This is a re-post of an article originally published on pundit.co.nz. It is here with permission.
There are three major but separate issues which constitute our housing problem: not enough quality housing; a speculative boom in house prices generating unsustainable inflation; an inability by people in reasonable circumstances to purchase homes. It is helpful to think about them separately.
There is not much one can do in the short term to increase the stock of quality housing by upgrading existing ones and building new ones. (In addition there is a need to upgrade earthquake-compromised houses and apartments, fix leaky homes, provide more land, while resources are being diverted to add office facilities to people working from home.) There is only so much the building industry can do even if it had been looked after better in the past. The record over the last few years has not been impressive but it is better than what happened a decade ago. However, the annual changes will be small compared to the total stock of housing – say an additional one or two percent – not enough to have a major immediate impact on the housing market, even if your long-run theories say it should in principle.
So more house building is not going to do much for rising housing prices in the short run. They are being driven by a ‘Minsky boom’, in which speculation creates its own momentum as investors buy houses to take advantage of the capital gains from rising prices (until there is the bust). The cryptocurrencies boom is an example.
Borrowing is critical in a speculative market because when the boom collapses some investors find they are unable to service their debts and become insolvent. Housing is a little different from, say, the cryptocurrencies, because many investors in rental housing cover their outgoings including debt servicing. They are vulnerable if interest rates rise – there is an expectation they will but we don’t know by how much – or if rental rates fall if, say, there was an increase in supply of housing or those renting found it easier to buy.
The government has taken a number of measures to take the steam out of the boil. Admittedly it tied its hands by refusing to institute a comprehensive capital gains tax on second housing although the brightline test has a similar but more limited effect. Other measures have been instituted too, including restricting tax deductibility of interest rate expenses on rented houses.
The impression is that the measures are slowly deflating the bubble, and that price increases are slowing down but are not yet stable. (Never forget that most who comment on house prices have an interest in their continuing the boil and will portray the data to make the inflation seem worse than it is.)
The impact will be complicated when house prices stabilise. Those who are renting out investment houses will find they are no longer making capital gains; hopefully they will be covering outlays with the rental revenue, but unless they have got their debt down they will not be making much profit. (A stupid scenario promoted by landlords is that they will then put up rents – why are they not doing so already?) My guess is that many landlords will trickle out of the market. (Where will they put their funds?) But they can only do this by selling the house to someone – presumably not another investor – and that is one less household renting, one more owner-occupying. (It’s a bit more complicated than that, but you get the idea.)
The story for one-home owners is different. Many who have been flipping the market or upgrading their housing will not bother. That means the number of houses offered on the market will decrease, which will reduce opportunities for those who have to move – say because of job relocation or a change in family circumstances.
In a conventional market these new circumstances might result in a fall in the market price. A significant fall – say more than 10 percent – is unlikely because housing is not a conventional market. In particular, one-home owners suffer from ‘nominal price rigidity’. Rationally, it might make sense to sell one’s home at a discount and buy another equally discounted home. But that is not the way home owners think. A drop in their house price is seen as a reduction in their real wealth; better to hang on and expect prices to return to what is judged as normal. (Landlords may think the same too, but may have to sell at a discount if their investment positions get undermined; there will not be enough of that to collapse the market.)
You can see why the government will be wary of taking measures which engender a significant fall in house prices. Stabilisation yes, but not a major decrease. The logic then is that while stabilising the speculative boom may be a good thing in itself, it will not offer a lot of advantage to those wanting to move from renting to ownership.
So the ‘affordability’ ratio, however defined, is not going to drop much. How then are the excluded to get into house purchase?
It is a distributional issue. The excluded have not got enough financial capital to deposit on a home as assessed by those lending. (Technically, the problem is they may have much human capital – prospects of earning – but without slavery, financiers are reluctant to lend on its security.)
The government is already inching towards providing additional support for first-home buyers. Here are three ways they could move further.
- Capital grants, like those 1950s’ suspensory loans which were written off after a number of years if the family was still living in the house.
- Capital guarantees, by which the state provided borrowing guarantees so that lenders could advance a higher proportion of cost of the first home that financial institutions would judge prudent.
- Share equity, by which the state takes an equity in the house so that when it is sold, the state takes a share of the capital gains.
Each has strengths and weaknesses but you will notice that in each there is a fiscal element and the state is exposed to risk.
