Kids born after 2008 into rentals were already hamstrung. Now their hopes for secure, healthy homes for their own whānau and futures are gone. Bernard Hickey explains how the housing market bolted and destroyed the dreams for our youngest people. And why there’s no real prospect our leaders can (or want to) wrangle it back to affordability.
Hope is a precious and powerful thing. It should never be discounted or given up easily, especially for the young. They emerge with a bright and open vista ahead of them and the driving force for the rest of us will always be to help the young realise their potential.
That’s why this is the ugliest and most despairing column I have ever written.
Why endowments matter
I have been hopeful for all of my life, in part because of a rich endowment from my family and the communities I grew up in. Of course, and I should have acknowledged this more often, it is easier to be hopeful and expansive and take risks when your base is secure and nourishing. My grandfather was given land as a rehab farmer in the late 1920s by the Crown. In retrospect, and from the little research I’ve done, it was probably land the Crown should not have owned. But he and my father and family worked hard to grow that asset and build lives for me and my three brothers. Our 1930s weatherboard home was not warm, but we had plenty of wood to burn in the winter and we were never kicked out by a landlord. It was ours and I proudly mowed the lawn around it. I played cowboys and Indians in the trees around that lawn and spent my childhood wandering off down to the back of the farm to swim in the river and collect swedes and tin cans of milk for dinner.
The proceeds from the farm that land became and the sale of it as an asset helped me finish university without a debt and then to quickly put a deposit on a home in Wellington. I also just managed to slide my university education in under the bar of student fees introduced by the third Labour government in 1990.
I had careful and kind and well organised teachers at my state-provided primary (Galatea and Hora Hora) and secondary schools (Cambridge High), and at Massey University. Again, in retrospect, I was privileged. Galatea was a well-resourced school in an almost completely Pākehā community and I was well supported. I remember it fondly. (As an aside, it was also Jacinda Ardern’s first primary school). The school over the river at Murupara, a mostly Māori community, was not so well resourced and supporting. Neither was the nearby Rangitahi College, which was eventually closed in 2012 because so many parents from Galatea were bussing their kids out to other schools.
My parents specifically moved to a farming district near Cambridge, an also mostly Pākehā and wealthy town, when I was 11 to ensure my three younger brothers and I had better secondary schooling. Luckily, my parents had the resources to do that. Not everyone had or has that endowment, although I thought at the time, the late 1970s and early 1980s, that we were nothing special and New Zealand provided everyone with an equal chance to succeed from an early age. Success was about luck and hard work, I was taught, not about how well off your family was. It wasn’t really true then, especially for the residents of Murupara, and is even less so now, but more on that later. The main thing was it felt true at the time. It was one of those “accepted” facts of public life. New Zealand was a fair and relatively equal place, we could tell each other with some relationship to some facts.
Back then, in the late 1980s, I was hopeful for my family and the wider community of Aotearoa I lived in, although hardly anyone called New Zealand that then. I was able to quickly learn a trade of financial journalism, founded on the endowments of a university radio station and newspaper, get a full-time job with benefits, and form my own family with the immediate prospect of finding a secure and healthy home. With some help from my parents, my wife and I were able to scrape together a $35,000 deposit and buy a 1904 standalone two-bedroom home in Newtown for $112,000 in 1992. That was also possible because the rent for my one bedroom in a Mt Victoria flat was just $80 a week for the previous two years. I had no student debt repayments and could save for that deposit and service the 12% mortgage on a property worth just over three times our household income once our first child was born.
My first house rose over three times more than incomes
I checked again this week and that first house of ours is now valued at $1.43m, which is about 10 times the median household income for Wellington. Sadly, although young renters reading this will rightly feel little sympathy, we sold it two years later to move to Canberra in Australia with my work, and then Sydney, and then London. As we bounced along, we rolled up any leveraged gains we got into houses we owned in serial fashion in Sydney, London, Auckland and now Wellington.
We are now rich in anyone’s language, and not because we earned it. Sure, we worked hard and didn’t “waste” too much money, but that wealth was purely about leveraging the endowments we had and riding for free on a once-in-a-century collapse in interest rates and the withdrawal of the state from financing enough infrastructure to provide enough housing for population growth over the the last 30 years.
