Impossible dream?

This Issue This is a part of the Affordability feature

By - , Build 140

The best way to increase housing affordability is for politicians to manipulate the market by bringing on more state housing and to discourage property speculators, but it’s not to likely to happen!

Auckland needs more housing – one reason for decreasing affordability.

CHRISTMAS HAS COME and gone, and yes, the goose was fat. The last year brought with it the latest housing affordability initiative. This is the fifth or sixth initiative I’ve seen in recent years. More time spent going over the same issues – again. Housing affordability has become a key campaigning issue adopted by the government and the Opposition.

Among the latest papers from the Ministry of Business, Innovation and Employment is the Residential Construction Sector Market Study Options Paper.

This addresses construction costs, productivity, the regulatory framework, materials importation, industry fragmentation and more – the usual pantheon of systemic construction issues always raised.

Home ownership becoming elusive

Last time I checked, New Zealand was a free-market, capitalist economy. Home ownership is encouraged as a cornerstone of society. The Kiwi dream of a freestanding family home on a quarter acre of heaven remains aspirational, driving house prices to astounding levels throughout the 1990s and early 2000s.

Around 2005–06 the market was dubbed unsustainable and a dangerous bubble. Yet 6 years after the global financial crisis with its deflationary effects, job losses and business closures, house price inflation is sending both Auckland and Christchurch values still higher.

Interestingly, these cities stand apart from the New Zealand norm. Getting a modest starter home in Greymouth? Cheap as. In Wellington, the seat of government? No real affordability problem.

Society as a whole recognises the problem. National newspapers run articles on how young and low-income families find it impossible to buy a home. At the time of writing, a Christchurch family has moved into a tent in a local park as their rental property was sold from under them.

We are rightly concerned, but we also recognise the problem of market over-inflation and its tendency to overstretch purchasers when buying properties. Generating sufficient savings to put a deposit on a home is seen as becoming unachievable in our two biggest cities. Buying a home is an impossible dream.

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Productivity doesn’t equal cheaper houses

Productivity is touted as the hot topic affecting housing affordability but productivity is not synonymous with affordability. Increasing productivity increases the profitability of construction companies.

Affordability is only improved if operational savings are passed to the customer. Rationally, will a builder pass on all these savings to the house purchaser?

If a builder can sell a house at a higher price into a hot market, why should they pass on the savings to a purchaser? Charity? I think not. Productivity is an input parameter that helps constructors improve or maintain margins but does not affect affordability per se.

Auckland needs more housing – one reason for decreasing affordability.

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Public not well informed

At the heart of affordability is knowledge – or lack of it – in the general public and politics. Both public and media are poorly informed about construction and the problems around housing affordability. Politicians respond to both public opinion and media, so it is not surprising that they follow polemics.

Fundamentally, the public considers house prices – that is, house plus land – to be synonymous with construction cost. Therefore, the simplistic logic is that the construction industry is inefficient, its costs are too high and it is exploiting the public with big players using their positions of power to make extreme profits to our collective detriment.

Do we actually see any of the large materials manufacturers and builders making astronomic profits in the housing sector? The New Zealand stock exchange tends not to show it. Are they being bought out by overseas capital? No. There is an apparently classic conflation of cost versus price versus value in the housing market. So let’s get these issues out there.

Currently, around 20,000 consents per annum are issued for constructing new dwellings – representing 1–2% of the around 1.67 million dwellings in New Zealand. However, the ‘price’ at the point of completion of each new dwelling is based on the value of the residual existing 98% of housing stock.

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Value lies in land location

Actual cost of construction is almost irrelevant. Consider the costs of building a 200 m2 house in Devonport versus the cost of building an identical property in Otahuhu. Materials and labour would be the same, yet the selling price – the true value of the dwelling – may be 3–4 times higher in Devonport. Conversely, picture trying to sell a $1 million house of any type in Otahuhu – as they say, ‘Good luck with that.’

Let’s take a 1920s villa, again constructed in Devonport. What was the cost to build it at the time? A few thousand pounds. What is the value of the property? Potentially $1 million plus. The principal determinant of current purchase price – that is, value – is the land the property sits on.

Efforts by government to reduce the input costs of the construction process – as seen in the current options paper – will have minimal effect on housing affordability.

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Is there really a scarcity?

There is an apparent scarcity of houses for sale, and this is driving up tender and auction prices.

But is there an actual lack of houses for ordinary Kiwis to live in? Do we see hordes of homeless families wandering the streets? Not really. In reality, the number of dwellings in New Zealand has gone up broadly in line with the population increase.

What has happened is that there has been an increase in the proportion of renters as opposed to owner-occupiers in the market coinciding with the rise of property investment – buy to let – as the principal retirement nest egg for many.

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Property speculation driving prices

Property investment is a cost and tax-efficient mechanism for those with the means to expand their capital holdings. We are bombarded with adverts by so-called property professionals advising on procuring buy-to-let investments.

Property speculation is the factor fundamentally affecting prices and values. Investors with significant equity can leverage further purchases. This forces the market still higher, generating more equity for those on the ladder – a classic spiral.

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Policy interventions needed

The politically difficult issue is simple to state. Increasing housing affordability equates to driving down values in the current housing market.

It would take a particularly socially responsible person to voluntarily see the value of their largest single asset reduced for the greater good of society. Do any politicians plan to make such a statement? I think not. Turkeys voting for Christmas springs to mind.

The solution is with policy change rather than construction-costs. We generally have enough dwellings in New Zealand – although we do need to boost construction in both Christchurch and Auckland. However, the only way to significantly boost house availability – thus affordability – will be to intervene to manipulate the housing commodity market.

This could be done by building large numbers of state-owned properties not subject to the housing commodity fluctuation. Coincidentally, this would force down rents in buy-to-let properties and make their purchase less attractive to speculators.

Alternatively, provide a carrot to encourage buy-to-let landlords to sell these properties, such as allowing one-off investment of capital gain into KiwiSaver for example. Finally, the classic stick of a capital gains tax across such investments could be introduced.

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Red herrings cloud issue

There are no easy options. However, the cost to build new homes – whether materials prices or other construction costs – is not the issue. This is a red herring. The latest affordability options paper takes us no further forward.

Government policy to manipulate the housing commodity market will make the difference. This needs to be faced. The problem is that, as the market continues to climb, it becomes costlier to take action prior to the correction that will come. The inevitable correction will – of course – be framed as the failing of the construction industry with its infamous boom/bust cycle.

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Auckland needs more housing – one reason for decreasing affordability.

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