How does New Zealand get out of the housing hole it’s bought and sold itself into? Property and construction professional James Goodhue has a comprehensive plan.
Decent housing is a basic human right. Affordable housing and balanced rental legislation are fundamental needs for an equitable society. Home ownership and secure housing tenure are important ingredients to well-functioning families, communities and neighbourhoods.
Housing is a complex topic, no doubt. It involves a multitude of professions, sectors and industries. It intersects security, investment, shelter, health, finance and community.
To really understand housing and the mechanisms available to create a stable and equitable housing market in New Zealand, I have broken down this multi-faceted subject into three core areas:
- Affordable housing & the housing continuum
- Coordinated supply & moderating demand
- NZ’s housing plan
Affordable housing & the housing continuum
The term “affordable housing” often gets banded about by commentators and politicians. But what does it really mean?
Despite the rhetoric that affordable housing is simply a maximum price point in the market, this definition is inaccurate, inapt and in many cases, irrelevant. It is dependent on your individual circumstance and the makeup of your household. For example, what is ‘affordable’ will differ for all three of the following households:
- A couple with no children and a combined income of $150K per year.
- A household comprising of three children, two working parents on low incomes and two retired grandparents, all living under the same roof.
- A single parent with two children under five years old.
By its very definition, affordable housing is about housing that people can afford to pay for. This means that the definition of affordable housing is relative to people’s ability to pay, which in turn is related to their income.
This differs from the approach taken by Auckland Council which sets affordability for the ‘relative affordable’ housing category at a level that is relative to the median house price. Although this approach has some merits in encouraging developers to build different types of housing, such as smaller houses and apartments, it does not provide a solution for the majority of people. For example, a $650K 2-bedroom apartment is simply immaterial for the second household above.
All housing is affordable to someone, so this begs two questions:
- What is ‘affordable’ to a person or household?
- Who should we be aiming to provide ‘affordable housing’ for?
What is ‘Affordable’?
An internationally adopted standard for defining affordability in housing is that residents should spend no more than 30% of their gross household income (GHI) on housing costs. This includes either rent or mortgage payments and is based on research that suggests that spending more than this amount places financial strain on families. The reason for providing affordable housing is to try and reduce the financial strain for these households.
We know from a number of sources that there is a housing affordability problem in Auckland. This is largely due to house prices increasing at a pace that is higher than the corresponding increase in people’s earnings.
To illustrate this at an individual household level, the current gross median household income across Auckland is approximately $90,000. If a household spends a maximum of 30% of this income on housing costs, this means only $520 per week can be spent on housing. Using a standard mortgage calculator, spending this amount would allow you to pay a mortgage of $376,000 (at an interest rate of 6% and a mortgage term of 30 years) which, assuming a 20% deposit (a mere $94,000), would buy a house worth $470,000. The median Auckland house price is now circa $865,000.
So, who are we providing affordable housing for?
To fully understand this question, one must first understand the housing continuum.
It is recognised that there a large variation of household circumstances that lead to a range of different housing requirements, from emergency housing through assisted home ownership, to the private sales market. This passage through housing is known as the housing continuum and is illustrated in the graphic below.
Let’s break down some of these steps:
Not only can some people not achieve the 30% criteria, but they actually can’t afford a house in the market at all, even if they spent 100% of their income on housing costs. These are households that are most likely to be in need of social housing, which is subsidised by the government to ensure that all families have access to housing.
Some people can afford the cost of housing, but this is more than 30% of their income. These families are often supported by the government through the accommodation supplement. In order to avoid financial stress, these households benefit from affordable rental products to reduce the cost of housing to an affordable level. Affordable rental products may also have other benefits such as providing greater stability of tenure and better quality rentals.
Some people can afford rental costs but not home ownership, which may be because mortgage payments are higher than rents, or due to the deposit requirements for a house purchase – $94,000 in the earlier example. In these cases, assisted ownership (or ‘shared equity’) products can provide a way in to the housing market for those who otherwise could not make the transition.
Some people could afford to buy a house if there was suitable stock available but the trend over the last few years has seen a preference for large houses (the average dwelling size is currently over 200m²) on large sections, as this is where developers make the biggest return. These households would be willing to buy a smaller dwelling if it was available and therefore market affordable products would provide this option.
