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ANALYSIS: Housing has become a hot political issue in recent months. Instead of sinking into a Covid slump, the real estate market has shaken expectations of a price drop to hit records.
Commentators and politicians have blamed double-digit home price inflation on everything from investors to a lack of supply and anti-tax attitudes from the public. But what is really happening? And why does it matter?
What is the problem?
New Zealand home prices have been rising at a rate that outstrips income growth for years, which means that it is becoming increasingly difficult for first-time buyers to enter the market.
In 2014, the median house price in New Zealand was $ 400,000. The median income from all sources was $ 31,200 a year.
Now, the median home price is over $ 700,000. The median income from all sources is still only $ 33,904.
Among people who earn wages and salaries, the median income has increased from $ 44,876 to $ 55,120 during that same period.
Interest rates have dropped significantly, but that doesn’t help those who still need to get in, because the deposit requirement has increased dramatically.
While there were lenders offering 100 percent loans before the global financial crisis, it is now common for first-time home buyers to need a 20 percent deposit. Only a small number qualify for government-backed loans that only need 5 percent, and banks only lend a small proportion of home loans to people with less than 20 percent.
Research firm Corelogic says it now takes an average of more than eight and a half years to save the deposit needed for a first home.
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Broker Glen McLeod estimated that 60 percent of his clients needed to find a 20 percent deposit.
“Some don’t have access to any extras and need to keep saving. The rest are lucky to have families who can help, or have enough income to pay a first and second mortgage. “
David White / Stuff
We are not building enough houses of the right kind, says Shamubeel Eaqub.
Data from research firm Corelogic shows that in 2020 so far, the median price paid by first-time home buyers was $ 565,000. That means a deposit of more than $ 100,000 for most.
Economist Brad Olsen said mortgage consultants had told him that a few years ago they would have asked buyers if their parents had money to help. Now they only asked how much their parents had.
“It is a prerequisite to have money coming from everywhere.”
$ 1.25 billion was withdrawn from KiwiSaver in the past 12 months for first-home deposits, a 21 percent increase from the prior year.
The market is being built on the basis that borrowers can save large amounts of money and then are willing to take on larger amounts of debt. At some point (and it might suggest that we’ve already reached it) that becomes untenable.
Why the concern now?
Home price inflation hit 20 percent last month, according to the Real Estate Institute.
There are a few reasons why the market is hot now, but one of the main drivers is falling interest rates.
In October, the average special rate announced by banks with a one-year term was 2.53%, compared to 4.14% in 2018. Ten years ago, it was common for buyers to face interest rates of up to 10 %.
When the cost of borrowing goes down, the ability of buyers to repay a larger loan increases. The amount it costs to maintain each dollar of loans has been cut in half in the last year.
So when you’re at the door and have equity in your property, you can afford to raise the prices of your next home or investment property.
Those low rates also attract more investors to the market because it’s hard to get a return on things like time deposits.
Bejon Haswell / Stuff
Basically, you need to pole vault to the first rung of the property’s ladder, says Brad Olsen.
Is it really more difficult than 20 years ago? Weren’t interest rates higher then?
Interest rates were higher – you wouldn’t have to look far to find someone to tell you that you had to pay more than 20 percent when you first got a home loan.
But house prices were much lower and inflation was on the rise, which meant that the real value of the debt he had was rapidly declining.
As a proportion of income, the payments were not very different because the amount of principal to be returned was much smaller.
Economist Shamubeel Eaqub said it would have been difficult for people to make the first and second year of repayments when interest rates were very high, but after that, inflation recovered and made it very easy because their wages would have grown significantly. . “Inflation is good for borrowers.”
Now that the Reserve Bank is charged with keeping inflation relatively low, buyers don’t have that “get out of debt” mechanism on their side.
We just don’t have enough houses?
New Zealand has not developed enough housing to keep up with population growth and demand for many years.
Olsen said that if supply problems are not addressed, there will be much larger fluctuations driven by short-term demand changes.
“One of the reasons we are seeing such a large increase in demand in response to low interest rates is that there is competition in the market. If there were more houses we would not have that level of competition ”.
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Adding long-term supply would mitigate short-term demand influences in the future.
Estimates put the undersupply of homes in Auckland alone at tens of thousands, though construction activity has increased and is expected to reduce that undersupply over the next 12 to 18 months, particularly with migration slowing for now.
Olsen said Christchurch was a good example of supply balance: Dunedin now has a higher average price than Christchurch due to the level of construction activity that occurred after the earthquake.
Eaqub said that although construction consent rates were running at a high rate, there was still a record waiting list for public housing and a record low rental vacancies, indicating supply pressure.
He said there was not enough supply of the right type of houses. “There are a lot of big houses with empty rooms.”
It would not be possible to fix the situation without a large construction program, he said, developing 100,000 houses. “It’s going to take decades to fix.”
But he said that the government’s response to Covid-19 had shown that it could borrow the money necessary to do so, if there was political will and ambition.
How do taxes fit?
You may have heard complaints that home prices are inflated because people can buy and sell properties and deposit capital gains, tax-free.
At this time, you pay capital gains taxes on investment properties purchased between October 1, 2015 and March 23, 2018, when they are sold within two years. For properties purchased after March 29, 2018, sales are captured within five years.
But other houses can be sold without any tax.
Many people have advocated for a capital gains tax, a land tax, or a wealth tax to capture some of the wealth effect of the housing market, particularly as the gap between landlords and renters grows.
But while equity issues could improve if capital gains were taxed in the same way as other income, not everyone is convinced this would drive home prices down.
Maarten Holl / Things
Homeowners tend to be more stable, which can have other benefits.
“It will never be the silver bullet that magically brings home prices down,” Olsen said.
While Westpac has said that a broad-based capital gains tax could lower home prices over time, the economic model for the Tax Task Force said it would raise rents and raise home prices.
Eaqub said it would make the tax system fairer if income from all sources were taxed equally. The income generated could be used to help people affected by a housing crisis. Would you remove the incentive to buy houses? No, it would reduce it, it would not eliminate it. “
Other countries with a capital gains tax still experienced property booms, he said. Taxes are a red herring. It is useful, but it does not solve the problem. “
Why does all this matter?
Homeownership tends to improve people’s situation.
Property is a huge driver of wealth for New Zealanders and the growing gap between the “haves and have-nots” in recent years has been driven by property owners experiencing an increase in their equity.
Data from Stats NZ shows that between 2015 and 2018, the gap between the net worth of the top 20 percent and the bottom 20 percent of all New Zealanders increased by $ 226 billion, as the rich got richer and those who were worse off went further. in debt.
Homeowners should, in theory, go into retirement with a freehold house paid to live in, which would make their retirement much easier.
People who own their own houses also tend to have more stability, allowing their children to stay in one place for school, for example, which can lead to better results.
Property ownership used to be considered a New Zealand dream, but it is fast becoming a nightmare for those who are trapped outside or have half a million dollars (or more) mortgages to enter.
