As the new Government puts various supply and demand policies into place aimed at the housing market, David Hargreaves wonders if it has a clear plan of how it would like to see the market looking and behaving

By David Hargreaves

The new Government has certainly been true to its word when it comes to attacking various aspects of the housing market.

Already it's moved to extend the bright-line test (the Capital Gains Tax that dare not speak its name) from two to five years, it has legislation before select committee aimed at banning offshore buying of existing houses, and it's advancing plans to 'ring fence' rental losses on investor's residential properties.

That's actually an impressive flurry of activity on the demand side of the equation - and it is the demand side that remember the previous government generally had to be dragged kicking and screaming to do anything about.

On the supply side the much-trumpeted Kiwibuild initiative is more noise than action at this point, though the Government can point to the big announcement of up to 4000 new homes on the Unitec Mt Albert site.

In the meantime the housing market itself - certainly in the previously problematic Auckland area - is much quieter.

What do we want?

And there is where I have a perhaps silly sounding question, namely: What would the 'right' sort of housing market be for the Government?

Is it happy with it now for example, bearing in mind that Auckland houses prices relative to wages are still incredibly stretched by world standards? Well, presumably not - hence all the activity.

If we talk about the current market though, presumably it would take a fair time even with only very small house price appreciation for wages to anything like catch up.

And presumably also, the Government would not ever want to say it was actually seeking for prices to come down. Because that way leads to electoral disaster.

Is there an internal target then for the Government that it doesn't want to share with us? Would it like to see house prices actually decrease? Or does it believe that over time it can get 'affordability' by the market remaining fairly flat.

How happy homeowners would be if they were still seeing their house having the same value in five years time as it has now is an interesting point though.

On the one hand you might say that such matters of how the housing market might look in a few years time are of no concern when we have a housing shortage in Auckland now and when we've just come off the back of a raging bull house market.

Focus on activity

It does concern me though that too often governments and government departments become 'activity focused'. The achieving of numbers of a specific type of activity (for example building houses) become the means to an end without ever actually pausing to say: "What is it we actually want to achieve at the end of this? What is the desired outcome?"

And does anybody really know at this point what the 'desired outcome' is of all the measures - both supply and demand side - that the Government has unwrapped or talked about unwrapping so far?

Is there a point at which the Government can say, 'okay, houses are now affordable'. For such a proclamation to be made, I would suppose you might need to be able to say that every young person who wants to buy a house in New Zealand can. But in reality, would you ever achieve that?

If we go back and look at the previous National Government, it basically refused (for as long as it could) to get its hands dirty in trying to dampen demand in the housing market. That was largely left to the Reserve Bank and its loan to value restrictions, implemented from 2013 onward.

What the National Government did do was make a lot of noise about supply. There was a huge flurry of activity around the 'Special Housing Areas' and the Auckland Housing Accord. All that these measures basically showed was that you could at a pinch increase the speed at which new sections were approved - but you couldn't force people to go ahead and build on them.

Now this Government of course is going the more direct route and will oversee building houses itself.

Playing catch-up

Auckland had building consents for the construction of 11,000 dwelling units in the 12 months to February. Historically, that's quite high, comparing favourably with the 12,000+ figures seen in the early 2000s. But of course the population's been growing real quick and arguably something closer to 20,000 a year would be needed right now to play catch up.

The Government's promising 100,000 Kiwibuild homes across 10 years, with half of those in Auckland - so that's 5000 a year. We still at this stage don't know to what extent the Government activity will just simply replace building activity that would have come previously from the private sector. We will have to find out. The suspicion is that Kiwibuild will just largely replace other activity from the private sector.

What sort of measurements will be undertaken as we go along on this process though?

Do we just blindly go ahead and bang those 100,000 houses up and not take into account what's happening in the market?

That's the point that concerns me.

Offshore ban

To take the offshore buying ban as the classic example, we have a Government that's moving to put a ban in place when it does not, hand on heart, know exactly what the extent of the activity really was. That's because no data at all was kept on this and then the data that has been very latterly collected is in large part meaningless and not reliable.

So, the offshore buyer ban is tackling a large perceived, but not quantified problem.

The housing shortage itself, while it looks a real enough problem, may become less so if the outbound migration tap turns on and if the inbound migration flow does slow to a trickle from the cascade we've seen in recent years.

The Government is to be congratulated for rolling up its sleeves and 'getting on with things'. But activity for activity's sake may not ultimately serve the country well.

I seriously hope that the state of the housing market is constantly monitored so that targets both on the demand and the supply side can be adjusted if necessary.

And it does all come back to that basic question: What does this Government consider would be a 'normal' housing market? Is it prepared to tell us? How can we measure the success or failure of its policies otherwise?

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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Getting rid of the home start grant and kiwisaver withdrawal would be a start.

