We don’t have a housing crisis, we have an aspirations crisis

OPINION: We do not have a housing crisis. If we did, the streets would be paved with the homeless and our cities littered with shanty towns. What we have is a crisis of aspirations, with a generation that is excluded from the housing market or is forced to live in suboptimal arrangements.

The house has two purposes; one is accommodation, the other is investment.

A property that generates net rental income of $ 50,000 represents an income stream or, in financial terms, an annuity. If an investor wants to earn 10 percent, they will be willing to pay $ 500,000 for an annual return of $ 50,000.

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In 2007, 10 percent was a fair price for a perceived low-risk annuity. That is why Bridgecorp was so popular and mortgage rates were 9.5 percent. Thanks to a decade of low interest rates, a low-risk annuity may only attract a 2.5 percent return, which is why a $ 50,000 annuity is worth $ 2,000,000.

If an investor is willing to pay $ 2 million to enjoy an expected income of $ 50,000 on a residential property, that will be the price to beat.

That is the crisis explained. There’s really nothing more to say. Forget greedy landlords, land use regulations, restrictive building codes, capital gains taxes, urban-rural boundary, or even buyers with Chinese-sounding names. These are all factors, but only at the margins.

The reason house prices have risen 20 percent in the past year is because returns on low-risk annuities fell as a result of the Reserve Bank’s monetary policy. Until interest rates rise, home prices will remain unaffordable for most of those who currently do not own real estate.

Adrian Orr knows it. Grant Robertson too. The PR dance they are currently doing is a Punch and Judy show in which each tries to blame the other, but neither is going to do anything.

If Robertson was serious, he could add properties to the basket of goods that is used to calculate the consumer price index (CPI). If it did, Orr would raise interest rates above the good character requirement to be a bankruptcy practitioner. House prices would fall.

This will not happen for two reasons. First, Robertson is borrowing about $ 1 billion a week and if he were to pay an honest interest rate on the mounting mountain of debt, it adds to the mountain of debt he inherited from the irresponsible Key and English, both both central and local government would become insolvent. . Or even more insolvent.

The second reason is political. In the last year, the value of my property increased more than the profits I made from my business ventures. There are many kiwis in a similar situation. As for us, we quite like these new inflated property values.

If last year’s real estate gains were lost, the headlines of a collapsing property market would spark an existential crisis. Humans feel the pain of loss far more than the pleasure of winning.

A drop in home prices would only benefit first-time home buyers and Judith Collins. There is no evidence that neither this government nor the governor of the Central Bank has any desire to help. More concerning to those who currently enjoy the soft leather of Treasury banks are the several hundred thousand former National Party voters who cast their vote for Ardern last month.

You don’t have to be a political scientist, or even a certified bankruptcy practitioner, to appreciate that these voters will return to the national fold if their property values ​​fall to where they were in 2019.

New Housing Minister Megan Woods has pointed to the increase in building permits, stating that this is part of the solution. She is wrong. The construction boom is simply a symptom of structural problems in the housing sector.

Our restrictive land use requirements and the Gordian knot of building regulations make pitching a tent difficult, and actually building anything complex, time-consuming and expensive. The economics of construction means that building a property that someone with an average salary could afford will not happen.

This is where the circularity of our housing crisis really hits home. Low interest rates drive investors to the residential market in search of returns. This means that a glorified two-bedroom garage in Fielding will look good to someone hoping to supplement their pension, and because they are willing to accept 2-3 percent of their investment, it will drive up the price of a low-quality home. .

This puts a price on anyone who wants to live in this glorified garage. Even if they could pay the mortgage, Orr will make sure the required deposit puts them off the market.

Developers, however, are busy because the skyrocketing prices they impose to build shoeboxes for investors to rent to working-class tenants means they will now make a profit despite strict regulatory hurdles from the central government and local.

If Orr and Robertson succeeded in lowering home values ​​without eliminating the volumes of regulations that make building houses complex and therefore expensive, builders would stop building houses for workers to live in.

Unless there is an economic collapse or a rise in wholesale interest rates, investors will continue to seek residential properties with the greed of a hungry mongoose. There will be no solution to the frustrated aspirations of millennials hoping to become homeowners.

They have a right to be angry, but many in this cohort of citizens are passionate supporters of various policies that sentence them to decades of rent.

This is a tragedy. Home ownership provides security and a tangible share in the shared wealth of this wonderful country. Our young people deserve better than the pantomime we have seen recently in Wellington. They will not receive it.