Tony Alexander: 12 reasons why housing market fixes could make things worse

In this year’s May Budget and perhaps sometime this month as well, the Finance Minister is expected to announce measures aimed at boosting the pace of new house supply while limiting investor demand. Some years back the challenge in doing this may not have been that great. But we have reached the stage now that affordable housing to buy or rent is in such short supply any actions aimed at curtailing demand could easily make some problems worse.

Here is a list of some of the issues the Government has to deal with and why there is no clear path towards things improving greatly for young buyers or renters in the next few years:

1. Investors are substantial funders of new developments such as apartment buildings and townhouse complexes. Any moves which hit investors could see this source of funds dry up and construction decline.

2. There are more people on average living in each rented property than an owner-occupied one. Ownership shift of a tenanted property towards occupancy by a first home buyer worsens the availability and pricing problem for renters.

3. Auckland has plentiful land available for redevelopment courtesy of the Unitary Plan. But in the rest of the country land shortages have appeared very quickly as people have flocked to arrange construction of standalone houses. Problems with rezoning land and financing infrastructure mean at some stage house construction growth in the regions may stall.

4. The country faces a shortage of construction workers. But boosting immigration of migrant workers will undermine the opportunity to permanently lift outcomes long-term for those Kiwis who now have a chance to enter the building sector with initially very low productivity.

5. Any assistance provided to first home buyers via grants or raised KiwiSaver purchase limits will place extra upward pressure on prices and encourage additional buying by investors.

6. The waiting list for state housing has blown out over the past three and a half years and the extreme pressures now appearing in the rental market mean further growth is expected. Developers report that Kainga Ora is looking to purchase whatever they are planning to make available. This is placing upward pressure on land prices while reducing the proportion of the housing stock available to first home buyers to purchase.

7. Rule changes aimed at improving tenancy quality and right of occupancy reduce the pool of investors willing to hold onto their properties for rental purposes. Selling currently underway to owner-occupiers is placing extra pressure on rental accommodation.

8. Growth in house construction tends to be greatest when house prices are rising firmly. Any policies which lead to worries that prices may fall will curtail growth in supply. Few people want to sign a contract to build a property they feel might fall in price, and few builders will undertake spec. construction in such an environment.

9. Governments have spent three decades telling Kiwis to save and invest for retirement and many have chosen to do so through purchasing properties to rent out. Reducing net rental returns through means such as reducing ability to deduct interest expenses will affect the retirement incomes and to a lesser extent wealth of many average Kiwis. Only 6% of investors own more than three properties and 78% own just one.

10. In some other countries, such as Germany, housing affordability and access are much better than in New Zealand. This is partly because many people do not feel the pressure to buy because of good security of rental property tenure and quality of rental housing. However, adopting policies in New Zealand which might yield similar outcomes would run counter to the popular narrative and belief that societal inclusion and success in New Zealand (especially to deliver a better-quality retirement) requires a high level of home ownership.

11. A key attraction to people of living in New Zealand, on low incomes well away from the world’s more exciting business and cultural centres, is the quality of life here, which includes plentiful standalone housing and green space – preferably on one’s own land. Moreover, right from the start, European settlement of New Zealand involved a focus on maintaining if not actually building one’s house oneself. Surging house construction based on multiple units with little open space and virtually no capacity for self-maintenance challenges the concept of what it means to be Kiwi and the rationale to many of being here in the first place.

12. Kiwis want to own a house, and they want that house to rise in price. They’ll vote for policies which support that even if getting a foot on the ladder may involve some years of expensive renting then a high ownership entry price. Taking on high debt to purchase a house is becoming a social right of passage.

- Tony Alexander is an economics commentator and former chief economist for BNZ. Additional commentary from him can be found at www.tonyalexander.nz