Fallow on Housing affordability

March 20th, 2008 at 2:04 pm by David Farrar

Brian Fallow says the following facts are sobering. They are indeed:

It uses data from Statistics New Zealand’s survey of family income and employment (affectionately known as Sofie) to estimate what proportion of couples and single people who rent could afford to buy.

To buy, that is, a house from among the cheapest 25 per cent available in their region while keeping their mortgage payments at no more than 30 per cent of their gross income.

They reckon that in 2000, 59 per cent of renting couples and 11 per cent of single people could have afforded a lowest quartile priced house.

By 2006, however, that had dropped to 29 per cent of couples and only 2 per cent of single renters.

It gets worse if you exclude those who could have afforded (based on their net worth) a 20 per cent deposit but who for whatever reason had decided not to.

Among the rest, the proportion of couples who could afford to buy dropped from 40 to 12 per cent since 2000.

“At current prices and interest rates, the gap between the income of those who cannot afford to buy a lower-quartile-priced house and the income needed to service a mortgage on such a house while keeping the payments at or below 30 per cent is large,” the report says.

“On average to bridge the gap, a couple would need a deposit of $122,000 and non-partnered individuals would need a deposit of around $177,000.”

For many people, the officials drily note, this would pose a considerable hurdle.

I am so glad I got in just in time in 2001, and purchased.

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35 Responses to “Fallow on Housing affordability”

  1. Monty (974 comments) says:

    it is getting really hard to buy a house – and the tinkering around the edges by this desperate government only makes matters worse. The stats get worse – consider that in Auckland it takes around 100% of the average income to pay the mortgage on an average house.

    Wellingotn is not much better. Now we have mass exodus of our youngest and brightest who head off partly because they cannot see home ownership as an option in NZ. One of the consequences of homes becoming unaffordable is that people do not put down roots as renters in various communities around the country and then become part of that exodus.

    Labour’s policies are failing New Zealand.

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  2. Owen McShane (1,226 comments) says:

    Placing the blame on regulation.
    The final version of the paper I presented in New York has the title “Why Urban Planners love Global Warming – or How Climate Alarmism has led to the Risk of World Wide Recession.”
    You can see the paper with the original shorter title at:
    http://www.fcpp.org/images/publications/HeartlandGaspF-2.pdf

    This recent release by Bloomberg draws the connection between land regulation and the meltdown. My paper simply moves one step further back along the cause-and-effect chain. The Centre is not arguing that Climate Alarmism is the only excuse for Smart Growth rules but it has certainly dominated the definition of “sustainable”, as in “sustainable urban form” over the last ten years. Go to:
    “Regulations are at the root of the US housing mess” – Bloomberg

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  3. Maynard (11 comments) says:

    I bought a modest house in Dunedin 3 years ago for $129000, an old villa, uninsulated and horrifically cold in winter. It’s increased in value since then because of the market, and much has been spent by my partner and I improving it’s value. She paid the deposit and for most of the rennovations, I service the mortgage at 50% of my income – and it’s killing me. I need to sell as the increase in the cost of living means the 50% of my salary I have left after mortgage payments doesn’t go as far as it used too. I’m seriously thinking about buying a house bus, it might be the only affordable option left to me. They are cheaper, no rates, no real electricity bills if you go for energy efficiency and have a wetback fire. You just have to accept that a lot more of your life will be spent outside, with the beach as your backyard. This government is forcing me to become an itinerent wanderer in order to survive. It’s either a house bus or join the aussie exodus.

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  4. burt (8,201 comments) says:

    The great kiwi dream of owning your own home has become the great kiwi dream of not needing a mortgage to do the grocery shopping.

    Labour policies and 1999 tax thresholds are screwing the very people Labour claim to be working for. Labour – SNAFU.

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  5. berend (1,698 comments) says:

    We’re all relieved to know that this is the result of the failed and discredited policies of the past and has nothing whatsoever to do with the current lot in power.

    And in case we need a solution, the answer is easy as well:

    1. More government.
    2. More bureaucrats.
    3. More taxes.
    4. Home buyer assistance for the “needy”.

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  6. John Dalley (394 comments) says:

    Maynard – What a loser.
    $129.000.00 for a home, 2 incomes and you still can’t meet your obligations. You blame the government for this, why not blame yourself for either being incompetent in your work and the resultant poor salery or your outgoings are too high. Which is it?

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  7. llew (1,533 comments) says:

    Heh. Just found this on http://sickipedia.org/

    There is no longer need for the Nuclear Bomb. We already have something that destroys people and leaves buildings intact it’s called a Mortgage.

