Monday, 19 December 2011

The Missing Rung on the Property Ladder

Did you know that:

  • Housing is considered affordable when the Median house price does not exceed 3 times the median household income*
  • No markets in NZ satisfy this. Auckland is more than double this (6.4x) and is one of the worst cities in the developed world. The New Zealand average is 5.3x*

*These are some conclusions from ‘International studies and benchmarking: Demographia International Housing Affordability Survey (2010)’

Have I got your attention?

At first glance this is quite different than what I normally write about, in that it is not a blog post about what I’ve made or something cute my kids have done.

However, THIS is a huge issue for me and is something that I’m sure will hit home to a lot my readers – that these days owning a home in New Zealand can be very difficult. Especially for young families.

And, I wonder how many of you, like me have just assumed that this was just how it is, has to be – that it is near impossible on the average NZ salary to own your home (and even more so if you are single/ or on one income) … and if you do manage to join the home ownership club the cost to you is significant debt.

My Dad (Simon White) has for years challenged this assumption and is the reason that I now do too.

He claims that essentially that the reason homeownership is unaffordable for so many is because excessively restrictive land use regulation has driven up section costs.

Here are few more things you should know:

  • I briefly mentioned in a previous blog post that my Dad is an unpaid trustee for the new charity The Canterbury Co-operative Land Trust  which aims develop low-cost sections for red-zone evacuees. According to my Dad, the problem facing these people is symptomatic of the problem facing the whole country – that section prices are too high.
  • My Dad is extremely passionate about this issue. Often when someone is passionate about something it is first necessary to ask: Why? –  What are their credentials/ how accurate is their information and what do they stand to gain from this? Dad is a Company Director and Chartered Accountant with over 30 years experience in the Financial industry and is a homeowner himself who just wants to resolve this problem for his children, grandchildren and for the future of New Zealand’s economy.
  • This is not just an issue for those of us unable to afford a home or burdened with a large mortgage – it is an issue for all New Zealanders (see the report below).

What can you do?

  • Get educated and informed on this issue – read my Dad and Uncle’s report/ submissions on the issue below and the The Productivity Commission's Draft Report and make a submission on it. (The Productivity Commission’s draft report and this issue generally featured on the front page of last weekend’s Dominion Post article – if you didn’t get a chance to read it you can read the online version here.)
  • Share this issue with others – help spread the word and get others informed.
  • Help us urge the Government to hear and act on this. Email your local MP.

…I didn’t intend for my ‘introduction’ to be quite so long – but I urge to click below to ‘read more’ for my Dad and Uncle’s research and thoughts on this important issue:

HOUSING AFFORDABILITY IN NEW ZEALAND

1. A call for action -now

This issue has been reviewed a number of times in New Zealand – but no effective action has been taken to implement past recommendations. It is now being reviewed again by the Productivity Commission – which is due to provide recommendations in March 2012.

The policy responses to date serve only to entrench the negative implications of the problem. For example: the Welcome Home loans initiative that assists first home buyers to acquire excessively priced houses - by assisting households with incomes of up to $85,000 p.a. to borrow up to $350,000, do not solve the excessive debt commitment problems for first home buyers.

Why do we continue to delay acting on the most significant quantified cause of this problem: excessively restrictive land use regulation has driven up section costs. This is appalling because first home buyers are taking on a burden of mortgage debt that is at least $100,000 more than it should be and because inflated house values and constrained supply will result in rents being much higher than they should in the future.

There is no justifiable reason for delay on solving this issue. In particular:

1. To enable the people in the red zones of Canterbury to be able to rebuild on an affordable section as an alternative to competing up the already over valued price of existing housing in the $200,000 to $350,000 price range; and

2. We will face a significant housing shortage as the economy improves, because new house building and household formation has been 40% below long-term trends since the recession commenced.

Action required now by councils – adopt international best practice land use regulation:

  • Increase the available residential zoned land to a point of excess supply – resulting in potential sellers of bare land competing down the price; and
  • Facilitate or encourage the use of Residential section development cooperatives to enable groups such as the people in the Christchurch Red Zone to jointly develop affordable sections.

2. Understanding the problem

In New Zealand, since 1993:

Section prices have increased at a much faster rate than house prices. If section prices had increased at the same rate as consumer price inflation since 1993, they would average $74,000 now. In June 2011 the median section price was $180,000 in New Zealand ($48,000 in 1993).

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House prices have more than doubled in real terms since 1993. This highlights that this is a structural problem. In fact, the recent small correction in house prices is much lower than other developed countries (except Australia), despite the deep and prolonged recession we have experienced.

Following the Housing affordability crisis of the early 1970’s, house prices reduced in real terms by more than 30% over the next 6 years.

