EVENING REPORT: On Friday August 20 the Reserve Bank of New Zealand governor Adrian Orr told Bloomberg that a fundamental imbalance in the New Zealand economy is a lack of supply within the residential housing market. But will a supply correction alone resolve New Zealand’s affordable housing crisis? Stephen Minto analyses this question.
SPECIAL REPORT AND ANALYSIS – by Stephen Minto.
Housing affordability is more than a simple case of demand and supply; there are structural factors creating too much investor demand for residential housing. Because of this, New Zealand can’t just build its way out of this crisis. And removing planning restrictions will delay intensification and the supply of affordable housing, the exact opposite of what its proponents claim. The structural forces, in which the property market functions, must be fixed.
To see this we need to understand three things:
- How we got here, and where here is.
- Our current trends and economic forces.
- What direction do we want to go in and how (possible solutions).
Part 1: How we got to this crisis – the NZ economy is a one trick pony; residential housing
We all know:
- The ‘normal principles of taxation’ favour holding a relatively low-effort, non-productive asset – residential property. Especially because you could claim the mortgage interest paid as an expense.
- There was no capital gains tax.
- The banks want to lend on leveraged property as a relatively secure loan. They are risk adverse.
- You can have a holiday home and rent it out occasionally as a pretend business to subsidise having it.
- Huge tourism to New Zealand along with AirBNB and ‘bookabach’ etc have given a lucrative income stream in the short-term rental market.
- Mum and dad savers/investors learnt from the 1987, 1998, and 2008 economic crashes that property was the best at retaining its value.
- The renters pay your mortgage, so there is little drain on your ‘income’ or there is positive enhancement from rental losses.
- New Zealand has had positive migration flows.
All these factors have been in place for many years making residential housing a fantastic investment, or superannuation scheme, or wealth–gain mechanism. It’s not clever to invest in residential property, it’s stupid not to.
But wait there’s more – the neo-liberal economic crisis
Commentators don’t talk about the neo-liberal structural changes in New Zealand and other first world economies from 1980 that have collapsed alternative investment opportunities.
The world economy was opened up on the mistaken belief that the great growth years of capitalism were made in an environment of little regulation and tax. A mantra to free up the private suppliers of goods and services (supply side economics) from laws, labour, and taxes was said to lead to an economic boom.
We all know there has been no boom for working or middle class people. There has been a boom for financial capitalism, technology, and billionaires.
What happened was skilled manufacturing and industrial jobs were exported to countries like China, Vietnam, and India. Many high income jobs evaporated in New Zealand leading to fewer people being able to save house deposits or save capital to start a business. Yes we got lower cost imports to match lower incomes, but we also got a throw away society with so much rubbish brought in.
Also, lower taxes and a smaller government meant the main source of apprenticeships, from Ministry of Works, Railways, Defence etc., dried up, leaving New Zealand small businesses without a source of trained and qualified people. They now had to pay to train them. We now have to import skilled people. We have fewer skilled people to build houses. Fewer apprenticeships means fewer people to set up their own businesses meaning fewer opportunities for those wanting to strike out on their own. Fewer new businesses means fewer medium-sized businesses, which could be an investment option for those wanting to invest.
The above reality is compounded due to the absence of a capital gains tax as business owners have an incentive to take an easy-life option and sell up to overseas buyers. These overseas owners contribute tax and labour costs but they often do their best to avoid these. Businesses listed on the sharemarket are often sold overseas and pulled out of our sharemarket. We now have a thin share market. Profits from New Zealand assets are exported overseas. Most investment capital is not being invested back into growing the New Zealand economy, instead huge amounts of New Zealand’s investment capital is going to non-productive assets, such as residential property. These are all structural problems significantly damaging the ability of the New Zealand economy to grow.
New Zealand is now a service based economy but business set-ups in New Zealand are often for overseas franchises with low margins and wages. In fast food our small shop owners struggle. Retail as a business model is struggling because consumers have less disposable income because of high rents. High rents, and other utilities like power, suck money out of other areas of the economy. Our overall economy is being damaged by being skewed to the non-productive asset, residential property.
This is where the New Zealand economy is today; there is almost nowhere in New Zealand to invest except in residential property. Neo-liberal policies have shrunk our domestic economy and removed opportunities for investment. Entrepreneurs are risk averse – they minimise risk and buy property.
Is there a property bubble?