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  8. Maynard (11 comments) says:

    ouch John. My sole salary pays the mortgage my partner invested all her savings, and her income goes on the children, rates, food etc. I have two university degrees yet employers in this town insist on paying less than I would get in Wellington and Auckland because of the “lower cost of living down here”. That’s true to an extent, but not much lower, only in transport really, and everyone is struggling now to pay for fuel regardess of where you live. My first home and it’s a huge struggle. Yeah I got a bargain on our house, 3 years ago I wasn’t feeling incompetent nor that my salary was poor. Today, well it’s not such a great salary, rates are on the increase, power is through the roof and will jump to winter rates any day now. My investment has turned from my pride and joy to a millstone. I don’t want to sell, but feel economic conditions will force me to. Yes maybe it’s the easy way out to blame the govenment, but over reguation, taxes, too many bureaucrats, and the spectre of dubious carbon taxes don’t bode well for the future. $129,000 house – I should be laughing. I’m not.

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  9. ISeeRed (236 comments) says:

    John Dalley: A bit harsh, don’t you think?

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  10. Kimble (4,426 comments) says:

    Why should everyone own their own home?

    This ideal that has effectively FORCED people into mortgages they cant afford. We must own our own home, we must own our own home. Mindless.

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  11. Maynard (11 comments) says:

    I’d prefer to own my own home rather than to give my money to a bunch of “fund managers” to invest in dubious markets and have the freedom to do so until I’m 65. Property ownership is a tangible investment of real value, not some ludicrous money go round of economic theory.

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  12. Doc (91 comments) says:

    Not really harsh at all.

    He says that his partner invested all her savings into the deposit, but let’s assume she had nothing, so the mortgage is 129k.
    Even if you were on a 100% floating rate motrgate over 30 years, the repayments would be a fraction over $1200 per month.

    Minimum wage earns $1950 per month. ($1562 net)

    His partner pays for the food, kids, rates, etc. His pays the mortgage.

    So – even assuming the worst possible case (in terms of deposit and interest rate and income) he still earns 130% of the cost of his mortgage.

    Somewhere, the figures don’t add up….

    (and with a double degree – you certainly wouldn’t be expecting to earn minimum wage!)

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  13. PhilBest (5,120 comments) says:

    John Dalley and Doc sound like twisted lefty alternative lifestylers who don’t give a toss for people who actually want to live a different way to what they do.

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  14. PhilBest (5,120 comments) says:

    Why is it acceptable at any time, for any reason, for economic mismanagement and bad policies to make it harder and harder for anyone who is behaving responsibly, saving up to buy their first home before having a family?

    Anything to do with the fact that the Socialists WANT to run your life, DON’T WANT people OWNING PROPERTY, shock, horror, bourgeois behaviour?

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  15. Bernard Hickey (19 comments) says:

    Here’s the latest measures of home loan affordability region by region for February. It’s not attractive.

    http://www.interest.co.nz/HLA/HLA-NZ-March2008.asp

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  16. ISeeRed (236 comments) says:

    Maynard: I don’t mean to pry, but paying down or off your debt is usually the best way of saving. I do feel for you, though. My mother has bought a nice cottage down Port (she’s 60), and although she’s in full-time employment on a fairly decent factory wage and lives a very simple life, I have to help her with the mortgage. She doesn’t buy cheese anymore – too expensive. She uses hotties instead of heaters and electric blankets – power’s so expensive now. She doesn’t vote and politics don’t really interest her, but she often comments about how unaffordable things are getting and how life isn’t getting any better. Many of her blue-collar workmates of all ages say the same things – escalating prices, unaffordable housing, not even ONE tax cut despite big surpluses, Labour doing little except giving handouts (WFF is considered by the majority as welfare, not “tax relief”), losing touch with their working class constituents (a few dags refer to Labour’s annual “Bludget”). Yet at her workplace, even an apolitical person like her is surprised when her union tells her how to vote – Labour, of course. “It’s not their job or place”, she often says. She’s about the only contact I have in NZ, as I have few friends in NZ myself now. Like me, they’ve seen the way the country’s headed – and left.

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  17. PaulL (5,943 comments) says:

    No ISeeRed, that’s John Dalley of the caring sharing left.

    I’m not convinced that this can be a systemic problem. Let me explain:
    – somebody owns all the houses in NZ
    – the price is set based on what someone will pay to buy it and live in it, and what someone will pay to buy it and rent it out
    – if I can afford rent but not to buy, that means that the rent must not be covering the interest on the mortgage
    – if the rent isn’t covering the interest, then the landlord is counting on capital gains to cover the gap
    – the capital gains aren’t there anymore

    Sooner or later either rents will go up, or house prices will come down. The capital gains cannot continue forever.

    If rents go up then this gap will narrow. If prices crash then the gap will narrow. I think the answer will be a bit of both.

