By Gareth Vaughan
New Zealand needs to find a cure for its housing affordability "disease" rather than merely administering pain killers and this should start with land availability and making sure both the costs and benefits of development are felt at the same level of government, says the executive director of think tank the New Zealand Initiative.
Oliver Hartwich told interest.co.nz in a Double Shot interview the "disease" in New Zealand stemmed from a long under supply of housing.
"You just have to go back to the 1970s to see that back then New Zealand built about 35,000 (housing) units a year. We're down to just under 15,000 now despite the growing population so we've got a massive under supply that has built up over many decades," Hartwich said.
"I think the problems are probably going to get worse in the future because of demographic change. So really rather than finding these one off solutions (such as) just instructing Auckland to build 39,000 units, we actually have to find a real answer to the long-term challenges in the New Zealand housing market."
He said lots of New Zealand families struggle with their mortgage payments, and it has become very difficult, especially for young New Zealanders, to get on the property ladder.
"It would be nice if these 39,000 (Auckland Housing Accord) homes get built," Hartwich added. "But I think it's still administering pain killers to the housing market when in fact you really need to find a cure for the disease. And I think the disease we have in this country is quite clearly that we have got a long undersupply of housing."
'In Germany there's nothing more boring than the property market'
I recently reported on a speech Hartwich gave to the New Zealand Property Council's Residential Development Summit in Auckland where he suggested New Zealand could learn a lot from his native Germany and neighbouring Switzerland to help deal with its housing affordability issues.
Elaborating on this, Hartwich said this view stemmed from work he did in London on housing affordability for the think tank Policy Exchange.
"And for me coming from Germany this was a completely different feel, because I wasn't used to the kind of property market inflation that Britain has experienced for many, many decades. Coming from Germany that all seemed very strange for me because when you live in Germany nothing is more boring than the property market."
He said Policy Exchange set out to ascertain what was the structural difference between Germany, with its "relaxed" housing market, and Britain and other English speaking countries. They looked at demand side factors and decided these were quite similar.
"All of these countries have some inward migration, they all experience some economic growth, they all experience shrinking household sizes. So structurally we didn't find too many changes and differences on the demand side," Hartwich said.
"Where we found differences was the supply side of the market. So we found that yes, Germany and Switzerland build more regularly on a per capita basis than Britain, or Australia or New Zealand. What we didn't quite understand initially was why they (Germany and Switzerland) built more, because as it turned out they had very complicated planning systems."
"They had building regulations, building courts, planning courts. I would probably say actually it is more complicated in Germany and Switzerland in many respects because they also have a three tiered system, - a federal system with national guidelines, state guidelines, local planning. So if anything it should be more complicated."
"But then we went to Germany and Switzerland, had a look on the ground, and talked to people and found that the difference really was a different way of funding local government," Hartwich said.
"To understand the difference basically put yourself in the position of a planner in an English speaking country. When it comes to development you have to pay for a lot of the infrastructure that goes with it, but you wouldn't automatically get an upgrade in your council's budget to pay for that."
"And to make matters even worse you have to deal with the nimbys (not in my backyard), or with the bananas (who are) the faction of people (who say) build absolutely nothing anywhere near anyone. There's a big anti development brigade and so there's nothing to win either financially nor politically for planners on the ground," Hartwich said.
What they found in Germany and Switzerland was the opposite.
"Especially in Switzerland, they have local income taxes. So any new resident pays into a council's, or canton's budget and therefore they can fund the extra required infrastructure out of that. They can also then exploit some economies of scale so you can finance the existing infrastructure with a larger population. And the existing population then benefits because they may get better public infrastructure, or they may get tax cuts eventually," Hartwich said.
Where NZ has lessons to learn
Hartwich and his colleagues come to the conclusion that the big difference between Germany and Switzerland's housing markets on the one hand, and much of the English speaking world's on the other, was in local government finance.
"And that's where I think New Zealand has lessons to learn."
