Housing affordability - How can we claw our way back?

"It's affordable for now and we don't tend to deal with things until they are well and truly broken,". Economist Shamubeel Eaqub.

This unfortunate truth has loud ringing consequences. Eaqub was here commenting on our superannuation, however the premise is as true for Super as it is for our housing market, the state of our lakes and rivers, our growing income & wealth inequality, and child poverty, mental health et al. Depending on who you talk to, everyone one of the ‘things’ listed above could be considered broken, however none quite so much as our housing market which is so far past the point of needing to be ‘dealt with’ that one gets the impression that maybe it’s just been put in the too hard basket.

In a rich country like New Zealand, having access to a warm, dry, safe house is a human right. Yet, as it stands, we have some 300,000 New Zealanders whom are being denied this right. On the flip side 60% of our population own a house. Most of these folk are doing pretty well, especially when you consider that the average house price rose around $50,000 last year ( that’s more than most kiwis earn). When you look at the two groups (home owners and non-home owners) the disparity in wealth is phenomenal and becoming moreso the more expensive property ownership becomes.

That raises the question of why, if property ownership is so difficult, more and more people don’t just rent and be happy? Why is home ownership such a holy grail for New Zealanders that we will bust our balls to get on the ownership ladder, no matter that it is so much harder? One of the two fundamentals driving a sustained excess demand for housing is a dysfunctional tenancy market. Tenants are able to be kicked from pillar to post by landlords and this imbalance makes renting an unattractive long term proposition for anyone. In Europe it is common for leases to be long (sometimes even life long) so long as the tenant pays the rent & upkeeps the property. Landlords cannot boot people out at will, even if they sell they often have to do so with the tenant still in situ. In other words tenancy agreements are commonly long term contracts and those give tenants security of tenure, and establish security for tenant families.

No such orderly market exists in New Zealand. The rental market plays second fiddle to what is the primary driver of property prices – a sustained excess demand for ownership. A home is not just a home, it is an investment because of the main loophole in our income tax regime, the tax loophole afforded owners. It is to maximize the benefit of this loophole that is the driver for people to invest in homes that are far more elaborate than their accommodation needs. It is a hugely tax efficient way to accumulate wealth, we all know that so we all keep trying to buy the most expensive house we can and of course that act in itself underpins the long term escalation of house prices. Get rid of the tax break and you will get rid of this unproductive investment of capital.

Let me elaborate. Can anybody actually justify the following? Three people save up from their tax paid income $500k. The first buys a bank deposit with the proceeds and pays tax on the annual benefit (the interest earned). The second buys a business and pays tax on the annual benefit (profits). The third buys a house and does not pay any tax on the annual benefit received (the roof over their head). There is nothing equitable about this situation and the impact it has is self explanatory – people invest as much of their savings as they can in their home (and keep doing it by trading up). That activity explains the excess demand for housing and why prices keep escalating over decades compared to income.

There is no justification for this disparity and yet there is no politician who is prepared to address it. Why on earth should we be surprised at the outcome – house price escalation, tenant instability and yawning inequality?

We are continually told that the problem is supply – that we need to build more houses. There is no evidence the drive of the disparity is lack of supply at all yet there is a compelling explanation as to why the disparity is the result of an artificially boosted level of demand – artificial in that it is driven by the tax break described above.

Can anybody show that this is not so?

Of course they can’t – and yet we have politicians and apologists for the gulf between demand and supply, falling over themselves to claim supply shortages are the problem. Shamubeel Eaqub suggests we should build 500,000 more houses. There is no proof that supply shortage is the problem, none whatsoever – yet rather than confront the sacred cow of tax breaks for property ownership, we get these silly suggestions that we need to just keep building and building.

The argument is disingenuous to be polite.

Gareth Morgan - Gareth@top.org.nz

Andrew Courtney - Andrewc@top.org.nz

 


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