    I am guessing that many of the people who are found to not be able to afford to buy based on 30% of their salary on mortgage, are basically having their current rent subsidised by capital gain, so they are renting in a location in which they cannot afford to buy (that is what the article effectively says). I’m not sure that should be a huge concern to anyone.

    When capital gains stop, then the rents will have to go up. Then some of these people won’t be able to afford to rent there anymore, they will rent somewhere cheaper. Then the prices will drop in the expensive locations. Everything will balance out, and some speculators will lose some money. Nothing in life is free!!

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  18. Doc (91 comments) says:

    Sorry PhilBest – your impression is completely incorrect in my case.
    I am very much right-leaning. Single, high income, and renting. I’m one of those ‘need to save a 170k deposit’ types that are referred to in the article.

    All I’m saying is that given Maynard’s supplied information, even the “worst case” figures are not as bad as he’s making out.

    Believe me, if I could get a villa in ‘south central’ Auckland for 129k, I’d be a landowner in a heartbeat.

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  19. ropata (117 comments) says:

    I really liked what Tim Hazeldine wrote (‘Taking NZ Seriously’) about the cultural shift of the last 20 years & where the NZ experiment went wrong. Also Austin Mitchell (‘Pavlova Paradise’) reminds us what we have lost. Geoff Bertram writes:
    The neoliberal reform programme has achieved fiscal and monetary sustainability, increased market flexibility, and insulated the economy against external shocks. At the same time it has led to denationalisation of economic surplus, ongoing current account deficits, and a significant diversion of resources from productive use into rent-seeking.

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  20. side show bob (3,660 comments) says:

    The socialist suckholes have been bleeding this country for 9 years now, they have passed laws that have given local councils and their parasitic shinny arsed offsiders the right to screw the peasants to the max. The bastards now hide behind excuses like high fuel prices and high interest rates for the rising of house prices. And these same pricks have their snouts in all the troughs taking more for the governments coffers every time the prices rise. In short the socialist scum have plucked the goose and the goose has no more feathers to lose, the blame does lie at the feet of the government.

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  21. natural party of govt (461 comments) says:

    A capital gains tax would help subdue the housing market.

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  22. Anthony (789 comments) says:

    Tim Hazeldine for years went on about there being no gains from the 80s and 90s reforms – and then when they came he had to find another downside.

    The gains of the reforms have been sqandered because too many distortions have been left. Why do we give tax breaks to foreigners who will to lend money to us? This merely drives the exchange rate up for any given interest rate.

    The increased marginal tax rates encourage people to make tax losses and invest in housing to achieve tax free capital gains as PaulL said. However, the capital gains have become unsustainable. The tax system was never meant to operate in this fashion but governments have been too scared to fix it and tax experts like John Shoe-in too self interested to recommend it.

    I doubt rents can increase much. All the landlords can’t act in unison so any landlord increasing rent significantly will likely lose his tenants and be worse off instead of better off. If there was dire shortage of housing and rental properties were being snapped up the moment they hit the market then landlords could ask for more rent. However, this doesn’t appear to be happening so landlords are just going to have to suck it up!

    I have never bought the ridiculous argument that we have to give tax breaks to landlords because we need them. Houses have to be owned by somebody. If landlords don’t want them then they can convert back to being owner occupied by the people who once used to rent.

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  23. mike.e (3 comments) says:

    Report after report tells us what we already know.
    No politicians are serious about this – or,they are quite happy with the results.

    Like Oil,it seems investments(with oil its derivatives etc)are interfering with our needs/wants of owning our own home.
    Whether its a want or a need is another issue.

    Some one said “why must everyone own their own home its silly”

    Well if youve rented for years,with no options,no rights, no opportunity to install solar hot water/ fix up the place…youl understand why people want to own their own place. Our landlord has never seen the place.

    2 Income families are socially destructive, no wonder our society is imploding. If mum and dad are slaving away working, the state can look after the kids and teach them right and wrongs for from age 2- 18!(as well as reinforcing the idea that qualifications = knowledge, and forced schooling = learning) See ‘deschooling society’ by ivan illich. http://reactor-core.org/deschooling

    Do we have to make it politically powerful to get something to happen?
    Il be reading geoff bertrams pdf as posted above.

    I dont see anything changing anytime soon.

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  24. Doozer (3 comments) says:

    Anthony, a few things to think about. On the mater of tax breaks to landlords. Owning a rental property is a legitmate business proposition and a landlord should be entitled to tax breaks like any other business. I can also assure you that being a landlord is not all beer and skittles. It’s not a simple case of buying a house, sticking a tenant in and collecting the rent. On top of the usual admin and maintenance activities there are crap tenants who either damage the place, don’t clean up when they leave, or fail to pay rent. On top of that the landlord takes the risk when buying a property for someone to rent. they hope that I have bought the right place in the right area to attract decent tenants and to have the place fully rented and not not empty for long periods of time. If I look at the hours I put in each year and consider the risk what tax refund I get back it doesn’t amount to much of a return (especially for those who have are not able to get much captial retrun). Frankly there are bigger rorts of the tax system than the tax breaks given to landlords.

