By Bernard Hickey
Prime Minister John Key has used his weekly post-cabinet news conference to defend his Government's record on housing affordability in the wake of an OECD report showing New Zealand housing was the most expensive in the OECD relative to rents.
Key said the housing market was not a "runaway train" and that National was moving to address the supply side issues underpinning house price inflation in Auckland and Christchurch.
He referred to the Roost Home Loan Affordability reports prepared by Interest.co.nz to argue that housing was more affordable under National in early 2014 than it was under Labour in 2008. See interactive chart below.
"The argument that this is somehow a crisis is wrong, and if it is a crisis, it was way bigger crisis under Labour," he said.
Key said he accepted that people were concerned about rising house prices.
He pointed to the Government's work in creating special housing areas in Auckland and Christchurch.
"This thing is complex. It's been on the rise for well over 15 years, but for 9 years Labour let those house prices double and did nothing," he said.
Asked about the OECD report showing house prices in New Zealand being 70% above long term averages relative to rents, Key said this was not the normal way to look at housing affordability.
"That's one way of cutting the data. You could say that rents relatively speaking are quite low. It's not the normal way of doing it. If you go and look at Roost index. That is measuring 80% mortgage on the average house in the area with someone on the average wage, and that is showing you we are not nearly as unaffordable today as we were when Labour left office in 2008," he said.
Migration
Key also rejected calls from Labour and New Zealand First for controls on migration to take pressure off house prices and interest rates.
He said National believed New Zealand should remain open and engaged internationally and such migration controls would not work, and he said skilled migration was needed to help keep the economy growing.
Key said Labour had not been "terribly successful" in targeting migration at between 5,000 to 15,000 -- as suggested by David Cunliffe on Sunday -- with net migration varying between minus 13,000 and +43,000 while in power.
"It's not that easy," he said, pointing to the volatility of New Zealanders leaving to live in Australia.
"Over half of all the people coming to New Zealand are skilled workers. Many of those people are adding to fixing those supply issues. They may be engineers or quantity surveyors or specialist IT people that the country needs," he said.
"The people that come into New Zealand either bring in skills or capital or the right attitude and as a general rule I think it's been a positive thing for New Zealand," he said.
"We don't have some runaway train," he said of the migration inflow.
Key said bank economists had pointed to supply issues in Auckland and Christchurch, "but actually it's not true that house prices are some sort of runaway train around New Zealand."
RMA reforms
Key said Labour had opposed the Government's moves to increase housing supply, both through its Special Housing Areas and Housing Areas legislation, and through reforms to the Resource Management Act.
He said those RMA reforms were likely to remain stalled until after the election because the Maori Party and United Future remained opposed to the changes.
"I think it's very unlikely we will introduce the RMA bill before the election. I think we'll campaign on what we want to do and see what the makeup looks like after the election," he said.
Asked if he would continue negotiations with United Future and Maori before election, he said: "No. I've decided to park it up."
(Updated with more details, comments)
No chart with that title exists.
16 Comments
You can basically get from demographa to roost by a series of mathematical transformations. Allowing for a bit of difference due to the rate you can borrow at being different, nothing much actually changes the comparison between countries. Saying it changes anything to use average wage to average value compared to Roost is rubbish. I suspect Key is choosing it because there is no published basis of comparison with other countries.
Actually given NZ interest rates, it would probably look even worse for NZ, let's check. NZ weekly take homepage $826, average house $440000. European country from the affordable end weekly take home 697 euro, average house 147000 euro. Five year fixed rate 5.15, floating at 80% LVR 4.29%. perhaps someone fom Interest can do the calculation as a follow-up, but I think the NZ average wage would need to be about 2000 a week to be as affordable (or the house price about halved).
Roost house affordability levels also depends on interest rates. Currently interest rates are at multiple decade lows (another reason Jonboy chooses this measure) but are predicted to rise in the near future. Mortgages cannot be fixed for their entire lifespan so it would seem sensible to see how Roost might look like in a few years times given what we know about interest rate rises.
Another flaw with the Roost measure of house affordability is it is not something that the Reserve Bank targets. The RB needs to prevent bubbles in actual house prices for financial stability reasons. So for inflation (general and asset) target reasons the RB will put up interest rates in the future and then the Roost housing affordability measures will quickly worsen. So a low Roost house affordability measure in one year is no indication that it will stay low in the future.
