With capital gains tax quashed, property investors are returning to the market at near-record rates. But if mum and dad buy all the houses, what's left for the kids? Kirsty Johnston reports.
It crept up on me, being a landlord. In 2017 I'd moved to Dunedin with my boyfriend, and bought a four-bedroom cottage by the sea, my dream. When we broke up a year later, I thought we'd sell and I'd take my money back to Auckland and invest in a centre-city apartment instead.
"Don't do that," my mortgage broker said. "Buy him out and then get the apartment as well."
At first I thought she was kidding. There was no way any lender would give me a second mortgage, on a single income, particularly not in Auckland, I said. But then I talked to a financial adviser, and the bank. Within three months, with a bit of money shuffling, and a bit of help from Dad, I had two homes, and a tenant, and a terrifying level of debt.
A year later, I think about the impacts of this decision almost all the time. I desperately do not want to own a rental property, both because it's stressful and because ideologically, it leaves me queasy. But each time I think of selling, someone says: "Are you crazy?". Then I do the numbers and I see they're right - there is no better way to invest my money.
Herein lies the problem at the root of both New Zealand's sluggish economy and a deepening generational inequality - we have made it too easy to have our wealth tied to property.
Data revealed by the Herald today shows that up to a third of property in New Zealand is owned by "mum and dad" investors like me, who buy and hold a small-to-medium number of houses, mostly as a form of retirement savings.
For a bit, this group looked to be waning. Their lobby groups, the property associations, had threatened that with cooling prices and possible tax changes, investors would be getting out.
But in the past few months, as the spectre of capital gains tax faded into history, mum and dad are buying again. In fact, CoreLogic data shows that "mortgaged multiple property owners" (ie. investors) accounted for 26 per cent of property purchases by August - levels not seen since the investor zenith just before the Reserve Bank changed the rules about deposits in 2016.
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The greatest increase was those with only one other property - new investors, the data said. The second biggest group was those with three or four houses, looking to expand their portfolio.
"Any investors that are getting out have just been replaced by more investors," says Nick Goodall, from Corelogic. "There's still easy credit, and low interest rates. And once capital gains tax was ruled out, the confidence came back. Investors are saying, we can continue to buy in this market."
Goodall says that growing investor group - even those that own between 10-20 properties - aren't professionals.
"They're going to have a job, they're part-time investors. They'll say, 'what else do I do for my retirement?'. They want a passive income and they know it's successful, so they continue to accumulate to get a portfolio."
Housing now makes up more than half of New Zealand's total investment assets, or 55 per cent. Just over 40 per cent of that is owner-occupied homes, and 13 per cent is investor housing, according to 2018's Tax Working Group report.
It is our biggest investment class by far - comparatively, for example, we have 8 per cent in investor shares and 4 per cent in investor funds.
We invest more in housing than any other developed country. According to an article by journalist Bernard Hickey last year, our housing market was worth $1.13 trillion in 2019, up by more than $1 trillion from $123 billion in 1990.
By that measure, housing is worth 3.9 times our GDP, Hickey says, and more than 7.2 times the value of our stock market. In contrast, America's housing market is worth US$33.3 trillion or 1.6 times its GDP and 1.5 times the value of its stock market.
In other words, housing is New Zealand's default investment choice. It has always been a driving force in our economy, a national preoccupation, a right.
But in the face of a supply crisis coupled with crippling housing unaffordability, it's becoming harder and harder to write off our obsession as benign.
A nation divided by housing
The arguments against over-investing in housing (and correlating high house prices created by such persistent demand) are both social and economic.
Economy-wise, experts say that if so much wealth wasn't tied to property, it could be going into business and creating jobs, which would be more valuable. Anecdotally, many small business owners, faced with expansion or buying properties, will do the latter.
Equally, ANZ economists, in a 2018 Property Focus report said high house prices were limiting New Zealand's economic expansion and productivity. New Zealand routinely underperforms on productivity by OECD standards.
They said high house prices both make it more difficult for younger households to invest in businesses, limiting the entrepreneurial endeavours of younger people; and create barriers to labour mobility and social mobility.
"And to the degree that high house prices are a symptom of excess domestic demand pressure, they will be associated with upward pressure on the real exchange rate, stifling exporting and import-competing activity," they said.
There are also economic risks associated with having extremely high levels of private debt.
Jenny McArthur, a New Zealander who lectures in urban infrastructure and policy at UCL in London, says when house prices are so high the huge amounts of workers' incomes siphoned off to pay mortgages is taken out of the economy - which can trigger a recession.
