Unlocking Housing Affordability

Housing in crisis

Housing affordability is an enormous problem in New Zealand and has worsened significantly in recent decades.

Houses are “unaffordable” right across the country and in some cases severely so (see our August ANZ Property Focus: Locked out for more details).

Nationwide, the median house price has increased from around $100k in the early 1990s to $730k now. But incomes haven’t increased anywhere near as much.

The median house price is now around seven times the average income, compared with three times in the early 1990s (figure 1). 

Mortgage rates have trended down, making debt servicing easier, but it now takes 15 years to save for a 20% deposit even if house prices stand still – about twice as long as a few decades ago.

Not surprisingly, home ownership has fallen for all age groups, but especially for younger people (see NZ Insight: The intergenerational divide).

And it’s not just home ownership that is out of reach. Rents are expensive too and have risen faster than incomes in recent years. Although it’s a complex issue, high housing costs are also an enormous part of the problem of endemic homelessness and deprivation in New Zealand.

Almost 1% of New Zealand’s population are homeless (or severely housing deprived).

That’s the highest rate amongst OECD economies – almost twice that of the runner up, Australia (figure 2).

The implications of homelessness are significant and distressing, particularly for children and other vulnerable groups. 

The heart of the issue of housing unaffordability is that not enough homes have been built to meet the growth in our population, and housing supply has not been sufficiently responsive to changes in demand, financial conditions – and price.

In recent decades, lower interest rates and increased credit availability have contributed to rising house prices, but the potency of these effects is directly linked to the fact that supply has not been responsive to changing trends.

Reflecting these supply issues, we have an infrastructure deficit and a significant existing housing shortage, which we estimate could be anywhere in the realm of 60-120k homes.

And looking forward, expectations that demand will continue to outstrip supply have been baked into house prices today. Land supply, in particular, is constrained and has not grown with population pressures.

Scarcity of buildable land has been an increasing problem, due to planning and zoning restrictions, land banking, urban-drift, poor infrastructure provision and other land-use pressures.

Meanwhile, population pressures have been very significant, in part due to very strong immigration cycles. Meanwhile, real income growth has been sluggish, in large part due to our poor productivity record.

That has had a myriad of direct consequences:

• House prices have risen significantly, reflecting the scarcity of homes. Homeownership has fallen.

• Homelessness is high and household size is higher than desired (in some cases leading to overcrowding) because housing is unaffordable.

• Housing costs (from owning or renting) take up a significant portion of incomes, even with lower interest rates having kept debt-servicing costs contained.

• When interest rates fall, this pushes up house prices significantly. If housing (and land) were more responsive, more stimulus would be channelled towards home building and improvements instead.

• Large housing cycles are the norm, because building is slow to catch up when demand increases. Internationally, areas with more responsive housing supply have lower rates of house price inflation and smaller cycles.

• Although house prices tend to rise on average, the market is vulnerable to short-term, painful corrections when interest rates rise, income prospects change, supply responds, population adjusts or risk-taking behaviour changes, exacerbated by high debt levels.

• Productivity is weaker than it would otherwise be, with households having to spend more time saving for a deposit, which diverts funds away from business ownership and investment. 

"It now takes 15 years to save for a 20% deposit even if house prices stand still – about twice as long as a few decades ago."

Liz Kendall, Senior Economist, ANZ NZ Ltd.

A simple solution, in theory

The solution is simple enough to describe: we need to have a plan to efficiently house and provide infrastructure for our growing population and we need a productive economy so that our incomes can grow.

In practice, that means freeing up land, building many more houses, and aligning demand and supply settings, with a continuous and responsive pipeline to meet population pressures.

We need to make meaningful change to elicit a sustained stabilisation or even gradual decline in real house prices, alongside productivity-enhancing initiatives to boost our real incomes. 

But attitudes need to change too

For houses to become more affordable, they need to be cheaper, or at least not appreciate in value while incomes catch up.

That’s the obvious truth that needs to be accepted for the sort of change to materialise that would address our housing affordability and homelessness problems.

