Dr Matthew Birchall: The generational housing divide

Home ownership is not as easy to achieve for many younger Kiwis compared with previous generations.

OPINION

Like many young Kiwis, I was surprised to learn during the election campaign that Chris Hipkins and Christopher Luxon both bought their first homes at the tender age of 24.

As someone who has recently written on the history of housing in New Zealand, I should not have been so surprised. New Zealand has long been a houseproud nation, and for much of the 20th century, the “quarter-acre dream” was a reality for many Kiwis – the two Chrises included.

And still, the number 24 nagged.

The reason is simple: for many young New Zealanders, the idea of owning a home in their mid-20s seems like a pipedream. Our country’s exorbitant house prices are among the least affordable in the world.

In Wellington, where our current and future prime ministers first entered the property market, the median home costs a shade under seven times the median annual household income. This median multiple serves as an international benchmark for gauging housing affordability; three or lower is broadly acknowledged as indicating a healthy and affordable housing market.

Unfortunately, none of New Zealand’s major towns or cities come close to hitting the mark. As of September 2023, Interest.co.nz reports that Whangarei is 6.4; Auckland metro is 8.88; Hamilton is 6.9; Tauranga is 8.29; Rotorua is 5.57; Napier is 6.92; Palmerston North is 5.74; Christchurch is 6.36; Dunedin is 6.19; Queenstown-Lakes is 14.86. The list could go on.

These numbers paint a bleak picture for aspiring homeowners – and for the young in particular. Without financial assistance from the bank of mum and dad, many millennials and members of Generation Z will find themselves trapped in the rental market. Fewer young Kiwis will own homes than their parents’ and grandparents’ generations.

This will have, and already has had, profound social and economic costs. Unaffordable housing is a cause of poverty; it limits labour mobility; and it creates social division by splitting society into property owners and those permanently locked out of the market.

What is more, it makes moving abroad an increasingly attractive proposition for our best and brightest. Housing unaffordability, in other words, has the potential to turbocharge New Zealand’s long-standing brain drain.

What can the incoming government do to finally tackle the housing crisis and ensure New Zealand once again becomes a country where the young can get ahead?

Over the past decade, The New Zealand Initiative has produced a substantial body of research that explains how New Zealand can restore affordability to its housing market. We have examined, among other things, the historical origins of today’s housing crisis, the impact that local government incentives have had on the housing market and the pernicious effects of New Zealand’s planning system on land supply. Our key findings are distilled in the housing section of Prescription for Prosperity: 2023 Briefing to the Incoming Government.

The fundamental cause of housing unaffordability is a lack of supply. Therefore, the Initiative proposes reforms that would make it easier to build up and out. In particular, reforms to local government and the planning system would help unlock the development New Zealand so desperately needs.

Better incentives for local councils would be a great place to start.

Councils do not currently receive enough of the benefits that accompany new housing and development. While central government takes the lion’s share of the increased tax revenue that comes with population growth, local government must scramble to pay for new infrastructure. Diverting some of this extra revenue to local councils would give them incentives and resources to fund necessary development. National’s build-for-growth incentive payments and Act’s GST-sharing scheme will be steps in the right direction.

Local government incentives should be accompanied by new tools for funding and financing infrastructure.

Long-term infrastructure bonds, backed by specific revenue streams and without recourse to councils’ main balance sheets, would enable project costs to be spread over the usable lifetime of what are some of the country’s most expensive assets. This would enable councils to fund the infrastructure necessary to accommodate urban growth.

While revenue bonds constitute more than 60 per cent of municipal debt in the United States, it is worth noting they were previously widespread in New Zealand as well. They helped fund a diverse range of projects, from the Ngaio Town Hall to the Auckland Harbour Bridge, as highlighted by the Initiative’s chief economist Eric Crampton in Funding the Future: The Case for Special Purpose Bonds. An incoming government serious about tackling New Zealand’s interlinked housing and infrastructure crisis should look to strengthen the Infrastructure Funding and Financing Act to enable more project-based financing.

New Zealand’s planning system also needs reform.

Although it has become much easier to build up, the restrictions on building out have not eased. The Infrastructure Commission has found that urban boundaries add more than $600,000 to the cost of a 500sq m section at Auckland’s fringes. This dynamic at the rural-urban boundary filters through to the price of even a downtown apartment, pushing up house prices across the city. The incoming government should abolish growth boundaries, which artificially limit the amount of land that can be developed and impose a premium on urban land.

Height and density controls should also be removed. These controls limit the allowable amount of housing in areas with high demand, such as Auckland Central or downtown Wellington. Abolishing them would allow developers to build taller and denser buildings, increasing the housing supply in areas where it is most needed. Although politically problematic, National would be wise to recommit to the Medium Density Residential Standards, which made it easier to build up to three homes of up to three storeys in inner cities.

Broader changes to New Zealand’s planning regime, such as reform of the Resource Management Act, will undoubtedly be needed in the longer term. But, to start with, the incoming government could do a world of good by equipping local government with better incentives and funding mechanisms. If complemented by changes that make it easier to build up and out, future Kiwis may find the prospect of homeownership at the age of 24 less astounding than I did.

- Dr Matthew Birchall is a research fellow at the New Zealand Initiative.