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The Task Force report on closing the income gap with Australia by 2025, included recommendations on barriers to increasing the supply and reducing the cost of housing:

“Houses in New Zealand are now among the most expensive, relative to incomes, anywhere in the world…..”

“The most valuable use of land in this country is not for grazing dairy cows (worth maybe $20,000 per hectare in normal times), but for housing. At present, urban sections, of less than a tenth of a hectare, in middling suburbs not particularly close to city centers, sell for more than $300,000.”

“Council zoning restrictions and arbitrary “urban limits” prevent the release of sufficient land to lower the overall price of housing. Grimes (2009) demonstrates that just inside the Auckland Metropolitan Urban Limit, where housing development is permitted, land trades at around 10 times the price of otherwise identical land which is outside the boundary. This is a striking example of costly inefficient regulation that has been set in place with no proper economic cost-benefit analysis. Such an analysis should focus on the real revealed preferences of individuals, not on poorly defined preferences of local bodies couched within the “intrinsic values” criteria of the RMA.”

“There is no shortage of land in this country, but local authorities prevent it being used for its most valuable purpose. That has to change. When it changes, housing will be a great deal more affordable: our incomes will stretch further.”

If councils relaxed regulations to create excess supply of new land for development, the cost per section should be halved. At present the cost of bare land in developments is approximately 20 times the value of the agricultural land use. We should be able to reduce this to 2 times (or less). The following indicative example illustrates this:

Section price components (includes gst)

Currently

Opportunity?

change

Bare land (acquire for $80,000 per hectare)

$96,103

$10,360

-$85,743

Council

$25,240

$25,240

 

Develop site/services

$28,791

$28,791

 

Financing

$12,365

$5,000

-$7,365

Selling

$9,378

$9,378

 

Contingency/admin

$9,378

$9,378

 

Profit

$11,185

$11,185

 
       

Total section price (incl GST)

$192,440

$99,332

-$93,108

International studies and benchmarking: Demographia International Housing Affordability Survey (2010)

This comprehensive study concluded:

  • Housing is affordable when the Median house price does not exceed 3 times the median household income (i.e. 3 years of income to buy a house).
  • No markets in NZ satisfy this. Auckland is more than double this (6.4x) and is one of the worst cities in the developed world. The New Zealand average is 5.3x
  • Australia is the worst overall (6.1x average and 7.1x average in major cities).
  • There is a very strong relationship between land use regulations (how restrictive) and housing affordability.
  • In unaffordable markets, higher land prices have been the principal contributing factor.
  • In the United States, there are a number of markets that have maintained ‘responsive land/housing supply regulations’. These housing markets have maintained affordable housing and been less prone to bubbles and busts than markets where land supply is constrained by physical and regulatory barriers.
  • Examples: between 1980 and 2010, in the following cities housing affordability has been maintained below 4.0x income at all times and debt per capita is much lower than other cities (Atlanta, Dallas, Charlotte, Cleveland, Philadelphia, Houston, Raleigh, and Columbia).
  • In Texas - Houston and Dallas have not been above 3.0x income at any time in the last 20 years. This has been achieved despite very strong population growth. In Houston, the median house price is currently $160,000 (about $200,000 NZD).
  • There is a strong relationship between positive net migration growth and improved housing affordability.

The study concluded that More Restrictive Land Use Regulation raises house prices in the following ways:

    1. increases underlying land costs (e.g. in NZ the cost of say $5,000 of rural land (per section size) increases to approximately $90,000 per section for the bare land in a development project).
    2. Increases planning and development costs (e.g. cost of studies, consultants etc.)
    3. Increased financing costs (function of project duration and other cost components – including the bare land purchase)
    4. Encourages more expensive houses (less expensive houses are hard to justify if the section price is excessive).
    5. Increases construction costs (less scale and more custom building increases costs per sqm of construction).
    6. Encourages “land banking” and reduced competition
    7. Encourages land and housing speculation.

3. The importance of solving this problem

For social, fairness, economic and strategic reasons the housing affordability problem needs to be solved as a matter of strategic priority:

