Govt holds ace


The Opposition keeps telling the government to meddle with the exchange rate.

Trans Tasman points out the difficulty of doing that without causing other problems:

. . . Interest rates are at their lowest level in nearly 40 years, easing financial pressure on those with mortgages. The Govt holds an ace up its sleeve in the exchange-rate debate.

To critics who call for policies to lower the exchange rate, it can say “how would you do it: cut interest rates or raise them?”

Cuts in interest rates would increase inflationary pressure and push up house prices. Higher interest rates would attract even more speculative currency inflows, and lift the exchange rate higher. . .

Neither higher house prices nor higher interest rates would do anything to help make housing more affordable.

Land affordability


Housing affordability is one of the causes de jour but asking prices across the country   shows the problem isn’t the price of houses.

The highest prices were in Auckland ($588,088) and Central Otago/Lakes ($515,859).

The lowest prices were in Southland ($264,028) and on  the West Coast ($277,538).

The difference isn’t in the price of the houses but the cost of the land they sit on which is a function of supply and demand.

The problem of affordability will be solved by people choosing to live in places where the demand for land is lower; by building houses which take up less land or in freeing up more land for development to increase the supply.

And they say farms are expensive


We were splitting the partnership in a crib in Wanaka and looking for another one at the same time we were buying a couple of hundred hectares from a neighbouring farm at home.

When given the price of the section and working out the per hectare price compared with the farmland my farmer asked, “how many stock units could I run on it?”

Urban sections aren’t directly comparable with farms but Don Brash points out just how out of kilter city prices are:

For one of the least densely populated countries in the world, it is ridiculous that tiny 500 square metre sections often end up costing well in excess of $250,000 – equivalent to $5 million per hectare. Yes, there are costs of servicing these new sections with infrastructure – but $5 million per hectare?

Five million dollars could buy you about 600 hectares of reasonable farmland in the Manawatu on which you could run about 6,000 stock units.

People complain that farms are expensive. I wouldn’t say they’re cheap but they’re far more reasonably priced than the sections Dr Brash talks about.

That’s a lot of money poured into what is usually a non-productive asset, if not a liability.

A section, and the house built on it, generally cost money and earn nothing until, if the market is favourable, it’s sold when there might be some capital gain.

That contrasts poorly with farms which are – usually – productive assets that provide jobs and earn export income.

Mobile retirees could help housing affordability


Baby boomers have started retiring and a lot more will follow.

Many of them will be in Auckland. Not all of them will want or need to stay there.

These mobile retirees could sell a home there and buy something at least as good for a lower price elsewhere.

Look at what $455,000 or $165,000 could buy in Oamaru and contrast that to what you’d get for a similar amount in Auckland.

Selling up and shifting out would take some of the pressure off the housing supply in Auckland and add to the population of smaller towns and cities which would welcome inward migration.

The difference between the price gained for the house sold in Auckland and one bought elsewhere would give the mobile retirees money to spare to enjoy a less frugal retirement.

This won’t make housing more affordable by itself, but add it to other measures and it could help.

Affordable housing requries culture change


Affordability of housing isn’t a simple matter.

Someone wanting to sell, or with a large mortgage wanting more equity in their property will be happy with higher prices.

However, there are more people finding it more difficult to buy and in responding to the Productivity Commission’s report on housing affordability, Finance Minister Bill English spells out why it matters:

“High house prices matter because many New Zealanders spend a large portion of their incomes on housing and that has helped fuel household debt and contribute to damaging imbalances in the economy,” Mr English says.

“In particular, high housing debt diverts money from more productive investments, contributes to New Zealand’s significant overall level of indebtedness and exposes taxpayers to growing demands for State assistance with housing costs. 

“Those factors make it vital that housing becomes more affordable. In addition, projections suggest that many more homes will be required in coming years than are being built.”

There are no quick fixes and improving affordability isn’t just the government’s responsibility but it has a programme with four key aims:

  • Increasing land supply – this will include more greenfields and brownfields developments and allow further densification of cities, where appropriate.
  • Reducing delays and costs of RMA processes associated with housing – this includes introducing a six-month time limit on council processing of medium-sized consents.
  • Improving the timely provision of infrastructure to support new housing – this will include considering new ways to co-ordinate and manage infrastructure for subdivisions.
  • Improving productivity in the construction sector – this includes an evaluation of the Productivity Partnership’s progress in achieving a 20 per cent increase in productivity by 2020.

Decisions made by local councils not only affect their local communities, but have wider effects on the economy and the Government’s books. 

“Many of the changes that will make a difference lie with councils and the Government expects them to share the commitment to improving housing affordability,” Mr English says. . .

These measures will help, but a culture change is also needed.

My generation and older were brought up with the idea of a single story house on a quarter acre section as the norm.

That is still possible in some places but in cities, notably Auckland, where demand for housing is so high and land supply inadequate it is no longer realistic.

People who want to live in those places need to accept that their sections will have to be smaller and houses higher. Terraced housing and apartments are normal in most other parts of the world where a lot more people are packed into cities which cover far smaller areas than ours.

Not PC discusses some options and shows some examples.

Denser housing will affect communities too – if people no longer have big sections round their homes, there will be a need for more public green spaces and play areas.

Those not willing to accept the change will have to move to smaller cities and towns where there’s less pressure on land and prices which could be good for both the city they leave and the place where they settle.

The full report is here.

WFF lump sums not the answer to affordability


Giving benefits to middle and upper income families is madness. Peter Dunne’s suggestion that people be able to capitalise Working for Families benefits  as a lump sum to buy a home is even worse.

It would add to the burden on the public coffers by bringing forward the payments. The country would be borrowing more to enable a select group – families who could afford to buy a house – to borrow less, or pay more than they could without the lump sum.

WFF payment are based on family income and the number of children. As income increases the benefit decreases imposing a very high effective marginal tax rate.

Offsetting Behaviour has the figures which show that around half the 357,200 WFF recipient families in the 2008 tax year faced an EMT rate of more than 50%.

Why would you work harder, gain higher qualifications or take a promotion if at least half the money you received for doing so was clawed back?

 If people took the lump sum which would be based on their current income, what would happen if their income increased?

They would have to pay back the difference between what they got at the start and what they would be eligible for after a pay increase, increasing the EFT rate.  If not those who took the lump sum and got the benefit from it would in effect get more than those on the same income with the same sized family who didn’t.

Offsetting Behaviour makes another valid point – increasing the demand for houses, by giving some people more money to buy them, won’t solve the problem of home affordability by itself.

Price is affected by supply and demand. If more people have more money but the supply of houses doesn’t increase to meet the new demand then prices will which will negate any gain in affordability.

One of the factors affecting supply, and price, is regulations. A builder told me that tighter regulations in the wake of the leaky homes disaster had imposed new costs of $10,000 on the price of a new home. That was four years ago and the costs of regulations will not have improved since then.

If Mr Dunne wants to make homes more affordable he’d be better addressing the costs imposed by bureaucracy which would help everyone, rather than tinkering with WFF which would apply to only a few people and may not do anything to improve home ownership affordability.

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