McArthur also argues that high house prices are creating untold intergenerational inequality. With prices in Auckland now up to ten-times-income, owning property is currently an unachievable dream for many.
"On the numbers, everyone born after 1995 - those turning 25 this year and beginning their working careers - was just born too late for housing to be affordable. Either you can't afford it at all, or you inherit. And we shouldn't want that," McArthur said.
In a Housing Stocktake commissioned by the Minister of Housing and Urban Development last year, the authors wrote New Zealand was "quickly becoming a society divided by the ownership of housing and its related wealth".
Ownership rates had peaked in 1991, it said, a year which was "historically significant" as the year of Ruth Richardson's "mother of all budgets", which ended the state's home-ownership support programmes and commenced the sell-off of the state's mortgage portfolio.
This inequality of ownership is exacerbated by rising rents - now at an average $500 a week - eating into the wages of already-struggling tenants. According to former Salvation Army housing expert Alan Johnson in his report Beyond Renting, renters have poorer quality housing; they pay more of their income in housing costs; and have much less wealth than those who own property.
"On the other hand, not only have landlords more wealth, but they have managed to accumulate more as house prices and rents have continued to rise faster than wages, salaries, pensions and benefits," he says.
A self re-inforcing trend
Using property as a path to wealth is deeply embedded in the New Zealand psyche. Doing up housing and flicking it for a profit fits squarely with Kiwis' egalitarian beliefs - that anyone can succeed if they try hard enough - and the country's strong DIY culture.
New Zealand Herald business editor-at-large Liam Dann says - even in the face of evidence that early egalitarianism has given way to class culture - that emotional attachment is one of the reasons we find it so hard to let go of using property as a commodity.
"Until recently, flipping was celebrated," he says. "When things were more equal it wasn't such a negative thing."
It's also what makes it politically difficult to do anything about regulating property investment.
Not only is it those who already own property who want to keep the system the same, but those who aspire to improve their financial position, too. So when the coalition Government looked at introducing capital gains tax, for example, it wasn't only property owners that felt like something was being taken away, and resisted change.
Dann says the other factor driving our strong cultural preference for housing - particularly for the baby boom generation - is a fear of the stock market.
"Even when the sharemarket outperforms housing, baby boomers are still wary of it because of the crashes in 1987 and 2008," he says. "They don't trust it. Whereas housing is something tangible, that they understand, that they can see. They trust it because it's worked for them - they've had double-digit increases on their properties, it makes them feel wealthy."
The problem with that attachment, says economist and politician Geoff Simmons, the leader of The Opportunities Party (TOP), is that it doesn't work for everyone. And it's only become such a strong belief because those who currently hold the balance of power have rigged the system for themselves.
"It's self-reinforcing. That's why it's in their psyche. Because it works for them in the set-up we have."
The reason it works, and the main reason those like Simmons say New Zealand is so wedded to housing, is because its incentivised by tax. Unlike in most similar countries, we don't have a capital gains tax. There's also no tax on housing as an asset, unlike the money in managed funds or bank deposits. Even retirement savings are taxed at a higher rate than housing, meaning as an investment, it's the most attractive asset class there is.
"The system rewards property investment and it rewards landbankers," Simmons says. "They know it's the best place to put your money."
And, unlike investing in the stock market, finance for housing is easy. Credit is available, interest rates are low. If you already have a property, using the equity to buy another one is actively encouraged by the financial sector.
Equally, regulation is light - there's no licence required to be a landlord. There are some laws - as of last year higher insulation standards were mandated, alongside other initiatives to make rentals healthier. Rental property losses are now ring-fenced. And the coalition Government have also proposed to strengthen tenants' rights, to make it harder to get rid of tenants without good reason.
Andrew King, the outgoing head of the New Zealand Property Investors' Federation, says in his opinion, people are being disincentivised from becoming landlords with such changes. His group argue that mum and dad landlords are essential to society, as they provide shelter for people. He also says that amid a housing crisis, having investors own homes is actually beneficial, as the number of people that live in each owner-occupied home (say, if purchased by a first-home buyer) is lower.
"And that's despite rental properties being smaller," he says. "So when you sell to a first home buyer that could lead to someone without a home."
He also argues that it's cheaper for mum and dad landlords to provide accommodation, than the state, comparing the cost of a private house to a public one, and the subsidies that go with those.
However, most property analysts don't think any of the regulatory changes have made a tangible difference to the investment space.