Yes. High house prices mean loans are beyond the ability of borrowers to ever repay. But that is still profitable for banks. The loans help push house prices higher, which rewards investment in property, and so it continues. But like the 25 July 2021 Radio NZ article ‘The problem with economists forecasts’, many have predicted a bubble burst but all have failed. Why? It’s obvious. The structural problems and incentives to buy residential housing are all still in place. Where else can the investors go? The economic signals from a dysfunctional economy trap investors in residential property. (ref. Radio New Zealand; July 25, 2021)
The property bubble can’t deflate until there is a functioning economy with alternative low-risk options for investment.
There are ways out of this, which is covered in Part 4 of this four part series.
Part 2: The current trends and economic forces shaping housing affordability
New Zealand can’t just build its way out of the affordable housing crisis. Previously I noted the ‘normal principles of taxation’ and the legacy of the neo-liberal experiment are skewing the economy to trap investors into holding residential housing as investments. This part looks at the recent developing economic trends that now trap middle and working class people into renting for life and why that is bad for our economy.
Trends – big business residential renting
The New Zealand situation sits along with a trend in the United States where large corporations, e.g. the Koch brothers, have been investing in new rental properties because the returns on rentals are so strong. This is because house prices in the US, like NZ, are high. This shuts out most young middle- and working-class buyers. These people then become a captive market of renters as they are wealthy enough to pay high rents. And the high rents in turn make it almost impossible for renters to save a deposit to buy a home, and the captivity continues. The returns and prospects for business are great.
Over time, the rental investor market is moving away from mum and dad investors as they surrender their houses to pay for retirement homes or to release capital to live comfortably. Big business will take up a lot of that divestment; they can leverage far more and so are able to pay and sustain high prices for residential houses. They will also be buyers of older homes to redevelop into more ‘productive’ new builds. Banks will feel secure to lend to a large business with captive renters.
This means the future of housing is evolving into a big business ‘build to rent’ model, which means not ‘generation rent’ but ‘generations of rent’.
And this is bad for the economy. One of the ways it is bad is it leaves people with little capital to borrow against to take up a business option. It traps people as employees. And people renting won’t be able to build equity because there are fewer other investments options and those other options aren’t performing as well as residential property because all the investment capital to grow those other options is being sucked into residential property. And the chances of saving to build equity are low because rents are high. More reasons are given in the next trend (see below).
Some governments have also undermined social housing, which has exacerbated the problem, but that failure did not create the affordable housing crisis.
At this point, some people who own lots of properties will say, ‘So what?’
- Nothing is wrong with people renting.
- Nothing is wrong with high rent if the market is willing to pay it.
- The critics are all anti-business.
My response is this:
- Yes, it is wrong if there is no choice.
- People are not willing to pay high rents – they have to pay them.
- Redirecting investment to the productive economy (exports, innovation, producing goods and services) is good for business.
All businesses will benefit from a shift to investment in the productive economy except the types of business based on highly leveraged rental property. The property investor landlords that are not based on highly leveraged property will carry on renting.
Trends – high price houses and rents are here to stay.
In theory, increasing housing supply will bring down house prices, but that is not so in the economy we have.
For renters, the high prices paid for housing purchases are used to justify charging high rents. Also, big business is very keen on making sure there is a good rate of return on capital, so there’s an incentive to keep rents high.
Supply of housing and the rental price is not really linked. Pricing is about how much ‘consumer surplus’ the seller believes they can extract. It is not about the costs of the business so much as what they think the renter can pay e.g. linked to area, what others are charging in that area for that size of house. What the renter thinks the rent should be is not really relevant. Business costs do not really matter for price e.g. as a landlord pays down their mortgage on a rental property they do not reduce the rent on the property. Cost and supply do not drive rent prices.
The easiest example to see how supply and price is not linked is the car market (used and new). There are a huge number of cars in New Zealand and it is presented to the consumer as a myriad of choices about car style and performance, ‘why do you want the car?’. Each choice means it becomes a smaller range of cars to choose from. Every ‘extra’ feature is a way to distinguish one car from the hundreds of other cars; to push price up, or help hold it up. This is what will happen with the housing market. The business model market will have a deliberate desire to push choice and variety up to push, or keep, the price up.
So for the ‘build to rent’ business model we will see tiny studio apartments marketed as the affordable option, which really primarily just suits a very young guy on his own, or short-term stays. As the size increases it will exponentially get more expensive. The business model will run that tried and true for-profit strategy. They will start organising your loans to make the purchase so they can get a commission.