For those households earning higher incomes, full market housing will be available. There may also be an income threshold above which it may not matter if you spend more than 30% of your income on housing provided enough residual money remains available to cover the costs of living. In this case, the full market housing will be available to anyone who can afford to purchase it.
The foundation to a stable and equitable housing market is the adequate supply of quality housing stock on every level of the housing continuum and the ease at which people and households can transition through each level.
What this country desperately requires is a comprehensive housing plan that establishes a clear relationship between sectors and expresses a mandate to ensure households have a smooth transition through and up the housing continuum.
Part 2: Coordinated supply and moderated demand
As suggested in Part 1, the foundation to a stable and equitable housing market is the adequate supply of quality housing stock on every level of the housing continuum and the ease at which people and households can transition through each level.
To achieve this, however, it is imperative there exists a clear plan that galvanises and coordinates all sectors – private, public and non-profit. Without such a plan, Community Housing Organisations (CHOs), Iwi, Housing New Zealand Corporation (HNZC) and the private sector will continue to work in silos, thus creating massive blockages and gaps in the housing continuum.
When these sectors do not have a clear mandate to work together; when the connections between them are fragmented; when they work in isolation from one another, the housing market is broken, unstable and unequitable. These are the conditions that currently exist in New Zealand.
Cooperation, Coordination, Collaboration
A comprehensive, integrated public transport network (such as that proposed by Greater Auckland), is one of the keys to unlocking Auckland’s housing crises, as it allows for greater density and thus a greater number of dwellings. But greater density must be planned around parks, public transport hubs, shops, schools and promote mixed-used developments. Clearly, these solutions require coordination, input and buy-in from multiple players, both across and within various sectors.
Realising a stable housing market, however, is not simply about building more houses. In fact, merely stating a goal to build more houses raises more questions than answers. How? Where? For who? What type? What price? What construction methodology? What infrastructure is required? Who pays for that infrastructure? Will it cause greater traffic congestion?
Yes, of course we require more houses to be built, especially in Auckland. But where is the government’s plan to coordinate these sectors and groups to produce the desired outcomes. Isn’t it the government’s role to control the mechanisms that provide for a functional, equitable society? Surely a stable housing market that delivers healthy, secure and affordable homes is a critical ingredient to a functional, equitable society?
To achieve anything close to the number of houses Auckland requires over the next 20 years, a coordinated cross-sector response is an absolute necessity. It is central government’s responsibility to provide the leadership that will facilitate this response. It is central government that must galvanise the key enablers to produce a stable housing market this country so desperately needs. Only then will Auckland, and indeed New Zealand, be in a position to meet the housing supply shortfall of the past 30 years.
That said, we hear so often that house prices are rising because supply has not kept pace with demand. But tackling only the supply side of this equation will not stabilise prices. We also need to take a closer look at what is fuelling demand.
Why do people want to own homes?
Other housing options are increasingly unviable: tenants want to escape poor-quality, insecure and overpriced rental properties, while social housing is being sold off and not replaced.
Unlike other types of unearned income, profits made on investment properties from rising values are not subject to capital gains tax, unless the owner declares their intent to profit from capital gains (standard practice is not to declare this intent). House owners can also offset tax losses on investment properties against other income, reducing the amount of income that must be declared to the IRD and thus the amount of tax they pay. This is known as negative gearing.
People wanting to own their own home increasingly have to enter a bidding war with speculative buyers. These include not only wealthy overseas investors, but also asset-rich baby boomers taking out loans against their homes to invest further in the property market, often as buy-to-rent landlords.
Where do people get the money to buy these expensive houses?
The prime source of purchasing power in the housing market is bank loans in the form of mortgages. The more banks are willing to lend, the more money floods into the housing market.
This is one of the key reasons that prices have been able to race ahead of most people’s wages. The credit that banks lend for mortgages is not money in someone else’s savings account, but new money created specifically to fund the loan. As banks become more and more willing to grant large mortgages, the supply of money to the economy and therefore purchasing power, increases.
Why are banks prioritising mortgage lending?
It was the deregulation and liberalisation of the credit market in the 1970s and 1980s that kick-started the shift towards this preference for mortgage lending over other activities, as banks and building societies were for the first time allowed to grant credit to households against the value of their homes. Previously, the banking sector operated under a myriad of government regulations, ratio requirements and guidelines.