That housing supply shortage was created by the three main pieces of legislation that now govern New Zealand: the 1989 Public Finance Act, the 1988 State Sector Act and the 1991 Resource Management Act. Collectively, they corralled councils and the government into prioritising public debt reduction and reducing public infrastructure spending. They drove the expansion of privately provided housing, especially rental housing when combined with easier credit and no capital gains tax.
The unleashing of leveraged house buying for financial gains and a collective strangling of housing supply was a global phenomenon driven by a collective loosening of banking controls and a surprise collapse in inflationary pressures, along with the growth of Not In My Back Yard (Nimby) friendly planning laws such as the RMA. Aside from a few countries and states able to sprawl into their deserts with all the externalised fossil fuel costs and subsidies that entails, most of the developed world has experienced this explosion of house prices. But New Zealand has been extra special. Our house price inflation has been the most extreme in the developed world over the last 20 years because our infrastructure deficit is bigger than the most and we have not had a capital gains tax.
This was not earned and I should not fight to keep it
The point of this explanation is to state that I did not earn this wealth of many multiples of my income. It is not really mine. I am not entitled to it. I happen to have it because I was endowed, and happened to own assets at a time when the manna of low inflation, massive bank lending and restricted housing supply fell from the heavens into my financial lap.
I am not alone in being the beneficiary of this bonanza, but I am in the minority of asset owners wanting this happy accident of history (for me) to not become an awful accident of history for those not endowed with assets at this start of this perfect storm. I voted repeatedly for a capital gains tax and would have voted for a much more aggressive use of government borrowing to fund housing and public transport infrastructure if one of the parties up for election had offered it.
Like most, I couldn’t see this calamity coming, and it has taken a long time to come to the view that it cannot be reversed in a sensible or politically realistic way. I’m going to spend more time than may seem necessary to show you why my capitulation to despair was not given away lightly or quickly. I’m including quotes from others over the years to show why it’s taken me so long to give up.
I was hopeful in 2004
It took me a while to recognise this perfect storm. I arrived back in New Zealand in early 2004 just after it had begun and simply could not understand how prices and rents could go any higher. The house price to income multiple in Auckland had risen over six times income and the median price was $340,000 by May 2004. I assumed in a pre-GFC way that the market would sort it out, and if prices were sticky, there would be a regulatory intervention to ensure sanity prevailed. I believed the “grown ups” when they said house prices could fall, and couldn’t easily rise much more.
Reserve Bank Governor Alan Bollard, who now chairs our Infrastructure Commission, was talking my language in January 2004 when he suggested the housing market may be a bubble about to burst. That was back when the median house price nationally was $228,000 and the median rent was $240 a week.
“Some people today may be incorrectly convincing themselves that level shifts associated with lower mortgage interest rates are in fact shifts in the trend of prices, that house prices only rise, and that someone can always be found who will pay more for a property. For a time, this behaviour can be price reinforcing, but eventually some unhappy soul will be stuck holding the bag. There are elements of speculative bubble behaviour present in recent house price developments. While that bodes ill for some individuals, however, it does not seem at this stage to be large enough, or of a character, to generate significant fall-out for the overall economy when the correction happens – as it will.”
– Alan Bollard in a speech in January 2004
He repeated the message nine months later. I quote from him in full if only to show what people were saying and thinking at the time.
“Most market observers, the Reserve Bank included, agree that the upswing has now peaked and that demand is gradually beginning to cool. The Reserve Bank has been giving a consistent message to households and investors over the last year. Prudent buyers and investors need to satisfy themselves that they could withstand a reasonably significant fall in house prices and rentals and/or a reasonably significant rise in interest rates. I should point out that the Reserve Bank is certainly not projecting a calamitous fall in house prices over the next few years. However, some of the fundamental drivers of the housing cycle that I mentioned before, such as rapid population growth, certainly appear to be easing, and the evidence does point to a cooling market. A reasonable view is that house prices are unlikely to rise much further over the next two years, and some falls are certainly possible, particularly in some regions.”
– Alan Bollard in a speech on September 2, 2004
The median price had risen $32,000 since his January speech.