  1. It is generally agreed that high levels of home ownership are beneficial to society. NZ home ownership was once one of the highest in the world, but has been declining since the early 1990’s. Home ownership has declined as house price increases have accelerated: from 73.8% in 1991 to 66.9% in 2006.
  2. It is unfair that land owners and land bankers can profit, at the expense of first home buyer, from the extreme supply restrictions applying to land zoned for residential.
  3. If New Zealand houses were affordable (a reduction in the house/income ratio from 5.3 to 3.0 would reduce the median house price from $360,000 to say $204,000), First home buyers debt would be at least $100,000 less on entry level housing and this would mean they have reduced debt servicing commitment of approximately $8,000 p.a. (after tax) to use for other services, retail spending, saving, building a business etc.
  4. Excessive house price increases have enabled and encouraged households to borrow excessively. Registered banks are likely to continue to encourage this type of lending with the lower levels of capital required in relation to these loans. New Zealand now has one of the highest levels of household debt as a percentage of income in the developed world.
  5. High house prices are likely to also result in excessive rent levels as investors seek to achieve an adequate return on the value of their investment. This is very likely to happen in the future as we have not been building enough new houses.
  6. New Zealand completes with Australia and other countries for talent (and tax payers). Sir Paul Callaghan recently said when talking in Christchurch about the importance of growth in higher income industries (such as hi-tech companies) that: “And so the fundamental mission statement for us has to be ‘a country where talent wants to live’”. Affordable housing must help. As an example, Houston is experiencing migration from people in the Silicon Valley.

4. Action required now by councils – adopt international best practice land use regulation

Increase the available residential zoned land to a point of excess supply – resulting in potential sellers of land competing down the price.

And facilitate or encourage the use of Residential section development cooperatives to enable groups such as people in the Christchurch Red Zone to jointly develop affordable sections.

5. Implication of solving NZ housing affordability – commencing with urgent action to remove excessive land regulations

The following implications are likely:

· New house construction would be restored more quickly to normal/required levels if sections are cheaper and new houses are a more attractive alternative. This would be a major driver of improved economic growth as currently new house construction is 40% below these normal levels.

· Rent increases would be much less than the general inflation rate as a consequence of increased housing supply and reduced cost of new housing. This would also lead to less need to increase interest rates to contain inflation (OCR and mortgage rates) and this should feed into a more fairly valued exchange rate for exporters.

· First home buyers would avoid at least $100,000 of debt and have reduced debt servicing commitments – so greater ability to spend on other products and services and savings.

· Restore NZ homeownership to past levels.

· Existing house prices will decline in real (inflation adjusted) terms by 30 to 40%. This last happened following the unaffordable housing bubble in the 1970’s by a combination of high inflation and house prices in nominal terms remaining flat. With low inflation now, existing house price might decline by say 20% and inflation (incomes growth) would absorb the rest of the adjustment.

· Household debt (as a % of income) would continue to track back down to more sustainable levels. This is already happening.

· Existing ‘land owners and bankers’ will experience a significant reduction in the existing perceived value of their assets.

Winners

· People renting

· First home buyers

· Building firms and trades employees

· Retailers and providers of services (extra future disposable income of home owners and economic boost of construction sector)

· People with an existing house mortgage (lower interest rates)

· Exporters (lower exchange rates)

· Parents and Grand parents – who like to see their offspring get the security of homeownership without excessive debt

· The community – benefits of improved home ownership levels

· Commercial/industrial development projects will become more viable with lower land prices

· Competing to attract and retain talent in NZ (in particular an advantage verse Australia)

Losers

· Land bankers/speculators (no more super profits)

· Developers holding land for development purchased at inflated prices

· Property investors of existing overvalued houses (rental properties)

· Banks – reduced lending in future to this sector and some increase in bad debts (but mitigated by lower levels of unemployment)

· People with low equity loans – vulnerable to house price reduction reducing their flexibility to sell house and move until debt reduced.

· People who wish to sell their home and live in a caravan. For most existing home owners the paper value of our house will be less but the functional and real attributes of the house will be unchanged.

Analysis and opinions: by Glenn Livingstone & Simon White.

3 comments:

shorty said...

Great food for thought! You sure got my attention very early on. Great to read a passionate, well written, and call-to-action piece on your blog!

(And don't get me started on the property thing because I'll start on how families like mine qualify for $1 a week on the Working for Families - almost feels like punishment for being ambitious, and it's hard to get anywhere in the world when you make sensible choices for your family in NZ like buying a house, having a parent at home, etc etc etc... like I said, don't get me started!!)

Jenny said...

Thanks Clare - the passion and good writing belongs to my Dad - (and I guess a bit of the passion has rubbed off on me.)

Like you we are also home owners (albeit the bank still owns most of our house.) Even when we both worked our budget was pretty tight - so obviously things are more so now. However, I know a lot of people who would love to own their own house but can't. Also, I am very aware that we made a choice to have kids and for me not to work, so there are inevitable financial consequences of that which we accept - but it is interesting to know that home ownership hasn't always been that hard and that it is more attainable in other areas of the world with different land use restrictions.

Stace said...

This is a great read!! and in lamins terms which is nice. We are homeowners on 1 wage as I choose to be at home with the kids. My granparents bought their home for 35,000...you cant buy land for that price anymore, let alone land with a habitable house on it already.
Thanks for sharing this, I have earmarked it to share after the holiday break