    Talk to prospective tenants out there (I assume you are one). A big issue is the crap selection of places for rent. Run down, poor location. Rather than picking on landlords generally as the enemy I’d focus on landlords that don’t run their rental(s) as a proper business and who provide poorly maintained properties and crap service.

    On the matter of rent increases. Landlords don’t need to, and in fact don’t act in unison for rents go up. Sure they have to be competitive or risk tenants going elsewhere but they doesn’t mean rents can or won’t increase. Any oversupply of rentals (if in fact there is one) and housing in general won’t last forever and not for long. There are some fundamentals which drive house prices – cost to develop land, costs of labour and materials to build. Even if the price of land was to drop considerably the reality is that to develop a piece of land cost money and it is not a cheap exercise. If the land developers can’t get a return they’ll sit on land until they can. This means less housing developments which means less work for builders and sub trades. Lets say the builders and sub trades drop their labour rates by 50%, it will not sigificantly dent the cost to build a house. Materials may drop a bit but not much (so much is imported and if our exchanges moves down that will only make it worse). So we now have a situation where population is still growing, developments have slowed, house stocks are used up. People still need a place to live, prices have dropped a bit but they are still an expensive proposition and therefore people rent..and rental stocks aren’t that plentiful..supply and demand…rents can go up.

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  25. Anthony (789 comments) says:

    Doozer, of course we need some landlords and I agree that tenancy laws shouldn’t favour the tenant, but giving tax breaks just drives the price of property up and helps no one.

    Don’t tell me that the mum and dad landlord business is taxed the same as any other business. The landlord business only makes sense (given recent property prices) if tax losses can be made at the start and tax free capital gains made at the end. Virtually no other small business can make a profit yet legitimately get away with paying no tax!

    The only reason the capital gains of small landlords are not taxed is that small landlords don’t regularly buy and sell properties so they slip through the gaps of some very old, poorly constructed tax provisions.

    Contrast the small landlord with someone who invests in forestry – also a long term investment with an expected growth in capital and also a business where the losses in the early years are tax deductible. However, when the forest comes to get harvested – all that income is taxable! Why should landlords be treated any differently when they come to sell up???

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  26. uk_kiwi (74 comments) says:

    The hyperinflation in house prices over the last five or so years is a story repeated all over the anglosphere. The cause is monetary- in the aftermath of the tech-wreck and Sept 11 the banksters found ways to massively increase the money supply, leading to huge inflation in asset prices. This became a full-fledged financial mania in the same league as Tokyo land prices in the 1980s or the dot-com boom.

    With the bursting of the USA property bubble, especially California (down 20-50% in some areas ALREADY!) we are getting a preview of the future here. Keep in mind that the Japanese economy has been on life-support since their property bubble burst nearly 15 years ago, with prices down 90% in some areas!

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  27. PhilBest (5,120 comments) says:

    And the role of restrictions on the supply of land for housing in all this…………?

    DUH !!!!! DUH !!!!!! DUH !!!!!!

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  28. Doozer (3 comments) says:

    In the past 10 years I have seen huge subdivisions appear. Some of these were on land that sat dormant for many years. These were dormant for economic reasons and not because they developers couldn’t get the necessary concents. Where does this perspective of the ‘restriction on supply of land for housing’ come from?

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  29. Doozer (3 comments) says:

    Anthony. No issues with capital gains tax but I’d like to see the research that says that tax breaks drive prices up, particularly the levels of increase we have seen over the past 5 or so years. There is nothing new that a landlord gets that they could get 20 years ago, except perhaps the ability to set up a company as an LAQC..but you don’t need one of those anyway.

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  30. Anthony (789 comments) says:

    Actually Doozer, 20 years ago the Muldoon introduced $10,000 loss offset limitation and interest clawback on rental property sales made in less than 10 years of purchase were still in place. These were removed only in the dying days of the 4th Labour Goverment – by Peter Neilson.

    The LAQCs were introduced sometime in the 90s I think.

    It is simple economics that subsidies usually get capitalised into the purchase price of the subsidised asset – and so prices drop when the subsidy is removed. We saw farm prices drop when Roger Douglas got rid of the subsidies to farmers and house prices drop when the last first home owner deposit assistance was removed. I had a workmate who borrowed $80,000 for a house in Porirua which for a quite a while in the 90s was worth less than that.

    Of course the price increases of the last few years have been driven by other things as well, but they would no doubt have risen less had there been no tax subsidy for landlords.

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