Credit: Original article can be found here
The Reserve Bank is under attack for pouring fuel on the house price bonfire with its latest move to boost the economy, but its defenders say it’s not the bank’s job to control the housing market.
An overheated housing market is not a problem unique to New Zealand but some countries boast stable, balanced markets – so how have they achieved that?
New Zealand is in the midst of a housing crisis. House prices are sky-rocketing, affordability is increasingly stretched and there’s still a huge imbalance between supply and demand.
While 64.5 per cent of households own their home, home ownership is at the lowest level since 1951 and homelessness is on the rise.
New Zealand is not alone in confronting such issues. Countries like Australia, Canada and the UK have ownership rates of around the same level as New Zealand, expensive house prices in their major cities and affordability challenges.
Motu Research senior fellow Arthur Grimes says that all the Anglo-Saxon countries have done poorly in terms of dealing with rising house prices and affordability issues. In his view, that’s largely due to the restrictive planning culture they share.
But there are markets in other parts of the world where house prices are stable and affordability is not an issue. And there are also areas which have had housing supply shortages and addressed them.
Germany is often cited as an example of a well-functioning housing market and it has maintained stable house prices for decades. One reason for this is the dominance and security of its rental market, which means there is not the same pressure to buy as there is in other countries.
Another reason is business tax incentives for local government around housing development. This has left local government keen to encourage and support development, which has ensured supply meets demand.
However, at 51 per cent, the homeownership rate in Germany is much lower than in most developed countries. Additionally, Grimes says a big wave of migration means the country’s population is growing strongly and that has led to increasing pressures in their housing market.
“The reality is that the easiest way to tackle a housing crisis is to be a place where no one wants to live, because slow population growth invariably makes for lower house prices. There are lots of European countries which have low population growth and they have more affordable house prices.”
Slow population growth makes for lower house prices, says Motu senior research fellow, Arthur Grimes.
Looking to countries with markets which have successfully addressed the imbalances between a fast-growing population and a shortage of housing stock provides better examples of possible solutions.
Singapore springs to the fore here. In the early 1960s, it faced a dire housing situation, with most households living in overcrowded slums and squatter settlements. This prompted the government to embark on a massive home building scheme.
While it was rental housing that was initially built, homeownership was the ultimate goal. From the late 1960s, residents were able to access funds from their social security accounts both for down payments and to assist in servicing their mortgages.
According to the latest Demographia Housing Affordability survey, Singapore now has a homeownership rate of 90 per cent, one of the highest in the world. It also has an after-grant price for averaged-sized new houses of 3.3 times the median household income.
While Japan has been lauded for its urban planning and house building policies, it has a population which is declining. However, Tokyo is a different case as its population has grown since the 1960s. It has also seen an improvement in housing affordability since the 1980s.
Economist Michael Reddell says the Tokyo example is an interesting one because while the house price to income ratio has been reasonably stable over the last 20 years, it comes in the wake of the huge property boom Japan experienced in the 1980s.
Tokyo has an urban planning system which makes it easy to build dwellings.
“It was hyperinflated and even led to people taking out 100-year mortgages and bequeathing them to their grandchildren. When that came to an end there was a significant market correction. But a less restrictive approach to planning was also adopted.”
The end result was an urban planning system which makes it easy to build – although the type of properties built tend to have a lifespan of 30 to 40 years, so rebuilding properties is a feature of the market. Reddell says that’s a housing concept that would be alien to many New Zealanders.
“It’s not clear this system does produce the sort of houses that would be attractive to Kiwis as well as affordable house prices. It’s hard to get good data on Tokyo house prices, but what you get for your money isn’t that good. You get small apartments and, relatively speaking, they are quite expensive.”
Singapore is different again as it has an unusual and intricate market system. Additionally, it’s hard to find reliable house price to income information and square it up with the metrics necessary to make valid comparisons.
Reddell says the fact that Singapore did not start its housing scheme from a position of ridiculously high house prices is also significant. The same applies to a country like Sweden which famously enacted, and achieved, a “one million homes” building project over 10 years from 1964.
In fact, massive building programmes in themselves are not the way out of a housing crisis. Issues like land supply, planning rules and infrastructure funding must be addressed as well. It’s for that reason that all of those interviewed for this article say the markets to look to for examples of affordable housing being maintained in the face of population growth are in the United States.
Innovative approaches to planning and infrastructure funding make all the difference, according to the NZ Initiative’s Eric Crampton.
These markets are ones like Atlanta [median house sale price US$325,000 in November 2020], Houston [median list price US$308,300], Phoenix [median sale price US$318,000 in March] and Little Rock in Arkansas [median sale price US$212,400].
NZ Initiative chief economist Dr Eric Crampton says the common thread between these markets, and ones like them in other US states, is in the way they approach zoning and planning, as well as how they manage infrastructure funding.
For example, Atlanta and Houston make use of Municipal Utility Districts [MUDs] to fund infrastructure services. They are typically financed through the sale of bonds which, in turn, are serviced by the taxes levied and collected by the MUD.
Phoenix takes another approach. It has a capital improvement program budget for the construction of new, or major repairs of existing, facilities and infrastructure. It is funded through various means, including bonds which are loans from investors that the city must repay with interest.
Such systems mean developers are not held hostage or hampered by Councils which are hamstrung by debt and can’t afford to bear the risk, Crampton says. “Councils are insulated from liability and they are also incentivised to push for growth and development.
“It means you have a city like Atlanta, which has one of the fastest growing populations in the US, but still has affordable house prices. Take a look at what you can buy there for $500,000 and it will make you cry! You can get a near mansion close to downtown Atlanta for that price.”
New legislation which relaxes planning rules should help to make housing more affordable – eventually.
New Zealand policymakers have started to look to these types of systems for inspiration. Former Urban Development minister Phil Twyford’s Infrastructure Funding and Finance Act, which passed into law earlier this year, was influenced by the MUD concept.
Commentators Stuff spoke to were uncertain about how much impact the IFF Act, and any potential reform of the Resource Management Act, might have on New Zealand’s housing market.
But they say such changes are a step in the right direction.
Housing affordability researcher Hugh Paveletich believes the new legislation, which relaxes planning rules and allows councils to pay for infrastructure over time, will make housing more affordable eventually. But more needs to be learnt from overseas markets which have successfully managed to maintain housing affordability.
“More land needs to be freed up for development, production building needs to be ramped up and we need a courageous politician to make the necessary changes. Still, we are making progress in the usual muddled political way.”