A recent study on housing in The Economist questioned the unthinkable: are high rates of home ownership really a good thing? The study argued that countries that do have high rates have tended to offer housing tax breaks and allowed NIMBYs to restrict building.
Sound familiar? Let's go down the rabbit hole to see how this argument plays out in New Zealand.
The incentive of high home ownership
The goal of having high rates of home ownership entices politicians to enact laws and deliver subsidies that inflate home asset prices. When house prices rise faster than inflation and wages, this facilitates a transfer of wealth from those who don't own their home, to those that do.
What does “transfer of wealth” mean exactly? Let’s backtrack a little bit and start with asset prices. An asset’s price is simply a promise of future income. If you’re willing to pay an even higher price, you’re betting that the asset will return that additional investment over time, usually more.
What determines house prices?
Because buying a house as an owner-occupier doesn’t generate a cash income, we look at what benefit is received, also known as “income in kind”. In the case of housing, this is known as imputed rent. Imputed rent is the rent a homeowner pays to themselves with no cash transfer, i.e. the rent they would otherwise pay to a landlord if renting a house.
If housing is viewed to be an asset, when prices rise that means the rent they generate has risen or is considered likely to rise in the future. Since rents have outstripped wages since the 1990s, it makes sense that house prices have too. What’s more, rents are generally a factor in supply and demand for accommodation, i.e. housing supply vs population. And in New Zealand this equation has been heavily weighted on the side of rising population, without the commensurate increase in supply to meet that population’s needs.
So by “transfer of wealth”, I mean that renters are paying a greater proportion of their cash income to landlords, and home-owners are receiving a greater share of income from their own homes in the form of rent they don’t pay out of their wages. Having paid for their housing costs, homeowners work out wealthier (which is reflected in house prices) and renters work out poorer.
Now, I know it may seem easy to blame landlords for this phenomenon, as they are benefiting from the growing population and significant restrictions on and lack of housing supply. But the reality is that the politics of home ownership have led to significant capital gains from housing. Most landlords are in the game to sell the service of accommodation, usually at a rate of 3–5% return on their investment. Given the right conditions, they compete on these margins, as seen in other countries that have plenty of supply. If we bring down the cost of housing, we bring down the price of rent and vice versa.
Back to politics and the incentive of home ownership. Thanks to house-purchase subsidies and incentives, homeowners are the largest demographic in the country and a voting block that is very hard to ignore. Wanting to be re-elected gives you every incentive to make them richer.
That is how politics works (particularly for the major parties National and Labour): suggesting and introducing policies that appeal to the largest cohorts of voters. This is how New Zealand has worked since homeownership rose from the 1950s onward. In other countries such as Germany, house prices have remained relatively flat since the 1980s, and home ownership rates are around 50%, whereas New Zealand’s rate oscillates around 65–75%. Remember “imputed rent”, which I mentioned earlier? Some European countries tax that. Others offer an equivalent tax break on retirement savings (think KiwiSaver) to encourage people to invest there rather than in housing. Germany does a bit of both.
Yet in New Zealand, because no cash changes hands, no tax liability is created. This is the country’s biggest housing tax break, and the single largest contributor to the demand and savings culture around home ownership. It is perfectly rational for everyone to want to own their own home – it is the magical force that keeps house prices levitating above the level of a reasonable return on a rental property. Why else do you think New Zealand has this artificial and irregular housing market that "doubles every 10 years"? Because most of us get richer from it, and we vote for it.
The sprawl of decision-making
The incentive of the housing tax break permeates all national decision-making, from the restrictive Resource Management Act and land-use restrictions, to infrastructure funding for councils. What council funding mechanisms there are have been increasingly limited, which has resulted in struggling water infrastructure, limited housing developments, and high levels of council debt. Large debts make it difficult for councils to invest in new developments, which they have to finance from their existing and future pool of rates. Without capital to invest in new developments, they can either simply maintain what they have or increase rates. How many of your local councillors campaigned on rate rises?
Urban sprawl has been a significant design constraint on building new housing. It’s a high-cost approach because you get less housing (i.e. rates) for your infrastructure and vice versa. And with no incentive to infill or upfill (increasing accommodation density per square metre of residential land), towns and cities have slowly bloated outwards whenever it’s been affordable to do so. NIMBY groups generally won't let you “build up” near them either, so even if a council tried to infill or upfill, it would have to fight an uphill battle against their ratepayer (i.e. voter) base to do so.
Furthermore, this approach has inevitably resulted in residential spatial planning that is utterly reliant on cars for transportation. New Zealand’s rate of car ownership per capita is now disproportionately high – the highest in the OECD. Sprawl makes cars far more useful than they would otherwise be and public transport far less appealing. Why do you think our "transformational" Government has only continued to break record levels of investment in roading projects? Because we love cars too much, and we vote for them.
An age-old approach to a new-age problem
How can we expect an appropriate government response to climate change when all our environmental challenges are directly influenced and amplified by the way we design our cities? And how do we deal with the strong opposition to change from the home-owning class (more than half of the population), which loves to see their house and land get more valuable and doesn’t want apartment blocks or townhouse strips to block or sully their views (amenity value).
