Kiwiblog

The Productivity Commission has released a draft report into housing affordability.

If you do not wish to read the full 259 pages, there is a 40 page summary and even a four page brochure.

The Productivity Commission is based on the Australian model which has strong support from Governments of both sides of politics. It has been the ongoing commitment to reforms such as those proposed by the Australian Productivity Commission, which has seen Australia move more and more ahead of New Zealand. If we do not act on recommendations for improved productivity, then there is a cost.

They observe:

… the distribution of house prices in Auckland is now markedly different to that in the rest of New Zealand, particularly at the lower end of the Auckland housing market. For example, between 1995 and 2011, the gap between lower quartile house prices in Auckland vis-à-vis the rest of the country increased by over 260% in real terms.

This means that for people in Auckland, even the less expensive homes are becoming unaffordable for many.

Section prices have grown more quickly than house prices over the last 20 years, indicating that appreciating land prices have been a key driver of house price inflation in New Zealand. This suggests a shortage of residential land in places where people want to live. Land price pressures have been particularly acute in Auckland, where section prices now account for around 60% of the cost of a new dwelling, compared with 40% in the rest of New Zealand.

They note:

The prevailing approach to urban planning in New Zealand has a negative influence on housing affordability in our faster growing cities. The widespread planning preference for increasing residential density, and limiting greenfield development to achieve this, places upward pressure on house prices across the board. Constraints on the release of new residential land create scarcity, limit housing choice, and are increasing prices across the market.

It’s simple demand and supply. If politicians restrict the supply of land, of course demand will push the price up. Measures around the tax system can make an impact around the margins, but one has to also get the fundamentals right.

They recommend local authorities:

• take a more active approach to the identification, consenting, release, and development of land for housing in the inner city, suburbs, and city edge, both with respect to volumes of consented land and the time taken to achieve consents;
• adopt a strategy that allows for both intensification within existing urban boundaries and orderly expansion beyond them;

The Auckland Council especially has to release more land for development, otherwise a generation of middle to lower income Aucklanders will never have an opportunity of home ownership. Those poorer Aucklanders will be locked into being tenants for life, funding the retirements of the well off.

They also note the large sums of money now being spent on subsidising rental housing, and how this will increase significantly in future if fewer people can own their own home:

• $564m on income related rents for 69,000 state houses
• Accommodation Supplement of $1,200m paid to 320,000 people (around 50% of all renters)
• $36m on community housing providers

Feedback is open on the draft report for a couple of months.

Roger Kerr writes:

A gains tax on housing would not reduce inflation. Inflation is an ongoing increase in the general level of prices, not a one-off change in some prices.

The introduction of the Goods and Services tax resulted in a one-off increase in the consumer price index – it did not lead to ongoing inflation.

Similarly, a capital gains tax might reduce property prices initially but it would not affect longer-term inflation.

True, and any increase in GST would be a one off bump.

Moreover, if such a tax on housing were applied only to realised gains as is likely, house prices could even rise. This is because of the lock-in effect, with owners holding on to homes to defer the tax on gains. Anything that reduces supply is likely to lead to an increase, not a decrease, in price.

One could do it on unrealised gains, but that would be pretty draconian.

Evidence confirms what theory suggests: the inflation performance of countries with a capital gains tax doesn’t differ systematically from countries that don’t.

Australia, the US and Britain, which tax capital gains, have all had large and volatile house price movements this decade.

I always like a look at empirical evidence.

A second mistaken assumption is that investment in rental housing enjoys tax privileges.

As the deputy commissioner of Inland Revenue, Robin Oliver, told a select committee in 2007: “Rules about expenses for deducting costs such as interest, upkeep and maintenance, as well as paying tax on income, are the same for investments in shares or anything else. In fact under the housing case … there are tighter rules regarding what is a capital gain.”

People are misled into thinking that rental housing is tax-preferred since highly geared rental property may record tax losses. This is because the full economic income (including the change in the market value of the assets) earned on rental property is not taxed.

However, this is a quite general feature of the taxation of real assets, including plant and equipment and farms.

A real issue though is whether it is sensible to allow property owners to claim 3% depreciation on their property annually, when the empirical evidence is that almost no residential property depreciates in value – in fact it appreciates.

The SST reports:

FOR THE first time in years, buying your first home is cheaper than renting. New figures released by interest.co.nz reveal affordability has tipped in favour of buying it now costs slightly less each week to pay the mortgage on a typical first home than to rent a similar property. …

The interest.co.nz figures show that in April it took 23.2% of the typical first-home buyer’s income to pay the mortgage on an entry-level house. Renting that same house would take a fraction more 23.3% of weekly take-home pay.