The lesson is that the mainly neoliberal regime for the housing market since the early 1990s does not work: it has under-supplied quality housing, generated unsustainable house price inflation and excluded many ‘worthy' people from home ownership (while giving a rough time to those who depend upon rental accommodation). That should not surprise any properly trained economist; many of the assumptions which underpin the standard market analysis do not apply to the housing market. The nostrums based upon such simple analyses will continue to fail no matter how plausible they sound.
PS. Susan St. John and Terry Baucher are proposing to treat the total net equity in housing and residential land as if it was generating a 'fair economic return' similar to that in a bank deposit. (There would be an exemption of of $1m net equity per person). Home owners with expensive homes and low mortgages would pay more tax (and the rest would pay less). When in the 1970s I proposed a variation on this – a tax on the imputed rent on housing which is the additional value a household gets from owning their own home over renting it – numerous economists told me it was an excellent idea – it would both improve efficiency and equity – but it was politically impossible. Given the timidity of governments – red and blue – over instituting a comprehensive capital gains tax, I doubt those economists would change their mind.
Brian Easton, an independent scholar, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014. This is a re-post of an article originally published on pundit.co.nz. It is here with permission.
68 Comments
100%.
Everywhere you look when trying to add a dwelling you have nasty little bespoke/boutique type providers who simply lack capability, talent, enough capital and skills (due to NZ in general being undercapitalized, small population).
Govt. could have done scale - but the lack of talent, skill, knowledge lets them down as they ignore experts in the sector and go along with pure academics or simply shot from hip without any basis. Worse government in NZ history.
You're right. There isn't much fundamentally different between Labour and National in terms of policy. The real difference is the lack of business expertise in Labour's ranks. Here in Christchurch National did a great job by rapid house building after the earthquakes. By contrast, Labour has presided over the Kiwibuild and other fiascos. Also, in the housing area, it was National that introduced the sensible bright-line test and the ring-fencing of rental property depreciation. Labour has extended the bright-line test to a de facto CGT, with unintended consequences, as opposed to a tax on short-term property flipping.
Farmers have been paying tax on unrealised capital gains for many years. Every year IRD puts put a value on various classes of stock and the difference between this year and last year's holding stock value is taxable. Be a great idea to treat residential investors the same :-)
The idea of imputed rent , and taxing that , is a stupid idea. ( My view) . Id be really surprised if many economists, back in the 1970s would have agreed with Brian.
In regards to affordable housing, which is a function of land cost + construction cost + compliance/ consent costs, maybe Brian could have written a bit more about that... Especially the compliance/ consent and land aspects.
Nothing neo liberal about that.... The ideology behind this is something else... And comes
out of buracrecy and town planning.... In my view.
Those things don't apply to family homes, imputed rents would. So you're setting a high bar for how much 'simpler' things would have to be given that one would capture a huge portion of the population for whom the family home isn't captured by tax in any way currently - if we're going to start treating home owners like investors just to make life easier for investors (who insist they are actual businesses and therefore regulations should be a matter of course) then we're missing the point a bit, aren't we?
...ummmm home owners are investors. Instead of interest on your $800k of which you pay tax, you get a return via accommodation - currently untaxed.
Which really sticks it to non homeowners who are savers. Unless of course you would like to even it up by allowing the interest on their first $800k invested to be tax free?
Rastus... Using your logic.
I sleep with a hooker and pay $200 which is taxed.
I sleep with my wife , which does not earn anyone any kind of cashflow income.
You would have me taxed for that because i get a return (benifit) via sex with my wife, whereas if id slept with a hooker tax would have been paid.
An imaginary income but not an imaginary tax.... in an imaginary , alice in wonderland world.
Im arguing the absurdity of taxing imaginary income, not ,for example , capital gains.
If they want to tax wealth, they should be straight up and honest about that and not use the conjob of imputed rental income.
Just my view .. of course.
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if we're going to start treating home owners like investors just to make life easier for investors
It's to make life easier for the people who own the least assets in this country, by ensuring those with the most assets pay fair tax on them.
It's also pretty simple if everyone does it for every house; ie just another fact of life, like rates bills and GST are. Things are complicated when it's not clear if they apply to you or not, or at what rate.