Then in 2007 a new young opposition leader, John Key, came along with a fresh and equally sensible message about a housing affordability crisis. He firstly cited high mortgage rates, which he pledged to get down.
“On current trends, the crisis will only deepen. Home ownership rates are predicted to plummet to 60% within the next decade. And one of the biggest factors influencing home-ownership rates over the next 10 years will be the difficulty young buyers will have getting into their first home. The second and most important reason for the home affordability crisis is one of supply. It explains why houses have become so unaffordable for so many people. Quite simply, not enough new houses are being built in New Zealand. This is a recent phenomenon. In many parts of the country, increases in demand for housing are now outstripping supply. National’s plan for housing affordability tackles these supply-side problems in two main ways. First, by freeing up the supply of land and secondly by dealing with the compliance issues that drive up development and building costs.”
– John Key speaking in August 2007
Then, the median house price was $348,000 and the median rent was $275 a week.
I was hopeful in late 2008
Key was elected prime minister in November 2008 just as the global financial crisis was kicking off. I thought the GFC would spark the necessary correction. Prices did fall around 10%, but not the 30% I expected.
About that time, the University of Auckland decided to launch its Growing Up in New Zealand longitudinal study of over 6,000 babies and their families born over 2009 and 2010 in Auckland and Waikato. The sample of families reflected that of the New Zealand population, with almost a half identifying themselves as Māori, Pasifika and Asian. The idea was to find out what factors cause problems, or generate success, as children grow up.
At that time, almost half of those children were born into households living in private rental property. The assumption was that many would quickly move into their own homes to improve the security of the base for their growing families. That’s what my parents did, moving from a sharemilking rental in Tokoroa to our own farm back in Galatea when I was three.
Instead, the study found that 40% of the children, and especially the kids growing up in both private rentals, were bounced from house to house because either the rent was too expensive or the landlord flicked the property on. Almost 40% of the study’s kids lived in cold and/or mouldy rentals and more than half of the kids moved house in their first five years of life.
Professor Susan Morton, the director of the study, was surprised at how many times these young families were moving. By the time they were eight, more than three quarters had moved at least once.
“We were seeing this generation who were not in stable housing situations. We fully expected that the stability of home environments might actually change once the children were born that, that perhaps this was sort of a part of getting ready to have a family or having a child,” Morton told me for this week’s podcast.
“But what we’ve continued to see, which has surprised us more than probably any other result in the study, is the high degree of residential mobility for these children throughout the first eight years,” she said.
“They’re often moving between private rentals. And that’s unfortunately, mostly due to the unaffordability of living and shifting jobs. But actually, a lot of it relates to finances. We haven’t seen the shift of this generation into their own homes.
“I’ve seen a few who had managed to move out of rental properties into homeownership, but that would be far less than 10% of the cohort over the entire eight years. And I think also given the amount of money that these families are having to spend just to maintain rental accommodation, it is unlikely that they are putting themselves in a position where they will be able to move out of that renting situation.”
I started losing hope in in 2012 and 2013
By 2012 I was starting to doubt my hopeful approach. I had expected interest rates to bounce back, but very low global inflation stopped that. I was encouraged by the Reserve Bank’s decision by 2013 to start restricting lending.
The new governor, Graeme Wheeler, was also talking my language at that stage.
“Our main concern is that rapidly increasing house prices increase the likelihood and the potential impact of a significant and disruptive fall in house prices at some point in the future – particularly in a market that is already widely considered to be over-valued.”
– Wheeler said in the bank’s annual report for 2012/13 in August of 2013
Then, the median price was $395,000 and the median rent was $325 a week.
There was a slight hiccup in prices and then they marched onwards and upwards. During the first six years of Key’s National government there had been a slump in new building and an exodus of trades people, along with another surge in migration.
The government was by 2014 focused mostly on reducing debt and cutting back on infrastructure investment to keep interest rates low. It successfully blocked Labour’s capital gains tax proposal at the 2011 and 2014 elections by arguing it would prevent new home buyers from accessing the capital gains tax free of previous generations.
I got my hopes up again in 2017
Then in 2017 a new and fresh opposition leader, Jacinda Ardern, started talking about the affordability crisis and what she would do about it, including introducing a capital gains tax. Again, I quote at length from her campaign launch speech in 2017 at the Auckland Town Hall.
