Here’s an interesting article that helps explain the NZ housing crisis in depth.
After breathing, this topic at the present time is number one for the media and politicians – it has been for some time and looks likely to remain so for some time yet.
A few thoughts, comments and suggestions that arise from all of this:
(1) The starting point here is to always remember that the number one issue for politicians is breathing, the number two issue is remaining in power – or getting into power – the best housing issues deep down can do here is to come in third at the very best.
(2) At present, there are around 1,790,000 households in NZ with the ownership and renting split being: Ownership 62% 1,109,800 households, Renting 34% 608,600 households, Living at home or with friends and/or family 4% 71,600 households (100% = 1,790,000 households)
(3) As at 31 December 2020, the median house sale value in NZ was $788,967.
(4) The median NZ family household gross income (before tax) for the year 2018 was $105,719 – this figure right now, I feel, would be around $112,200 and if you deducted the Income Tax of $21,200, then this would leave a median NZ family disposable income of around $91,000. This would then suggest that the December median house sale value of $788,967 is around 8.67 times the NZ median family disposable income – this figure 15 – 20 years ago was around 4 at the most – in other words, the median house value would need to about halve to get back to this house value to disposable income benchmark of around 4.
(5) The Government very much does not want a fall in present house values, what they want really is a plateau effect.
(6) 62% of NZ households (1,109,800 in total) are quietly comfortable with the house price increases – based on, say, 2.6 people per household and with, say, two in the household having a vote that suggests that around 2,219,600 voters are quite happy with the present scene – a very important point from a Political point of view.
(7) Some 38% of NZ homeowners presently have no term debt.
(8) Around one in five (20%) of the 800,000 NZers receiving National Superannuation still have some debt on their present home – that’s why at least one of a couple will probably carry on working for perhaps five years after turning 65 years.
(9) The median NZ rent announced also in December 2020 is now $520 per week with that for a three bedroom stand alone house closer to $590 per week.
(10) The general feeling amongst independent and knowledgeable people deep in the rental industry is that most families cannot pay more than 30% of their disposable income in rent – the figure of $520 per week represents $27,040 per year which, based on our point (4) re a disposable income of $91,000, represents 29.7%.
(11) The Government is already subsidising NZ family’s rent with its accommodation supplement with this presently costing $37,000,000 (37 million) a week – that is $1.9 billion per year.
(12) NZ residential rents have been increasing a lot faster in the last ten years than have NZ families’ net disposable income – this is part of the core of the problem – residential rents have increased by 25% – 30% over the last five years – Australia has done much the same as NZ, but in the USA, household’s disposable income has kept up with house price increases.
(13) John Key, as far back as 2007, was writing and speaking about the NZ house affordability problem some 14 years ago, but nothing really has come from this. NZ now is at the bottom of the OECD countries (usually referred to as around 40 Countries) regarding house affordability.
(14) What countries have handled affordability well to date – Germany, Sweden, USA, France, Singapore, Switzerland and Austria – the latter country has a 1% tax like PAYE especially for Government housing projects – around 25% of the residential houses in Austria are owned by their Government.
(15) Our Government may look at a tax on all residential houses based on, say, 1/2 of 1% on, say, the land value which is already recorded in our rating valuation system – this would produce around $5 billion a year which Government could spend on building state homes or perhaps houses to rent/purchase.
(16) Since around 1990, NZ has had a housing issue developing – since 1990, the NZ population has increased by 1,545,000 people – approximately 893,000 being births less deaths and around 650,000 being net immigration – it is no wonder the house issue is getting serious. There are presently some 21,000 Households on the Government housing waiting list.
(17) One of the elephants in the room has been the Resource Management Act which started off with good intentions but many key people would now suggest it needs major changes. These changes are in the wind, but I will be surprised if this has much real or beneficial effect within the next three to four years. Elephants are hard to push and slow to turn – also a lot of people deep in the Resource Management Act are very well paid.
(18) NZ house building costs have increased by 110% over the last 15 years – at the same time, the cost of living has only increased by 44%. The median section cost is approximately 40 – 44% of the overall house and section cost at the present time.
(19) The annual costs for a NZ house regarding insurance and rates each year are approximately 1% of the house and section value – repairs and maintenance is on top of this again.
(20) For many NZ people, the main choices regarding their investments at the present time are: (a) Bank deposits; (b) Share market; (c) Second house to rent; and (d) KiwiSaver. The bank deposit situation at the moment is hopeless – but it is not the Banks fault. The share market and KiwiSaver are one and the same really, but many NZers never forgave or forgot the 1987 share market crash. As a result of all this, it is not surprising that rental housing is a strong option – perhaps to some degree by default but still a sound, obvious option.