"We should make sure that when it comes to development, the costs and benefits occur at the same level of government," Hartwich said. "The bulk of all taxes generated go to Wellington, but the costs are often borne by local government."
However, the German and Swiss housing markets have developed affordability issues of their own. In October the Bundesbank said apartments in Germany's biggest cities might be overvalued by as much as 20%, after rises of 25% on average since 2010, in part due to speculation. The Swiss National Bank recently moved to force banks to hold more capital to try and cool the country's housing market where prices have risen an average of 20% since 2008.
And analysts at Goldman Sachs included Germany and Switzerland among countries with the world's five biggest housing bubbles.
Hartwich maintains these problems were created by the euro crisis rather than structural problems with the German or Swiss housing markets.
"The dates that you mention - 2008 and 2010 - are quite telling. It basically coincides with the euro crisis. You can see that interest rates have fallen in the eurozone. The European Central Bank is now going through a period of activism to deal with the euro crisis and what we see in the housing market is a direct result of that," Hartwich said.
"So money is generated, it has to find a safe haven and therefore it goes into property. Not just into property, you can also see it in the German stock market. The stock market last week went through the 9,000 barrier. That's money that just needs to find a place to be invested rather than staying in savings accounts where it doesn't yield any interest anymore in the eurozone," Hartwich said.
"For the same reason money is flowing into Switzerland. The Swiss National Bank is fighting the appreciation of the Swiss franc. I don't think that has anything to do really structurally with the responsiveness, the price responsiveness, of the German or the Swiss property market. It really has everything to do with the euro crisis."
'Focus on supply not demand'
Hartwich isn't a supporter of introducing a capital gains tax, banning non-New Zealand residents from buying investment properties or the Reserve Bank's restrictions on banks' high loan-to-value ratio (LVR) residential mortgage lending.
"The problem I have with all of these solutions is they typically start with the demand side," said Hartwich.
"They are trying to reduce demand when I think we should be taking demand as a given. The problem New Zealand is definitely experiencing is a lack of supply for many, many decades so that's where I would like to start. And introducing LVRs, introducing bans on foreign ownership, introducing a capital gains tax, all of this is really focused purely with demand but it doesn't build a single new home."
And Hartwich said even if it's significantly more expensive to build a house in New Zealand than Australia, which a Productivity Commission study suggested, 60% of what you typically pay for an Auckland home is for the land.
"So you may make building more efficient but you would only affect about 40% of the total price. So I think that's not the way to go about it. If you really want to solve the housing crisis, you really have to start with land and land availability."
The Ministry of Business, Innovation and Employment has released an issues paper seeking comment on the cost of building houses in New Zealand.
'Stable property prices encourage renting'
Another major difference between the German and New Zealand housing markets is the ownership level. According to Roy Morgan Research, 72.3% of New Zealanders own their own home or are paying one off. In comparison about half of all Germans own their own home.
Asked whether more New Zealanders should be prepared to rent, and to do so for a long time, Hartwich said this would be desirable. But first the country needs stable property prices.
"Firstly there is no stigma to renting. If you're in your 30s or 40s and still renting in New Zealand people think that something must be wrong with you. In Germany it's a perfectly acceptable lifestyle. But I think it's a lifestyle that develops over long periods of time based on an expectation of stable house prices," said Hartwich.
"German tenants are actually making some very rational decisions about their own personal finances. If you're living in a housing market that has been characterised for a long period of time by stable property prices, there is no point rushing into the market when you're in your early 20s just to get a foot on the property ladder and just to be able to afford a home in 10 years time."
"Whereas in a New Zealand context many people rush into the housing market because they believe if they don't do it now they will never be able to afford anything in the future.
So I think once you take the pressure out of the housing market, once you actually create a system that delivers stable property prices over long periods of time, there is no rationale anymore for jumping into the market at any cost."
"So I think home ownership rates are lower in Germany as a result of a stable property market, it's not the other way around."