Home ownership is a defining characteristic of being a Kiwi. It had been an attainable aspiration for more in each generation, but it ended with the baby boomers. After rising for nearly a century, home ownership has been falling since 1991 and is now at the lowest level since 1951.
Home ownership has fallen because houses have become unaffordable. House prices have risen much faster than incomes. Even for double income families, buying a home can now mean massive sacrifices, including some parents leaving their young children in care for up to 11 hours a day and facing long commutes to work.
Unaffordability is extreme, but it is relatively recent and only in some places.
Until the early 1990s house prices were around 3 times annual household incomes. Today, it is over 6 times. There are differences in interest rates, inflation and other policy settings when comparing generational experiences, but the end result is lower affordability and fewer homeowners.
Unaffordability is uneven across the country. While house prices are very cheap in places like Southland (around 2 times annual incomes), they are exorbitant in Auckland, at over 10 times.
In Auckland, the average house price is nearly $840,000. The average income for a family is around $80,000 a year. At current historically low interest rates, this equates to mortgage payments of nearly 60% of income. If interest rates rose to historical norms, mortgage payments would be two-thirds of a family’s income. The average family cannot buy the average house.
Too often we hear that house prices would be lower only if:
- we just stop foreigners from buying; and
- we just stop immigration.
Besides, there is no problem, all global cities are expensive. Right?
If we look at these claims in turn we find some truth in them, but they do not explain the situation in full. Data on foreign ownership is sketchy, but we estimate non-New Zealanders purchase fewer than 10% of homes. Foreign investors are the most prominent of this group. Immigration has certainly added about 20% to housing demand; most of the housing demand growth results from natural population growth and smaller families. In terms of the inevitability of expensive housing if Auckland is to be a truly global city, housing in Auckland is less affordable than housing in Sydney: Auckland’s population is a third of Sydney’s, and while house prices are similar, incomes are a third lower in Auckland.
There are some legitimate concerns:
- poor tax policies (negative gearing rules are a form of reverse welfare for the rich);
- a preferential bias to housing in our banking rules (its cheaper and easier for banks to lend to residential mortgages than businesses);
- and a complete mess in supply of housing, which encompasses planning rules, funding and provision of infrastructure, NIMBYs and an immature construction/development sector.
The drivers of unaffordable housing are political, cultural and regulatory.
Unaffordable housing is locking Kiwis out of a critical part of our culture. But also a critical requirement for many other things, including getting capital to start a business or being able to retire on national superannuation, which is only possible with a fully paid off home.
Rising house prices have been a boon for property owners. But with falling home ownership, the benefits are accruing to fewer and fewer people. For future generations, there is an increasing risk that only those with help or bequest from their parents will own homes. The egalitarian dream of equal access to opportunities, including the opportunity to buy a home, will be a lie. New Zealand is well down the path of a hereditary system of wealth and success, like the ‘old country’. The new landed gentry will do everything they can to preserve their wealth and influence. Generation rent is fragmented and as yet voiceless.
Yet, generation rent is a pretty large and increasing segment of society. In the 2013 Census, 52% of over 15 year olds lived in a rental property (and 57% in Auckland). Renters are typically young (under 40) but people of every age are increasingly more likely to rent. Even though majority of adults rent, renting is a raw deal. Compared to our peers, New Zealand has some of the most restrictive rental policies in the world. Renting is a precarious existence, characterised by low quality buildings, short terms, and often few rights to small alterations or even owning pets.
Unaffordable housing is also pushing the poor further away, risking the kind of ghettoization that is the hallmark of unenviable places like Johannesburg. Being poor is getting more expensive, as gentrification pushes the poor to the least desirable locations with few resources like public transport and amenities.
Houses have become unaffordable over a long period, which is why home ownership has been falling for over two decades. Poor tax policy and easing financial settings have encouraged and abetted housing investment, which has driven out younger first-home buyers. Slow housing supply, encompassing density, height, ‘greenfields’ and all the infrastructure that goes with it, has been the main factor. A small and shallow construction sector cannot respond fast enough to rapid changes in demand from net migration and interest rates.
We propose a number of solutions in our book, Generation Rent. We think some immediate palliative care can be provided, by fixing the rental market (improving security of tenure and making a rental more like a home) and a shift in attitudes towards renting and property investments would stop alienating half of New Zealanders who rent. But the real deal are structural policy changes that are hard. We need to increase the supply of housing (change planning rules, deal effectively with NIMBYs, sustainable and equitable funding model for infrastructure). We need to fix banking sector biases to housing – current rules are inflating the property market and misallocating credit away from productive businesses. Fix tax rules on capital gains on investment property and investigate negative gearing to remove the tax bias to investing in housing. This needs to be hand in hand with improving financial literacy – so that people can invest wisely, not just in housing.
The housing market is broken as a result of broken policies of many decades. Fixing them will take time but we know what needs to happen. What is needed now is leadership from our politicians and policy designers – and intense pressure from the public to make these changes, which are unpopular with a small but powerful vested interest group.