Residential mortgage lending has increased from $0.88 billion, or 13.6 per cent of total bank lending in 1984, to a massive $211.45 billion, representing 51.9 per cent of total lending, in 2016.
The clear conclusion here is that anyone who bought a house in the early 1980s has been extremely fortunate because aggressive bank lending has been a major contributor to the sustained rise in house prices over the past few decades.
With the majority of NZ loans now funding mortgages, most new money in our economy is being pumped into land and housing.
What are the wider economic risks?
For those lucky enough to own homes, rising prices give the feeling of rising wealth and encourage more spending (the “wealth effect”). Unsurprisingly, this wealth is not evenly distributed across the population. New Zealand household wealth figures show the booming residential property market is a major contributor to the country’s growing wealth inequality. This is because house owners are reaping the rewards from soaring property prices while renters are drifting further and further behind.
In aiding the creation of an economy that runs off mortgage debt rather than through boosting spending power via increases in wages, productivity and trade, we’ve become entrenched in a housing affordability crisis with a great human cost:
- Overcrowding is becoming prevalent and there has been a 25% rise in homelessness between 2006 and 2013. The total number of homeless is now over 40,000.
- Almost 1,600 deaths a year are attributed to cold, unhealthy homes in New Zealand, far more than the national road toll. Yet there is no Warrant of Fitness requirement for housing.
- The burden of mortgage debt is now increasingly falling on the shoulders of the young, much more so than any other time in the last 20 years.
What are the solutions?
There is certainly no silver bullet to New Zealand’s current housing market. There is, however, a range of levers and mechanisms that should be utilised to re-balance the current situation and these should be outlined in a comprehensive, clear and robust housing plan.
Part 3: New Zealand’s housing plan
To tackle New Zealand’s current housing woes, we require a government that shows leadership in housing. A government that creates a robust housing plan illustrating their understanding of the issues and their binding commitment to a stable and equitable housing market.
A national housing plan must be created as an overarching, governing document that sets out strategy and road-maps targets for housing in New Zealand. It should establish distinct relationships between sectors and express a clear mandate that ensures households have a smooth transition through the housing continuum.
A national housing plan should provide confidence for stakeholders with interests on both the supply and demand side of the ledger. A comprehensive housing plan would enable households, business and industry to plan into the future with a level of certainty that reduces risk and delivers social and economic stability.
Below are 15 key components that require attention and inclusion into New Zealand’s housing plan:
1. Social Housing: Establish a specialised state-owned property development agency to regenerate existing state-owned land, as this would ensure:
- State homes are not sold to the private market
- Improved quality and efficiency of housing on state-owned land; and
- An increase to the total number of social homes
- Scalable opportunities exist for alternative/innovative construction methodologies to be successfully brought to market, such as pre-fabrication.
- Regeneration projects would include necessitated house/unit typologies and are mixed-tenure developments.
2. Community Housing Organisations (CHOs): Establish a CHO Funding Plan that will allow CHOs to operate and plan with certainty of grants and low-interest loans. CHOs are critical to providing adequate social and affordable housing stock in the market.
3. Private Market: Planning rules, development fees and sufficient infrastructure must encourage and enable, both the correct volume of houses as well as the right types of housing to be developed. Supplying a variety of dwelling sizes and price points is critical to a well-functioning housing market.
4. Rental Market: Amend legislation to deliver strong, clear and equitable rental laws that serve both the tenant and the landlord equally. Rental agreements need to provide families with security of tenure on longer term leases. All rental properties must obtain a Warrant of Fitness prior to tenanting the property. The private rental market must support and enable professional landlords and institutional investors in this space. These players hold properties for longer periods of time and are more focused on tenants’ needs than amateur investors, who are primarily motivated by capital gains. Professionalising the private rented sector will provide greater rent stabilisation and longer-term tenancies.
5. Town Planning: Current town planning rules and models must be updated to reflect the fact that we’re now living in the 21st century. NIMBY-ism must also be addressed through education and compensation. Greater density, decent housing and mobility choices and mixed-use developments must occur around public transportation hubs, green spaces and urban centres. Intensification within these parameters, coupled with good urban design, generates vibrancy in communities and increases demand in those areas. It is critical that areas approved for mixed-use developments and greater intensification be accompanied by appropriate investment in quality public transport networks and green spaces. Should these two components not happen simultaneously, the urban dwellers’ quality of life is reduced along with their property values.
