sop so we will think oh goody, there’s and end.

    It won’t end. It’s tell the sucker what they want to hear. While we keep doing it until they really squeal.

    It is not anti immigration. It’s sensible immigration I want. 1.7 million specialist jobs? for the 1.7 million borne overseas. Yeah right! I didn’t realize we had such a shortage of Pak n Save and Countdown workers. And while the lads and lasses at those establishment do a great job. I’m pretty sure the training doesn’t take that long. Nor is that specialized we need to import folk for it.

    Cheers. 🙂

  10. Well I had the bare-faced audacity to try and build some affordable apartments around 6 years ago. In Papakura, South Auckland.

    And I can tell you Papakura Council, and then Auckland Council made it nearly impossible and hugely expensive, stressful and time consuming. The government is right to blame them for the housing shortage.

    Like many others, I have done this once, and will never ever do it again. Auckland Transport actually tried to take some of my property from me and lease it back to me for crying out loud.

    So those of you here, who malign landlords, who complain about the government and so on, try building an affordable house in Auckland. Instead of just sitting on the sidelines and bleating, thinking you know the answers. Give it a go, and you will see first hand what the problems are.

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