By Simon Angelo/Wealth Morning
Critical thinking can help a lot. Focus on improving every aspect of what you can control. Leave what you can’t.
So, there’s nothing more aggravating when you come across a situation where those trying to fix broken systems are hamstrung – such as in providing more homes.
Across the country there is a shortage of accommodation. Housing is too expensive, with mortgages or rents taking up too much of people’s income.
I would suggest this is the number one economic problem this country faces.
It operates as a hurdle on the young. Because house prices are up to 11 times the median household income, many are compelled to live in a financial straitjacket — or leave the country. This fuels a brain drain. It dampens consumption in other areas across the economy, with rent and mortgages devouring too big a slice of income.
At the 2018 census, the home ownership rate was 64.5%, with 35.5% of households renting. Of all households, 33.1% have a mortgage.
Some households may be renting, while having a mortgage on a home they are not living in. But for the most part, close to half of owned homes have a mortgage. Or almost 70% of households are paying either a mortgage or rent.
There are around 1.26 million outstanding mortgages in New Zealand. More than 50% of these mortgages are due to re-fix their interest rate between now and July next year. The most popular fixed periods are one-year, then two-year terms.
This would imply that between now and the middle of next year, some 630,000 mortgage-holders could see their financing costs double.
Well, the government has tried altering all settings in an attempt to achieve more affordable home prices and rents:
- Instructing the RBNZ to consider sustainable home prices;
- a foreign buyer ban;
- Brightline test extended to 10-years (capital gains tax) on sale within this time;
- removing interest deductibility for landlords;
- restrictions on landlords increasing rents or evicting tenants;
When adjusted for inflation, homes are still about as unaffordable as they were before all these changes.
That is probably due to the fact that regulating existing supply is a zero-sum game. In any market, where demand exceeds supply, prices escalate.
The key is to increase supply
It is in this area where we have failed to zone enough sections, connect infrastructure, and build enough homes.
So, the other week, I spent an hour having coffee with a property developer in North Auckland.
He has built hundreds of homes. And is now trying to develop an apartment building and terrace home development.
What he told me was shocking.
He used to be able to build a typical three-bedroom home in about 11 weeks. It’s now taking him up to a year.
Worse, he’s finding that obtaining consents, permits, riding out delays and dealing with local government has brought his business to a standstill.
In his view, councils have become a law unto themselves. Planning departments, he says, are filled with ‘indoctrinated people’ looking at why developments should not proceed.
Meanwhile, I recall a friend who built a 50m2 sleepout in his backyard in Auckland. His consents cost him more than $20,000. The council claimed that further measures were needed, since the area could experience ‘high wind’.
However, his brother in Scandinavia built an entire family home with council consents for less than $8,000.
Clearly, the systems of zoning land, building infrastructure, and consenting the development of homes in New Zealand is broken.
Broken and suspended in bureaucratic malaise.
Yet, beyond all the other issues we face, housing should remain front and centre.
New Zealand’s system of rolling out new homes is broken. It needs to be fixed. Widened. And made to work.
Now, you may say that unaffordable housing has become a global problem. It’s a problem in Australia and the UK. And since the pandemic, the US also finds itself short of about 3.8 million homes.
Yet the interesting thing with the US is that the market is flexing back.
While the supply of existing homes has fallen 19% as homeowners avoid breaking their multi-year mortgage deals, the supply of new homes has increased about 24%.
There are some large home builders listed on American stock exchanges. The market is flexing in states where local government is encouraging development. That is creating more affordable options for home buyers and opportunities for investors.
Here in New Zealand, a great reset needs to happen.
In the 1970s we built many more homes per head of population. Compared with today, home prices were as affordable as milk. I grew up in a 1970s-built home.
It may be that we can open this bottle again by dealing with the strangulation of zoning and council red tape.
Prices are a function of supply and demand. Regulating existing supply without increasing new supply seldom leads to affordability.
A different broken property market
I had dinner a few days later with a friend recently returned from three weeks in China.
There, the situation is entirely different.
He told me about blocks and blocks of apartment buildings he saw empty. No washing hanging in the windows. No lights on at night.
To his shock, he learnt they were slated for demolition.
Why? Property sales have fallen 30%. The home ownership rate exceeds 90%.
Economic confidence is anchored in property values. The demolition of unsold units helps stop prices from collapsing.
With memories of poverty and famine, the Chinese are savers. They perceive property as safe. Many Chinese own more than one home. Apparently, there now is enough vacant apartment space to house most of the US population.
With property representing up to a third of GDP, this scenario now presents a broken road that is crumbling away their prospects for economic growth.
China is now set to export deflation. Their problems are quite the opposite of ours when it comes to housing. Yet their property market is equally broken.
Central planning has produced too many homes based on too much debt.
Meanwhile, we’ve produced too little homes that are generating too much debt to buy them.
Both instances are a case of a failure to get the settings right. One road is too wide. It is coming apart. The other too narrow, it’s squeezing everyone.
China has over-planned and over-delivered to the detriment of their market, causing colossal waste.
However, we have under-planned and over-regulated, to the detriment of our property market, causing terrible unaffordability and all the problems that go with that.
We need to resolve our broken property market.
As for investors, they may be better off to look at markets that are less broken.