Home truths: Buying a home in New Zealand

By Chris Barton

According to the 5th Annual Demographia International Housing Affordability Survey, buying a home in New Zealand is prohibitively expensive due largely to planners.
The reality, however, is far more complex.

In this instance, coming second to Australia is not so bad. The Aussies are the undisputed world champions in unaffordable housing - a home in the lucky country costs 6.3 times the average annual household income.

But New Zealand is not far behind. Buying a house in Godzone is prohibitively expensive too - 5.7 times average household earnings. Crikey. That's almost double the rule of thumb for affordable homes - that they should cost no more than three times annual household income. In Canada the "median multiple" is just 3.5. And in the United States, it's 3.2. How the hell did things get so out of whack Downunder?

According to the 5th Annual Demographia International Housing Affordability Survey, the root of the problem is planners - specifically the way their zoning rules and regulations constrain the supply of land.

Free up the supply of land, especially at the city fringes, says Demographia and housing will become affordable again. More suburban sprawl brings housing for all.

What may be surprising about Demographia's analysis is not that it reflects a property developer's ultimate fantasy, but that the Government is buying its message.

"National understands there'll be property cycles, but the recent cycle has been so extreme as to suggest there are fundamental problems with how the market is operating, notably around the supply of land," said Housing Minister Phil Heatley last week.

"This research proves that many first-home buyers are excluded from entering the property market by a number of factors, including restrictive zoning and consent laws, which not only make life difficult for ordinary Kiwis but are major factors in New Zealand's poor productivity and economic growth levels."

Actually, the research doesn't prove anything about restrictive planning. And before jumping on the Demographia bandwagon, the minister might want to take a closer look at the survey.

The non-profit social change agency, Shelter New South Wales, commissioned research in October 2008 to do just that. It found the overarching methodology flawed, pointing out that it includes all house prices across an entire city - multimillion-dollar properties alongside lower cost homes.

That can easily give a skewed impression. "A city with a high median multiple might have large numbers of affordable properties that operate as separate housing markets in the city," says the research. Demographia only includes home purchases, excluding dwellings in the public and private rental sector, which are important sources of affordable housing supply.

Andrew Coleman of Motu Economic and Public Policy Research is concerned too that Demographia's analysis doesn't take into account the essential financing cost of a house over an extended period of time. "For most of the last decade New Zealand has the highest interest rates in the OECD, so that makes housing far less affordable in New Zealand than elsewhere."

Another feature not taken into account is the increase in the average size of new houses in New Zealand - from about 130 square metres in 1990 to just under 200 square metres today. He notes too that the boom in house prices in New Zealand has occurred in places like Timaru which have few problems with land availability. "It's not really obvious that we have constraints in finding sites to build on ."

Shelter NSW's research argues housing affordability is a complex mix of supply and demand variables including income levels, employment trends, access to (and the cost of) finance, demographic shifts, and housing preferences.

"The Demographia surveys reduce this very complex issue to a simple casual relationship between house prices and assumed planning constraints on land supply," says the research.

The research takes issue with Demographia's claim there is an economic consensus regarding the role of "prescriptive planning" in causing housing affordability loss.

Demographia: "There is a growing consensus that more land must be made available on the urban fringe to accommodate new residences and that a competitive land market needs to be restored."

Shelter NSW: "Most authoritative economic sources focus on demand factors (eg falling real interest rates, strong economic growth, immigration rates, and, in some countries, weakening lending standards and easy credit) to explain house price growth..."

Shelter NSW's research also criticises that lack of empirical data on whether a city's planning regime is "prescriptive" (bad) or "responsive" (good) and concludes that Demographia's planning data "conveniently reflects the subjective impressions of the authors."

But while Demographia's view may be understandable, given that one of its authors is Christchurch property developer Hugh Pavletich, the overall finding that housing here, and especially the land component, is overpriced, can't be denied.

Other housing affordability indexes paint a similar unaffordable picture. But unlike Demographia, they focus on the cost of mortgages and highlight the fact that - thanks to falling house prices and falling interest rates - the tide is turning rather sharply.

Interest.co.nz shows that it now takes 59.6 per cent of one median after-tax income to pay the mortgage on a median priced house purchased in December, down from November's 63.8 per cent. The index was a whopping 81.1 per cent a year ago and 52.3 per cent five years ago. It reached its highest point - 82.9 per cent - in November 2007.

But as Interest.co.nz managing editor Bernard Hickey points out, while prospects are improving, housing is still out of reach for most. "We reckon housing isn't affordable again until we get near the 40 per cent mark, where it was in 2002 and early 2003."

For household incomes the picture looks better. "Median-priced housing is now affordable for families in New Zealand when both adults work," says the website. On this measure it now takes 38.9 per cent of a median household take-home pay to service a mortgage of a median home purchased in December. That's down from 41.6 per cent in the previous month and a year ago, when it was 52.8 per cent. But it's not as good as five years ago when the index was 34.5 per cent.

First-time buyers, however, continue to struggle. It now takes 52.2 per cent of one median income of a person in the 25-29 age group to pay the mortgage on a lower-quartile priced house in December, down from November's 54.4 per cent.