I agree that it isn’t really a free market with the supply side so regulated. But I’m not sure how to fix that - infrastructure is bloody expensive these days, it’s not like the 50s where they could just pump the poos to the sea and lay a simple road down. we have much higher expectations these days.
Quite right @Roelof.The highly regulated NZ housing market is a complete mess the last thing it needs is further intervention, it needs deregulation.
California has similar highly regulated housing market to NZ the housing market in Texas has far less regulation. The cost of a home in Texas is drastically cheaper than owning a home in California. The average cost of a home in the U.S. is $231,000. A home costs 60% more in California compared to Texas.
In Texas, the median home price is only $195,000, which is lower than the national average. This means on average homes are about $36,000 cheaper in Texas compared to the national average. This is a huge advantage for Texans. In California, the median home price explodes to $552,800! That means California’s homes are $321,000 more than the national average which is like paying for two homes in Texas.
One can discuss as much but nothing will change as Mr Orr and Jacinda Arden has created a Monster - PONZI so big that now no one can touch it without dire consequences.
Like induced coma, if government and Mr Orr has the will should and could control it ( without mentioning that have no silver bullet - need no bullet but intent and if have intent can and will act otherwise number of reasons and excuses to hide behind).
Bubble has to burst but if done by policies and measures cocequences will be not as severe and will be short term but longer the delay bigger the pop, it will be. Unfortunately politicians and Orr do not think more their term and not for country as a nation.
A generation voted away a user pays superannuation scheme in the 1970's in favor of a universal state funded superannuation free for all. Now this generation has realized that there is no such thing as a free lunch, they have turned existing houses into their superannuation scheme by tapping into the wages of the younger generations, who are also expected to fund their own tertiary education and pay into their own user pays superannuation.
Just replace every paragraph in the article with this, over and over again.
Then explain to that same generation that they should also be paying rent on the off chance they've managed to take on enough life-long debt on a modest first home, simply for the pleasure of owning their own home.
The market is broken Sir.
The team of 5 million is not a team. This is a greedy team. If we are a team, we would enable the ones who can least afford to get into a house by not giving them free money but by making it reasonable so they can buy a house from what they earn.
But pumped up rich listers are pushing prices up and sequezzing the poor. What happens when a poor is hungry and do not have money to buy food, what will he do ( snatched from others) ? Guess the future is society in NZ.
You talk about a boom bust situation and all the reasons why it will happen, but then dismiss it by saying that owner occupiers will not sell at a loss.
Could be right, but surely the market peaks are set by the speculators and not owner occupiers, who as you point out are generally selling high/buying high. So surely the market bottom will be set by speculators, who faced with no foreseeable capital gains, no interest deductibility, and no option of increasing rents to cover those factors, will bail, and do so en masse.
You seem to take no account of the herd mentality of speculators. The irrational behaviour in driving prices so high will be matched by equally irrational behaviour in not being the last person in the game.
Any plateau will be short term, and either result in another sustained rise, or a severe crash to an equilibrium where the yields on a rental property provide a suitable return regardless of capital gains. The rises to date have been driven by a number of factors, most of which have disappeared or been attenuated, except perhaps for the stated desire of the government and RBNZ to ensure prices do not fall. They have a limited number of options left to underwrite 1.5 trillion of over-valued assets.
House prices aren't actually high in New Zealand. It's residential zoned land that makes building a house insanely expensive. If government where serious about fixing the issue they'd implement a general 'right to build'.
However this is actually a problem government doesn't want to solve.
That's partially true. The land is very expensive and it's all down to artifical restrictions by clown councillers and crooked politicians.
But, I've been getting quotes recently for building here vs building in Australia. It turns out New Zealand is almost TWICE the price using the same franchise . 450k AUD vs 950k NZD for the exact same model of house.
When I questioned why, I was told in so many other words that there are some very fat leeches rorting and ticket clipping through the entire delivery pipeline in New Zealand. Will this country ever change? Not a chance in hell.
It is land banked land that those holding it know the council needs to have developed first to join their 'next on' infrastructure, which means they have a monopoly position hence rentier exorbitant prices.
What is needed is access to affordable land, which is easy enough to do, if more choice was given to put in independent STEP wastewater systems. This would prevent any land banked land from having a monopoly advantage.
People are just land banking. Land has doubled in price in my town in the last year and a half, as it is just drip fed onto the market to keep demand high. The real money seems to be in the land, and not in building, even though profits on building are also pretty good.
