. . . One of the reasons why you probably haven’t had a significant correction is because over the last 45 years there’s probably been a general view that houses are not overvalued relative to a whole lot of different factors. My point is that the market, in the end, assesses when housing is massively overvalued compared to fundamentals, not politicians. – John Key
BNZ economist Tony Alexander joins the discussion on Auckland housing and the part played by foreign buyers:
. . . So we remain in the dark about the extent to which Auckland’s housing market is truly being driven by offshore buying. But as emphasised previously, there are three key points which I shall keep repeating regarding Auckland housing and house price pressures.
1. The fundamental cause of rising prices in Auckland is a shortage of supply and until that gets addressed prices will stay highly elevated and perhaps keep rising out to late-2017 this cycle.
No matter what tinkering is done to reduce demand by restricting foreign buyers won’t change the fact that there is a shortage of supply.
2. Whatever the true magnitude of Chinese buying has been these past few years it will get much greater. Chinese families are growing wealthier, so naturally they will seek offshore assets. Chinese people wish to get assets off the mainland and this week’s massive intervention in sharemarkets by the Beijing authorities illustrates why people have high distrust of the environment on the mainland in which they would hold assets. And Chinese authorities have yet to relax hefty restrictions on people getting their funds offshore. When they do, well then you will see something entirely new hit the world’s residential property markets.
3. We should as soon as possible adopt Australia’s rules restricting foreign buying of anything other than new housing unless resident for 12 months.
But here is the fourth point which to date I have not emphasised but now will do. Adopting Australia’s rules as they stand won’t be the panacea many are hoping for. In Australia’s case people have been able to get around the restrictions quite easily. The regime is now being enforced more rigorously, but that does not necessarily alter what is being seen as a huge problem – something which people in Hong Kong have been seeing more and more of in recent years.
Many Chinese who buy properties never, or rarely, occupy them. They sit empty. This applies even to newly built apartments sold to Chinese buyers. Chinese simply want an asset away from any control by the CCP. There was an article on this in The Australian newspaper this weekend, page 6.
What this means is the following. As Auckland very slowly goes vertical in areas like New Lynn, developers will find they can very easily get offshore financing for their projects and hefty sales off the plan to Chinese investors (we Kiwis prefer to touch and feel before buying). These investors may never occupy or even rent out their investment. Thus while on the face of it the Aussie rule that a foreigner may only buy a newly built house or apartment sounds like a grand idea, it could leave the housing supply situation unchanged from a no-rule regime.
Thus, were we to adopt the Aussie regime we would need to add in an extra clause along the lines of apartments having to be made available for rent, actually rented, or something like that.
When might we see the adoption of some form of restriction on foreign home buying in New Zealand? Maybe within two or three years. About three years ago I recommended that we adopt the Australian regime. That was/is not because I feel Chinese buying is currently the big buying force people believe it is, but because the buying will grow and the eventual popular backlash against such buying and introduction of legislation in that heated environment would risk a backlash. The Chinese leadership may feel we were targeting them and getting above our station. Trade retaliation would be likely.
That is still the position I hold and the earlier we adopt Australia’s rules with the extra twist noted above, the better for everyone, including exporters to China wanting good access for many years who may feel nothing needs to be done on foreign home buying. You are the ones most at risk should this situation turn bad in 5, 10, 15, or 20 years time.
If there needs to be restrictions on foreign non-resident buyers they must apply to all foreign non-resident buyers.
Over at Kiwiblog, David Farrar points out that Labour’s policy of treating Australians more favourably than Chinese would contravene the free trade deal which that party signed when it was last in government.
Even if it didn’t, putting higher hurdles in the way of those from one or more countries while applying less restrictive rules to others is discriminatory and could lead to tit for tat repercussions which would endanger trade.
That would impact on the whole country when the housing problem is essentially Auckland’s and the solution to it lies not in restricting demand but increasing the supply.
In the debate on Labour’s dodgy numbers on the impact of Chinese purchasers on Auckland’s housing market the root cause of the problem has not got the attention it should.
Eric Crampton focuses on that and points out the wasted opportunity:
. . . If Auckland zoning were sane, all of that capital could be helping to build new subdivisions, new apartment buildings, new townhouses, new mid-rises – new housing. There would likely be less of that capital, as expected price increases would be lower, but the capital would be giving us new housing.
Instead, it’s bidding up house prices. That’s not a particular problem, but big price fluctuations that could come from it are a bigger problem than having too much housing built. In the worst case, if the capital were directed to new building and then the flood dried up, the cost of housing would fall – there would be more housing available at lower cost. Just imagine: Auckland would have low rents and a low cost of living with plentiful housing. If “oh nos! They built too much housing with their own money and they lost a pile of their money and now we get to live cheaply!” is somehow a worst case.
