By Alex Tarrant
Government has announced the Productivity Commission will investigate housing affordability in New Zealand, saying debt accumulation and the wealth effects of rising prices through the last decade could have made the recession worse than it otherwise might have been.
Finance Minister Bill English and Regulatory Reform Minister Rodney Hide announced the commission’s first tasks today, which will also include an investigation into international freight costs, due to the increasing importance of international trade to the New Zealand economy.
The Productivity Commission was set up by the current National-led government to look at productivity issues in the economy, and possible reforms and regulation changes that may aid productivity growth.
House price rise well above general inflation
The median house price in New Zealand has risen 102% to NZ$350,000 in the decade to February 2011, according to figures from the Real Estate Institute of New Zealand. By contrast, Statistics New Zealand's Consumer Price Index has risen about 31% over that time. It now takes around 51% of median after tax pay to afford an 80% mortgage on the median house price. See the Roost Home Loan Affordability report here on Interest.co.nz.
The average house price is now worth around 6 times the average income, more than double what it was 20 years ago.
A house price boom between 2003 and 2007 led to a large inflows of foreign debt into the country as New Zealand’s big banks lent on terms up to 100% finance to meet demand for investment in real estate due to rising price and rental returns, as well as tax breaks.
“New Zealand experienced a sharp rise in house prices over the past decade, resulting in declines in housing affordability and home-ownership rates and large increases in household debt," English said in a media release.
“That accumulation of debt has made the New Zealand economy more vulnerable to external shocks like the global financial crisis. It has also most likely contributed to higher interest and exchange rates, raising the cost of capital for businesses and reducing exporters' returns,” he said.
Debt and wealth effects, higher interest and exchange rates, may have "exacerbated" economic cycle
The government's terms of reference for the investigation said the commission should evaluate the factors influencing the affordability of housing (both rental and owner-occupied housing), and to examine potential opportunities to increase housing affordability.
"Stability of the home environment is widely considered to be important for social cohesion and family stability. Real house prices in New Zealand are markedly higher than they were a decade ago," it says in the terms of referencce.
"The rise in real house prices has been associated with general declines in housing affordability, as indicated by a number of different measures, and in the rate of home ownership. These declines have contributed to increased demand for rental accommodation and additional pressure on the social housing sector," it says.
"The debt accumulation and wealth effects associated with the rise in house prices may have also exacerbated New Zealand’s last economic cycle. Interest rates and exchange rates were arguably higher than they otherwise would have been during the upturn and there has been greater contraction in demand during the recession. Debt accumulation may also be a factor in on-going economic risks."
Announcement welcomed by, guess who...
Following the announcement from the government, Westpac sent out a release saying they welcomed the investigation into housing affordability.
"For more and more New Zealanders the option of owning a house is moving beyond reach. House prices rose faster than incomes during the 2000’s with the average house price now more than six times the average household’s annual disposable income. In 1990 the ratio was closer to three times," Westpac Institutional Bank CEO David McLean said.
Affordable housing was also more than just about income and the ability to service debt, it was about understanding the varied needs of New Zealanders.
“Government assists those in need but a change in the current model of state housing will really make a difference. The nature and scale of the social housing problem demands we do so,” McLean said.
“New Zealand needs more houses in the right places. It is hard to build new houses when thousands and thousands of houses in the existing stock need to be rebuilt. New Zealand now has a once-in-a-generation opportunity to make a difference. There are two new ways of making this happen – public private partnerships (PPPs) and not for profit initiatives using Government capital and or stock transfers,” he said.
"Westpac has experience in social housing PPPs through its role in the Bonnyrigg project on the outskirts of Sydney. For 25 years, Bonnyrigg was known as a troubled housing estate. In 2009, a AU$1 billion redevelopment began that was a partnership between the NSW Department of Housing, a not for profit and a group of private companies led by Westpac. The 18 stage project includes replacing over 800 existing state houses with approximately 2,500 new homes and providing on-going management, maintenance and up keep for 30 years.
“Using the Bonnyrigg model, PPPs could be hugely beneficial in quickly addressing the issue of affordable social housing in New Zealand. The problem is significant and we welcome the Government’s focus on it,” McLean said.
Minister for Housing Phil Heatley told interest.co.nz this week he had visited the Bonnyrigg site and was impressed by what he saw.
"There's no doubt that, or a variation of that, could happen here in New Zealand," Heatley said (See Gareth Vaughan's article here).
"The government will be involved in PPPs for social housing in New Zealand. We have got large tracts of land across the country that we would like to develop with the private sector," he said.
See the release from Finance Minister Bill English and Regulatory Reform Minister Rodney Hide:
The new Productivity Commission's first two inquiries will be into housing affordability and international freight services – two areas that affect New Zealand's international competitiveness, Finance Minister Bill English and Regulatory Reform Minister Rodney Hide say.
The Ministers also announced the appointments of Sally Davenport and Graham Scott as commissioners, working alongside New Zealand Productivity Commission chairman Murray Sherwin.
Ministers will initially refer two topics for inquiry to the Productivity Commission:
· Housing affordability – to be reported back by 1 February 2012.
· International freight transport services – to be reported back by 1 April 2012.
“The Productivity Commission is another step in the Government’s programme to lift New Zealand’s economic performance in both the public and private sectors,” Mr English says.
“Both of these topics have a bearing on New Zealand's export competitiveness. That is important as we seek to rebalance our economy away from excessive borrowing, consumption and government spending towards savings, investment and exports.
“New Zealand experienced a sharp rise in house prices over the past decade, resulting in declines in housing affordability and home-ownership rates and large increases in household debt.
“That accumulation of debt has made the New Zealand economy more vulnerable to external shocks like the global financial crisis. It has also most likely contributed to higher interest and exchange rates, raising the cost of capital for businesses and reducing exporters' returns,” Mr English says.
The inquiry into international freight transport services will look at the effectiveness and efficiency of the existing infrastructure and regulatory regimes for international freight transport services.
“International freight issues are vitally important to us as a nation of exporters, located a long way from major world markets," Mr Hide says.
“Increasing our international trade is a critical part of achieving better productivity growth andensuring New Zealanders maintain and increase their standard of living.
"The two new commissioners bring a good mixture of research and commercial skills to the commission. I’m very pleased that people of such high calibre will join Mr Sherwin and his team looking into major issues for our economy,” Mr Hide says.
The commission, which formally starts work tomorrow, has a wide-ranging brief to inquire into productivity-related matters. It is funded through reprioritised contributions from the existing budgets of 29 government agencies.
Terms of reference for its first two inquiries are available at:
(Updates with affordability chart, link to Roost Homeloan Affordability Report, Westpac response, link to Treasury documents on Productivity Commission, terms of reference, chart, intro paras)