Supply is only one of the many factors (e.g. location, quality, number of rooms), to set a rental price. Too many people are talking as if supply will fix the problem of affordability and this is a mistake. For example, a ‘tradie’ did a job at a rental house (almost $700 a week for a whole house in an outer suburb) there were several people home (a Polynesian extended family) and the rental owner, in casual conversation with the tradie, said as there were more people in the house than they thought, they would raise the rent, i.e. they can charge more. This is an insight to price setting. The idea, that people can just go somewhere else if rents rise, is silly. People want continuity with where they live, especially if they have children at schools. Also, demand to rent a property would generally be seen as inelastic, i.e. you need a place to live so you have to pay what is asked for. If you negotiate a rent reduction it tends to be by quite small amounts. (I’m sure there are anecdotes of some large reductions but clearly that is not the norm from the Trade me site or as renters report).
This shows cost, and supply, is not what primarily drives rent prices and this business model will work counter to the government’s, and most voters’ objectives, of ensuring there is affordable housing for our families, children and grandchildren.
Trend – a business ownership model versus a home ownership model
Residential housing is currently being repurposed into a very strong and profitable business model either with long term renting, or short term renting (Airbnb, book a bach etc) for tourism – when tourism returns – the previous model being high levels of home ownership. These business models will further push out home buyers unless they can pay a very high price. Therefore an affordable housing shortage will persist due to New Zealand’s lack of building resource capacity and a positive net migration. This is the nature of the private market and it has already shown it can’t deliver affordable housing. It needs a push, and help, to deliver affordable housing.
With a move to big business running more rentals, the chances of rents being lowered by supply are slimmer than if it was lots of mum and dads running the rental market. A large business will hold many properties and can carry empty property more easily as tax deductions can still be made against the property. High rents on some properties can cover for vacant periods on other properties.
Also the concept of ‘affordable’ is a monetary concept but housing is a qualitative experience. The economic/profit drive for business will be what is market ‘affordable‘ – e.g. those apartments that are south facing and that do not get any direct light, or they look onto a concrete wall. More planning rather than less will be needed to avoid these sort of outcomes.
The private rental market is not conducive to lower rents. For example, one rental comes onto the market and the fact that 10 or 100 people applied for that one new flat is taken as a signal to all the other people holding rentals (with that rental service company) to raise the prices on their other rentals. The private market tends to quickly inflate the impacts of scarcity. But when one rental takes a long time to rent there is no rush to drop their prices on their other rental properties. Private markets tend to hold prices high. So housing supply, if held in the private business model market, will not necessarily bring down rental prices. Anecdotally, I am personally aware of many houses in New Zealand’s capital city Wellington, that are not occupied. Ideally, this housing stock would be used for housing supply if done up, restored, renovated, or simply rented out. Some supply currently exists but is not being utilised. This is the scourge of land banking.
Rents are high now and deflation is only generally associated with economic crashes. There is nothing identifiable yet that would indicate rental prices will decrease. The whole discussion, about increasing the supply being the solution to the housing affordability crisis, is just magic thinking. If left alone, the economic forces at work will prevent increasing supply being able to have a positive impact.
Former BNZ economist (and now an independent economist) Tony Alexander made a point in a NZME bulletin that getting tough on landlords will just drive up rental prices. However, I argue, prices not quality have been rising anyway. Therefore, now is the perfect time to remove interest deductibility from residential rental property, particularly as interest rates are currently low. Nobody is getting tough on landlords, rather investor demand is being dampened and investment capital gently directed away to the productive economy. (ref. Youtube, NZHerald.co.nz; March 1, 2021)
I repeat increased supply and intensification definitely needs to happen but it is not going to launch a huge reduction in house prices or rent as the forces driving investor demand will still be in place. And supply is still a long way off.
But there are things that can be done to free renters and house buyers from high prices by making the market work better. See solutions in Part 4 of this four part series.
Trend – Government as the good quality high paying tenant
The outlook for investors in the rental business is getting even better if rent is made to beneficiaries as the rents are paid direct to the landlord by the government. If there is an overloaded or not properly funded bureaucracy any complaints about the quality of the rental may be slow for the government to follow up on, but the rent continues to be passed through directly to landlords. Business loves it as it is a very secure income stream. If government has to pay repairs for damage it may be a more reliable payer than a private tenant.
On rental price settings that impact government, it was strongly anecdotally reported that with the Government’s first budget, where the accomodation allowance was raised by $50 a person, rents increased correspondingly. This showed the rental business market’s true colours. The rental rise was not based on costs but on the ability to extract the money as the government had declared it available. This shows the government therefore will become trapped in a cycle of paying for high rents by leaving so much of the rental market in this growing private business model.
Trend – business model housing is bad for the economy.
