Q+A: Shane Taurima interviews Bernard Hickey and Murray Sherwin.
 
Housing shortage and affordability issues are concentrated in Auckland because of population growth.

Restrictions on land supply and increased building and consenting costs have resulted in fewer houses being built and mostly at the top end of the market - not enough starter homes.

Home ownership is declining from traditionally high rates, Auckland worse than the rest of NZ.

Bernard Hickey: Government doesn’t understand the risk of younger generation being locked out of the housing market, adding incentive to move to Australia.

Bernard Hickey: There are more politically controversial ways to reduce land prices not being considered - land taxes and capital gains taxes.

Both Murray Sherwin and Bernard Hickey agree with Labour’s Annette King  that the accommodation supplement needs review as cost is rising sharply - could be used instead to build houses.
 
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Q+A
 
SHANE TAURIMA INTERVIEWS

MURRAY SHERWIN AND BERNARD HICKEY
 
 
CORRIN DANN
                        House prices are at an all-time high around the country. The median price is $372,000. In Auckland it’s half a million dollars. Combined with historically low interest rates it’s great news for those who own their own homes, but for those struggling to get into that first home, it’s just another blow. Home ownership rates are dropping too, but renting is no longer a cheap option either. So what is to be done? In March the Productivity Commission presented its report into housing affordability to the government. The government is yet to respond. Here’s Shane Taurima with Productivity Commission Chair, Murray Sherwin, and our most outspoken expert in this area, Bernard Hickey.
 
SHANE TAURIMA
                                    Welcome to you both. Bernard Hickey, let’s start with you. How unaffordable is it to buy a home?
 
BERNARD HICKEY, interest.co.nz
                        Well, it depends who you are and where you’re trying to buy a house. In Auckland, for young people with not much of an income, it’s pretty much impossible now, because prices, particularly in the last couple of months have zipped up to record highs in Auckland. Christchurch is difficult, too, because we’ve got a lack of supply, and prices are rising there for undamaged houses. But in a lot of provincial cities it is quite affordable for young people to buy houses. It also depends on how many incomes you’ve got. If you’ve got a couple of decent incomes and a bit of a deposit and you can take your money out of KiwiSaver, you can afford to buy a house, as long as you borrow a lot of money. That’s the key
 
SHANE          Why is it so bad in Auckland?
 
BERNARD   Really, it’s about supply at the moment, and the Productivity Commission has done a great job of identifying the supply issues in Auckland in particular, but in the rest of the country, there’s been a massive change over the last decade. A big chunk of housing has been taken out because of leaky buildings, but also there’s been restrictions on land supply, and increased building costs - both construction costs and consenting costs - which has made it much more expensive to build a house. And because affordability is so difficult, we’re seeing fewer new houses built, and that’s increasing the pressure upwards on prices.
 
SHANE          So, Murray, the Productivity Commission, they did a lot of work in this area. What did they find? What did you find?
 
MURRAY SHERWIN, Productivity Commission Chair
                        Well, we found that we do have an affordability issue, and it’s largely concentrated around Auckland and the upper North Island, because that’s where the population growth is. That’s where the big pressure is. Auckland, in particular, starts probably 10,000 - 15,000 houses behind where it needs to be, and it’s building at a small fraction of the rate that it needs to build in order to accommodate these people. So leave aside the issues about whether you have urban sprawl or intensification and all the rest of it, we just don’t have enough houses, and what we are building these days are very expensive. We’re building into the top end of the market. We no longer build the starter homes that allow young couples or young families to get started in a decent home.
 
SHANE          John Key says that if you’re a first-home buyer or a low-income earner it’s a great time to buy because interest rates are at an all-time low. Is he right?
 
MURRAY      Well, he’s right in the sense that interest rates are very low and accessing finance is not a big issue, and hasn’t been an issue in New Zealand for some time. Some of the deposit requirements are higher now than they were, and that’s probably a good thing, on balance, for the system overall, but the cost of houses is too high. We can build them cheaper, and we should be building them cheaper. We need to
 
SHANE          So, Bernard, what happens when the interest rates go up?
 
BERNARD   Well, that’s the problem. And for John Key to say, ‘No problems with housing affordability’ - if that’s indeed what he is saying - ‘because you can simply borrow a truckload of money’ is very dangerous, particularly when banks now, in the last six to twelve months, have started to ease off in their credit rules. So you can get 90% - 95% home loans. You can borrow seven, eight times income. You can get your legal fees discounted. And when interest rates are at 5%, as they are now, it’s amazing how much you can borrow. That’s a problem, though, if someone gets pregnant or sick or interest rates go back up to, let’s say, 8% or so, which has been the average over the last decade or so.
 
SHANE          So what does this all mean? How should we take the Prime Minister’s advice?
 