With an ageing population that lives on widely spaced plots within urban boundaries, in empty nests with no incentive to downsize, it's no surprise that the price of inner-city homes has sky-rocketed. Nor that no denser developments are being built to house the growing population of workers who simply want access to the most profitable jobs. Why do you think NIMBYs work so hard to block new builds? It typically raises the value arbitrage in their own homes, and we vote for that.
The end of the boom era
This situation is only going to get worse unless something changes. The Baby Boomer generation, which makes up the majority of the home-owning cohort (I'm not blaming you, you're just part of a population boom that governments have consistently sought to serve), is beginning to retire in the largest numbers of any generation ever. Superannuation is paid for by the workers of today and of tomorrow. The NZ Super Fund cannot sustain the amount of superannuation necessary to fund more than twice the current number of retirees.
For tomorrow’s workers to be as productive as possible and to pay for this super, they need access to profitable jobs. Urban sprawl increasingly forces workers to live further and further away from these jobs, which tends to increase living costs. The most efficient way to get to work is to drive, and we pay through the nose in transport costs because public transport is logistically inefficient in such vast sprawl.
Because urban development is failing to keep up with the out-of-control demand for accommodation, caused by record-levels of immigration and tourism, we bid up the price of houses that are further away from the cities and jobs. We are paying record levels of debt or rent for these houses, all after we've paid the largest chunk of our taxes to retired annuitants who have no incentive to downsize and make way for the next generation of workers.
After forking out housing costs and taxes to fund this cohort of relatively unproductive retiree voters, we have much less income left with which to raise our families. Our children are paying the price, and will continue to do so. Children lose precious time with their parents to longer working hours and commutes, and many get poorer-quality food and live in lower-quality homes. They may also suffer significant displacement, since 60% of renters are families and all renters change homes on average once per year, which can have damaging social costs. New Zealand has among the lowest levels of elderly poverty and the highest of child poverty in the world. We are lowering the living standards of the next generation to pay for the higher living standards enjoyed by retirees.
Why do you think New Zealand has the most generous superannuation scheme relative to productivity per capita in the OECD? Because politicians have delivered policies to enrich the largest voting block at everyone’s expense, and we vote for it.
High housing costs mean high everything costs
Urban sprawl has increased the layers of costs all over New Zealand in just about every sector. For example, because there is no effective rail-based freight network strategically placed around production and industrial zones, goods and food are mostly transported by truck. More trucks stress the roads, which we pay for in fuel taxes that in turn are added to the cost of both transport and food. We also pay premium prices for the best rural land for dairy and livestock farms, and especially orchards, because the most fertile land lies on urban boundaries. This is no surprise given that many older settlements were centred around farming colonies, and spread out from there.
The higher marginal cost of producing land-born goods like fruit and vegetables means local suppliers raise the gross price to remain profitable. Think of it this way: a producer who charges a 30% gross margin on a base cost of $5 charges $6.50. Another producer with a base cost of $6 needs to charge $7.80 to get the same return on their investment – a difference of $1.30. Although it doesn’t sound like much, if all your goods are 20% more expensive, it certainly adds up at the checkout every week – and that’s before you add on GST.
The cost of these healthy foods therefore generally creeps up in tandem with land prices, as a direct result of competing with urban sprawl. Livestock and dairy have largely evaded this issue by seeking out remote pastures away from the cities, but as we've become aware, there's a lot of contention around the resulting environmental costs.
Since most of our productive rural land lies on the outskirts of urban residential zones, when we try to increase housing supply by extending urban boundaries, the most fertile land becomes a lot more expensive and useful as housing land. If we want to increase housing supply, we must work within existing urban boundaries instead of eating into the areas that produce food.
Why do you think New Zealand imports some foods cheaper than sourcing it locally, and exports so much of our produce to richer countries? Because we made primary production less alluring than home ownership, and we vote for it.
But there is still hope
This is the beginning of the end for New Zealand. If we don't change how we do things now or how we talk about these low-level systemic issues that permeate society, we have no chance of providing a higher standard of living for our families/whānau and young people, and eventually even the retiring Baby Boomers on whose shoulders this society was built.
All it takes to change this is to vote into Parliament representation for the generation that is subsidising the wealth of homeowners. These representatives need to understand the core issues and propose real solutions to rejig the entire incentive structure in our economy that landed us here.
We need to start from scratch with a new plan, for a better future. A future where all Kiwis have equal opportunity to access the fundamentals for a healthy and prosperous life. Where no one gets left behind simply because they weren't born into a family that owns houses. Where we stop obsessing over "the property ladder", "home ownership", and "first-home buyers", and any other permutation of housing as an asset to own. Where accommodation is viewed as a necessary, basic infrastructure service for a thriving society offered via a fair and dynamic market.
We can't get rich by ignoring the needs of our kids and future generations. If we don't change how we build our country into the future, everyone will pay the price, and we would have voted for it.
TOP has a plan to make rents and house prices affordable again. The most ambitious Housing Supply Policy Aotearoa New Zealand has seen in decades (here).
Adam Parsons is an IT consultant with a background in the banking and financial sector. He is a member of and volunteer for The Opportunities Party.