What would it take to fix it? Open up zoning to allow new building under very rapid consenting – again, both up and out. To get substantial new greenfield development in the suburbs, you’ll have to ease up on the Overseas Investment Act at the same time so foreign investors can buy tracts of land to put up housing.
Bit depressing that the knee-jerk reaction is to put controls on foreign investment here rather than to fix the darned rules that prevent its being used more productively.
The problem isn’t who is buying houses nor where they come from.
It’s that the demand for Auckland property is greater than the supply.
Restrictions on development are the main cause of that and more overseas investment rather than adding to the shortage could, if allowed, help improve the supply.
(The transcript is here).
Thomas Lumley, Professor of Biostatistics counters his assertion in a post headlined what’s in a name?
. . . So, there is fairly good evidence that people of Chinese ethnicity are buying houses in Auckland at a higher rate than their proportion of the population.
The Labour claim extends this by saying that many of the buyers must be foreign. The data say nothing one way or the other about this, and it’s not obvious that it’s true. More precisely, since the existence of foreign investors is not really in doubt, it’s not obvious how far it’s true. The simple numbers don’t imply much, because relatively few people are housing buyers: for example, house buyers named “Wang” in the data set are less than 4% of Auckland residents named “Wang.” There are at least three other competing explanations, and probably more.
First, recent migrants are more likely to buy houses. I bought a house three years ago. I hadn’t previously bought one in Auckland. I bought it because I had moved to Auckland and I wanted somewhere to live. Consistent with this explanation, people with Korean and Indian names, while not over-represented to the same extent are also more likely to be buying than selling houses, by about the same ratio as Chinese.
Second, it could be that (some subset of) Chinese New Zealanders prefer real estate as an investment to, say, stocks (to an even greater extent than Aucklanders in general). Third, it could easily be that (some subset of) Chinese New Zealanders have a higher savings rate than other New Zealanders, and so have more money to invest in houses.
Personally, I’d guess that all these explanations are true: that Chinese New Zealanders (on average) buy both homes and investment properties more than other New Zealanders, and that there are foreign property investors of Chinese ethnicity. But that’s a guess: these data don’t tell us — as the Herald explicitly points out.
One of the repeated points I make on StatsChat is that you need to distinguish between what you measured and what you wanted to measure. Using ‘Chinese’ as a surrogate for ‘foreign’ will capture many New Zealanders and miss out on many foreigners.
The misclassifications aren’t just unavoidable bad luck, either. If you have a measure of ‘foreign real estate ownership’ that includes my next-door neighbours and excludes James Cameron, you’re doing it wrong, and in a way that has a long and reprehensible political history.
Property Institute of New Zealand Chief Executive, Ashley Church also uses the term ‘reprehensible’ and calls the claims ‘an exercise in unveiled racism’.
Mr Church describes the data used by Mr Twyford as ‘shonky’ and says ‘it has so many holes in it that it would be marked with an ‘f’ if it was submitted as a High School Economics project’.
“Mr Twyford uses ‘Asian sounding’ surnames as his means to identify which buyers are ‘Asian Investors’ – without any way of knowing whether the buyer is a New Zealand immigrant who lives here, or an investor based in China”.
“On that basis Mr Twyford should be blowing the whistle on Scottish foreign investment in this country – because a large number of kiwi homes are owned by people who have names starting with ‘Mc’ or ‘Mac’”.
“This is the sort of racist sideshow we’d expect from NZ First – not a serious political party with pretensions to hold the reins of power”.
Mr Church says that Mr Twyfords claims that the Auckland property market is being skewed by non-resident investors may prove to be correct – but he says that any action taken should be based on hard data and facts – and that the race of the buyer shouldn’t be a factor.
“We might be surprised to learn who the major investors really are. Work done by the Overseas Investment Office, in 2012, suggested that the biggest buyers were Americans, Brits, Canadians and Aussies – with the Chinese a long way behind”.
Mr Church says the Property Institute supports the recent move, by the Government, to create a foreign buyer register by requiring investors to have a New Zealand tax number.
“This will provide good, accurate, information and it will help us to determine whether we need to be taking steps to ban foreign investment in kiwi homes – or direct it into the construction of new houses, as is the case in Australia”.
If there is an issue with non-resident foreigners buying houses it’s not one of people from any particular country.
But in light of Twyford’s comments, who could blame anyone with a foreign-sounding name if, as Gravedodger suggests, they start buying property under some variation of The Smith Family Trust numbered whatever.
However, let’s not forget the real problem is not who’s buying houses but that there’s not enough of them in some areas nor who’s responsible for the imbalance between supply and demand:
Hugh Pavletich co-author of the Demographia International Housing Affordability Survey says blame the incompetent council:
If Auckland was a normal housing market, like most in North America, house prices would be at or below $300,000 for those on $100,000-a-year household incomes.
