Young People and Housing Affordability

Day in, day out - there seems to be some sort of article about housing affordability. One day there's an article on interest rates and what it means for mortgage holders, the next day there's a report from a real estate agency on the current trends in the residential housing market, and the day after that is an editorial by someone who sounds like they vaguely know what they're talking about.

There's no doubt that housing affordability is a big issue, and the people who should be most concerned are young people. We haven't even begun to think about getting a house, and yet we're being told they're already unaffordable. To get a foot in the door, it seems almost impossible.

So, what is the problem?

The issue of housing affordability comes down to two halves - the price of the house, and the money people can access to buy a house. Both sides of the equation have problems that together, create the messy and complex issue that is housing affordability.ᅠ

On the market; house prices in New Zealand have increased tremendously in the last 15 or so years, because the supply of houses is fairly static. We don't build houses fast enough to meet demand, leaving a shortfall that is expected to reach a deficit of 90575 fewer houses than we need. Main factors include difficulty obtaining resource consents, the soaring costs of building materials, inefficiencies in the construction sector, and especially in Auckland - acute scarcity of land available for building on.ᅠ

With too few houses and too many prospective homeowners, speculation on housing is immense.

But to buy a house, you need money - but in more ways than you'd think. Kiwis are offered some impressive finance opportunities for houses, with lending criteria for mortgages allowing people to put down minimal deposits and take out big mortgages with low interest rates. Retail banks like Kiwibank allow customers to borrow 95% of the cost of a house at 5.5% interest per year. A 30 year mortgage for a half million dollar house (median price from in Auckland May 2012) would mean weekly repayments of just $621 with this criteria - which is considered affordable for the average Auckland household with an income of $1423 per week.

Young people are at an extreme disadvantage because we are not the average or median, in fact we are well below them. We are starting out with low wages and very low savings (not to mention student loans, overdrafts, and credit card debts), which means we have to start from the bottom somehow.ᅠ

Good economics and population dynamics would suggest we buy the cheapest property we can find, and trade up to better houses when our first house appreciates and our incomes rise.ᅠThe challenge to get a foot on the property ladder, and then to climb it, seems impossible in today's housing market - which is why so many of us are preferring to rent.ᅠ

With house prices so high and continuing to rise, the deposit required to get on board is becoming dauntingly large, even with government subsidies and schemes like Kiwisaver and Welcome Home loans.
Young people who are lucky enough to already own their first house are no better off either; income mobility is becoming difficult, wage increases are low, and yet house prices are rising faster and faster - so we'll be lucky to get any higher on the property ladder.ᅠ

While we could complain that this is just an Auckland issue (with the Auckland-based New Zealand Herald reporting most often about it), other parts of the country are beginning to feel it too. Even with the Canterbury earthquakes, the Christchurch property market is seeing steep price hikes. Auckland is experiencing the issue most acutely, because housing supply is particularly inflexible to the huge growth in population. With even more people expected to move to Auckland in the next 20 years the issue of housing affordability is set to get worse even faster.

Being the complex and sensitive issue that it is, housing affordability can't be solved by blunt tools or token gestures. Proposals to tackle the issue include speeding up the resource consent process, pressuring local councils to free up more land for development, introducing a capital gains tax (CGT) for residential property, and a state housing construction scheme. All have their merits, but all have their shortcomings.ᅠ

Resource consents need to be sped up, but they also need to be approved in much greater numbers. Resource consents for new houses have fallen over the last two years, at a time when they need to be increased significantly. Pressuring councils to free up land will be meaningless unless changes in legislation allow developers not only to develop on more land, but to redevelopᅠexistingᅠhouses to meet today's needs.

A CGT has often been promoted for closing a tax loophole for property speculation, but where the majority of capital gains-seekers are home owner-occupiers, this will do very little except to pass on costs to renters - a more vulnerable group than homeowners. A state house building project is very ambitious without legislative changes that allow major development to occur in the first place, such as changes to the building code which will allow houses to be built far more cheaply.

Kiwis see home ownership as one of the hallmarks of the Kiwi lifestyle, indeed an aspiration of the 'Kiwi dream.' Nowadays, it's more of an aspiration and dream than a realistic lifestyle, in fact home ownership is more of an exclusive club than anything else. Without being able to afford to live in the country we call home, it's little wonder so many of us are driven to living overseas.ᅠ

Home ownership is not just about having a roof over our heads, when renting is a comparatively attractive option. Home ownership is important for Kiwis because it serves as an investment;ᅠa dignified nest egg of hard-earned wealth. With our love-affair with houses becoming ever more wild, New Zealand needs to keep the relationship stable to give young people the chance they deserve to live here.ᅠ

Sources:
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1076...
http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10860253
https://www.kiwibank.co.nz/personal-banking/home-loans/home-loan-options...
http://www.enz.org/house-prices-auckland.html
http://www.enz.org/new-zealand-incomes.html
http://www.nbr.co.nz/article/nz-politics-daily-skeptical-reaction-housin...
http://www.productivity.govt.nz/inquiry-content/1509?stage=4

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