This is bad for the New Zealand economy. High rents, or mortgages (and for other utilities) means less disposable income for renters/mortgagees which leads to less stimulus into the rest of the economy. More disposable income could mean more people seek education, experience the arts, take up exercise, domestic travel, etc. All these are NZ based service industries that are struggling at the moment. But landlords in particular have a captive inelastic market where they can continue to raise rental prices even though interest rates are at a record low.
As said before, high house or rental prices prevent/slows people developing capital on which to create a business opportunity and/or push an innovation they may have developed.
As bad if not worse is the diversion of so much of New Zealand’s investment capital into a non-productive asset, residential housing. We need that investment capital to go into innovation projects and/or producing things for export, or for the services industries that our economy employs most of our people in. The housing market, built on a business model, is not a service industry we want to encourage.
And once the ‘build to rent’ companies take over and they are big enough they might list on the stock market and then the chances of it being sold overseas – with all the rental profits going overseas – becomes very real.
New Zealand will not get wealthy selling houses to each other.
No business representative group should be upset about this redirection of investment into the productive sector of the economy. It will benefit most businesses. It is only those rental businesses built on being highly debt leveraged that will have to change.
There are solutions to high housing prices and the affordability crisis outside a big business rental model, I talk about some solutions in Part 4 of this four part series.
Part 3 – The problems that come from a supply fixation as a solution to housing affordability
The government is aware of complexity in dealing with the housing affordability crisis so it wants to include the private market as part of the solution. They have reflected this in the Urban Growth Agenda. It encourages changes to relax planning rules to facilitate residential development and intensification. This means developers can force their dreams and vision through, rather than a community’s visions of a city being realised. History shows this will inevitably result in conflict and a firestorm will come down on the government and councils as the private market will not deliver affordable housing. Again, inevitably, government and councils will be blamed for damaging the cities as developers will insist they are simply following the rules. And, in turn, opposition political parties can exploit that conflict. The places where these ideas arose from is as follows.
Alternative ideas on affordability
Tony Alexander in the YouTube clip ‘When will house prices cool down/Cooking the books’ from March 1, 2021 says house prices won’t go down because low interest rates are what is driving the high prices. This is a factor because it makes it easier to borrow and leverage a property. But pressed for his suggestion to solve the housing crisis, it is not to raise interest rates (I agree with him) but to remove planning restrictions. This solution is linked to the defective increase supply argument as explained previously. He expresses sympathy for first home buyers and has a great analysis but overall he is passive about most of the factors driving affordability, they just exist for him. Using the metaphor of climate change, I think his analysis is more as a weather forecaster looking at the factors of the day but not as a climate scientist looking at what is underlying and driving the factors.
Alexander’s suggestion on planning is to relax the rules so that six story buildings can be built beside single story buildings. To take Wellington as an example, when this sort of absence of rules existed back in the 1950’s and 1960’s, huge amounts of heritage (for example in central Wellington, Te Aro flats and into Thorndon and Mount Victoria) were destroyed in an ugly way. This is why protection rules were introduced.
Alexander also critiques actions that impact the landlord/investor as being counter productive as any costs placed on them will just be passed on in rents. But even without any government actions rent prices are unaffordable. Fatalism, or perhaps a desire for defeatism, pervades his argument. Because if the actions were successful and investors are less active in the market there would be less demand and less push for prices to rise. And the New Zealand Property Council has said actions on removing the deductibility of interest would dampen investor demand.
- Can planning laws alone fix supply?
The answer is no because of the structural problems created by the ‘normal principles of taxation’ and the neo-liberal economic legacy that encourages excessive investor demand and that will hold housing values up – which holds up rents as well. Planning laws are needed to drive intensification which I fully support, but not at a cost to the historic character and liveability of a city. However, it appears the policy ideas Alexander supports are being listened to by the government.
Urban Growth Agenda – right idea, wrongly executed
For those on the left, the government’s recently developed Urban Growth Agenda is a neo liberal’s dream come true. Why? It is predicated on giving ‘permission’ to private developers to disregard the needs and wants of the existing local communities so the developer can build a six story build right beside one story houses meaning they will loose their sun and privacy with no chance to complain. The developer’s dream or plan (to make money) will come first and be forced through.
The Urban Growth Agenda does not have urban planning as its primary focus. It does have a vision of urban growth intensification which I fully support, but it is not ‘urban planning’. It has a feature Housing Infrastructure Fund which is money set aside to pay for infrastructure to support the private developer’s vision. This fund could cover parks, play areas, but it could also cover drains and water etc. But that is not urban planning for the local community. The risk is the fund will just be mitigation after an eyesore is built and the damage done to the house values of surrounding private home owners – the result: one group is allowed to make money over another group.
