Brian Fallow: NZ in 2020 - A nation divided by housing

One household in three are renters. Photo / 123RF

COMMENT:

The country that will go to the polls on September 19 is divided, to a degree once inconceivable, between haves and have-nots.

Nowhere is this more evident than in housing.

Consider the plight of renters — one household in three.

The December 2019 inflation data released last Friday recorded the largest increase in rents for eight years.

Rents have been creeping up relentlessly in real terms. They have risen at a compound annual growth rate of 2.36 per over the past eight years, outstripping CPI inflation of 1.25 per cent.

House prices have risen faster still, of course, three times faster than rents over the same period. That is one of the reasons why New Zealand is seen as having among the most over-priced housing in the world.

But at least the owners of houses see their equity rising — amplified by gearing in the case of those with mortgages.

Indeed, much of the increase in house prices can be explained by a seesaw relationship between interest rates (now at historic lows) and asset prices.

Another driver of house price inflation has been the failure to build anything like enough houses to accommodate population growth, a phenomenon partly explained by perverse incentives in the way we fund local government.

Then there are the baleful effects of distortions in the tax system, which for a generation now has told New Zealanders that if you want to provide for your old age, don't save money; if you do they will tax you every step of the way. Better to borrow as much as the Reserve Bank will allow your bank to lend you, use it to bid up the price of housing, then sit back and enjoy all the benefits of leverage in a rising market, plus imputed rentals (if you are an owner-occupier) or interest deductions (if you are an investor).

Meanwhile, as made clear in the the richly informative Household Incomes reports the Ministry of Social Development releases every year, income inequality is consistently greater when measured after housing costs (rent, mortgage payments, rates and insurance) than before housing costs.

This reflects the fact that lower-income households spend a higher proportion of their incomes on housing than richer ones do.

When households are ranked by disposable (after-tax) income, 40 per cent of those in the bottom quintile, or fifth, spend more than half their income on housing.

For those in that income band who rent privately, three in every four spend more than 40 per cent of their income on housing, the latest MSD incomes report tells us.

It is a similar story when the statisticians reweight the CPI, which is based on spending by the average household, to reflect the different spending patterns of subsets of households.

Those data, called the household living-cost price indices, have rent as 11.4 per cent of all households' spending, but it ranges from just 3.9 per cent for the top quintile of households ranked by income to 17.5 per cent for the bottom quintile (which would include a lot of superannuitant households).

But the most conspicuous proportion going on rent is for beneficiary households, at 32.7 per cent.

Which brings us to the issue of the Accommodation Supplement and the fact that rising rental inflation is a problem not just for tenants, but for taxpayers too.

In the current fiscal year, accommodation assistance transfer payments are forecast to hit $1.84 billion, of which the vast majority ($1.7b) is Accommodation Supplement.

It is up $200 million or 12 per cent on last year, reflecting higher rents, more recipients and the fact that fewer recipients are bumping up against the maximum allowed them following some relaxation of the rules in April 2018. It does not include the $1b of income-related rent subsidies to people in state housing.

Four-fifths of the recipients of Accommodation Supplement, of whom officials estimate there will be 310,00 this year, are in private rental accommodation. The rest are struggling owner-occupiers.

So what we have here is a large amount of money, a subsidy if you will, flowing from taxpayers to landlords, without touching the sides in the sense of alleviating poverty.

That at least is the conclusion of a report for the Child Poverty Action Group (CPAG) last year.

The December 2019 inflation data released last Friday recorded the largest increase in rents for eight years. Photo / Getty Images

It is highly critical of the decision by the National Government in the 1990s to essentially stop building social housing and focus instead on income support — which begs the question: whose income is really being supported, tenants' or landlords'?

"In the absence of adequate complementary housing interventions, the Accommodation Supplement has been moving wealth from the state to the landlord class since its inception. In effect the state has been renting space from a relatively small number of people without accumulating assets for itself or for a large number of low-income tenants," it concludes.

"The result is more tenants, fewer owner-occupiers and more landlords with larger portfolios." The CPAG report argues that even after long-overdue lifting of some scheme parameters in 2018, it still leaves many recipients, even most, below the poverty line, defined as 60 per cent of median income after housing costs. It is expensive but ineffective.

The complex means testing of the Accommodation Supplement has some perverse effects, including very high effective marginal tax rates (EMTRs) which create or compound poverty traps.

"For example a parent on a low income and Accommodation Supplement who earns an extra dollar will lose 25c of [Accommodation Supplement] as well as another 25c of Working for Families tax credits. The extra dollar is also taxed at 17.5 per cent so that the effective marginal tax rate is 67.5 per cent — far higher that New Zealand's top tax rate of 33 per cent."

Even worse is the example of a sole parent with one child who works and earns between $48,000 and $70,000. She will face an EMTR of 81 per cent (including ACC), or 93 per cent if she is paying off a student loan and 96 per cent if in a KiwiSaver scheme.

Discouraging, or what?

Demographic trends will make these numbers worse. A young couple saving up to "get on the housing ladder" face lousy interest rates on their savings, rising rents and rapidly rising house prices.

"Whereas most pre-1991 young adults could reasonably expect to not only own their own home but be mortgage-free by retirement, by the late 2010s this was increasingly a pipe dream," the CPAG report says.

The level of New Zealand Superannuation assumes that by the time people retire they will at least own the roof over their heads. But declining rates of home ownership combined with an ageing population implies that the proportion of Accommodation Supplement going to superannuitants will rise from around 14 per cent now to a much larger share.

If nothing changes, that is.

The underlying problem of not enough housing being built, especially at the affordable end, will take years to correct.

In the meantime, a left-of-centre government seeking re-election, whose books are in good shape, might want to think, as it approaches the May Budget, about the second leg of the strategy CPAG advocates: designing and funding the welfare system, including Working for Families, so that benefit recipients can cover all the basic necessities, including housing, without requiring supplementary assistance in all but the most extraordinary circumstances.