“Leading a country that gives our next generation hope and opportunity means there is another issue we can’t look past. Housing. Housing affects everything. There is nothing more basic than having a roof over your head. That is why a warm, dry, decent home is a right. I was door knocking in Hastings a few years back, and remember some doors where I couldn’t see inside for the dampness pouring down them. Even in my home electorate. I’ve seen kids who sleep stacked underneath bunk beds because there is just no room. That is our housing situation at its worst. But this is not a reality we have to accept.
“I do not accept that young people, our teachers and our nurses should give up on owning a home. Not when we can do just three things that will make all the difference. Under Labour, we will remove speculators’ unfair tax advantages. We’ll stop foreign buyers who have no interest in New Zealand buying existing homes. And we’ll just get on and build more houses.”
– Jacinda Ardern in August 2017
The median house price was then $500,000 and the median rent was $400 a week.
But a few days before the election she abandoned the talk of a capital gains tax in her first term. Less than two years later she said she would not bring in a capital gains tax in her political lifetime. In the 2020 campaign she ruled out any sort of wealth tax. Kiwibuild was killed off as quietly as possible earlier that year.
By late 2020, when prices were exploding again, she was explaining why the government could not take actions to drag prices down and she wanted sustainable price increases of around 4% per year. By then the house price to income multiple was approaching 10 nationally and would take 50 to 100 years to return to early 2000 levels with inflation barely below income increases.
“It is much more sustainable to have those much smaller increases. I think people expect that you see that in the market. What we also accept is that for most New Zealanders, their house is their most significant asset. So if you see, for instance – as was predicted at the beginning of the year – a significant crash in the housing market, that impacts, of course, people’s most significant asset.”
– Jacinda Ardern in December 2020
The median price had risen to $745,000 and the median rent was at $550 a week.
The post-Covid decision of the government and the Reserve Bank to print more than $50bn to lower interest rates and pump up home equity by nearly $320bn in a year was the final straw.
The hope has gone
Now anyone without parents able to help them with a big dollop of equity, or unable to marry into wealth, have no hope.
Professor Morton has noticed in it in the ongoing study of those kids born in 2009 and 2010, who are now seeing the effects of unaffordable and unhealthy housing in their school results and wellbeing.
“One of the things that I guess I’ve found really most difficult about this over the last few years is that by the time the families have experienced the greatest poverty and disadvantage, by the time the children are four and a half, ready for school, ready for those opportunities that school presents, we’re seeing those hopes start to be blunted,” Morton told me.
“The parents are lowering the expectations for those children who have been growing up in those disadvantaged environments. And I think that’s the saddest thing of all: the poverty of hope that those parents are already expressing,” she said. “I guess there’s a glimmer of hope alongside that, and that the children still see themselves as potentially able to do anything.”
Morton, amazingly, still has hope the results of her study might convince politicians and bureaucrats and voters to change.
I don’t see that chance any more. The median voter remains supreme. The government has in recent weeks prioritised “keeping a lid on debt” over infrastructure to ensure houses are built.
Get out while you still can
Those parents still renting and those just graduating into Covid without assets should move now. Giving up hope seems a capitulation. It is. But sometimes discretion is the better part of valour. Sometimes there is no hope. Move to Australia and you’ll find wages are 30-40% higher and rents have fallen $50-100 in the last year.
I write this as the Wellington City Council is debating whether to gut its spatial plan to ensure fewer houses are built to avoid altering the views of those who own homes close to the centre of town. It is hopeless in my experience of covering this debate for nearly 20 years. Get out while you still can.
At the end of May the median house price was $820,000, up 30% in a year and not slowing down despite the government’s actions in November and March to address supply and demand, again without any real intent to lower prices. And the median rent was $550 a week, up $150 a week since the election of the Labour-led government.
These prices are predicated on home buyers being able to handle mortgage rates of at least 6%, which is the affordability threshold set by bank lending managers. Any shift lower in that affordability threshold towards 4%, which is likely as interest rates stay below that for several more years, would justify house prices rising another 50% in the next couple of years.