Encouraging income growth through productivity-enhancing policies would be helpful, but is challenging to achieve, and on its own is unlikely to be enough to elicit meaningful change in housing affordability.

These underlying issues have been well understood for some time (see Productivity Commission Housing Affordability Inquiry Full Report and A Stocktake of New Zealand’s Housing for discussions).

And to their credit, the Government has been working on these issues for a while, making improvements. But the response needs to be bigger, bolder and more urgent.

To do this, political buy-in for a fundamental change within the housing market is needed. Allowing the market to function more freely would reap benefits, in aggregate and over time, even if some homeowners have to forego something now.

Specifically, we – homeowners, local and central government and the general public – need to be willing to accept a lack of capital gains in housing, or even be willing to stomach a fall in our asset values, while incomes catch up.

That goes against the “Kiwi psyche” and expectations of perpetual house price increases. But it’s absolutely necessary. Stabilisation in house prices would be a vast improvement from the rapid inflation we are seeing currently.

House prices have increased 7% per year on average since the early 1990s (figure 3), with a lot of ebb and flow. Even a sustained stabilisation would require a monumental shift in the market.

On that sort of trajectory, progress to houses being significantly more affordable would still take a long time.

But we have to be willing to reverse the tide. If houses are to become truly more affordable, a decline in real house prices needs to be accepted too. This need not be catastrophic or scary.

A gradual decline engineered out of continuous expansion in construction could lead to increased growth and spending.

By contrast, a disorderly adjustment would have demand-choking effects.

House price declines become problematic when they see households in financial distress or credit contract.

House price falls can and do happen, and the possibility of an eventual painful adjustment if we continue with the status quo should not be downplayed.

We need a responsive market to reduce the sorts of house price swings that are common in New Zealand, and which can pose risks to the economy and financial system.

For owner-occupiers, stabilisation or gentle decline in real house prices doesn’t necessarily mean a material loss in wealth. First, housing is a long-held asset that reaps rental benefits not just capital gains, and over the long term, benefits of home ownership are still enormously significant.

Second, upsizing would be more affordable, neutralising the effect on purchasing power. Nor would it mean a material change in financial prospects for those connected to the market – houses still need to be rented, built and sold, and loans will be required and paid back.

Plus, to the extent that high house prices are hampering our productivity (we think they are), more affordable houses would have long-term real income benefits.

If we did see a gradual decline in real house prices, a drop in returns would be expected for property investors relative to history. But that would be the case for any reduction in house price inflation relative to expectations. 

Current rates of house price inflation are unsustainable.

Meaningful, orderly change is possible

Making meaningful change can be challenging and take time to implement. But it is absolutely possible to address housing affordability problems in a way that is orderly.

We have seen it done across Canterbury post-earthquakes, with particular success in Selwyn District, where population growth has been very strong, the regional economy is buoyant, and yet housing supply is expanding and real house prices have been pretty flat.

Since 2015, real house prices in Selwyn have risen just under 2%, while across New Zealand they have risen 37% (figure 4).

Given income gains, house prices in Selwyn have been getting gradually more affordable.

This is despite very strong population growth, with the population increasing 60% since 2011.

The crux of the response in Selwyn has been making land available to house the growing population and facilitating new building. Government and local council have worked together to do the following, and have done this efficiently and effectively:

• Release significant parcels of land in accordance with the Selwyn Housing Accord.

• Develop parcels with a minimum net density to use land efficiently.

• Release large parcels under single ownership to encourage building at scale.

• Streamline resource consents to speed up and simplify the process.

• Develop a 30-year infrastructure growth plan. 

The importance of this housing supply response should not be downplayed, and is borne out when looking at regional data.

The relationship between house prices and lack of building is not always obvious, since building often lags price rises.

But the relationship has been stark recently: areas that have built more have had less rampant house price inflation (figure 5). Selwyn and Queenstown are clear outliers; building has been very rapid to accommodate population growth. 

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