Some developers may not care if large buildings are built beside their properties as they can put one up beside it and each building can look into each other. The private developer sector’s vision is bounded by the constraints of; – I have this bit of land here and I need to maximise the profit from it so I stay comfortably in business. Even allowing for ideas like stunning new architecture it is still bounded by those facts. And those facts are not transformative urban planning in a positive community-led way.
The Urban Growth Agenda also has the Housing Acceleration Fund which provides for government directed as well as private developments. Why should it include private developments when these companies already have access to funds through debt leveraging, which banks seem quite happy to do? Our current housing experience in Auckland already shows private developers are not building affordable housing. They advertise studio apartments for $600,000. This suits short term rentals (Airbnb) investments, or young men looking for a bolthole to call their own. And if a studio costing $600K is rented out, the rent will be high, it will not be affordable.
The history of private developers conflicting with the Resource Management Act is simply their vision conflicting with others who are also stakeholders in the community. A simple way to fix this problem is for there to be an earlier process to identify needs in the city, a proper urban plan of what the housing should approximately look like in this or that area or site, and then for developers bidding or volunteering to be part of that development. The current connect of development and ownership of random pieces of land and then developers trying to impose their vision on that piece of land is causing conflict. Urban development should be more planned. Areas should change as part of a process that is well signalled and worked towards over time. In many areas of central Wellington for example, this can be done quickly as there is so much low intensity commercial use.
The current Urban Growth Agenda is not urban planning but a one sided urban permission to build. The plan too much takes the side of the developers’ interests. Once high rises are built there will be community reactions. Developers will then say we are just doing what we are allowed to within the rules. The public will then turn on the rules makers (the government and council). It is a recipe for anger and conflict which is generally not good long term politics.
There are many ideas to fix the affordable housing crisis while increasing intensification which I fully support. I cover these in Part 4 of this four part series.
Wellington City – an example of planning relaxation that will not lead to intensification and affordable housing supply
Presumably following the Urban Growth Agenda the current Wellington City Council has gone zombie-logic against historic suburbs in the mistaken belief that this is the cause of a lack of intensification in the central city where more people want to live. But a simple glance across the city shows there is lots of low-level commercial buildings and plenty of land on which to intensively build (e.g. Te Aro), and there is little heritage over large parts. Huge fields of carparks cover large amounts of Te Aro. So intensification is not happening in the non-heritage areas, which indicates that heritage is not the cause of a lack of intensification.
There is simply no economic push to intensity which is why intensification hasn’t happened. And reducing the planning rules to increase the amount of land that could be available to intensify (which is what the council has done) will actually reduce the drive to intensify in the central areas. The issue is simply not about heritage holding back intensification, and counterintuitively, is not about relaxing planning restrictions to increase the supply of land.
There needs to be some scarcity and an economic push to intensify (profit is a good one but that won’t make for affordable housing), and not just a council or government planning rule ‘we want to intensify’ and a permission ‘you can’. Developers will be screaming at this point ‘there is scarcity now!’ Okay? So what is causing that scarcity for their development ideas? Landbanking.
Developers have their little pieces of land they want to develop but they can’t get central city pieces of land because others own it and are just holding it for huge capital gains, (and possibly a lack of finance, or ideas, or ability, or desire). As an example; Wellington City is underdeveloped for central city living because of previous lax misguided neo-liberal councils and in part caused by reducing rates on commercial ratepayers and shifting (the cost of commercial rates reductions) onto residential taxpayers as part of the user pays philosophy. With lower land/rates costs businesses can afford to sprawl and underutilise land. Land banking is more cost effective with low costs. This has encouraged a lack of intensification of land use in the central city and encouraged suburban sprawl up the coast and Hutt Valley to get affordable housing.
The Wellington City council is currently allowing several developments of low level townhouses in the city, (car yards in Taranaki Street, and near Vivian Street between Willis and Victoria streets). The obvious question ‘why aren’t these semi industrial/commercial areas (car yards and carparks) developed into quality high-rise intensified living areas? The owners likely answer is – that low level two story builds are lower-cost to build compared to multi-storey builds, and therefore profit is maximised. But the real answer is nobody is demanding they build up or else. Developers should be instructed that as this site/area is slated for medium to high density housing, therefore they must comply and build it that way. And, if they are unwilling to do so, then perhaps somebody else will.
Another example to demonstrate this lack of push to build up, is car parks in Wellington. Carparks used to be many stories high. Now Te Aro has many sprawling field carparks. Parking provides enough income to business to cover costs. There is no drive for central city landowners to intensify and make the most of their land, so they do not. Council has listened and responded to developers who argued about planning issues, because that is what developers see. But what residents see is liveability with heritage. There are plenty of other areas to build affordable housing without destroying heritage.