The Roost index is not 'housing affordability', and makes no claim to be.
It is 'home loan affordability' which is something slightly different, more hip-pocket related.
It is the relationship between take-home pay (that is, after tax pay) and the mortgage payment on a house bought this month.
It targets the incomes of 30-35 year olds (or 25-29 year olds for the first-home-buyer series), so is aimed squarely at the core early house buyers. It's not trying to measure anything for baby boomers or investors/speculators.
Our rental affordability series is a separate analysis, one that tries to square the differences that include rates, insurance, maintenance.
The problem with "home loan affordability" as a guide to potential first home buyers, is that they may not take into account the risk of the way things could move in the future.
Compare the current position of astronomical house price and loan at record-low interest rates, with a seemingly similar position from 30 years or so ago, of an astronomical interest rate with a low house price and loan.
The people who got the small loan with astronomical interest rate 30-odd years ago, firstly were in a condition of high CPI inflation, hence the high interest rate. This meant that within a single decade at most, and often within a mere 5 years, their income would have doubled due to the inflation rate, while the home loan in nominal dollars was the same size.
Is anything like this happening for the current borrowers with astronomical loan principals and low interest rates?
Furthermore, the condition of high CPI inflation and high interest rates is something that the authorities are always determined to solve; and they did solve it in the past. Mortgage borrowers could not lose whatever happened. If and when CPI inflation and interest rates fell, their repayments fell. If CPI inflation and interest rates did not fall, the mortgage principal was "inflated away".
The current borrowers, in contrast, cannot win. Interest rates are extremely unlikely to fall by 50% plus, as happened to the lucky generation. It is impossible for the current borrowers loan value to be "inflated away" without interest rate rises instantly bankrupting them.
Complacent old boomers proffering "wise advice" to the young about "how tough we had it too" are abetting a fraud and a breach of the civilisational compact between generations.
David it is a perfectly good short term measure of home loan affordability and I am sure you make no claim of anything more than that. I am criticising the Roost measure because John Key has used this measure today to deny there is a problem with affordable housing in NZ.
It is not particularly good long term measure of home loan affordability for the lifetime of a mortgage, because 'affordability' will change with the interest rate cycle. So it is difficult to say if a house is more 'affordable' using this measure in one year versus another or if just interest rates are temporarily different.
It also not an internationally accepted measure -we don't have the figures other countries.
My preference for measuring home affordability are the simple medium house price or medium rent divided by medium household income measure, because they do not have the above problems.
My suspicion is that John Key chooses this measure for home affordability because it fits his desire to deny there is a housing affordability crisis. This measure does not compare with other countries and it temporarily looks good because interest rates are so low.
It seems unfortunate that the banks do not measure their allowed loan size on what might happen to the borrower if interest rates do rise significantly. Perhaps the government could legislate to prevent banks from recovering the amount of a debt that has stretched the borrower beyond a specified limit.
It will not this one as they are hopeless at anything stretching beyond next week anyway.
John Key 'pointed to the government's work in creating special housing areas in Auckland and Christchurch'.
Where are Christchurch's government created special housing areas? There isn't even one.
This is just a lie and the media should say so rather than publish untruths.
JK is getting a bit boring now. He is sounding like a child throwing his toys whenever he gets asked a difficult question.
Q. John, houses are expensive now.
A. Yes, but they were more expensive when the other lot where here...blah blah.
Leaders should take ownership of what they are doing not blame others.
It may have something to do with the fact that he doesn't really care about the hoi polloi....the fat cts and rich mates, yes, but the rest of us?
Well, he's got his money in the bank, and is probably eyeing a chushy UN job after this, so why WOULD he care? Really.
Hi Boatman,
I dont agree with you or John Key. NZ does already control the immgration rate through a points system.
Its the inward migration rate which is the issue and that can be controlled. Give the RBNZ the tool to control the 12 month rolling rate (net migration).
But yes I agree we cant control the outbound rate.
Superb analysis and critique of Key's comments HERE:
http://www.macrobusiness.com.au/2014/05/nz-government-takes-backwards-s…
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