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Housing affordability a looming retirement income crisis, retiring Retirement Commissioner Crossan says

Posted in Property
Outgoing Retirement Commissioner Diana Crossan

By Alex Tarrant

Housing affordability woes present a looming crisis for New Zealand's retirement income framework, outgoing Retirement Commissioner Diana Crossan says.

In her last speech in the role, to a Treasury-Victoria University seminar on the government's long-term fiscal projections, Crossan said growing numbers of New Zealanders faced hitting retirement without reaching a key phase of the Kiwi dream - home ownership.

Crossan headed the Retirement Commission, now called the Commission for Financial Literacy and Retirement Income, for 10 years before announcing she would stand down earlier this year.

While she has constantly been in the headlines for recommending New Zealand's retirement age be lifted from 65 to 67 by 2032, Crossan used her final address to stress the importance of home ownership when it came to retirement.

“Rates of poverty amongst retirees who own their own home outright are much lower than those who are still paying a mortgage or rent," Crossan told the seminar on Monday afternoon.

“Unfortunately, housing affordability has declined to a point where, now, a house costs five times a salary, compared to two-and-a-half times a salary in the 1990s, and rates of home ownership are declining."

Crossan outlined a version of 'the Kiwi dream', which she said faced a crisis:

“In the year 2012, you’re born in a public hospital; You grow up running around barefoot in your mum and dad’s back yard; You receive a state-funded education at your local kindy, primary and high school; You get a state-financed tertiary education; You land a job, start a career; You join KiwiSaver, you work hard; You use your KiwiSaver fund as a deposit on your first house;

“Your kids are born in the public hospital, and they grow up playing barefoot in your backyard; You continue to work to pay off your house; Then you receive New Zealand Superannuation, regardless of what you’ve done in the intervening years; And at some stage you finish working. You’re living in a free-hold home, and your grand kids love running around in the backyard barefoot, just like their mum did," Crossan said.

That system was fundamentally believed to be fair in New Zealand, she said.

Sustainability of the Kiwi dream needed to be considered when thinking about the sustainability of New Zealand’s retirement income system.

“We need to consider all the elements of the Kiwi dream, but most notably at the moment, housing affordability," Crossan said.

“Housing affordability is a key retirement income issue, because we know that the most important factor in determining welfare in retirement is housing cost.

“That fact points us to the looming crisis in the Kiwi dream," she said.

“It’s not the cost of New Zealand Super; It’s the potential for huge parts of the entire cohort to reach retirement without owning their own homes.

“A cohort that hasn’t had the accidental exposure to a well-performing asset investment class for most of their working lives, a cohort that is paying rent, or servicing a mortgage, and trying to live on New Zealand Super," Crossan said.

“When I started in this job 10 years ago, everyone wondered if delayed home ownership was because of delayed family formation – people not becoming first parents until their 30s. But we’ve seen research from the Department of Prime Minister and Cabinet, and more recently from the Productivity Commission, showing what we knew anyway: That affordability is the primary reason for delayed home ownership.

“We all know this is an issue. It’s news to nobody. But now it’s time for us to start regarding it as a retirement income issue, not just a housing issue,” she said.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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20 Comments

Well, chaps and chapesses,

Well, chaps and chapesses, if'n the current housing affordability mess - let's rehearse the sorry list once more:

  • median multiples twice-three times what they Should be,
  • new builds impossibly tangled in economic deadweight and Elfin Safety - just lookit the current consenting rates
  • materials subjected to a Cosy Cartel
  • Land banking encouraged by all and sundry
  • Leading to wicked rural-urban land price multiples - 10-20 times
  • And all fuelled by the cheapest credit we're gonna see for a generation or two

 
So, list done, where wuz I, yah, right, goddit. 
If'n all this hits a sufficient number of Imprudent Boomers, p'raps we may see some Dawning Recognition of the pernicious state of affairs, and see some Politcial Spine grow back to tackle it?
 
I wouldn't bet the mortgage-free Farmlet on this, mind yez....

 .... and some further

 .... and some further reading at http://www.performanceurbanplanning.org/ and at http://www.cantabriansunite.co.nz/ ....but you have heard all this before these past 8 years...
 
The only question is....when is THE GREAT INERTIA SECTOR Government going to do something ? Much the same culture as this London Council reported by the UK DAILY MAIL a couple of years ago...
 
http://www.dailymail.co.uk/news/article-1289702/Public-sector-inertia-council-office-employees-month-sickies.html
 
And please don’t be a loser confuser by telling me the solutions to this problem are “complex”.
 
Hugh Pavletich

Looked at an affordable

Looked at an affordable residential conversion in a commercial space.
 
What's needed to live there comfortably and safely: upgrade fire safety, a bathroom and a kitchen - about $30/40K spend.
 
What's required to legally live there: upgrade fire, acoustics, insulation and everything else in the building code to as if new plus over $30,000 development tax - about $150K spend.

Of course Crossan is right.

Of course Crossan is right. The far-reaching effects of housing un-afffordability are profound.
...From staving out families to starving out the economy, and the retired.
 

“Unfortunately, housing

“Unfortunately, housing affordability has declined to a point where, now, a house costs five times a salary, compared to two-and-a-half times a salary in the 1990s, and rates of home ownership are declining."
 
“Housing affordability is a key retirement income issue, because we know that the most important factor in determining welfare in retirement is housing cost.
 
“That fact points us to the looming crisis in the Kiwi dream," she said.
 
“It’s not the cost of New Zealand Super; It’s the potential for huge parts of the entire cohort to reach retirement without owning their own homes.
 
