By Alex Tarrant
"It’s not about smashed avocados" - Shamubeel Eaqub, Wellington, 5 April 2017
New Zealand’s political leadership has failed for decades on housing policy, leading to the rise of a Victorian-style landed gentry, social cohesion coming under immense pressure and a cumulative undersupply of half a million houses over the last 30 years, economist Shamubeel Eaqub says.
Speaking to the NZ Planning Institute’s annual conference in Wellington this week, Eaqub gave a detailed presentation on the reasons why housing in New Zealand had become so expensive and out of reach for the bottom half of the population.
Eaqub’s disdain for the political conversation around housing, the gross inaction by successive governments and even comments made by others in his profession blaming younger generations for their inability to purchase housing was evident. “It’s not about smashed avocados,” one of his slides said, perhaps in regard to Tony Alexander’s recent outburst.
The 45-minute presentation can be viewed in the video above. A selection of key comments and quotes are below.
- There has been a cumulative 500,000 gap in housing supply over the last 30 years
- Eaqub predicted a construction bust next year, led by banks tightening lending
- It’s remarkable NZ authorities do not have proper data on foreign buyers. While he estimates 10% of purchases in Auckland are made by foreign investors, he said the main focus should be on the other 90% by local.
- However, migration creates cyclical volatility that we can’t deal with; it is unbelievable that New Zealand doesn’t have a stated population policy
- New Zealand is still not building the right sized houses – the majority of properties being built in recent years have had four-plus bedrooms, while household sizes have grown smaller
- The majority of New Zealand’s adult population is now renting. This could be the catalyst for a Brexit/Trump-style rising up of formerly disengaged voters – young people in our case – to engage at this year’s election.
- New Zealand’s home ownership level is now at its lowest point since 1946.
- We have a cultural sclerosis of buying and selling existing houses to one another
On house prices relative to incomes & home ownership levels:
“They’re at the highest level they have ever been. And they have risen really, really fast since the 90s, but more so since the early 2000s. This is the backdrop that we’re dealing with.”
“House prices…have far outstripped every fundamental that we can think of.”
The consequence is easy to see: “After nearly a century of rising home ownership in New Zealand, since 1991 home ownership has been falling. In the last census, the home ownership rate was the lowest level since 1956.
“And for my estimate for the end of 2016, it’s the lowest level since 1946. We’ve gone back a long way in terms of the promise and the social pact in New Zealand that home ownership is good, and if you work hard you’re going to be able to afford a house.”
“The reality is that that social pact, that right of passage has not been true for many, many decades.”
“The solutions are going to be difficult and they are going to take time.”
On raising a deposit, Generation Rent, the ‘bank of mum and dad’ & a Victorian landed gentry:
“Before you come and tell me that you paid 20% interest rates…the reality is that, yes interest rates are much lower. But the really big problem is, house prices have risen so much that it’s almost impossible in fact to save for the deposit.”
People could have saved a deposit and paid it off in about 20-30 years in the early 1990s. Fast forward to today, and that’s more like 50 years. “How long do you want to work to pay off your mortgage?”
“What we’re talking about is the rise of Generation Rent…those who manage to buy houses are in mortgage slavery for a long period of time.”
There is a widening societal gap. If younger generations want to access housing, it’s not enough to have a job, nor enough to have a good job. “You must now have parents that are wealthy, and home-owners too.”
The idea of New Zealand being an egalitarian country is no longer true: “The kind of societal divide we’re talking about [is] very Victorian. We’re in fact talking about the rise of a landed gentry.”
“For those who are born after the 1980s, the chance of you doing better than your parents are less than 50%.”
“What we’re creating is a country where opportunities are going to be more limited for our children and when it comes to things like housing, then ourselves. I worry that what we’re creating in New Zealand is a social divide that is only going to keep growing. This is only one manifestation of this divide.”
Pity the poor; social housing:
There had been a change in philosophy in what underpins the housing market. “One very good example is what we have done with our social housing sector.”
Housing NZ started building social housing in the late 1930s and stock accumulated over the next 50-60 years to a peak in 1991.
“Since then, we in net…have not added more social housing. On a per capita basis we have the lowest number of social housing in New Zealand since the 1940s.
“This is an ideological position where we do not want to create housing supply for the poor. We don’t want to. This is not about politicians. This is a reflection on us. It is our ideology, it is our politics. Our politicians are doing our bidding.”
“The society that we’re living in today does not want to invest in the bottom half of our society.”
On credit growth and the coming construction bust:
The really big kicker has been credit. Significant reductions in mortgage rates over time had driven demand for housing. “But we have misallocated our credit. We’re creating more and more debt, but most of that debt is chasing the existing houses. We’re buying and selling from each other rather than creating something new.”