The new Wellington Spatial Plan, which has significantly relaxed planning rules, is a disaster for heritage housing in central Wellington and the liveability of the city for all ratepayers. Heritage brings tourism and is one of the main factors that makes a place special and gives it character. Successful central cities have gardens and trees connected to history that allow views and sun. For those who have lived in and hated dilapidated heritage houses; that fault lies with the landowners who are land banking and exploiting people. That is what needs to stop. Heritage housing can easily be renovated and restored to a modern exciting excellent standard.
To those who say heritage is a poor use of land which is not permitting inner city development to occur so as to accomodate an increase in inner city residents; and people come first. Heritage is people coming first. The brand new two story no parking townhouses in Taranaki Street are no more effective at housing than low level heritage. Yes more people will live there than before (it was a car yard) but what about the long term opportunity cost of not having medium to high density intensification on those sites. More importantly these are crammed in with little outlook or privacy. The chances of them being subject to an urban ‘Vicious cycle’ is quite high, i.e. good residents move out as the units are too cramped/not private/noisy from wooden frames, ergo; rents drop, maintenance drops, those with little means arrive, poverty can drive overcrowding, meaning more people move out, repeat.
But even if we destroy all heritage and built residential Burj Khalifi towers over every block in Wellington, a time will come when all space will be used with a maximum possible number of people – then what for the people who still want to come? My point; there is a limit to the number of people who can live central. New York did not destroy Central Park to allow more people to live central. Beijing didn’t destroy the Forbidden city to allow more people to live central. Wellington should not destroy its heritage either.
Heritage (pre-1930’s houses) is a very finite and dwindling resource that is critical to the Wellington economy, i.e. tourism, including domestic tourism. It is also critical for the liveability of all residents. And unfortunately New Zealand history can’t just be corralled to a few tiny zones as proposed in the plan because historic houses in Wellington have not been corralled previously, so they are mixed in with other buildings, that is the nature of history. The problems arise as though the buildings do not mind a big new six story building beside it, the people living there do, and they vote.
Relaxing planning rules on heritage is not the solution to drive intensification of the residential housing supply. More planning and direct requirements on developers is needed, not less. But their projects can be supported when they accord or are adapted to fit with the community’s vision of the city. It could be that a developer may have land in an unsuitable location for their desired project but there may be land in another location, held by council, or government, or somebody else that could fit with that development. So it could be supported by a land transfer or some such vision.
I put forward several solutions to the housing affordability crisis and the need for intensification in Part 4 of this four part series.
I also suggest that Wellington City councillors roll back their Spatial Plan before the next local body election as there is already talk about councillors being challenged. It is a political gift to an opposition when large buildings are built in low level residential areas. Councillors want affordable housing and intensification like I do, but the roll back of planning restrictions is the empowerment of big business to force through changes they want without direct community involvement. You are facilitating the old neo-liberal ideas that have failed. (So Ironic that Nicola Young didn’t vote for less planning rules. Good on her.) On affordability you are saying to developers ‘you do it, build it, save us’. But that is simply not how they operate. They are attracted by the high prices for high rewards. But the high prices can’t deliver the affordable rents as they must have a sufficient return on capital. Your permission to developers to ignore the community is going to come back and bite you.
Part 4. Solutions – What can we do to fix the housing affordability crisis
SOLUTIONS: We first need to acknowledge there is an affordable housing crisis. Also, it is not a political issue but a fact that needs action to be taken to address it. The current actions will not fix it because the underlying economic forces are still in place that trap investors in the housing market and an increasing number of renters will be trapped renting, with long term equity consequences for the New Zealand economy. That is the basis for the following suggestions. It is the crisis that means we must look at things that may previously have been unthinkable for many.
No political party should be upset about redirecting investment into the productive economy for innovation and exports. No political party should want to stop voters, the average New Zealander, having the chance to build some equity through owning a house, and possibly create business opportunities for their family and for the rest of society from that equity. Those on the conservative side might reflect on the fact that homeowners have traditionally been more conservative. Voters who are eternal renters may be less conservative than you would like. Tough confronting solutions have to be looked at; it is a crisis.