But, but Matt Nolan said it's ok, just yesterday. 
 
Between the March 1998 year and the June 2012 year, real median household income rose 27% (an average of 1.7% per year).
 
So the middle/median household can effectively afford 27% more goods and services now than they could in March 1998.

Affordability. It's

Affordability. It's competitive. It's elastic.
Sounds to me like those couples who both have jobs and are willing to make a commitment to each other and pool resources, they can afford to buy a house. Or a single person who is willing to rent out rooms. Others, forget it.
The tone of the article suggests but stops short of making a recommendation that those who rent should have a higher NZ super than those who own a house. ie Means testing NZ super for house ownership.
Scary stuff.

Sounds to me like those

Sounds to me like those couples who both have jobs and are willing to make a commitment to each other and pool resources, they can afford to buy a house.
 
Is that possible for all income cohorts and full time as well?

Yeah I guess you can afford

Yeah I guess you can afford it.....just.....But is this what NZ needs to look like?
 
40yrs of debt bondage to the banks. Hundreds of thousands of dollars to the banks, for each and every house.
This is enormous wasted money we are talking about. It's only a house after all.
I, among others think we can do better with a lifetime of earnings.
Cheers

Housing Affordability has far

Housing Affordability has far reaching costs into the entire economy, Health being a major long term cost.
Young New Zealanders who dont own a House or part of one, can not access business loans for the creation of new Enterprises with out security.
Also they are unable to purchase existing businesses so succession is greatly reduced.
Upon established business not being purchased existing staff are let go and the Enterprise closed. In turn this affects suppliers.
Would it not seem that we want to encourage the building of Affordable Houses specifically constructed to meet a specific price point.
Reduced finnace to encourage developers to take this inclusion up. The Developers would still be bound by loan agreements that have to be repaid with a reduced interest rate.
That way all in the supply chain including Councils would not be overly affected.
Govt create Affordable Housing, Gain a small rate of return on their investment and then the Banks would be quick to fill the mortgage space created of mass new homes.
I note that other countries run many housing scenarios in parallel choosing the very best from many models, this is due to the sector constantly evolving and taking advantage of new materials etc,
One thing New Zealand doesnt need is yet another report or inquiry, We've had Home and Housed, then the Productivity Commission surely now its time for action, real action banging in nails onsite and actually committing to build real houses.
Slow down on the Roads of significant importance invest into new Financially Accessible Affordable Housing or be prepared to build Social Rental Housing for ALL.
 

Many economists including

Many economists including Michael Hudson question whether the practice of using homes to secure business loans is in fact the best practice. He notes Germany has had more equity investment in small businesses and so the lender has more stake in success.
His book "The Bubble and Beyond" has much to say on this issue.
There can be no doubt the financial sector's share of the economic pie is enormous. They have an explicit interest in rising nominal prices.
Cheers

That would be brilliant if

That would be brilliant if young New Zealanders were applying for Business Loans from Economists. The German system sounds great almost prudent and wise.
But the very first question any of the Big Banks ask is, "Do you own a House?" not do you have a business plan. If you have equity in your home you can use it on what you like...
Numbers recently showed 30,000 SME had secured their company debt by way of the family home, again its the future of those that dont have the chance at Home Ownership that suffer in retirement and thats tricling down into the younger population as well right now.
Many of the people clearly state the reason for leaving New Zealand, Housing Affordability.These are Kiwis with aspirations for home ownership, they are go getters and there going to Australia to get a Home.

Oh yes I agree with what you

Oh yes I agree with what you are saying. That is the reality. I was just pointing out there are alternatives.
Of course mortgage lending is a cash cow. You essentially get every last available dollar from all income earners. For life.
Cheers
 

Average house value - Top 18

Average house value - Top 18 as at 10/12/12:
1          Herne Bay       $1,913,333
2          St Marys Bay   $1,566,889
3          Parnell             $1,295,333
4          Epsom             $1,178,833
5          Stanley Point   $1,146,611
6          Remuera         $1,139,389
7          Takapuna         $1,125,278
8          Ponsonby        $1,095,000
9          Westmere        $1,063,722
10        Mission Bay     $1,062,667
11        Devonport       $1,042,333
12        Freemans Bay $1,008,389
13        Mt Eden          $1,001,667
14        Cambells Bay    $994,994
15        St Heliers          $963,889
16        Kohimarama     $956,000
17        Grey Lynn         $934,444
18        Castor Bay       $923,889

Will have to go for a drink

Will have to go for a drink at Andiamos when HBay hits the 2 mill !

Also will have to go for a

Also will have to go for a drink at Gypsy Tea Room when Grey Lynn hits the 1 mil !

The housing affordability

The housing affordability issue is slowly but surely becoming a multi-leg caterpillar that is starting to run.
 
Soon the politicians seeing a nice juicy hot potato will carry it like a rugby ball and race towards the goal like there is no tomorrow.
 
Labour David Shearer has got the last run, soon every politicians with an instinct for survival will follow and the housing issue becomes the main platform for the next election ??
 
Anybody for $350,000 houses ? By the time the next election comes into radar, I bet it will cost less !!!

Big savings to be had...close

Big savings to be had...close down the Retirement Commission....fire all the bureaucrats...dump the Minister out of  Cabinet...

Yes, kill the messenger.....

Yes, kill the messenger.....

Nice blog!The United States,

Nice blog!The United States, typically thought of a first-world nation, is rapidly losing its standing if one thinks about the security and life-style of its average citizens after retiring from the work force. According to a brand new study, the U.S. ranks low in relation to retirement security and even lower in health care. Resource for this article: Financial Advice