(21) When you really get down to it, the actual return from residential renting is not high – the attached is a real example – (special valuation and purchase 12 months ago was $575,000.) Gross Rent ($540 per week – for 49 weeks) $26,460 Less Expenses: Rates and Insurance $6,200 Repairs and Maintenance $760 Administration $400 Bank Term Loan ($345,000 at 3%) $10,350 Interest on Own Equity $230,000 – Rental Agency ($26,460 at 7.5%) $1,984 _______ $19,694 _______ Net Rental Income $6,766 ======= Based on the purchase price of $575,000, the net rental of $6,766 represents a return on their net equity of $230,000 of 2.94%. It is no wonder there is little or no corporate interest in owning big chunks of NZ residential homes – the only way it would work for them would be to pray hard for inflation every night (note – the 49 weeks is because it was vacant for three weeks). To get some heavy overseas capital or NZ private capital into the NZ housing sector, the true return (excluding inflation) would have to probably double – that is, get to 5.5% – 6.5% – this is how big pension funds and the like work – if Government allowed them to claim depreciation and maybe a lower tax rate for the first, say, ten years and perhaps some sort of GST adjustment, this is the sort of incentive that may be required.
(22) Every time there is a marriage/relationship break up after any reasonable duration then that increases the requirement for more housing and the potential Bank of Mum and Dad, from their children’s perspective, disappears.
(23) Also, NZ demolishes about 14,000 houses a year, usually to build more intensively on the same site.
(24) Presently in NZ, there are 120,000 houses unoccupied and not rented or lived in – 40,000 of these are in Auckland.
(25) In some ways, NZ needs a Housing Commissioner who can pull all the strings together but even more importantly can get an accord political such that all parties have some say and can get on the same page – this whole issue is too important to leave to just one party whose main aim is to get re-elected – we need a genuine, workable housing accord. This Housing Commissioner will need some real power – have a support committee of the right people – support from the current Minister of Finance – have a six year term so he or she can make the hard decisions.
(26) Presently, the NZ Government is borrowing around $115,000,000 ($115 million) a day – that is, if continued for 12 months (which it will for several years), a total of $42 billion per year. My point here is that Government has a few other issues on its plate other than a NZ housing affordability issue.
(27) Government has handled the Covid-19 issues well and this is very much to their credit – but they and the NZ Reserve Bank are still to come to terms with these housing issues – if the NZ population continues to increase at around 51,000 per year, which it has done since 1990, then by 2030 this represents another 510,000 people which, at an average of, say, 2.65 people per house, is another 192,450 houses/apartments/units. A pull back of the immigration number would be a starting point.
(28) I have had a good look at the build and rent concept and the rent to own concept – there is quite a bit about them both in the media space. To be really effective though, the NZ Government would need to get right in behind both and they would need to encourage investors, local and overseas, to get involved – there would need to be some real encouragement re special dispensation re income and GST type issues.
(29) Hard to see what Government can do with such a national demand and supply market process – a 50% deposit requirement for investors and a 20% deposit requirement for first home buyers is a very strong step and would have an effect, but many investors have heavy deposits in the bank and very much want to invest these deposits into real assets.
(30) Another approach by Government would be for: (a) Investors to have to make a 50% deposit and a 4% bank loan principal repayment each year. (b) First home owners to make a 20% deposit only and to have the right to have an interest only mortgage for, say, two years. These two would certainly have an effect, but it would encourage the poorer group to take the higher risk.
(31) So what does the Housing Commissioner need to look at and take real action on: (a) Encourage Government to improve the Reserve Management Act significantly. (b) Obtain a genuine workable housing accord involving all political parties and keep them all facing north. (c) Accept that any real progress on the whole issue will take three to five years. (d) Encourage Government to allow overseas capital to invest in NZ housing stock for rental purposes with an equation that works for both renters and investors. (e) Establish a key benchmark for the bottom, say, 25% of renters of residential rents that 30% of their disposable income is fair and reasonable but a maximum. (f) Keep a balanced view that part of the problem for that bottom 25% of renters is that they are poor to very poor with their own money management – he or she Commissioner will be providing some fishing gear to help them fish well, but not provide the fish. (g) The Minister of Finance of either party will be committed to strongly support the Commissioner with the politics being secondary. (h) The Commissioner will have the power to get deeply involved in land purchases and land disputes. (i) The Commissioner will have a six year term with an annual salary of probably $500,000 – $750,000 per year. (j) A land tax at ½% of the land value of all NZ houses is to be considered for perhaps a ten year period which would not be Income Tax deductible to land owners. (k) Have a good look perhaps at taxing unoccupied houses (120,000 of them) in some way. (l) As well as overseas capital, Government makes it attractive for NZ pension funds, ACC and KiwiSaver to own big blocks of NZ housing stock which is rented out on the workable equation referred to earlier. (m) Because the general population (62% of the population, in a broad sense) is quite comfortable with the present situation – the Commissioner will need to have real ability, real support and a sensible timeframe to have any real effect.
Content written by: Alexander & Associates Limited.