The bottom line is that the full cost of a newbuild to buy is unaffordable for most people in NZ without equity. People forget that Govt investment in infrastructure in the middle of the last century was basically a home ownership subsidy. The people that benefited from that subsidy (and their children) are now sitting pretty.
Policy direction will never be sufficiently changed by any government.
The only possibility being in 20 or 30 years time when perhaps only 30% of the population own housing. Then the voting numbers might stack up for radical change.
But until then, expect tinkering around the edges from out centrist governments.
You dismiss the possibility of a significant decline but if interest rates go up significantly I think it becomes likely - so many first home buyers up to their eyeballs in debt. Not that I am predicting a significant rise in interest rates - no signs at the moment of that - but certainly in the "could happen" bucket.
Interesting read, although blame is being placed on neoliberalism instead of also considering the impact of net population growth over the last 20 years as well as massive government spending causing real assets to increase in value...
It has been a slow but steadily increasing demand vs. supply problem that could have been tackled a long time ago by curbing immigration and promoting building/ densification; now we find ourselves at the sharp end of the market with no short term fixes available and only COVID curbing immigration, although house prices still climb due to the massive government spending programs regardless of S&D...
We won't solve this anytime quickly - as housing take time to increase supply, and the government is spending big... and the tax implications will take time to bite into investors pockets re interest deductions all of which leaves us in limbo for the time being
We don't need any more tax. We got to where we are right now being taxed to death, perhaps there just needs to be more accountability as to where the existing tax is being spent. More tax money is a waste of time if its being simply flushed down the toilet by a bunch of incompetent people with their snouts in the trough.
Where are these tiny $1 million plus sections on the outskirts of Auckland? More like $550-$800k, which is still mad (out west, up north, down south). You can get a decent brick and tile unit in somewhere like Belmont on the Shore for @$800k, which is far, far cheaper than a similar location in Sydney, Vancouver or London, not to mention HK or Singapore. Global problem, too many people, too few nice places.
The only people who want a tax on unrealised capital gains are those without any. A tax on first home equity would be hugely unfair, especially as property is already heavily taxed via rates. Many average income Auckland homeowners and retired people would pay it, but few south of the Bombays or north of Wellsford would. And it would fuel a boom in other speculative investments as people borrow and reinvest in equities, crypto, goats, kiwi fruit to keep net property equity below the threshold. The only taxes that work simply and effectively are on income and consumption. A lot of unintended consequences lurk in the tax minefield.
"(Never forget that most who comment on house prices have an interest in their continuing the boil and will portray the data to make the inflation seem worse than it is.)"... All commentators are either an owner of residential property or not. All should be required to declare their ownership position at the end of theur articles, just as share market commentators do. By the way, Brian Easton has been a socialist leaning economist in the past.
To remove the desire (and necessity) for NZers to save for retirement via housing, fix our 'unique' superannuation saving policies away from the pathetic draconian TTE system introduced by the Lange/Caygill govt to the same EET system we used to have (that is still used by our sister countries US, Oz, Canada, UK) to provide their citizens with a dignified retirement. Its a no brainer - but our pollies have no brains, relying on their own fat, defined benefit schemes funded by the taxpayer
> A stupid scenario promoted by landlords is that they will then put up rents – why are they not doing so already?
Not really that stupid, the reasons why rents may go up is because if a significant cost of renting a house goes up for significant number of landlords, then a significant number of landlords will try to put up prices. Just like a stall in market can't put up their prices for apples, but if the cost of transporting the apples goes up, then all the retailers put up their prices, the consumer has to bare some of the costs. Just like when insurance prices went up, why weren't they charging the higher prices before, simple because of competition, but all the insurance providers costs went up so insurance cost went up.
By how much the rent will go up I don't know, but it is quite possible that they do go up.
An investor buying a house today is quite exposed if interest rates rise, or other costs increase and they need to increase rent. A investor who purchased a house decades ago, if they still have a mortgage, it will likely be tiny, so their costs will be significantly less, so they can afford to keep the rents down. But they benefit when the market rents increase, and they then decide to increase the rent, because their profit increases even more. But many could afford to keep rents lower. But why would they when the market will pay more? NZ needs a lot of changes around renting, to protect renters more.
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