Why, they are roughly analogous to the norms of the past, being able to capitalise the family benefit etc.

Already it's moved to extend the bright-line test (the Capital Gains Tax that dare not speak its name) from two to five years, it has legislation before select committee aimed at banning offshore buying of existing houses, and it's advancing plans to 'ring fence' rental losses on investor's residential properties.

That's actually an impressive flurry of activity on the demand side of the equation

Unintended consequences..???
I would also argue that it is an attack on the "supply side", in regards to rental properties for rent.
Time will tell...
Obvious sign will be increasing rents..

Obvious sign will be increasing rents..

Increasing rents means an equivalent monetary missing from consumer spending. What happens then?

No it does not .. different consumers get to spend it , that's all .

Unless those different consumers are highly leveraged, in which case it goes via the bank to shareholders either in Australia or NZ, if those banks manage to return a dividend this year

No it does not .. different consumers get to spend it , that's all .

Garbage. Consumer spending is concentrated in the mid- to low-income SECs, which are more likely to be renters. Furthermore, mid- to low-income h'holds have a tendency to spend all their income; whereas high-income individuals and h'holds tend to save more. Read Thomas Piketty instead of spouting BBQ nonsense.

the folks who spend the most money in the economy and our economy in the US is driven by consumer spending. Seventy percent of the economy is consumer spending. Folks who spend the most money are in fact the 90% of people here who have very little to no income growth.

If raising rents were so easy, why not raise it to $2000 a week and start really making money.

Market forces, if you are the only one to raise rents by that much you will lose your tenants. What needs to happen is either everyone increases a little at a time and hope they haven’t set the price to high to still get tenants or govt intervened and makes a change that everyone recognised means that they can raise prices. It isn’t price fixing if govt is the catalyst and landlords don’t all discuss and agree on a fixed raise.

Your still going to get a point where no one can afford the rent, so they wont rent.

Then you will have people who cannot keep up with mortgage payments, as they cant get people to rent, then houses will go on the market, maybe even mortgagee sales, people will pick up cheap houses have lower mortgages to pay, wont need as much rent to hit good yields, then there is a new market price that landlords need to match.

If that were true you wouldn’t get entire towns in rural NZ being swapped to Airbnb ( ). Shouldn’t there be plenty of mortgagee sales to make prices drop so that locals can afford the asking rates?

Doubt there'd be much demand for rural new zealand air bnb's outside tourist hot spots though

This. Fhbs, you can preempt a sale by visiting a rental you like the look of, and hitting the landlord with a low-ball offer.

I'm sure that works if you have limitless time and a thick skin to being told to f-off. But why limit it to rentals? Why not check the papers for funeral notices of male deaths with a living widow (preferably with no children), then approach her at the funeral and see if you can wrest her house off her for 50 cents on the dollar. You can always justify the behaviour by reasoning she's making a profit /sarc

The tactic of lowballing - often hunting in packs - is a practice of some of the more well known property investment seminars / groups that charge 10k for their entry courses. They condition the owner by having multiple of their members go in with lowball offers, until the owner gets discouraged enough to sell.

Auckland 'previously' problematic?? Still highly problematic!
Just because there haven't been gains in the past year does not make this horrid crisis disappear!

In terms of the political conundrum of wanting to promote affordability but not wanting to crash prices - the answer is easy, and the government is applying it.
That is, a government housing program such as Kiwibuild will deliver homes to first home buyers at lower price points, but have minimal if any impact on existing house prices.
If built en masse, Kiwibuild could well bring down median prices. But that is a totally different thing to bringing down the prices of existing houses in very different (more expensive) sub markets.

What is a 'normal' housing market?
A price to income ratio of no more than 5 (I think 3 is unrealistic).
A market where housing supply responds to demand in a highly elastic manner.

Although I agree with 5 at the medium I do think it probably needs to be a little bit more pegged to wage categories as the higher the income the more disposable cash you have after normal living expenses

maybe something like

under $80k = 4.5
$80K - $150K = up to 6
$150K and above = up to 8

Good Questions David, Alas very little ( if any) wise people at the helm could answer them.

As an example, I watched with horror Jenny Salesa's interview on the Nation yesterday ...

People can make their own minds as to what sort of outcome can be expected from such a vague Minister " of Construction" !!

Same old broken record, same old promise and same old "keep the faith" message. the results will be 6000 units if we are lucky by 2020 .

Are we out of any Engineers or Qualified Project Managers or any construction industry related professionals to head this Ministry? ....

With all the respect to Jenny ( BA/LLB degree 1996), An adviser on territory Education and a health specialist who has mostly worked with health and education issues, was out of her depth and sounded as being PT's PA or Press Spokeswoman for most of the interview. She looked like she had no actual answers despite trying to keep her cool.

So how can the public have any faith or trust that these people will come up with the promised goods when minisiters with the wrong qualifications and experience are assigned difficult and sensitive portfolios like these ?

