Both National's and Labour's housing policies can begin to look like a house of cards when you get into the detail. But one seems more likely to give us more houses

Crisis, what crisis? That's been National's call when it comes to the rapidly rising price of houses in our main centres. The debate over what to do to address our runaway housing market, especially in Auckland, is one of the defining differences between the two parties, but both have problems with their policies.

National, in short, took their eyes off the ol'd kiwi dream during the global financial crisis. Despite some good sounding promises from then-Housing Minister Phil Heatley, nothing much happened in its first term. Heatley went so far as to admit "there are fundamental problems with how the market is operating", but then did little about it.

National kicked for touch with the Productivity Commission's report and figured the market would sort itself out. It didn't.

They've started to act in the past year, creating Special Housing Areas wherever they see a spare patch of grass, but National's MPs are hamstrung by ideology. They're depending on a market solution when there's little incentive for developers to build a large number of entry levels home at affordable prices. While some movement is happening, it's not nearly enough.

So National's latest approach is to throw money at the problem. It's ironic given the amount of time National spends criticising Labour and the Greens for doing the same thing. The problem for National is that the example it uses in its own promotion of the scheme only goes to show how its failed to deal with rising prices. Check this out:

“The package means a couple in Auckland each earning $50,000 who have contributed to KiwiSaver for five years will be able to withdraw $35,000 and receive a $20,000 KiwiSaver HomeStart Grant, giving them a $55,000 deposit on a new home. With the Welcome Home Loan scheme allowing only a 10 per cent deposit, they will be able to buy a home up to $550,000 in value."

But if you do the sums on that, the future for that young couple starts to look pretty bleak. Even with all that help – which economists have almost universally said will only increase house prices by creating more demand and putting more cash in the market before there's more supply built – they're looking at a life of debt. (And they only get the $20,000 grant if they build a new home).

With a 25 year mortgage at a relatively conservative 6.5% (and mortgages are expected to go higher than that in the next couple of years), that couple will have to pay almost half – 47% to be precise – of their take-home income on housing.

By international measures, spending more than 30% of your income on housing is considered unaffordable. Consider that the averag age of a first home buyer in Auckland, according to Westpac, is 34 years-old and you're talking about that mortgage being a huge, huge financial burden. And let's not forget many will have student loans as well.

Housing Minister Nick Smith shrugged off that burden on The Nation saying that he paid 70% of his income on his first house. John Key said, in essence, that's just the way it is.

It's an admission of failure.

Labour's solution involves a more hands-on government. So hands on it will swamp the market with 100,000 new homes. The devil, however, is in the details. Since the KiwiBuild policy was announced in 2012 the size of the home and its price have kept changing. Currently the promise is that the homes will typically be two-bedroom terraced homes for around $360,000. They'll be built off-site en masse and the saving will come from the fact they're pre-fab and companies can buy 10,000 door knobs at a time, for example.

But if that's the price of the house in the first year, I've never really had a clear answer, however, as to what the price of those same houses will be by year 10.

Still, Labour has long promised 100,000 homes in ten years – 10,000 homes a year. Yet on The Nation Twyford gave more detail about the practicality. The thing is, there aren't the factories around to build all these pre-fab houses, so it'll take time for things to scale up.

Given Twyford has taken much glee in pointing out that not a single house has been built in National's Special Housing Area in Auckland, it's a bit ironic when he admits that only 800 homes will be built in the first year of his scheme. Not 10,000.

The goal is 4,000 in year two, 8,000 in year three and not 10,000 a year until year four. You might say that's only reasonable and they can still make 100,000 over the decade, but it does make you wonder if they're basing their numbers on some pretty rough, back of the envelope calculations.

At least, however, you can be confident you'll get many thousands of new homes over a decade. With National's scheme our fate really still lies in the hands of the developers.

So that's the choice we've got on housing. Whadyarekon?

Comments (8)

by stuart munro on September 05, 2014
stuart munro

The 25 year mortgage calculation leaves out employment durations. In 1980, holding the same job for 10-20 years was pretty common. Nowadays that would be pretty rare. A mortagage that takes the bulk of a couple's income for over two decades looks much less achievable when the mean employment interval is say, 2-3 years. Six months out of work for one partner, or a restructuring to less hours and lower pay and the whole deal falls over - risking a forced sale with attendant losses.

National's position - fine if you believe in the ineffability of markets, otherwise not fine. Labour - pedestrian at first but realistic in not promising 10,000 in year one. Ultimately the test is whether either party can halt or reverse the demographic decline in ownership. On these policies they won't - smart governments will look to improve on these projections with supplementary policies. Green or IM should have something useful to offer - and if the Right were anything more than a cesspool of corruption they might have an entrepreneurial or PPP offering that would help. We'll need all that and more.

by Katharine Moody on September 05, 2014
Katharine Moody

National's plan just pumps up the private-sector market. No solution for FHBs at all because in Auckland it is not only house prices that are too high but rents as well (and high rents impact on ability to save). Labour (and National) should build more houses but they should be state houses as I think the need will only increase in the likely event of a future economic shock, and we should be prepared. Both parties should also be considering the potential needs of a growing number of destitute elderly in future years - again, the private sector won't build retirement facilities fast enough and they will be unaffordable anyway for a large number.

