Owning our own house is considered part of the Kiwi dream, but it is not clear why – apart from the tax benefits of course.
There are many claimed social benefits from people owning their own home, but they don’t stand up to close scrutiny.
There are plenty of other countries where home ownership is lower than in New Zealand, yet they are ahead of us on many social indicators.
Is the Auckland housing market a bubble?
We already know Auckland houses are increasingly unaffordable – in fact it is the tenth least affordable city in the world with prices that are over eight times the average annual income.
But that alone doesn’t prove there is a bubble – after all it could show that the supply of housing is severely constrained (as the Government claims).
A more certain sign of the market entering bubble territory comes from one of New Zealand’s foremost economists; P.C.B. Phillips. He is the guy that first noted that inflation creates jobs – at least for a little while. His latest paper tests whether Auckland is in a bubble.
The answer is yes – starting in about 2013.
Prices are rising faster than rents – so supply is not the problem
One of the key measures Phillips uses compares house prices with rental return. He and his colleagues find that Auckland’s rental return is now below 3% – a terrible deal in anyone’s books. That is a nominal return – before depreciation and other costs such as rates and insurance. Once you take inflation into account these investors would certainly be better off putting their money in the bank, and are probably making a loss.
This is a sure sign that investors buying now are doing so not for rental return, but because they expect house prices to keep going up, as they have for the past 45 years. That shows the key problem isn’t supply of housing as many claim, if the problem was lack of accommodation then rents would be rising too. Instead the driver of price rises is the demand for houses as a source of tax-free capital gain. Given all the attention around the Auckland housing market, prices will probably keep rising – until they don’t. Such is way of bubbles.
Why not rent then?
Given this is the case, anyone thinking about buying a house in Auckland right now might well be better off sticking with renting. Shock, horror! This idea usually gets met with one of the following responses:
It’s always better to buy than rent
Well no, actually. If someone else wants to own the house and is prepared to accept a rent of 3% of the house value in return, they are actually doing you a favour.
It’s better to pay your own mortgage than your landlord’s
At that rent you aren’t paying their whole mortgage. They will still be paying some of their mortgage too. And remember most of those mortgage payments would just be going to the bank, rather than paying off the house.
At least you have a house at the end of it
Well yes, but rents are less than a mortgage would be for the same house. If you rented and invest the money you save, you might end up with more than the value of a house.
Why are we so obsessed with home ownership?
There are many claimed benefits of home ownership, which seem to have convinced us that it should be the right of any Kiwi to own their own home – assuming they want to that is. But how real are these benefits?
Home-owners are happier, but that isn’t really surprising since they also tend to be richer. They also move around less than renters, which is also not surprising. However, this more stable lifestyle leads to other social benefits, such as getting more involved in the local community. That is probably the strongest reason to support the idea of everyone owning their own home.
There are other claimed benefits – such as home ownership reducing crime rates. While it is true that areas with high rates of home ownership have lower crime rates,that doesn’t mean the home ownership is the cause. These sorts of links are complex and very difficult to untangle.
Tax Benefits of Housing
Of course, the greatest benefit of home ownership is actually the tax advantages that come with it. Is this the real driver behind our cultural obsession with investing in housing? If so, it is an expensive one.
The lack of taxation on housing distorts the investment in our economy, drives up inequality and ultimately shifts the tax burden onto other taxpayers – particularly PAYE wage and salary earners.
Ironically, if we want to increase home ownership, the OECD points out that one of the best things we could do is tax the effective return on house ownership.
The OECD points out that tax loopholes around housing tend to get exploited by the rich, which drives up house prices and puts them out of reach of those on limited incomes.
What happens in other countries?
New Zealand shares its obsession with home ownership with many other Anglo nations, but this isn’t the case everywhere in the world. In many parts of Europe, long term renting is the norm. These nations often have strong laws to support the rights of renters, however, there is nothing to stop people asking for long-term agreements in New Zealand. Many landlords would appreciate the certainty of a long-term tenant.
There are many very advanced nations with lower home ownership rates than New Zealand – such as Germany and Denmark. These countries seem to handle lower rates of home ownership without their social fabric falling apart. That is probably because they have long-term tenant arrangements that provide the same level of social stability and engagement in the local community.
Is owning your own home really part of the Kiwi dream?
Should we be worried about falling rates of home ownership in Auckland?
It really isn’t clear that a society where people own their own home is any better off than one where people don’t.
Regardless, if encouraging home ownership is our goal, having tax breaks on housing are not the way to do it.
This article was first published on his blog, Gareth's World. It is here with permission.