By Gareth Vaughan
In 2015 when he and his wife Selena published Generation Rent Rethinking New Zealand’s Priorities, economist Shamubeel Eaqub admits he was pessimistic about the housing market. That has now changed.
Speaking in interest.co.nz's Of Interest Podcast, Eaqub, now of economic consultancy Sense Partners, explains why he's now optimistic about the housing market.
"I think there is a consensus across the political spectrum that there is a problem, and now we're fighting about what the solutions are. To me that's a really optimistic place to be when it comes to the housing market," Eaqub says.
"We've seen changes in the Auckland Unitary Plan which has led to significant increase in supply, diversity of types of supply in terms of more medium density [housing], high density, places that are infills, places that are greenfield. So we're seeing really good progress. We've seen changes in the Residential Tenancies Act, it's not perfect but it's heading in the right direction. Recently we saw an announcement for build to rent. Again it's not perfect, [but is] heading in the right direction. We're building more state houses, [which is] very, very good because we have a massive wait list of over 25,000 households that are waiting for social housing."
"So I think we are heading in the right direction in that the balance has moved from apathy towards action, and we are arguing about what are the best solutions," Eaqub says.
In the podcast he also talks about why a land tax - a "pseudo wealth tax" - is top of his housing market wish list, the psychology of the housing market, pressure on the Reserve Bank after it "misdiagnosed the [Covid-19] problem and flooded the housing market with money with predictable results," and perhaps what it should've done, outdated thinking in the public service, the needs of renters and requirements for affordable housing, consenting, the current difficulties for borrowers in attracting mortgages and how and when this might change, and much more.
*In this 2015 video interview Eaqub talks about Generation Rent with Jenée Tibshraeny).
78 Comments
Yep - all good reasons for being positive about the housing market.
Opinions are strengthening that the market will stabilise as soon as early/mid 2023. We’ll see……
Notably, mortgage interest rates are not rising as much as was commonly anticipated. Much of this week’s OCR increase was already factored into market rates - and that will be the case for the next couple of OCR increases.
The vast majority of homeowners will simply ride out the market correction, content that property remains the best long-term investment. In the interim, some of them will hasten to add further properties to their portfolios, buying at discounted prices.
TTP
Gee. If you believe that and hold off buying a house, more fool you. Do people like you actually do any research or understand the drivers of residential real estate prices? Don't believe the negative Nellie's, never hold off from buying a home. If you do, you will regret it forever.
It does take in interest rates.
If supply can equal demand, then as interest rates drop, and stimulate demand, then more houses are built to meet that demand as is required and therefore the prices do not go up except for the rate of general inflation, as does income, so the net result is the house price to income multiple stays roughly the same.
If interest rates go up and cause demand for housing to reduce, then if as demand falls, so does the supply, so there is very little if any oversupply, so prices don't fall.
This equilibrium only happens when there are very few restrictions to supply in the system, and evidence from all over the world shows that equal/balanced/stable markets have a median income to house price of approx 3 to 4x. Anything moving up or down from this shows there are dysfunctions within the housing market, which in NZ are supply restrictions due to bad Govt. policy.
In a balanced market interest rates have very little effect on supply and demand as is shown in other jurisdictions.
You only have to look at the median house price to income ratio to know how dysfunctional or not your housing policies are. IE NZ has very dysfunctional housing policies.
To elaborate…
The new density rules may have some minor aggregate effect on the level of future price rises in housing, but it’s likely to be a minor moderating impact rather than something that fundamentally impacts on affordability.
Yes the government has increased state house building, but the net number of new houses over the last 3-4 is pretty low.
Further, immigration will be restarted in the next couple of years.
at some point the OCR will be cut significantly again, and that will result in another cycle of rising house prices.
Built to rent will be helpful, but it’s likely to be of marginal benefit.
I’m not so certain. The right wing are going to really struggle to appease everyone on issues such as house prices, environment, transport, abortion, etc. They may think all their voters want to give tax cuts to the rich and property investors and repeal the clean car discount and cancel public transport investment, but I’m not sure it’s so black and white these days.