BERNARD   I think the government and on both sides of politics need to look very hard at building an awful load of houses or changing the rules or the policy settings so that a lot of houses are built. Because unless we get a lot of new houses into particularly Auckland, or as Murray says, the upper part of the North Island, some of those concentrated urban areas, Christchurch, in particular, we are going to have big problems with affordability for a long time to come, so much so that a generation of New Zealanders will look at this and go, ‘I can’t afford a family home in Auckland any more. I’m off.’
 
SHANE          So you’re talking about big building schemes?
 
BERNARD   Well, we need some changes in policy settings, and that’s why we’re so keen to see the government’s response to the Productivity Commission’s report. What are we gonna do with land supply? What about these limits on where you can build? What about consenting costs? What about making it easier to build green fields and brown fields? How do we get those houses built? How do we, for example, have better economies of scale for house builders? One of the great achievements of the Productivity Commission’s report was pointing out how few builders we have that build a large number of houses. It was stunning. Unlike in Australia and the States, where you have these home builders who can pump out lots of cheap houses, here we’ve got lots of spec builders who might do one or two houses a year, which just isn’t enough.
 
SHANE          Let’s go back to home ownership.  We’ve traditionally had a very high rate of home ownership. Is that still the case?
 
MURRAY      It’s been declining. I think we had somewhere over 70%-75% of families owned their own properties. It’s now down to 60%-65% and falling, and lower in Auckland than elsewhere. There are all sorts of reasons for that Some of them is just demographics - young people don’t want to buy a house. There are relationships breaking up and people coming back into the rental market where they might have been in a relationship previously. But the fact is that it’s a lot harder, particularly for lower-income families, to get into a house these days. That’s why we’re putting so much more pressure on the rental market, also.
 
SHANE          So, Bernard, of those people that have homes, is it evenly spread around? Who actually owns our properties?
 
BERNARD   Well, increasingly, those people who have a lot of money and who were in the market before prices took off in 2004 have been able, in some cases, to leverage up those equity gains that they’ve had, because they actually made a lot of money. People in New Zealand don’t actually realise how much prices increased and how much wealth was created for those who owned property, particularly before 2003, 2004. When you look at how much the worth of housing increased, probably around $300-$400 billion, and how much debt increased, which is maybe around $80-$100 billion, you’re looking at enormous sums of equity that were increased for those people who own property. Some of those have leveraged it up to buy more properties, rental properties. Others went on a big party. But it certainly meant that those people who were lucky to own property or able to get in before prices took off are now rich - let’s face it - and those people who weren’t seem locked out, particularly in those intense markets like Auckland.
 
SHANE          So there’s a generational divide here.
 
BERNARD   And that’s the risk here, that the government doesn’t understand that, doesn’t realise that there is a group of pretty grumpy young people who are saying, ‘Hang on a minute. I’m graduating with high student debts, I can’t afford to buy a family home in Auckland - I might be able to get myself an apartment, but not have a family - I’m not actually making much of an income. If I do buy a house, I have to buy astonishing amounts more relative to income than my parents. What am I doing here? What are you doing to help me build a family? Maybe I’ll just go to Australia.’
 
SHANE          So, Murray, what needs to be done? What are some of the key recommendations that the Productivity Commission has put forward?
 
MURRAY      Well, mostly it’s about boosting supply and making supply more responsive to changes in demand. And that means making, in the first instance, more land available and lower-cost land available.
 
SHANE          So when you talk about making more land available, who needs to do it and what do you mean?
 
MURRAY      Well, it’s around councils consenting, and working with developers. I think we actually need councils to sit down with developers and say, ‘If we want to build a whole pile of houses that are going to be closer to $400,000 than $600,000 or $700,000, working backwards from that price point, what do we need to do, right back to consenting?’ Because there’s a lot of cost tied up in the length of time it can take to bring a new development through. It can take six, eight, ten, twelve years in some cases, and that means tens of thousands of dollars per section in carrying costs, in interest costs for the developers. So we need to be able to work the price of that section down. In Auckland now the analysis we did suggested that around 60% of the value of the property is represented by the land alone, and the rest of the country it’s around 40%. We need to get that back down. Now, that can come about by more green fields development, so more urban expansion, if you like, or intensification within existing limits. I’m perfectly relaxed about which way it goes, but whatever we do, we need to be able to provide affordable houses, so that means lower-cost houses than we’re doing now. And attractive lower-cost housing, and I think that’s perfectly possible.
 
BERNARD   There are other ways, though, too, to try and reduce those land prices - some more politically controversial ways, which perhaps haven’t been looked at, particularly around land taxes and capital gains taxes. Now, this was something talked about when the tax working group looked at this a couple of years ago, and it was shown that this would reduce land prices significantly. That’s a political hot potato, one that neither side of politics is looking at, but if you really want to come from left field and actually make a difference to land prices, that’s one of the things you could do.
 
