Housing Crisis: New Zealand Edition

Nothing the New Zealand government is trying is working to resolve the housing crisis

There are no easy solutions to housing crisis whether it is a developed country or a developing country as New Zealand and Jacinda Ardern are finding out. Nothing the NZ government is trying seems to be working as house prices have increased by 20% in 12 months, median rent climbed by 30% and waiting list for social housing has tripled since 2017.

“We’ve probably seen the biggest widening of wealth distribution that we have ever seen in New Zealand between people who own houses and those who don’t,” said Arthur Grimes, professor of public policy at Victoria University of Wellington.

The steps taken by NZ government to affect housing include:

• Requested Central Bank to add housing cost to monetary policy. Central bank refused saying that if housing cost is added to central bank remit e.g. including it in inflation calculations will increase inflation statistic forcing central bank to increase interest rates when inflation and employment excluding inflation aren’t doing that well. This is similar to Reza Baqir tanking the economy by increasing discount rates to attract hot money while justifying it by citing (supply side) inflation.
• Central Bank requested authority over macro-prudential tools i.e. setting maximum limits of mortgage debt-to-income ratio. Theoretically this is a sound request as it will prevent the population from becoming over-leveraged i.e. overextending themselves to get on the housing ladder. Politically it can be disastrous. When incomes aren’t increasing due to global slowdown yet house prices continue to become out of reach due to immigration and investors, the only way for first time home buyers to acquire property is to drown themselves in mortgage debt.
• One of the ways to increase affordability is to cool down housing prices through land value taxes and capital gains taxes. However, over the past few years, the narrative has been built that house is a source of wealth and not a place for shelter. Thus any reduction in housing value will be deemed as reduction in wealth. The homeownership rate, which is at a 70 year low in New Zealand, is at 64.5%. No political party will commit political suicide by reducing the deemed wealth of 64.5% of the population.
• Earlier government initiative included building houses but that didn’t happen. A NZ$2 billion project called Kiwibuild was launched to build 100,000 affordable houses. There was no take up, and project was abandoned in 18 months. By 2020, only 602 homes were delivered.
• The government has introduced such demand-side measures banning foreign buying and introducing capital gains tax when property is sold in less than 5 years but so far it has had no impact.
• Professor Grimes imply that it is the slow release of lots and planning approvals that is making the housing expensive. Though planning does exacerbate the problem, however, it is the false narrative that has been spread by developers that house prices would not have increased if planning wasn’t being delayed. As the below news from Oct 2019 shows, Damac one of the largest developer wants other developers stop building otherwise it will be a disaster. Disaster in developer speak is prices will stabilize or correct. Finally, a year later in December 2020, Emaar, the largest state owned developer, decides to halt construction.

The current NZ government is working with developers to develop mixed income housing of 6,400 social homes by 2022 and it remains to be seen if that will deliver.