I agree. On paper I should be a National voter (work in business, live rurally, receive no tax credits etc) - but I don't think people are as selfish as Luxon seems to think they are. I don't want to see Labours' healthy homes repealed, or the property tax changes. I quite like the idea of all kids growing up in warm and dry homes. National under Luxon is there to protect the rich, they are not interested in levelling up. If they were, they would have focussed on improving state education and training first, rather than bashing benefit claimants.
Ironically, leveling up is what will save rentier class which is over represented within the Nats base.
If people feel emotionally and politically invested in our social-democracy and its institutions, and there is a pathway for improving one’s own lot supported by State intervention where necessary (I.e education and housing not being commodities, abject poverty being deemed unacceptable), we all benefit and avoid significant social disruption - which is what the rich have the most to gain from in the long term.
I agree. It is a near certainty that National will win the next election and despite any of the promises that they may make before then, the infamous Christoper 7 houses, "your just a bottom feeder", Luxon, from Te Puke will rapidly reverse any price falls by cranking up the immigration fueled low wage, low productivity, housing ponzie economy. All his statements to date indicate this already. Even if Labor wins, I doubt that they will let prices fall much further. Their record to date supports this and Ardern has explicitly stated that she believes in never ending property price rises.
The only hope for young skilled first home buyers is to leave New Zealand for countries where price to income ratios are sane.
House prices are largely attributed to unknown costs associated with Councils. Even before a hole is dug in the ground you are looking at about $150,000 to get all paperwork in place which takes minimum 1 year to get all approvals then another 1 year to build and get CCC and new titles. 2 Years holding cost for Land and building costs on top. Don't hold your breath about price reduction on any developments...
Councils should have Fixed price models and a timeframe where they can assure that your project can start when you plan to start.
House prices (as with all other prices) are set according to what buyers can afford.
If inflation continues to rise (or flatline at 5+%), the OCR will have to continue to rise, wages eventually have to fall, spending will fall, economy will falter, jobs will be lost, mortgage rates will rise, house prices will fall as (1) people have to sell and (2) people will only offer less money. Its what always happens.
Doesnt matter how much houses cost to build, or how many we need, or how much land is. if people cant afford to pay the asking price, and the buyer has to sell - then the price will be the highest amount on offer. That amount will drop, builders will have less work and thus offer their time for less, building material suppliers will have to do something to compete or survive, land owners who need to sell will drop prices, councils will need to do something etc etc.
Everything adapts in the downturn. And right now its looking increasingly likely. Real estate agents round our way are all struggling for any heads at open homes. Might be a good time to build social housing assuming councils and government can afford to build)
it requires spending up front. If our economy nosedives our government will be needing to cut the existing spending commitments - let alone any cash left to pay the builders or increase superanuation or benefit spending in a downturn. They didnt exactly save for a rainy day.... but i am not sure the new generations have experienced a serious downturn yet.. so why prepare
Interestingly P8 used to be a big fan of bank economists forecasts, but only if house prices were going up. I wonder what he would think now when the RBNZ and ANZ are forecasting a crash (i.e. a 20% drop in prices).
I guess they would no longer be relevant economists worthy of listening to. They've lost their street credibility because they've turned into doom goblins (lol) and therefore clearly shouldn't be listened to.
I don't rate economists as a general rule, but at least internationally in much bigger countries the law of averages means you come across a good one every now and then.
One or two of the university economists in NZ are quite good, and I also rate Rodney Dickens quite highly.
Otherwise, it's scraping the barrel....
Some good questions from Gareth, but missed asking some great questions. And not-so-great answers from Shamubeel.
For starters, small steps in the right direction are not the right type of steps if you have to leap a chasm ie it's either one big leap or none to get the job done.
Land tax is still an added cost and too blunt an option and will force people to market even if the market says we have enough supply. EG we have enough consent supply right now, most of which won't get built, due to no market and can't build below market value, so how would putting a land tax on them encourage them to build if it meant a further loss? Also, the likes of farmers with residential zoning on the fringe will be forced to develop even if they prefer to farm. Plus it will put more pressure on the council to supply services, which they being the monopoly supplier will use to increase infrastructure levies, so the result won't be cheaper housing.