But for FHBs both parties needed to focus policy/actions on discouraging investment in rental properties as a means to "reset" home ownership back to its long-run averages.  This requires an orderly exit of a proportion of property investors. Although restrictions on non-resident purchases is a step in the right direction (in other words it serves not to further exacerbate the existing problem) we still need existing investors to sell down in a manner that sees prices also easing. A CGT has potential to generate the opposite effect (existing investors might hold longer).

The biggie deterrent to holding onto investment properties particularly in the lower end (i.e., first home buyer) of the housing market is to announce a staged withdrawl of the accommodation supplement. This is a $1 billion+ government intervention in the private rental market. It seems many investors are presently running near break even (or loss) rental property businesses in anticipation of future capital gains. Announcement of a program to remove this government intervention (say in two stages over three years) would I think see a good number of those investors put their assets on the market as there would likely be a corresponding downwards adjustment of rental prices (and for those highly leveraged the losses would be too high to absorb). In the absense of a CGT, with such an announcement, many property investors might think 'time to take the money and run'. If the government is making this announcement at the same time it is building a new crop of state houses - it creates the perfect storm (for rent decreases, that is).

   

by Kat on September 05, 2014
Kat

National does not have a 'housing policy' its just right wing leave it to the market ideolgy.

Labour at least wants to actually physically build houses.

by Nick Gibbs on September 05, 2014
Nick Gibbs

The trouble is it's not just a matter of hammering some nails. Sub-divisions need building, schools, shops, drainage, roads, sewage. It takes years for council to permit these developments not months. Then someone has to stump up with a heap of cash to kick off the earthworks. It's high risk. Delevopers regularly go bankrupt. 

It's not hard to see lots of houses that the taxpayer has paid for being sold below cost. Be a big scamble for these Labour give-away houses. I hope I get one.

by Ross on September 06, 2014
Ross

Tim

You've mentioned the supply side but haven't mentioned demand. A capital gains tax and restrictions on who can buy properties - Labour policies - will assist on the score. I am not sure National intends to look at demand.

It was recently reported that house prices in Auckland rose by over 11% in the last year. Increases in the OCR don't seem to have had a huge impact on Auckland prices, though demand has apparently fallen. The OCR is a blunt instrument to fix a complex problem.

by Andrew Osborn on September 06, 2014
Andrew Osborn

Ignoring the Christchurch Earthquake issue for the moment, the only place with significant housing inflation is Auckland. Wellington housing has been flat for nearly a decade.

http://properazzi.co.nz/insights/wellington-property-market-latest-insig...

So why does it cost more to build a house in Auckland than down the road in Gisbourne or Palmerston North?

There are two answers to this:

1/ It doesn't. It's largely to do with the price of land. Exactly how is Labour going to create cheap land on which to build their 21st century slum? 

2/ An overbearing and overstaffed council adds endless fees and restrictions to exacebate the problem. Is David going to ask Len to scrap is resource and building consent taxes and restrictions? 

To sum it up: Labour hasn't got a clue. The problem is a local govt one.

 

by Richard Aston on September 11, 2014
Richard Aston

A quick answer to your question Tim , at least Labour does have a policy, one that could make a real difference to housing affordability . Yes there will be issues releasing enough land and trimming the bloated local council costs but once they get the ball rolling and build momentum as well as houses, solutions will follow. 

No one is talking about rental housing though. If we followed the example of Sweden, Govt (National and Local) would also develop rental accommodation let out at affordable income related rents. 
If this was done in volume it could radically change the rental market. It would be just unprofitable for private investors to put borrowed money into "property investment”, which would in turn lower demand for second hand houses and lower the demand for mortgage money.

Oh hang on didn't we do that once before a long time ago.  

by Richard Aston on September 11, 2014
Richard Aston

Andrew 

To sum it up: its complex. The problem is a local govt one and a national govt one and a banking one and building industry one. 

Local govt has to work under the RMA and other national govt regulations. They also have to earn money to fund development ( reserve contributions) because they cannot borrow it cheap enough. They most likely also overblown and inefficient as well. 

The building industry have never really been challenged to produce a lot of low cost houses . They need tradespeople but I think they also need creative design ideas , to develop lower cost housing . 

A lot of bank loan money sits under all this but why should this funding be exclusive to the private banking industry , largely owned by Australians, looking for and making sizable profits. Surely it is possible to come up with govt underwritten finaince at very competitive rates. 

I think we need to shift thinking about housing as a commodity to a housing as shelter, to shelter as a basic human right. 


 

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