The following areas of action are needed:
- ‘The normal principles of taxation’ are overdue for a reset – not just for housing, but in regards to how it directs and shapes the economy, and supports tax avoidance. If done right, it can lead to a less growth oriented economic model but a more sustainable one. Less chance of boom/bust, with more economic activity that benefits smaller entrepreneurs and NZ based businesses. If we don’t do this the lack of affordable housing will remain a problem for New Zealand as the principles are twisted in our economic environment and it will continue to push money into housing that is not affordable. I have developed a submission that reduces tax avoidance, and by shutting down some behaviours it redirects investment capital into innovation, exports, technology, and small local businesses.
- Provide councils, communities and government with the tools to urban plan more forcefully and directly. These can then be used to ramp up affordable housing much more quickly. The current idea with reduced planning rules is to give that ‘force’ to private developers.
- Ensure the current housing stock is available and being used to reduce the affordable housing crisis. This is a cheaper and quicker option than building new, especially compared with intensification projects.
- Create secure, profitable, alternative investment options other than housing.
Government must take the lead
To build an affordable housing market there is no escaping the fact that the government must take the lead. It must be government projects first. The recent trends show private enterprise does not deliver affordable housing. The burden must be on private developers to prove otherwise.
How can the Government build affordable housing?
The government is best placed to provide affordable housing but is constrained by not having much control over urban land on which to build and intensify housing. And it needs to be fiscally prudent to prevent inflation so it must be careful about borrowing. So as the need for social housing is in crisis, the government should take some or all of the following steps to get hold of existing residential housing.
- Trade in house for investment security – mum and dad investors with one or two rentals may be willing to trade the rentals in for a long term Government ‘term deposit’ paying a high rate of interest that is sufficient to compensate for loss of the rental revenue. This means government gets a house it can provide instantly to a family or person in social need (displacement of demand by another renter occurs but it is for a higher need).
- Public Works Act acquisition – we do it for roads so let’s use it for affordable housing. Sites close to transport could be taken if they were identified for development. From my understanding the Act is actually generous and some people dream of the cash injection from having some rural land taken. A question to consider is; should it be this generous? (In the Netherlands and Germany such acquisitions for housing are normally made at existing land use cost – I’ve not researched what happens in New Zealand).
- Trade up a home for a home – If an intensive development is going to occur but some local houses are needed for that development then perhaps they should be invited to choose one of the brand new houses at no cost to surrender their existing house. This policy would need to consider how much mortgage there is to pay. Should some of that mortgage be paid as well?
- Low intensity land use swap – a developer may have a vision for urban housing intensification and can think of a site where it would be good but does not own the land. In such a situation, a process could be initiated to evaluate the desirability of the low intensity land use versus the quality ‘affordable’ development, and whether the two could be integrated e.g. business on a lower level with apartments above. Once a decision is made, a swap of land could be enforced and perhaps a small compensation paid. Exemptions for historic buildings can be made for low intensity use. Other factors would need to be considered. The same could also apply for the government or local council around transport hubs where they have a desire for housing intensification, or other urban planning objectives, like parks that would support intensified housing.
- Reverse mortgages for house acquisition – the government eyeing up future development sites or as a more general service, could enter the reverse mortgage market with lower fees and protections for these people. A purpose in this is that the house could eventually become an asset for affordable housing. It should allow transfers from other entities that hold reverse mortgages. These mortgages are generally not good for home owners in rising markets.
Several of these options are relatively low cost to the government or a council. There is a cost layout but the asset (house and land) will be on the government’s/council’s books.
Once land is accumulated the process may be the government/council create a site, designing and planning its function and then inviting tenders to build it. If land is going to ancillary services or activities attached to it e.g shops, there may be the possibility of a joint cost or build. It could be that a site or area is identified and developers are invited to make proposals and tenders for development of that site.
Redirecting investment from housing.
- Trade in house for investment security – The first bullet above is a key component for redirecting investment. In some ways it is similar to a mum and dad rental investors who pay a property company to handle dealing with the rental (maintenance and monitoring etc) and the renters. So they don’t really see the rental house. This option would have to be developed and promoted.
- Micro private/public partnership – The government can also rethink the private/public partnership model which is heavily centred on cooperation with large corporate enterprises. The government could trial a descale down to individual New Zealand investors. A series of infrastructure projects (e.g. transport, housing, education, research, stadium) could be announced and people could choose to sign up to invest in the ones they want to. Their capital could be used to support the construction and then they would get some sort of reward over time as the asset is used. It means New Zealanders can use their capital to back New Zealand projects and they can see the result. The government would have to ensure there is not too much exposure to risk, just like they do with a big business.
Other options to deliver affordable housing sooner.