All that they need to do is have fewer zoning restrictions and this will allow cheaper land into the system by default. Shamubeel may be an economist but does not seem to understand how the free market supply of land works in making housing affordable.
The Built to Rents he mentions are not true BTRs and are just as much a rebranding exercise as anything. Shamubeel even admits that BTRs will be more expensive to rent. It's a shame Gareth didn't ask him to explain that comment. Can Shamubeel explain how a BTR helps a forever renter, to be able to afford to pay the rent once they retire?
Interesting discussion. If you haven't listended, I recommend you do. If Shamubeel is right, the central bank-commercial bank complex is breaking down and has to change. I agree with him. We need to go back to lending for business enterprise, not for bidding up house prices. The problem as I see it is that the boomers are not going to give up the fight and lie down so easily.
When it comes to housing, there is no more basic fundamental than average price/income ratio, which (of course) also affects rents. One can argue about exactly what that ratio should be for housing to count as "affordable," but no one can deny that in NZ it is well above the affordable level.
Because of that fact, it is rational in the medium term to expect 1) for bright and talented young people to start leaving NZ in increasing numbers, simply because most of them cannot afford to buy a house (there is some evidence that this has started to happen); and 2) Prospective migrants from wealthier countries to be deterred because of the exorbitant cost of NZ housing (poor migrants have no hope of purchasing, at least initially).
NZ has had about 20 years of deliberate attempts, from both major parties, to ignore these fundamentals. This cannot continue indefinitely even if government wanted it to, and there is now evidence that they recognize this. The most likely outcome for NZ property is that the price/income ratio will decrease, either because of a fall in house prices and/or an increase in wages.
"... simply because most of them cannot afford to buy a house (there is some evidence that this has started to happen)."
My niece shifted to the USA 2 years ago after completing her PhD in Statistics (easy to get jobs anywhere in that field) because of house prices and is now a homeowner there.
Too many DGM's here, same moaning different day....
The half glass empty crew...
In my opinion, Inflation has peaked. My Industry (importing commodities) are seeing shipping rates, fuel and commodity prices coming down for many sectors. This will filter into Q1 reductions(possibly Q2) next year. The higher priced stock and local supply stock holdings will be depleted and manufacturing costs should start reducing early to mid next year.
In turn I don't see interest rates going to the level that some would like to see to make home owners squirm. Most would have fixed for 2-5 years at relatively low rates and would ride out a lot of the high interest costs.
The Reserve bank needs to be careful here.
I note, 43,000 residence visa's have been approved with tens of thousands to go, this has already lead to a small uptick in the amount of would be buyers in the market and some increase in volume of coming back to open homes. A lot of these families or individuals have been sitting and waiting for approval to buy homes.
We still don't have enough housing.... And certainly the Govt is happy to point the finger and vilify at the private sector in this regard. They have medalled with the free market far too much and it has shown unintended consequences!
The Toll poopy syndrome in NZ is rife! The private sector is doing what they can to provide a service to Tenants and it is noted that they take on full risk by doing so!
Everyone has a right to buy a home. Same way they have a right to a clean/healthy and tidy Rental and a roof over their head. If the private sector can't provide suitable rentals who does....certainly not the Govt, the state housing list is too long and those houses are well behind meeting the Healthy homes standards, the Govt have given themselves longer to achieve this vs the private sector!
We need positive outcomes for current home owners and FHB and for Tenants. For some, having a wishful 50% drop (ain't going to happen) would cripple many home owners (and Landlords). These people have taken on the risk to get a home or provide a suitable home for a Tenant. I don't wish this on anyone and in some cases 2 families can lose out.
Build costs alone being as high as they have been, amongst shortage of materials/labour will put some floor on house prices.
A modest landing is a good outcome and back to a new modest norm of growth. Personally for me the factors are leading to flat or modest house price growth early to mid next year. Just my opinion. DYOR.
I keep a keen eye on commod prices and also PPI and retail spend out of Chyna. It's not fashonable to say that 'demand is falling of a cliff" I know. Whatever it is you do, I do not dispute that things are red hot and input prices are high. But that may not reflect the wider environment.