I’m going to start looking at property to buy in around nine months. I think prices will drop a wee bit further yet.

Bernard Hickey blogs at the excellent interest.co.nz on home affordability:

Plunging mortgage rates and another fall in house prices improved home loan affordability by a record amount in December to its best level in 4 years, the monthly Home Loan Affordability report from www.interest.co.nz shows. At current rates of improvement, housing is likely to be broadly affordable again for most home buyers towards the end of 2009.

In other words, back to sanity.

You can see the impact of both the fall in prices and of interest rates. And both should continue to fall. The tax cuts in October and again in APril will help also as they boost take-home pay.

40% is generally regarded as the maximum home owners should pay towards their accommodation. That’s probably unrealistic for many, but it would be good t get it below 50% anyway.

Bernard Hickey in the HoS calls for an end to being able to deduce investment property lossess off your personal income tax:

It is the elephant in the room of New Zealand politics. Everyone knows it, yet our leaders refuse to address it, partly because they and their generation benefited personally through the massive house price inflation it created.

I’m talking about the abuse of the tax system by property investors that has allowed them to establish various types of trusts and loss attributing qualifying companies (LAQCs) that make losses on investment rental properties to reduce their personal income tax bills.

This was among the major reasons for the property investment frenzy of the past six years that drove house prices to unaffordable levels and has now created the conditions for a bursting of that bubble.

It would be good to see some hard data on how much of the price increases can be credited to the tax treatment, and how much to land supply etc.

The Department of the Prime Minister and Cabinet wrote a report on house prices and affordability in March. It showed landlord numbers rose more than 100,000 to 300,000 in the decade to 2006. The report estimates the $149 billion of rental property generates a tax benefit of at least $700 million for property investors, with the potential for up to $1.8b of tax benefits.

The Reserve Bank has asked the politicians to consider ring- fencing these investment property losses to remove some of the hot air pumping up the housing bubble.

But there isn’t a politician addressing the issue seriously.

Well I doubt anyone wants to lose the 300,000 votes such a move would result in.

Could such a change be grandfathered in? That would be inequitable but possibly the only way politically to do it.

Steve Pierson at The Standard takes issue with the statements from the Property Investors’ Federation that it is better to rent than buy. He notes:

First, it’s comparing the average rent to the cost of buying a median house. Rental properties tend to be lower quality, cheaper – so are likely on average to be worth well below the national median. Comparing apples with apples would look at the rent on properties of the same value.

This is a fair point. However would be useful to have some data on the average GV of rental properties compared to properties for sale to see how significant this is.

Secondly and most importantly, if you’re buying the house at the end of 25 years, you own a house. If you rent, at the end of 25 years you have nothing. That’s a pretty serious difference. If you buy rather than rent you might pay some more (less than the difference in the graphic though) but you end up with an asset in the end.

Now this is absolutely key. It is why I purchased back in 2001 – even though mortgage payments were way more than my old rental payments.

However does this asset compensate for the extra costs? Let us look at the graphic referred to:

Now I have not got the time to calculate inflation and interest adjustments so am going to do a simple linear calculation.  Over 25 years you will pay a total of $396,500 if you rent and $968,500 if you buy. So that extra $572,050 you pay renting is well in excess of the $345,000 value of the house.

Now again interest, inflation and changing house values will affect this equation. But the point is that the gap between buying and renting is now large enough to make buying significantly less attractive.

I am so glad I purchased in 2001. If I had waited a few more years, I would really struggle with being able to afford to buy.

Bernard Hickey blogs that home affordability got worse in March – to an all time low in the Fairfax Media home loan affordability series.

The median house price increased slightly in March, and interest rates crept up another 10 basis points to produce the worse ever result:

The proportion of median take home pay required to service the mortgage on a median house rose to 83.1% in March from 80.2% in February and surpassed the record 83.0% seen in November last year when house prices hit their peak.

This is also worse than the 77.8% seen in March last year and almost double the 44.2% seen in March 2003 when housing was seen as only just affordable. Most bankers believe anything more than 40% of after tax pay is unaffordable.

In Wellington it is even dimmer. One would need to spend 90.7% of your take home pay to service a mortgage on the median house. In Auckland 96.8%.

Nationally one needs an after tax income of $1,421.76 a week to have only 40% of your take-home pay go on the mortgage. That is $2,100.95 gross a week or $109,549.50 annually.

So if you earn less than $110,000 a year you can’t afford the median house unless you devote more than 40% of your net income to the mortgage.

The DPMC House Prices Unit has calculated that a couple on the average wage would need to save $122,000 before they can afford a mortgage. And for a single person it is $170,000.

And again that is the deposit – not the mortgage!