MURRAY      And we took a different view on that. We looked at capital gains taxes and felt that they wouldn’t make the difference that was proposed for them. And also, if you’re going to do a capital gains tax, you need to be really careful about the unintended consequences and to do it across the board. It’s part of a broader tax issue. So, in principle it can be done; in practice it’s really tricky.
 
SHANE          Because Labour’s Annette King says as well as a capital gains tax we should also be thinking about big building schemes, which we spoke a bit about earlier, with public-private partnerships, and she also says we need to revisit the accommodation supplement. Is she right?
 
MURRAY      I think she is. Bernard mentioned before that very few of our builders build at scale. In fact the analysis we had showed, I think, five companies in New Zealand that build more than 100 houses a year, and about 4600 building companies that do more than 1 house a year mostly. It’s in that sort of order. So we just don’t get the economies of scale. And we don’t do large developments, and there are very few entities, very few companies that have the balance sheet that will withstand the costs involved in putting up a large subdivision of the sort that you see in Australia, the US, UK, Europe and elsewhere. And we don’t therefore get the economies of scale and the factory-built modules that can go into quite attractive but really high-value, low-cost properties.
 
SHANE          Bernard, what about the accommodation supplement? Annette King says it’s a $2 billion subsidy to landlords. What do you make of that?
 
BERNARD   Well, that’s a really hot one for supporters of the National government, and for landlords themselves, who are relying on a chunk of this money to help support their property prices. Also for those people who are renting - if you were to simply withdraw that subsidy, there are a lot of people who just couldn’t afford to rent.
 
SHANE          So just break it down for us. What is Annette King actually saying here?
 
BERNARD   She’s saying the cost of the accommodation supplement is rising very sharply. It’s now a very large chunk of government spending. It is being used to keep people in property. And the question is, should it be continued? Should it be used in another form? And can what essentially is a subsidy for landlords be reused to build a bunch of houses? And it’s worth having a debate about that accommodation supplement.
 
MURRAY      In total, in the social housing area, including accommodation supplements, provision of state housing, income-related rental subsidies and so forth, I think the Crown is currently spending somewhere between $3 billion and $4 billion a year.
 
SHANE          And you say that it could be better spent.
 
MURRAY      Well, that’s an awful lot of money, and I’m not sure that we’re getting anything like that sort of value out of that spend. So there’s a place for the government to look really hard at how it’s delivering support to low-income New Zealanders who will need support, and we’re gonna have a whole bunch of them who are gonna need support for a long time. And as long as we’re delivering expensive houses only, and not enough houses, that pressure is gonna come on the government balance sheets. So the risks to the government fiscal policy are very strong right now.
 
BERNARD   And you could use that $3 billion to $4 billion to build a shed-load of houses and actually perhaps reduce prices for everyone across the market.
 
SHANE          Murray, you’re still waiting for a response from the government. Are they likely to pick up on your recommendations, do you think?
 
MURRAY      Well, we don’t know. That’s within the government system, and they’re being pretty closed-lipped about it. I think we’re likely to get a substantive response. I hope we do, because I think it’s a significant issue for New Zealanders generally and for governments in particular.
 
BERNARD   And it’s raising the price level in the economy, which means interest rates are relatively high. It’s a structural issue for our economy, which I think Bill English is aware of, and hopefully the government addresses.
 
SHANE          The Economist last year warned that there’s this big crash coming. Is that what we need, Murray?         
 
MURRAY      I don’t think we ever need a big crash. I think what we need right now is a supply response. We need houses to be constructed to meet the demand. We have one of the fastest growing populations in the OECD, and a lot of it is concentrated around Auckland, and we just need to recognise that and recognise that the status quo won’t stand. There’s a lot of status quo bias in our planning. There’s all the resistance from existing residents who don’t want intensification or new developments, councils who are reluctant to fund the infrastructure and the other things that are required. So there’s a lot of status quo bias, but that looks very awkward in the face of rapidly rising population.
 
SHANE          Bernard, do we need a correction?
 
BERNARD   We certainly need land prices to come down, and we need to improve affordability for those people in Auckland. How you do it, whether you do some things to increase the amount of land that’s available, increase the number of houses that are available, whether you use changes in policy around the accommodation supplement, something needs to be done from a central and local government point of view to improve affordability, particularly in Auckland. Otherwise it’s gonna continue to be a structural weakness in our economy and the cause of, frankly, social strife.
 
SHANE          And the question, Bernard, that everyone wants answered - fixed or float?
 
BERNARD   Well, it’s a tough one. It depends on your view of interest rates and your appetite for risk. Are you willing to take a bet, if you like, that interest rates won’t rise, or might even fall?
 
SHANE          Fix or float?
 
BERNARD   I’m a floater because I think interest rates stay lower for longer. But there are other people who worry about interest rates increasing and they choose to fix.
 
SHANE          Thank you, gentlemen, very much for your time.          
 

ENDS

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