"The Toll poopy syndrome in NZ is rife! The private sector is doing what they can to provide a service to Tenants and it is noted that they take on full risk by doing so!"
BS - private sector have been bailed out (by monetary and fiscal intervention) in 2008 and 2020 meaning they haven't assumed any risk at all.
Oh and how's the tall poopy (poo) syndrome going....that sounds messy!
Likewise we have seen a 20% drop in our main raw material we import for manufacture and too wonder if inflation has or is peaking.
As for housing, you mention 43,000 residence visas have been approved. Yes that will result in an uptick of buyers in the market, but on the other side of the coin is a down turn in renters. These people are already in the country, living in rentals.
We don't have enough housing?
- In 1992 there were 1.31m private dwellings. In 2022 there are 1.98m private dwellings. A 51% increase.
- In 1992 our population was 3.5m. In 2022 it's 5.1m. A 45% increase.
The private sector only does stuff it can make money at. This includes construction.
There is no margin at the bottom of the cliff for these dudes to make money, regardless of how well (or in our case, how poorly) they build houses. We could look at the suppliers but remember, we're just a big city on a couple of smallish islands miles away from anyone else, in the south Pacific. In other words, we have no economy of scale & it costs a small fortune to get the good stuff into the country. We will always have to pay a premium for our lifestyle unless we double the population? No thanks.
As I've posted repeatedly before, we don't have a whole of housing problem/issue, other than one for the poor people that the taxpayer funded government breeding programme has created over the past 50 years. Not only was this created by the governments on behalf(???) of the taxpayers, but was let down by those same governments by not investing in social/state/whatever housing over the same last 50 years. Poor leadership on both accounts, I would argue, however, don't go blaming the builders who get up every day & work hard building homes & other stuff for a decent return for their labours. We can blame the builders for the poor quality, which some will argue is the same problem from the other viewpoint, but these guys are workers & for the most part it's a tough game.
And as some have noted above, too tough for this government for sure. And don't get me started on covid.
There will be a 'settling time period,' which we've entered already. As others have said, it is needed, & it is (and I'm a boomer) happening. It'll continue to happen slowly as the boomers die off, as has already started, until you correctly remind me, of the immigration factor.
Sadly, we don't have much of a choice here. Poor leadership once again has driven over a million Kiwis to foreign lands, over half of them to Oz. Such is life. In order to keep the lights on we need skills that we are obviously not growing ourselves, due to our poor education standards generally (another day's argument) so we need to import these skills if we want to continue to be First World participants, which I'm not entirely convinced, some of us do. Anyhow, that's the reality, even though it sucks.
What is the chance of everyone living happily ever after, you might ask?
To the answer for that, we only need to look at the current goings on (and non-goings on) of our favourite sport. Rugby. The NZR is officially woke & broke, and as we all witnessed this week, doesn't really have a clue about what to do, & therefore our chances of winning the World Cup in 2023 look about as good as Jacinda being re-elected, both happening about the same time.
Project New Zealand 2024 begins.
Is it poor leadership that sent them to Aus or just the fact they can make crap loads of money from a hole in the ground?
I find it odd to point out all of these problems and then try and say the solution is the National party! The status quo do nothing the market will fix it all party.
"we have a massive wait list of over 25,000 households that are waiting for social housing"
That statement tells you how much we've trashed our society
When there are that many "excess" that can't afford to house themselves through, wages, benefits or pensions.
This is what happens when you have 30 years of 7% growth in house prices, cheered on by politicians and regulators whilst wages at the low end increase by 2-3% you create inequality that becomes very difficult to fix and creates a welfare state.
Shamubeel Eaquab for years said don't buy a house because prices would come, and he didn't own one. Then, after many years, he realized how wrong he was and bought one. His housing advice is spurious. Ditto Brad Olsen, another economist who gives spurious opinions on housing. He's a ~25 year old kid who doesn't even own a house. All housing commentators should be required to state their ownership position before giving their comments in public forums.
Define overpaid, overpaid at the time of purchase or overpaid now. Highly unlikely anyone who bought a house even 2 years ago or more considers that they overpaid looking back now. My place still has miles to fall to the Sept 2020 price paid, its not going to happen.
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