"Essentially a single median income for a first-home buyer is not high enough to buy a lower-quartile priced house, even with a deposit around 10 per cent of the house's value," says the website. "However, a couple/family with more than one income may find the lower-quartile house price is affordable."

Massey University's Home Affordability Index to November paints a similar picture - showing affordability improved 4.6 per cent over the last 12 months. The national index is based on median house prices, average personal income and mortgage interest rates. In November it was 32.31 - still a long way off an affordable 20 last seen in November 2002. (A low index equals improved affordability).

But just when the trend towards affordability is improving, a new barrier has emerged - the banks' increased deposit requirements. Whereas in the past, banks regularly lent 95 per cent and sometimes 100 per cent of the mortgage, they now require a 20 per cent deposit. "Based on current income and house prices it will take an individual 8.2 years to save the 20 per cent deposit as now required by most banks," says Interest.co.nz. A first-time buyer wanting a lower quartile priced house will struggle too - taking 6.6 years to save the 20 per cent deposit as now required by most banks.

Despite such hurdles ahead, Demographia maintains freeing-up land on the fringe of metropolitan urban limits will save the day. Pull up the boundary fence and let the city limits push out. In its vision of suburban paradise, Demographia does not dwell on the downside - that a more sprawled-out Auckland for example would result in increased infrastructure, transport and social costs.

There's another problem too. Changing zoning laws doesn't automatically lead to cheaper land - especially when greenfields land is concentrated in the hands of a few land-bankers.

Professor Bob Hargreaves, of Massey University's Property Foundation, points out that the land-bankers would need some other incentive to sell. "Research shows that freeing up the land doesn't make much difference. The reality is, it's not in the developers' interest to suddenly dump a lot of sections on the market at low prices. There has to be some penalty on developers if they just sit on land and don't bring it into the market, but I'm not sure on how you do that."

From a developers point of view, Hargreaves says it makes sense to corner the market and drip-feed sections on to the market to get a higher price.

A closer look at Demographia's list of 87 "affordable" housing markets in North America gives new meaning to the word. "Is it any coincidence that the top 20 most affordable markets are in economically distressed regions?" asks Keith Hall, chief executive of the New Zealand Planning Institute and a member of the American Institute of Certified Planners. "These are mostly the 'rust belt' cities of the American Midwest and neighbouring Ontario in Canada, areas chronically plagued by high unemployment among predominantly blue collar auto industry workers. The one exception to the auto-steel industry connection among the top 20 is a community on the equally distressed Atlantic Coast of Canada."

Hall, who stresses his views are his own and not the official position of the New Zealand Planning Institute or American Planning Association, says many of the cities in Demographia's affordable regions are mostly inland cities in the vast Midwestern flatlands of humid summers and extremely cold winters. "The first Sunbelt city on the list, Killeen, is best known for its large Army base, and a 1990s mass murder that made global headlines."

Unplanned and unzoned Houston is often touted as an example of how the lack of growth management and the absence of planning can maintain regional affordability. But the irony of Houston is that it's a city with lots of planners. "That is where I began my career in planning," says Hall.

Yes, planning processes in Houston are certainly different, and both the regulatory environment and the flat coastal landscape allow unabated sprawl in nearly every direction. But, says Hall, a key advantage to Houston's system of planning is that it has facilitated central city intensification. "Even in free market Houston, there is strong demand for high quality, medium and high density housing in walkable, mixed-use neighbourhoods with good public transport access."

Hall also owns a house in Houston - a convenient six blocks from a tram line that passes close to every sports stadium, most of the city's world-class museums and performance venues, two universities, and the headquarters of many corporations. The convenience did not happen through random dropping of a sports stadium here and a museum there says Hall. Planning took place to ensure that these major investments captured "the synergies of co-location".

As to affordability, Hall points out that while mortgage interest rates are significantly less in the United States, property rates, insurance, and utilities costs offset Houston's affordability when compared to Auckland.

Looking at Demographia's 64 "severely unaffordable" housing markets in North America, Hall notes most are coastal cities and many are near mountains. "Never mind the artificial constraints that politicians place on these cities with their growth management and zoning regulations, these cities face real limitations on growth in constrained geographies."

"If you want to live in an affordable housing market, why not move to the most affordable city on the list?", says Hall. Homes are affordable in Youngstown in Ohio because more people are relocating away from, rather than to this prime location also known as "Murder City," and offering the "Youngstown Tune-Up" - auto worker slang for the city's frequent car bomb assassinations.

A close reading of the Demographia data shows "affordable housing" is found largely in flat terrain with extreme climates, high levels of crime, dying economies, few natural amenities, and limited prospects for academic and professional achievement for the next generation.

But Hall, like Shelter NSW, says the value of the Demographia reports is that they highlight housing affordability issues and serve as starting point for a dialogue between developers, planners, economists, banks and government that urgently needs to happen.

Hall agrees there are planning and growth management challenges in the mix, but other complex issues also contribute to the problem. If a dialogue were to occur, Hall and others say the taboo subject of a capital gains tax on investment property should be on the agenda. So should government incentives for first-time buyers such as cheap interest and suspensory loans - especially for new houses.

And, if the Government is serious about finding ways to stimulate the economy, getting builders out there building - invigorating a supply chain that reaches all the way back into our forests - seems a good place to start.

- NZ Herald

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