A Normal housing market does not mean that every person could afford a house at any given time - that model does not exist anywhere in the developed world.

Most of us said before that house price rate rise will slowdown as a result of lending and regulatory constraints despite the big imbalance between the current S&D

Affordability shall improve with time as people move up in their career - the current employment and economic growth will help narrowing the gap.

For some young people, this could mean saving and waiting a bit longer. The government could if they were serious and proactive about Kiwibuild, but as David said it is more noise than actual plans - ironically, they just don't seem to know what they are doing, have the wrong people at the helm, and keeping most of it under wraps !

Go figure !!

For some young people, this could mean saving and waiting a bit longer.

According to the Stats dept, the median net worth of NZers for the 25-44 age group is <$100K. Let's hope for reincarnation.

I think when people are young they don't mind flatting with others so 4 to a bedroom for a 4 bed house you could have 16 people paying off a house. Easy.

Could even have a garden and sell the veggies for extra money, maybe AirBnB the house as well, advertise it as a Kibbutz, have house parties, charge entry fee.

These young kids don't know how easy they have it.

Great link EB, for this who don't want to watch the 13min video the summary is:
"How will you be able to ramp up Kiwibuild with the shortage of builders?"
" We know we have a shortage of builders and we're looking into it"

well given that house prices in Auckland have doubled or tripped since 2009 it will take 23-37 years of 3% wage inflation to catch up (that's if house prices remain static from now on). Simple math ln(2)/ln(1.03) = 23.4 years or ln(3)/ln(1.03) = 37.1 years.

Either house prices come down or a large cohort will end up financially destroyed, or something else?

What happens if you get 3% p.a. wage inflation against a backdrop of 2% p.a. property value drop? Does that condition equilibrate the system faster?

Same as 5% wage growth with static house prices - in terms of house_price to income ratio that is. Doesn't make a hell of a lot of difference to anyone in their 40's who lives in Auckland and doesn't own a house yet.

The picture is bleaker that that though because nobody in their right mind would lever up to buy asset if they knew it was depreciating at 2% pa. Banks also wouldn't loan against a depreciating asset. Overvalued markets with high levels of debt are subject to Minsky moment type corrections, so a gentle 2% decline is unlikely.

Squeaky bum time or bust.
You've made a hugely important point about being 40 and not having set foot in fhb territory. I guess a higher median age shortens people's maximum loan terms, effectively capping how much people can borrow. DEMOGRQPHICS ANYONE? (sorry, couldn't resist!)

Even then Aucklanders in their 40s are not the people to worry about here, because a lot have their careers tied into the Auckland region. It is people in the 20-30 bracket that should scare us, because they don't have any real ties to the city. Auckland is the exceptional place in Australasia, the only place where buildings have not been built. However by 2019/2020 there will be a significant oversupply of housing in Australasia.

When Auckland's 20-30s realise they will get a better deal in any other city, they are going to leave.

This blog has been big on the immigration effect with regards to property prices, you all know what will happen if a large group moves in/out.

A normal housing market would have a whole lot less "investors" in it. A whole, whole lot.

That is really it in a nutshell. Getting kiwis to invest in the productive sector instead of swapping houses with each other. It will take generations unless it is forced down the throat of the general public. It needs to go from Bo Derek to Maggie Thatcher. Plastic surgery in the short term is the answer.

Which productive sector is lacking investment? Where are those opportunities? Everything is expensive whether it be the sharemarket, small businesses for sale or productive agricultural land. If you are brave enough to start your own business then you have to work out how many hurdles the COL muppets will think of.

I am sitting on TDs in the bank with no investment property and deal in distressed finances on a daily basis, yet don’t see these opportunities. Educate me.

Have you looked at Angel Investment websites ? Not a sit on your arse and wait for capital gains opportunity, but get involved and use the skills you have to help grow others businesses, and financially benefit along the way. I don't have deep pockets but have put money and time into two businesses over the last year, as well as running my own for the last seven years (which was partially funded by angel investment).
I go to trade shows all over the world every year looking for products and opportunities and growing my network. Opportunities present themselves if you put yourself out there.
This maybe all to high risk for some, it has worked for me.

I dont know if thats educational at all, just my experience, your results may vary.

I'm 56 and saving for my retirement. I've saved substantial $ sums, but my cash burn means it won't last more than 10 years without dipping into house equity. Angel investment is high risk high return and I'm not in a space where I can be bothered dealing with the high potential for investor/owner friction, which is why I've been looking at private PE investing. Nothing is coming up right now. We need a recession to turn off the bank funding taps.

Are there more businesses in places that have conditions that encourage greater investment in business (vs. other vehicles), or fewer?

It makes plain sense that in an environment where all have been incentivised to invest in property instead, you'd struggle to find great investment options in other fields.