- Requiring maintenance of historic houses – For historic houses (pre 1930’s) the local council should have the power, whether the building is rented or not, to require the owner to bring the house up to a modern or restored excellent standard of housing. A house cannot be left to become dilapidated even if the owner chooses to do that, because it is an asset for the city and future generations. It is also a little piece of carbon capture. But as importantly the community must ensure a person living there is not at a health, fire, or safety risk to themselves or others. If the house is rented then the renting standards should apply – there should be no slum landlords. But the local council or government (perhaps administered by Heritage New Zealand) must decide if any action is to be taken. Should the owner not be financially able to update the house professionally, then the council/government should undertake the work and the amount spent becomes a low interest loan that is secured over the property. They should not be permitted to do the work themselves unless it is professionally being done and checked. Timeframes would be established. When the person sells or dies the loan can be collected from the house sale/disposal, or the house can move into the council’s or government’s stock of affordable housing assets with any balance in value paid out to the estate.
- An ‘empty home tax’. This is a tax in Vancouver as I understand. Anecdotally around Wellington there are lots of empty houses that could be rented but aren’t. Such houses should be sold if the person doesn’t want to do it up. Neighbours could be one of the main way this is identified. Obviously more work needs to be done to investigate and establish how this would work before it is applied.
- If a house has no occupier, then the house must be required to be rented – this is similar to an historic houses requirement and an empty home tax. If the house is in need of repair so it can then be rented, the council can undertake the work (contract in) and the cost of the work becomes a loan (normal interest) secured against the house. In Wellington for example there is anecdotally many empty houses that are a little rough but could quickly and easily be brought up to an excellent standard for rental. If the house is still not rented then the ‘empty home tax’ would apply. Details to stop delaying tactics would all need to be worked out.
These options would all generate local work and open opportunities for apprenticeships. They are quicker than new builds to increase the housing supply.
How should the government/council treat housing ownership when built through schemes it leads or looks after
The ownership model for affordable residential housing is open.
- Government ownership with rotating occupancy as people move on (Traditional state housing occupiers and rents).
- Rent to buy with financial support schemes from government to make this viable.
- Government (creates and builds affordable housing) on sells. The price will vary according to each development. Price would be influenced by market but pushed down to make affordability possible.
- Government owns houses but rentals not targeted to any economic group, rents capped at affordability for the renter. e.g. 20% of income. As income rises so does the rent.
A mix of the above is possible, and there may well be others. e.g. below – rent capped.
According to some economists there should be no need to buy a house but just rent which gives social/economic mobility if people need to move for work or there’s a change in family circumstances. I do not support this model but it is not without some merit. If this was the case most housing should be owned by government or other entities and rent capped according to an ‘affordability’ concept. e.g. 20% of income. Some push back may occur if private entities complain about the ability to maintain property, or to get a sufficient return on capital.
You can clearly see the housing investment sector is currently in a holding pattern due to the government announcements on removing interest deductibility and the Inland Revenue discussion document that holds out the prospect of options to get around the restrictions. But if this rent cap was required by government now, it would certainly create a very quick and immediate reaction in the rental and housing sectors. It is not something I would recommend but excess investor demand would dry up almost instantly.
The New Zealand economy is a one horse pony based on residential housing. Excessive investor demand, driven by ‘the normal principles of taxation’, leveraging, and a lack of safe alternative investor options is holding up prices leading to a housing affordability crisis. High prices shut out working and middle class people from buying, and make saving deposits impossible as high prices mean high rents. Even if banks make huge loans for people to buy, this strips disposable income out of the economy just as high rents do. This leads to less demand through all other sectors of the New Zealand economy, e.g. education, arts, domestic tourism, hospitality, the ‘trades’. As importantly it leads to less chance for a person to build equity, to one day take up a business opportunity of their own making, which in turn could employ others and turn into a medium sized business that further benefits New Zealand.
New Zealand has had almost forty years of a private business model focus on housing and it has not delivered affordable housing but rather the opposite. It can not deliver supply to meet demand. The new ‘build to rent’ model is driven off the current system and the prospect of good profit, not affordability. But we cannot build our way to sufficient quality affordable houses because all the drivers of excess demand remain in place, so prices will remain high. We need to make a collective effort, not just our private effort, and use the strength of government for; tax reform, overhaul existing housing stock, and building.
The affordable housing crisis is not just about the low quality of the lives of New Zealanders now and the problems from low levels of disposable incomes. It is now about the strength of the economic future of New Zealand, for our children’s and grandchildren’s sake.
EDITOR’S NOTE: Stephen Minto lives in Wellington with his two children. He worked for New Zealand Inland Revenue Department for approximately 33 years and is now enjoying no longer being bound by public service etiquette of being non-political.