Economists Shamubeel and Selena Eaqub are on a mission to give power to the people. By people, they mean renters unable to get a foot in the property market; Generation Rent.
The husband and wife duo have used the catchy term to identify and give a voice to the 50% of New Zealanders over the age of 15, who rent.
While many choose to rent, the Eaqubs say exuberant house prices are leaving an increasing number without any option.
We often hear from the big bad investors who fan the raging fire that is the Auckland housing market, the baby-boomers, who are taking comfort in the fire’s heat, and the first-home buyers who can’t get close to the fire without getting smoke in their eyes. But what about the rest of us?
The Eaqubs discuss the significance of renters within the economy in their new book ‘Generation Rent: Re-thinking New Zealand’s priorities’.
In a Double Shot interview Shamubeel Eaqub, who’s also the principal economist at the New Zealand Institute of Economic Research, outlines need for a serious change in the way we think about and regulate the rental market.
He says, “The idea of the narrative around the book, and the narrative of where we need to go, is not just about what’s happening with house prices, and the consequences of this on economic stability and financial stability, but the much more important and insidious impact on social stability.
“What we have sown are the seeds of inequality for future generations.”
The Eaqubs’ formula for solving the housing crisis
In ‘Generation Rent’, the Eaqubs discuss three sets of solutions to help solve our housing problems.
“The first set of solutions – palliative in their nature – will be to provide better and more sustainable living conditions for Generation Rent”, they say.
“The second set will take the heat out of the housing market in the current cycle, by using levers to control demand: raising interest rates, reducing credit availability, creating a more responsive construction sector and perhaps restricting migration and limiting foreign buying.
“But these cyclical measures, though useful, will only buy us time. Throughout the cyclical ups and downs, prices have steadily trended upwards because of underlying policy errors.
“The real fixes, and the hard work, will be in correcting structural problems: slow land supply; expensive infrastructure provision and a broken model for its funding; taxes that favour housing; and policies that encourage banks to lend more for individual property investment.”
Tougher regulation of rental market
Looking at the “palliative” set of solutions first, Eaqub says the law needs to give both tenants and landlords a clearer view of their rights and responsibilities to make renting a better option.
He proposes making longer-term tenancy agreements the status quo, and lengthening the notice periods landlords and tenants need to give each other on ending an agreement.
“We compare very unfavourably [when it comes to regulating the rental market] to countries like Switzerland and Germany, which have very high rates of renting, but people are happy to rent”, Eaqub says.
Read more about how the Eaqubs want to see more regulation around the rental market here.
Getting around the NIMBYs
The Eaqubs recognise the need to increase the supply of houses… the right kind of houses – smaller properties/apartments, as household sizes are shrinking, in high demand areas like central Auckland.
They say the way to get around property owners who don’t want to see housing densification in their backyards, is to explore ways of compensating them for the changes that need to be made to their suburbs.
“We know that the vested interests of the current owners are, ‘we want to preserve what we have’," says Shamubeel Eaqub.
“But for future generations we also know that… it cannot stay as one and two story houses. We have to get more density, we have to get more height, we have to get more capacity, because this land is extraordinarily valuable for people to be able to access work and play very easily.”
He’s calling for local government to reassess the best use of its land holdings.
“Local government may need to evaluate which of its designated ‘heritage’ sites truly merit their protection and which ones can be built over”, the Eaqubs write.
“Auckland Council owns the land for 13 golf courses. Could some of them be repurposed into well-designed, medium-density, mixed-use housing developments?”
We’re the problem… not the foreigners
Eaqub says there’s no evidence to show foreign investors are pushing up house prices.
Figures suggest foreign purchases only made up 9% of all houses sold in Auckland over the past year.
Eaqub says it’s easy to point the finger at foreign investors, rather than admitting we’re driving up prices by bidding against each other.
However he notes comprehensive data needs to be collected, so we can better access the influence of foreign buyers on the New Zealand property market.
He's pleased that in this year's Budget released last month, the government announced foreign buyers will have to register with the IRD and have a New Zealand bank account.
This way we will have a better way of pinpointing where money's coming from, which will also guard against money laundering.
Capital gains tax crackdown
Eaqub is calling for the parameters around the capital gains tax we already have, to be tightened.
Currently you have to pay a capital gains tax is you buy a property with the intent of benefiting from a capital gain. You can read more about this here.
“Essentially what we have is a rule that’s there but is very vague in it’s writing, very vague in it’s implementation, and is not particularly effective”, says Eaqub.
“We don’t think this is a solution in terms of fixing the housing market, but it just acts at the margin to take away some of that speculative element that housing is tax-free, highly geared, you can’t lose kind of proposition.”
In the Budget the government announced it would introduce a new "bright line" test to tax gains from residential property sold within two years of purchase, unless it's the seller's main home, inherited or transferred in a relationship property settlement.
Reserve Bank's power limited
Eaqub recognises the Reserve Bank is between a rock and a hard place when it comes to reviewing the Official Cash Rate.
It can’t increase interest rates to try to dampen the housing market at the expense of the rest of the economy.
The Eaqubs write, “The Reserve Bank has a range of other tools it could use, including imposing loan-to-income ratios and debt-servicing ratios, asking banks to hold more capital against all lending, and asking banks to treat housing investors differently by holding more capital against their loans specifically.
“These policies are untested, but they may be worth trying in order to take the edge off the sharp peaks and troughs in the cycle.
“Ultimately, however, it is not the Reserve Bank’s policies on managing the cycle that have caused the sustained increases in house prices relative to income. They are the result of structural policy failures.
“The Reserve Bank can only buy time for other political and policy-making entities to deal with those issues.”