6. Community Development: All large-scale development projects are required to obtain EcoDistricts certification (or similar).
7. Community Land Trusts (CLTs): Amend current legislation to allow CLTs to operate effectively in New Zealand, as they:
- Provide a mechanism for central and local government to increase social and affordable housing stock without selling down public land to the private market, or spending significant amounts on redevelopment projects.
- Ensure housing remains affordable in perpetuity for future generations.
- Provide low and moderate-income earners with the opportunity to build equity through home ownership.
- Ensure residents are not displaced due to land speculation and gentrification.
- Protect owners from downturns because people are not financially over extended.
8. Land Tax: Introduce an urban land tax over a certain threshold (say, a land value of over $500k) to discourage land banking and help fund infrastructure projects.
9. Infrastructure Funding: Central and local governments must enable a range of infrastructure funding options to ensure lack of infrastructure is not a constraining factor in the supply new and affordable homes. These options include:
- Enabling Community Development Districts (CDDs) and Municipal Utility Districts (MUDs) to operate in council jurisdictions.
- Tax break/incentive for local government. For example, local government shares the GST revenue from every new dwelling constructed, which is then invested back into local infrastructure projects.
- The issuance of Green Infrastructure Bonds used to fund infrastructure such as stormwater projects e.g. bioretention, rain gardens, permeable paving, green roofs and rainwater harvesting.
- Land Tax: Proceeds of which are invested into new and upgrading infrastructure.
10. Regulatory Framework: Regulatory processes must be simplified, faster and less costly. New technology software needs to be developed to streamline consenting processes, creating efficiencies across Council, property developers and consultants. The Local Government Act, the Resource Management Act and the Land Transport Management Act require alignment. The regulatory complexity created by these acts means that it is conceptually and practically difficult to supply land quickly and easily. Until policy can be better aligned and streamlined, land supply will remain slow.
11. Construction Industry: Amend the building code to a higher standard and widen its scope to encourage innovation and competition of building materials and methodologies. Enable short-term worker accommodation and incentive apprenticeship programmes, especially in high-need areas such as Auckland and Queenstown. Develop a long-term (50+ year) plan illustrating a clear pipeline of land supply and other large-scale projects that would allow the sector to train, invest and upscale with certainty.
12. Capital Gains Tax (CGT): Better enforcement of the current CGT is critical to an equitable market. If a property is bought with the intent to benefit from capital gains, then it is liable for tax when sold. The word “intent” requires a robust definition and strict enforcement.
13. Negative Gearing: Tax loopholes on rental properties such as negative gearing must be closed. Returns from an investment property should only be offset against the same investment, as opposed to income. Residential investment properties should stand on their own merits, rather than hiding behind a tax safeguard.
14. Alternative Savings and Investment Options: Financial literacy and a better understanding of savings, debt and alternative investment options to housing, should be prioritised. Greater regulation of financial markets may be needed to improve the attractiveness of alternative investment options. There is a dire need to develop secure, attractive pensions and alternative savings and investment options to reverse the growing dependency on housing wealth to pay for retirement and old age care.
15. Monetary and Macro-Prudential Policy: Build a mortgage market that serves principally to enable people to organise their finances for the long term, by removing teaser rates, interest-only periods and by favouring loans with long-term fixed interest rates. The Reserve Bank could also set limits and restrictions such as:
- Loan-to-income ratios
- Debt-servicing ratios
- Require banks to hold more capital against mortgage lending and keep the loan until maturity, rather than packaging it up and selling on.
The 15 solutions and mechanisms outlined above are the key ingredients to a stable and equitable New Zealand housing market.
The creation of a national housing plan that galvanises industry sectors, coordinates supply of various housing choices and fairly moderates the demand of housing speculators, is one that will create the stable, equitable housing market this country so desperately needs. Now, more than ever, we need leaders to facilitate these outcomes. We need leaders with the vision, wisdom and courage to implement a solution-focused, multi-faceted housing plan that serves the many, not the few.
James Goodhue is a property and construction professional with extensive experience delivering multiple housing projects across the private, public and non-profit sectors.
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