Five steps to restoring an affordable housing market

A starting point for thinking about how to lift home ownership again is to look at why it increased over the 50 years up to 1986 and why it has fallen since, says Simon Collins. Photo / File

Home ownership in New Zealand rose from 50 per cent in 1936 to a peak of 76 per cent in 1986, before dropping back to about 65 per cent today.

There are good reasons to worry about this reversal. Homeowners have more incentives than landlords to invest in quality improvements such as insulation, which improve their families' health, and children learn better if they can stay in the same schools. A starting point for thinking about how to lift home ownership again is to look at why it increased over the 50 years up to 1986 and why it has fallen since. Here are five key factors.

1. State finance - The state financed over half of all new housing through state houses and lending money for families to buy houses, from 1936 until the late-1960s. From 1959 until 1986, it also let families capitalise their family benefits to buy their first homes. That active role ended when the Bolger Government virtually stopped state lending and sold off existing state-backed mortgages from 1992. The state could lift home ownership again by widening access to KiwiSaver deposit subsidies, restoring low-interest lending for first home-buyers, and buying land so that it can again play an active role in housing development.

2. Equality - Incomes were more equal here than in most countries for 50 years. Compulsory union membership from 1936 kept workers' wages high enough to afford houses, and high top tax rates, reaching 76.5 per cent by 1949, restrained the rich from paying themselves more and becoming landlords. Compulsory unionism ended with the Employment Contracts Act in 1991. Taxes on top earners were halved from 66 per cent to 33 per cent when GST was introduced in 1986, unleashing a culture of high pay for some so that by 2004 almost 8 per cent of New Zealanders were landlords. New Zealand now has a less regulated labour market and a flatter tax structure than most countries. We could strengthen workers' bargaining power and make the tax system more progressive again if we chose to.

3. Tax deductions - First home-owners got a tax rebate for the first five years of up to $1,000 a year until 1990. Conversely, landlords could deduct only up to $10,000 of losses on investment properties. Since the 1990s the balance has reversed. People who live in their own homes no longer get any tax deductions for mortgage costs, while landlords can borrow to buy an investment property, pay more in interest than they earn in rent and deduct the losses from their other income for tax purposes - while still paying no tax on any capital gains in most cases. Many countries "ring-fence" losses on investment properties to limit or stop landlords using them to reduce their taxes, and most countries tax capital gains. We could do the same.

4. Lending limits - Bank lending was heavily regulated from 1936. Governments limited bank lending to "second-tier" sectors such as housing, at first by direct fiat and later by controlling the ratio of reserves they held at the Reserve Bank against loans to each sector. The system was irksome but effective in keeping a lid on house prices. Reserve ratios were abolished in 1985. Exchange controls, imposed in 1938, ended in 1984. Since then banks have been allowed to borrow overseas to fuel a huge expansion in mortgage lending which almost trebled house prices in real terms between 1990 and 2007. The Reserve Bank's proposal to limit loans above 80 per cent of a property's value is a first step towards restoring lending controls. More may be needed.

5. Migrants and foreigners - New Zealand's biggest post-war house price booms all coincided with surges in net immigration. Experts differ on the extent to which migrants actually drove these booms, but they clearly had some effect, especially after 1987 when immigration law was changed to recruit people with skills and capital from anywhere, not just Britain. Until the 1980s, most countries also restricted the amounts their citizens could invest overseas. Those controls on outward capital flows have been relaxed almost everywhere since then - although, as Labour has noted, many countries still restrict inward property investment. Collectively these options would involve a real transfer of both wealth and financial freedoms away from those wealthy enough to be landlords and towards those who are now shut out of home ownership. But that is the price to be paid if we are serious about making houses affordable again. A ban on foreigners buying houses would play a relatively minor part, but history supports it.