The housing boom could not have happened on its own. The banking sector facilitated it. “We have seen more and more credit being created and more of that credit is now more likely to go towards buying and selling houses from each other rather than funding businesses or building houses.”
“One of the saddest stories at the moment is, even though we have an acute housing shortage in Auckland, the most difficult to find funding for now is new developments. When the banks pull away credit, the first thing that goes is the riskiest elements of the market.”
Seasonally adjusted house sales in Auckland are at the lowest level since 2011. This is worrying because what happens in the property market expands to the economy, consents and the construction sector.
“I fully expect a construction bust next year. We are going to have a construction bust before we have a housing bust. We haven’t built enough houses for a very long period of time. And if we’re going to keep not building enough houses, I’m not confident that whatever correction we have in the housing market is going to last.”
New money created in the economy was largely chasing the property market. Household debt to GDP had been rising steadily since the 1990s. People were now taking on more debt, but banks had started to cut back on the amount of credit available overall.
“For every unit of economic growth over the course of the last 10, 20 years, we needed more and more debt to create that growth. We are more and more addicted to debt to create our economic growth.”
“Credit is now going backwards. If credit is not going to be available in aggregate, we know the biggest loses are in fact going to be businesses and property development.
“It means we are not going to be building a lot of the projects that have been consented, and we know the construction cycle is going to come down. I despair.”
“I despair that we still talk so much more about buying and selling houses than actually starting businesses. The cultural sclerosis that we see in New Zealand has as much to do with the problem of the housing market as to do with our rules around the Resource Management Act, our banking sector.”
Migration, population and foreign investors:
“On demand, we know there’s been significant growth in New Zealand’s population. Even though it feels like all of that population growth has come from net migration, the reality is that…it’s actually natural population growth that’s created the bulk of the demand.
But net migration had created a volatility that we can’t deal with. A lot of the cyclicality in New Zealand’s housing market and demand, comes from net migration and we simply cannot respond.
We do know that there is money that’s global that is looking for a safe haven, “and New Zealand is part of that story.” We don’t have very good data in New Zealand because “we refuse to collect it.” There is “a lack of leadership” regarding our approach to foreign investment in our housing market.
Looking at what’s happening in Canada and Australia would indicate roughly 10% of house sales in Auckland are to foreign buyers. “Yes it matters, but when 90% of your sales are going to locals, I think it’s a bit of a red herring.”
Historical context of where demand for housing comes from shows the biggest chunk is from natural population growth. The second biggest was from changes in household size as families got smaller - more recently that has stopped, ie kids refusing to leave home.
There has been a massive variation in what happens with net migration.
Eaqub said he had always thought New Zealand needs about 21,000 houses a year to keep up with population growth and changes that are taking place. “But over the course of the last four years, we’ve needed more like 26,000. We’re nowhere near building those kinds of houses.”
This means we need to think about demand management from a policy perspective. “It’s more about cyclical management rather than structural management.”
“Population growth has always been there. Whether it’s from migration or not doesn’t matter. The problem is our housing market, our land supply, our infrastructure supply, can’t keep up with any of it.”
While immigration was a side problem, Eaqub said it nevertheless was an important conversation to have due to the volatility that can be created.
“I struggle with the fact that we have no articulated population strategy in New Zealand. We have immigration because we have immigration. That’s not a very good reason.”
“Why do we want immigration, how big do we want to be – do you want 15 million people or do you want five?
“What sort of people do we want? Are we just using immigration as shorthand for not educating our kids because we can’t fill the skills shortages that we have in our industries?”
On property investors:
Let’s not pretend that it’s all about people wanting to live in houses.
“You’d be very hard pressed to argue that people want to buy houses in Epsom at a 3% rental yield for investment purposes. They want to buy houses in Epsom at 3% rental yield because they want to speculate on the capital gains. Let’s be honest with ourselves.”
“If your floating mortgage rate is 5.5% and you’re getting 3% from your rent, what does that tell you about your investment? It tells you that you’re not really doing it for cash-flow purposes. You’re doing because you expect capital gains, and you expect those capital gains to compensate you.”
The real story in Auckland is that a lot of additional demand is coming from investment.
Land supply, infrastructure & house sizes:
“Land supply in New Zealand is slow, particularly in places like Auckland. But it’s not just…in terms of sections, it’s also about density.” The Unitary Plan was a win for Auckland. “The reality is that if we only do greenfields, we will just see more people sitting out in traffic at the end of Drury.”
The majority of New housing supply are large houses, when the majority of new households being formed are 1-2 person households.