Thanks to the incompetent Auckland Council, an Auckland family with a household income of $100,000 is forced to pay $820,000 for a house.
The council is forcing them to pay an extra $520,000 for the house and this new study calling for more apartments in the suburbs is no solution to the crisis.
That money for an Auckland house must come from a grossly excessive mortgage, crippling the city’s residents for the remainder of their working life.
Add the interest over the life of this inflated mortgage and this $100,000-a-year household is forced to pay over $1 million in excessive mortgage costs, and all because the Auckland Council is incompetent.
The council is being deliberately misleading because it has lost control of its costs and has lost the capacity to meet its infrastructure responsibilities to its community
Land supply, infrastructure financing and processing for new housing are issues councils must tackle – and no council more than Auckland needs to deal with this.
Back to Professor Lumley:
But on top of that, if there is substantial foreign investment and if it is driving up prices, that’s only because of the artificial restrictions on the supply of Auckland houses. If Auckland could get its consent and zoning right, so that more money meant more homes, foreign investment wouldn’t be a problem for people trying to find somewhere to live. That’s a real problem, and it’s one that lies within the power of governments to solve.
It’s not difficult for people with a better grasp of statistics and without the political desperation that’s driving Labour down this divisive path to counter the claims.
But let’s not forget that the naming, blaming and shaming by numbers can hurt people.
I received an email from a Young Nat, Melissa Hu, who wrote:
. . . I was born here, I study here, I work here and I’m a New Zealand citizen but because my last name sounds Chinese I’m apparently a big part of the housing affordability problem – (I’m actually of Mongolian descent but would Labour care about that?
Labour chose to make racially inflammatory comments based on half-baked data from an anonymous real estate agent in Auckland. They chose to say that there are too many Chinese buyers in the Auckland housing market based on whether your last name was Wang, Lee – or even like mine.
The problem is, this data doesn’t actually prove whether the buyers are foreigners or not. Even NZIER’s Principal Economist said Labour’s comments were “very damaging for a multi-cultural, welcoming place like New Zealand”.
I’ve lived here all my life, and I’m proud to call myself Kiwi. Young New Zealanders like me are ambitious, excited and open about New Zealand’s future. I don’t think my last name, or yours, has anything to do with trying to buy a house.
We need to be encouraging all Kiwis – young, old, European, Maori, Chinese, whatever – to aim high, work hard, create wealth and continue to raise our living standards. We also need the Government to keep taking common sense steps with councils to make more land available for housing. That’s why I support National they know there’s a problem and they have a real plan to fix it.
We don’t need to start a “pick on the Chinese” attitude which could create more problems than it solves. Auckland’s housing problem is a supply issue – not a Chinese issue. We’re a multicultural, ambitious and prosperous country – I hope we stay that way.
There’s nothing new about this naming, blaming and shaming.
My father-in-law was the butt of some because his name was German, even though he’d though he’d not long returned from serving overseas with the New Zealand army.
How sad that nearly 70 years later it’s still a political tactic.
I would unreservedly support a law change mandating stringent performance standards for rented properties provided that the following section is included in the legislation:
“Nothing in the Law of Supply and Demand nor the Law of Unintended Consequences shall apply to the provisions of this Act.”
This is really important because, unless Parliament can somehow prohibit those other laws from having an effect, extensive housing reform has the potential to make life much harder for many renters. . .
there can be no doubt that the impetus for reform comes from a place of good intentions. By any historical measure, New Zealand is a prosperous country. We should aspire to be a society in which the basic comforts of human existence are universally available – particularly to children, who bear no responsibility for the circumstances in which they are raised.
Nevertheless, it does not follow that we should disregard the known risks of forceful government intervention. At some point, the imposition of requirements on landlords will result in rents being driven up. That could make it difficult for poor families to find any accommodation at all. – Liam Hehir
. . . Dunedin, Invercargill, Timaru and Nelson are seen as very affordable places for first-home buyers, but the consistent drift north of jobs and government services, in particular, make it difficult for young people to find work.
To find work, many go to Auckland or Christchurch, and the problem continues.
Dunedin has a median house price of $281,500 and Invercargill’s price is $210,000. If more could be done to encourage people to live and work in the South – say through a regional development policy – some of Auckland’s housing problems will disappear. . . – ODT editorial
Andrei commented a few days ago on the family and other ties which bind people to familiar places.
That is a valid point.
But it doesn’t apply to everyone and moving for most of those for whom it does would still be far easier than it was for the immigrants who came here in past centuries from far further than the distance between Auckland and Dunedin.