Hmmmm... Only way house prices can move down is if economic conditions overseas are strong enough to lure kiwis out of NZ for a prolonged period. OR economic conditions deteriorate here. Plenty of catalysts in the pipeline, for example decline in oil industry here, rising cost of shipping transport blows up our log export industry making it unviable, meat/dairy disrupted by synthetics, smelter shutdown, Huntly shuts down in a dry year and we run out of power (blackstart could take months). Plenty of risks for NZ going forward.

I'm just thinking, this could just be fantasy land and may never ever happen but what if.

They extend the brightline,
Don't allow losses to be claimed,
China stops the flow of money out of their country,
Banks make it harder for borrowers to borrow money
Cost of borrowing increases
Interest rates go up
Don't allow foreign buyers to buy property in NZ
Immigration is tightened
NZ wages stay the same and house prices are out of whack with income

This stuff could never happen could it.

Happening now, or just around the corner I guess.

Fascinating, I wonder if those factors alone would be enough for kiwis to consider working overseas, or rebuilders to head back to UK? I know a couple heading home to Scotland with their baby, say they've done their dash in NZ and just want to be close to family again.

I agree. These measures put together could well work. And by work I mean lower price of housing because that is the only way houses become more affordable. PM saying she wants to make houses affordable but not lower price...?? The only part that isn't really happening yet is immigration slowing down. Not really yet anyway.

Another GFC and a drastic fall in migration could do the trick ?

If you look at the evidence since 1950, a normal housing market is one in which the average dwelling price increases by about 65 percent every 5 years.

But under Labour Governments, price increases are more than average. National Governments do a better job of keeping the lid on house price increases.


Do you reckon that might be due to a lack of business confidence driving investors into “lower” risk investments?

activity for activity's sake - this is exactly the right answer currently, because we have just come out of an era of inactivity for inactivity's sake aka "There is not enough clear information" for the last few governments.

One vague target will be to put a stop to the years of panic bidding in the FHB segment. I guess in Auckland this has slowed, but in Wellington it continues that FHBs mostly get their home by panic - becoming tired of offering something reasonable and getting blown away by desperate offers much higher, so becoming that desperate person themselves and going all-in.

"Desperate, panic, reasonable, blown away, going all-in". Emotive and ultimately subjective words, but then buying a home is an emotional experience. If you don't like the market and its prices then why not build? That's not actually a question, because we all know the answer, it's cheaper to buy existing. FHB has always been this way. It's a huge financial commitment and there's bound to be buyers remorse because you had to pay more than anyone else was willing to to get the property. If you are waiting for a nice relaxed experience where you think you are getting a great buy and there's no competition then you need to wake up and smell the coffee. It hasn't happened in my lifetime and the COL don't have the answers, they're just preying on the gullible for votes. Judging by the Colmar poll, fewer are buying the rainbow unicorn and pixie dust approach.

To me a normal housing market means a price to income ratio between 10 and 15.

Would that still be considered normal on 10% interest rates?

Ha-ha-ha :) DGZ, your comment is just pure Troll bait! If you're being serious then, facing facts, you're just not normal.

I think you mean the Price-Earning ratio lol

The simple answer is they must have a DTI target as Its the easiest way to gauge affordability across the country.

The wages are not going to close the gap but a depreciating market will. Even though all Labours policies clearly will have a dampening effect on the market, I wouldn't be surprised if depreciating prices get blamed on external factors such as offshore interest rates rises and overseas buyers being a larger component that the 3% touted by National.

Its taboo to admit that prices might have to drop, so they will only be flattening, cooling, plateauing or in the worst case correcting as far as the government are concerned.

Most Auckland households have one or two people living in them.
Most Auckland new builds have 4 or 5 bedrooms.

We need to change the mix.

You can make the market more affordable, and bring down the median, by increasing the supply of one and two bedroom houses, without necessarily reducing the price of existing houses.

What happens next - capital flees Auckland.

Currently a speculative boom is maintaining high prices in the majority of Australasia. In the event of a correction prices and rents will decline in the majority this market due to a pervasive oversupply of new builds. Except in Auckland, where very little has been built (apart from the sprawl). In Auckland costs and rents will remain stubbornly high.

Anyone looking for investment potential, anyone looking to start a business will be put off by the inordinately high costs in Auckland and move their capital elsewhere. Auckland will stagnate, declining in value compared to everywhere.

How about normal is 1x average annual income per 10 square meters? (So 30 sqm = 3x and 120 sqm = 12x )

A normal housing market is when supply and demand are in balance. What we have is too many people entering our country in too short a time... simple really.

Get rid of land zoning and replace with effect based planning, as was the original intent of the RMA.

For a properly functioning market land use needs to be as elastic as practicable.

Land zoning rules are made up by urban planners who don't have to bear the costs of the consequential inelastic land use market