"It's not too hard to find reasons for why smaller investors' appetite for residential property has lifted again," wrote CoreLogic's Kelvin Davidson in August. "After all, although the costs of being a landlord have increased [e.g. due to extra insulation standards, the tax ring-fence for rental property losses], the flipside is that rents are also rising."
In her paper on the New Zealand rental sector, Massey University academic Karen Witten noted this almost cognitive dissonance by investors as a trend. She wrote how landlords decried high house prices but "failed to link" their behaviour - taking advantage of tax breaks, cheap finance and increasing equity in their existing property - to those prices and the subsequent difficulties faced by first-home buyers.
'It will destabilise the country'
Justine Sachs, is 25-years-old, and she's mad. The union organiser, from Auckland, came to New Zealand from South African when she was 11. Despite promises of a better life, her family were unable to afford their own home. Sachs now fears she will always be the same.
"The lack of freedom and insecurity is just… unfair," she says. "I feel locked out of this market. I'm not even focused on myself, I just want my mum to have security."
Sachs watched the debate over capital gains tax last year and felt like no one had her interests at heart.
"Those people saying, I don't want to go prices to go down because it's not in my interest, that politicised me. I thought it was selfish."
Unlike elsewhere, New Zealand is yet to see instability from huge levels of inequality and anger from the youth towards the establishment. But Sachs believes if there isn't regulation - better tax, or at the very least, better rental laws - it could lead to political unrest.
"I think it's coming, there is rumblings," she says. "I think if this government or the next one doesn't do anything it will happen. But that's terrifying. It will destabilise the country."
Sachs isn't alone in this feeling. In fact, several academics interviewed for this story said they couldn't understand why the youth weren't marching in the streets.
Otago University tax expert Andrew Coleman, speaking from his current teaching post in Morocco, was one of those. He described the situation as "appalling".
"The fact baby boomers and even the generation younger than them don't seem to care about this at all is an indictment on them. It's a real intergenerational scandal," he said.
"I find it surprising that young people haven't said 'hey these systems are biased against us'. I don't know why there isn't a revolt."
Coleman believes tax is at the heart of the inequality. He has studied the rapid escalation in house prices since 1989, when changes were made to the way property was taxed in comparison to retirement savings, and says he thinks people responded to those changes by investing in housing.
"If you tax land at lower rates than other assets. then you drive up the price of land," he says. "I don't want to say that it's only tax. But tax is one of the issues in the market which may be under-appreciated."
Coleman wants the tax on retirement savings lifted, so it can compound faster, making it more equitable to property investment. He says it can still be taxed when it's withdrawn, the same as most countries overseas.
His idea is one of many that experts say could happen to dampen the market. Simmons, from TOP, says his party would go further, taxing all assets at the same rate as a bank account.
Neither of those ideas have proved particularly popular among voters or investors so far.
Witten, in her paper, argued that one way to help was to make renting a viable alternative, with stronger tenant rights.
"[That] requires a perceptual shift to viewing a dwelling as primarily 'a home', rather than predominantly 'an asset'; and for this to be reflected in legislation which affords tenants secure occupancy," she said. It is unlikely that the rental laws introduced this year will redress that balance.
McArthur raised the idea of a debt-to-income limit, where borrowers would be allowed to borrow up to five times their income in mortgage debt. That has so far not found a footing.
"Everyone is instead talking about supply. But there are bigger things at play - if we don't address the supply of debt then we are still going to have this problem," McArthur says.
Like Dann, and Coleman, and Simmons, and Sachs, McArthur says the main roadblock to solutions is attitude. When she returned to New Zealand recently she felt frustrated that the problem was getting worse, not better, and no one seemed to care.
"There's this idea that this is just how it is now. It's normalised. Which is just so shocking," she says. "Why is no one on the streets about this? People are like 'oh, I just have a giant mortgage' But that is wrong. And the government are responsible for not letting this happen, but they have. They just let this happen, completely in plain sight."
She believes the cultural narrative about homeownership is one-sided and we need to acknowledge that we've gone from having a model that helped everyone build wealth, to that model being a problem.
"We need to say, there's two sides to the story - on one side you have people protecting values and protecting their assets and capital gains," she says. " And then you have those who don't have housing. And they're directly connected. Nothing comes for free. It's coming at the expense of someone else."
After speaking to McArthur, I went and looked (again) at selling my rental home. The numbers (again) did not stack up. Term deposits are down to 3 per cent interest. Dunedin property prices increased 14 per cent last year. I consoled myself by thinking, well at least my tenant has somewhere to live. If anyone asks, I'll say she would have been unable to afford to buy anyway. I'm doing her a favour.