Between the last two censuses, most of the housing stock built in New Zealand were four bedrooms or more. In contrast, the majority of households that were created were people that were single or couples – “we have ageing populations, we have the empty nesters, we have young people who are having kids later…and we’re building stand-alone houses, with four bedrooms.”
We have to think very hard about how to create supply not just for the top end, even though we know in theory building just enough houses is good for everybody, when you’re starting from a point of not enough houses, it means the bottom end gets screwed for longer. We have to think very hard about whether we want to use things like inclusionary zoning; we have to think very hard about what we want to do with social housing.”
Right now we’re not building houses for everybody in our community. We are failing by building the wrong sorts of houses in our communities.”
Land costs are the key driver:
“Right at the top is land costs. If we think about what has been driving up the cost of housing, the biggest one is the value of land.” It’s true that we should also look at what’s happening in the rental market and what was happening with the costs of construction. “But those are not the things that have been the majority driver of the very unaffordable house prices that we see in New Zealand today.
“The biggest constraint is in land, and that is where the speculation is taking place.”
The 500,000 home building gap
We know we’re not building enough. In the 1930s to 1940s we had very different types of governments and ideology. “We actually built more houses per capita back then than we have in the last 30 years.”
In the late 40s-early 70s, with the rise of the welfare state and build-up of infrastructure. “On a per capita basis, we built massive amounts of houses.”
But since the oil shock and the 1980s reforms, “we have never structurally managed to build as many houses as we did pre-1980. That cumulative gap between the trend that we have seen in the last 30 years, versus what we had seen in the 40s, 50s and 60s, is around half a million houses.”
Eaqub conceded it wasn’t a very technical analysis: “I did some sums. But essentially, every year we have under built relative to population growth. And that cumulative gap is 500,000 houses. So there is something that is fundamentally and structurally different in what we have done in terms of housing supply in New Zealand over a very long period of time.”
“The changes in the way that we do our planning rules, the advent of the RMA, the way that we fund and govern our local government. All these things have changed. So the nature of the provision of infrastructure, the provision of land, then provision of consents, all of these things have changed massively. But the net result is we’re not building as many houses, and that is a fundamental problem.”
Auckland house building need – the projections are wrong. We will need more (and in Carterton):
In Auckland there was a massive gap between targets set by government for house building over the past three years and the amount of consents issued. On top of this, the targets themselves were still not high enough.
“Somehow we’re still not able to respond to the growth that Auckland is facing.” Consistently we have underestimated how many people want to live in a place like Auckland.
But it’s not just Auckland. “Carterton surprises every year…it’s because they’ve got a fantastic train line and people live there – it’s not surprising.”
“But we are failing. We have been failing and we continue to fail. We have to be far more responsive and we have to have a much longer time horizon to have the provision for housing that’s needed.”
There was in fact no real plan. “The Unitary Plan is fantastic in that it actually plans for just enough houses for the projections for population. [But] we can confidently say that projection is going to be pessimistic – we’re going to have way more people in Auckland.”
Solutions in the politics – the rise of Generation Rent
Trump and Brexit had marked a shift in politics and a polarisation in the public’s view of politics.
“In New Zealand I think one of the catalysts could be Generation Rent. In the last census, 51% of adults – over 15 year olds – rented. It is no longer the minority that rent, but the majority of individuals that rent.”
Eaqub added that he was not saying we’ll see the same kind of uprising in New Zealand, but what we saw in Brexit was that discontent was the majority of voters. If young people had actually turned up to vote, Brexit wouldn’t have happened. The same was true for New Zealand.
It was strange that there was no sense of crisis or urgency. “For a lot of the voters, things are just fine. For the people for whom it’s not fine, they’re not voting and they feel disengaged.”
The kind of politics that we will start to see in the next 10 years is something much more activist – the ‘urgency of now’.
“The promise of democracy is to create an economy that is fit for everyone. It is about creating opportunities for everyone. Right now, particularly when it comes to housing, we are failing. We are not creating a democratic community when it comes to our housing supply because young people are locked out, because young people are going to suffer, and we know there are some big differences across the different parts of New Zealand.”
“It's not going to be enough, when we’re starting from a position of crisis, to simply create more housing that will appease the public. We have to make sure that we’re far more activist in making sure that we’re creating housing that is fit for purpose, not just for the general populous, but for the bottom half who are clearly losing out from what is going on.”
“We know what the causes are. I’m sick of arguing why we’re here. We know why we’re here, because we haven’t ensured enough political leadership to deal with the problems that are there.”
“We can’t implement the solutions unless we have political leadership, political cohesion, and endurance over the political cycle. This is a big challenge, but a big opportunity.”