National is warning that proposed changes to building consents, such as one consent for a development, may lead to “ticky-tack” suburbs with identical house designs.

While it is a fair criticism, I have to say that overall I find the proposals by Shane Jones to be a move in the right direction.

Especially welcome is the proposal to change the regulations so that minor alterations – such as moving a window, door or toilet – no longer required a building consent.

The devil is in the detail, but the Jones proposals look to be the first serious move to start reducing consent costs, after eight years of increasing them. Better late than never, and I think the changes are worth supporting.  That of course depends on the exact details.

Housing Minister Marian Street is quoted in the Dom Post:

But Ms Street despairs at some of the “hard luck” stories.

The latest target of her ire is a weekend newspaper article about a young professional couple who turned up their noses at $400,000 do-ups in Grey Lynn and starter houses in “dodgy” outer suburbs. They were distressed when they found a two-bedroom townhouse in Herne Bay, one of Auckland’s most exclusive suburbs, was on the market at $900,000. …

“I’m really sick of reading stories about nice young couples who have got hugely high earning potential stretching out in front of them complaining about how awful the housing market is because they can’t get a house in Herne Bay.”

The couple in last Sunday’s article had dismissed $400,000 do-ups in Grey Lynn because they said they couldn’t afford to renovate – an argument that holds little truck with Ms Street.

So what are the details of this rich prick couple in the weekend media? Looks like a reference to this SST article:

Van der Stoep, a Sunday Star-Times journalist, and her partner, a fifth-year medical student, rent a one-bedroom apartment in Herne Bay, but are desperate for more space and a small garden they can call their own.

They won’t be in a position to buy until next year but they have already begun scouting the market to find a house at $385,000, the limit of what they can afford by spending 48% of their income a level which experts say causes “mortgage stress”.

Van der Stoep says the couple, who will have a combined income next year of about $76,000, have discussed pushing their budget up to $400,000 but even at $385,000 their finances will be stretched so they are reluctant to take on any more debt. They hope to save a 10% deposit.

“It actually makes a massive difference to your weekly payments. You don’t want to go at the end of the week `Oh my God, how am I going to afford the groceries?”‘

Van der Stoep says they looked at a small two-bedroom townhouse in Herne Bay which they thought might be within their reach only to discover it had a $900,000 pricetag.

So a couple earning $76,000 are now rich pricks. How dare they complain about spending 50% of their income on mortgage payments.

I don’t read the SST article as them complaining they can’t live in Herne Bay. It is complaining that even a modest house in a modest area is almost unaffordable for them.

And I am not sure about their “hugely high  earning potential”. A 5th year medical student may be a long way off “high earning” and medicine doesn’t pay anywhere as well as it used to.  Hell policy analysts earn more than some doctors. Likewise journalism isn’t known for its riches either.

Every Council that has submitted on the Government’s Affordable Housing bill is against it, and Local Government NZ has said it does not know of a single Council who would use it, if passed.

Here are some quotes:

Auckland said the bill would require it to analyse who qualified as needing an affordable home.

“This bill requires [councils] to take an interventionist role in social policy and the domestic arrangements of residents that Auckland City Council does not consider appropriate for local government.”

Indeed.  It means big rates rises for everyone, including oh yeah home owners.

Manukau City’s submission called for the bill to be withdrawn, saying it left councils and ratepayers effectively subsidising cheaper houses.

This is all the Government seems to know sometimes. Instead of focusing on fundamentals such as how to improve the overall wealth of NZ, their instinctive response to every issue is merely for rich pricks to subsidise everyone else.

We’ll see this later this year when all taxpayers will be asked to have more of their tax dollars go towards extending paid parental leave.  That won’t stop people fleeing to Australia.

The North Shore City Council said it would need two years and up to $250,000 to establish a policy on implementing the changes.

The bill’s provisions would push up the overall cost of housing, leaving “middle-income New Zealanders” paying more for their homes.

Yep affordable housing for Labour means having “rich pricks” or as NSCC calls them “middle-income NZers” paying more for their housing.

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.

DPMC have published a very good report on house prices. I quote one section:

Like other businesses, a rental property investor can combine their net rental income with income from other sources. An investor’s total deductions for interest, rates, repairs and insurance may exceed the gross income from rent, creating a loss that can be applied to reduce the taxpayer’s liability on other sources of income. The value of this aspect of the tax system is directly related to marginal tax rates. Therefore, the increase in 2000 to a top marginal tax rate of 39% may have encouraged some additional investment in rental housing.

So Labour increasing the top marginal tax rate increased demand for investment properties, pushing house prices up. And one presumes that a reduction in marginal tax rates would make investment properties less desirable and lead to a drop (or less of an increase) in house prices.