Is housing really unaffordable?
While homeownership in New Zealand has fallen over the last 20-30 years from 73.8% in the 1990s to 64.5% (at the time of the 2018 census) it is still a significant proportion of the population. Given the population has increased by 39% in that time an additional 500,000 people now live in owner/occupied housing.
One often-quoted measure of affordability is the multiple of the median-income to house-prices. In the 70s and 80s this used to be in the vicinity of 4 to 5 times income. Now, particularly in Auckland, it is north of 10. So, at face value houses have more than doubled relative to income.
This would appear to be backed up by the recent data from Thompson & Barfoot indicating that the median sale price of a home in Auckland has increased from $575,000 in March 2013 to $1,048,000 in March 2021 (an increase of over 82%).
If housing has become so unaffordable why then are sales volumes and prices at all-time highs. Barfoot & Thompson recorded an increase in sales for March 2021 of 1,844 properties v 1,096 in March 2020 (68% increase) and total sales prices increased from $1.088 billion to $2.042 billion (87% increase). The rolling 12-month figures are equally impressive. To the end of March 2021 13,540 sales for a total of $14 Billion v March 2020 figures of 9,931 sales and a total of $9.3 Billion. Recognise that Barfoot & Thompson are a major real estate office and others are making the same comments.
The Government is sensitive to these trends and is in the invidious position of having to placate two different constituencies. Existing homeowners who enjoy the wealth effect of their ever-increasing property value and the first home buyers who are struggling to get on the property ladder in such a hot market. The cynic in me says this is why the Government has sought to share the problem and has now made it part of the Reserve Bank's responsibilities to set monetary policy with an overview to house prices.
The Government has not been idle. They have found a new villain in the piece to blame - that being property investors (previously it was foreign owners). Changes have been made, including removing the tax deductibility of interest costs and extending the taxation on profits if sold within 10 years.
Will these have an impact? Limited at best would be my assessment and that is because the underlying drivers aren't being addressed. In fact, despite the above statistics arguing housing has become grossly more expensive two factors would argue the opposite - the cost of funds (interest rates) and the cost of alternative (renting).
- Mortgage interest rates in 2013 were between
5.50% p.a. and 6.00% p.a. Today a 12-month fixed
interest rate on a mortgage is around 2.29% p.a. and
in some cases as low as 1.99% p.a. If we assume a
20% deposit and use the above-median house prices
(2013 mortgage of $460,000) the annual interest
component would be $25,300. In 2021 while the
mortgage would be $838,400 the interest component is
only $19,200. When you add in 8 years of wage growth
the cost margin is significantly lower today.
- Rental prices have done the opposite to interest rates and continued to rise. Many would say this is due to the shortage in housing supply. Whatever the driver the reality is the average rental cost of a three-bedroom townhouse in Auckland is now $670 per week or $34,840 per annum. Therefore, the cost of renting is considerably greater than the cost of ownership even when rates, insurance and maintenance are included.
The other factor that potentially continues to drive prices north is the anticipated return of Kiwis from around the world. Some surveys of current ex-pat Kiwis suggest anywhere up to 250,000 may return home in the next five years due to the fall-out of COVID-19 and family priorities changing.
Our current new build rate simply isn't going to sustain this level of demand.
So, what's the real problem? Is it the actual cost of buying a house - as the above would indicate once in a home it is more affordable to own than rent. Getting the 20% deposit together is a challenge. For many, this has become a joint venture with the "Bank of Mum & Dad". Could the Government not take on a similar role of one of equity partner and own a 20% stake in a first home? It appears we are prepared to spend over $1 billion on emergency/temporary housing, rent subsidies and other concessions per quarter. On an annualised basis that would provide a $120,000 deposit to 33,000 families. Wouldn't that provide a better return on our housing spend and provide a future asset for all concerned?
Or is the problem "cheap money" and the low level of
interest rates. The dilemma for the Reserve Bank is
needing to keep interest rates low to help drive the
economy and lift us out of this COVID-triggered
Rising interest rates would cause house buyers and mortgage lenders to be more cautious. The downside for New Zealand is that the majority of our banking system is foreign-owned (primarily Australian) so increasing interest rates would simply drive profits higher for foreign banks and be out of step with the rest of the world which primarily has a loose monetary policy stance (anticipated to continue for the rest of this year and into the future). Higher interest rates would distort currency flows and reduce business confidence. So, what's an alternative? Would it be possible to put a "surcharge" on residential interest rates? For example, airlines have put surcharges on tickets to cover rising fuel prices, and local councils have put regional petrol taxes in place.
A surcharge on residential interest rates (say 1%) would most likely affect the affordability to borrow and therefore impact pricing. A surcharge would be payable to the Government coffers - boosting government revenue not bank profits. A surcharge should not increase commercial interest rates as the bank profit margins are unaffected. A greater increase in commercial lending may eventuate.
If the problem is returnees from overseas then the only solution to this is increasing the supply of housing and reducing the time and cost to build.
In the meantime, despite the changes, many people will continue to see property as their best form of investment. Whether by owning a second property or moving up the property ladder to larger and more expensive homes. Other asset classes are either producing little or no returns (eg. Bonds and Cash) while Equities continue to increase in price but company earnings and economies are still very fragile. Volatility in prices and reduced or suspended dividends are likely to continue.