This is the first of a series of guest posts from reader Lucy JH looking at housing affordability
The title of this blog-post might sound like a Cleo article about finding the perfect man, but actually it’s about housing affordability in Auckland. I know, a lot less interesting but still important…
The other night I went to an Auckland Conversation public meeting which involved three economists discussing housing affordability in Auckland. Shamubeel Eaqub (from NZIER), Dominick Stephens (Westpac) and Arthur Grimes (Motu Economic and Public Policy).
In particular, I was interested to hear their views on the government’s recent policy announcements around housing affordability. While they didn’t discuss these policies directly too much, they did talk a lot about what causes increases in house prices. This is obviously quite relevant as if you don’t understand what makes house prices go up you are not likely to have much luck reducing them.
Arthur Grimes presented a model, drawing on NZ data from the last 30 years, in which he argued there are two key kinds of factors that influence house prices: Physical and financial.
Physical factors relate basically to supply and demand. So they include things like:
- Number of houses currently existing and being built in an area each year
- Number of people living in and moving into an area
- The cost of construction materials and labour
- Availability of land and the price of land (which are often pretty closely tied together)
Minimum parking requirements and minimum lot sizes both fall into this category because even though they themselves are regulations they still impact on the number of houses available in an area.
Financial factors, on the other hand, include things like the:
- Tax system. This encompasses:
- the lack of a capital gains tax in New Zealand
- the fact that until recently landlords could claim depreciation on buildings at 3% a year
- landlords could also use their rentals as LACQs, which meant they got a personal tax rebate if they spent more on their mortgage than they collected in rent
- Inflation (high inflation makes investing in property attractive and vice versa)
- The ways that banks lend money. As this article explains, right now banks in New Zealand tend to treat mortgages much more favourably than other types of lending, requiring just 5% deposit
- Interest rates (when they go lower, buying houses becomes more attractive)
After Arthur presented this model there was some debate among the economists about what matters more: The physical or financial?
Dominick Stephens pointed out that the really big spike in property prices in NZ happened in the period from 2002-2007. During this period house prices rose about 100% everywhere in the country, even in areas like Dunedin and Invercargill, which had extremely low population growth and lots of available land during those 5 years. This suggests the increase probably wasn’t caused by physical factors.
This is not to say that physical factors don’t also have some impact. For example, all the economists agreed that house prices are going up in Auckland right now partly because the rate at which we were
building houses dropped dramatically in 2006 and partly because we had a big influx of people from Christchurch after the earthquakes.
But many economic commentators believe that financial factors are having more impact on house prices than physical factors.
Dominick Stephens argued that, if this is true, then the government’s recent policy announcement isn’t likely to actually have much impact on house prices. That is because it is mainly focused on changing
physical factors relating to housing costs (such as availability of land) rather than financial factors.
I think he’s probably right. Obviously, a really dramatic change to physical factors would change house prices. For example, if the council got rid of all minimum parking requirements or the government built
say 30,000 affordable houses in New Zealand over the next 5 years, then we’d probably see houses prices either stay at the same level or possibly even drop relative to inflation.
But unless we tackle the financial factors as well, we’re probably not going to stop house prices in NZ climbing in the long term. The government made a good start on that in 2011, when they removed the
ability for landlords to claim depreciation or use LACQs. But more has to be done.
What do you think – what matters more? The physical or financial? And what are the solutions?