The Housing Minister’s commissioning of three left leaning commentators to undertake a stocktake of New Zealand’s housing has produced the desired result both from the Government and the Opposition. Housing Minister Phil Twyford has claimed that the stocktake report shows that the housing situation is much worse than the previous Government admitted while National’s housing spokesman Michael Woodhouse has claimed that the stocktake is a predictable beat-up and that Government is big on promises but short on specifics.
A Stocktake of New Zealand’s Housing was authored by public health professor Philippa Howden Chapman and me and released on 12th February. The release event and media coverage of it was dominated by Shamubeel Euqab who was only nominally involved in preparing the report. He is quoted as saying that the private rental housing market was a cluster#@!* and that we needed to build 500,000 additional affordable houses and not the 100,000 the Government is aspiring to build through its KiwiBuild programme. The actual stocktake report makes no such claims but the media appears to have had little interest in evidence or moderate argument.
The Stocktake report attempts to deal with a wide variety of topics across the housing landscape – from rising rents, poor quality housing, homelessness, declining home ownership and tenure insecurity amongst others. It doesn’t offer policy suggestions because that was not in the authors’ brief.
While the report draws many conclusions one compelling one is just how stuffed the private rental housing market is. None of the fundamentals in this market line up to produce anything but rising rents, increasing shortages and often poor quality housing. These outcomes are likely to continue for at least five years and perhaps longer. For example yields on rental property investments have fallen from 6.5%-7.0% in 1997 to 3.5%-4.0% in 2017. The average cost per square metre to build a new house has risen 33% in inflation adjusted terms in the past 10 years. Since 2012 Rents have risen by 25% over the past five years while average wages have risen by 14%.
The private rental market of old was sustained by two things. The first was the promise of untaxed capital gains and perhaps – if could arrange high gearing of the investment in your ‘little renter’, maybe even a tax write-off for the cash losses involved. The second was that the investments were not normally in new housing but in lower valued existing properties in working class neighbourhoods. These lower-valued properties had often been in owner-occupation meaning that tenure patterns in these neighbourhoods changed quickly from a stable balance of owner-occupiers and tenants to a predominance of tenants. Consequently the neighbourhoods changed with higher rates of residential mobility, poorly maintained housing and reducing social cohesion. Not that this matters to the middle class investors creating this environment – they made sure they didn’t live there.
The prospects for the private rental market looking forward are dismal and Shamubeel’s cluster#@!* description is apt. The lower valued properties which were the favourites of Mom and Dad landlords have been bought up. Outside of tiny CBD and inner city apartments, the opportunity to buy newly built low cost properties for investments is quite limited given construction costs and land prices in the suburbs. On any account the promise of further capital gains is faint given that we have probably reached the top of the price cycle for housing and are likely to face several years and perhaps even decades of stable prices. Furthermore tenants have been squeezed by rents rising more quickly than incomes and there is unlikely to be much more to squeeze from low-income tenants.
This would not be so bad if we had not become so dependent on Mom and Dad investors to provide rental accommodation to low-income households. Around 70% of the additional 150,000 households formed in the past decade have been tenant households. That amounts to about 10,000 extra tenant households each year. In other words to meet demand we need 10,000 Mom and Dad investors stumping up with cash and debt of at least $400,000 per house– and at yields of 4%. That’s $4 billion per year.
This may happen but seems unlikely given the much high overall yields made during the heady days of rapid house price inflation. As well many of the Mom and Dad landlords are baby-boomers saving for their retirement which of course is happening right now. In addition banks have become weary of highly geared lending on investment properties.
The crisis narrative to describe the status of the private rental market is accurate. Rents will continue to rise. Queues for available rental properties may grow longer. Overcrowding will continue and may worsen.
The problem with this crisis narrative is that it will soon wear thin as the depth and the intransigence of the housing problem becomes more apparent.
There are not simple quick answers here. Outside of a major meltdown in the real estate market, we are unlikely to see a large scale market adjustment which addresses the current imbalances anytime soon.
One obvious solution is good old fashioned public investment – especially in state housing. But this is an extensive and long-term option. I have previously suggested that we should be building at least 2000 additional state houses per year and that the cost of this is around $1 billion annually. In its 2017 election campaign promised to build at least 1000 but is now looking at how it might up this to 2,000 each year.
As the Finance Minister considers how he might build 2000 state houses per year no doubt the true impact of the Labour-Greens Budget Responsibility Rules will become apparent. These rules include bringing core Crown debt down to 20% of GDP and maintaining recent historic ratios of Government expenditure to GDP. Both great neo-liberal ideas. All this is fine until the economy stalls which of course is exactly the time when we should be building public housing.
To avoid breaching such self-imposed constraints the Government and its budding corporate finance partners might dream up new forms of debt like bonds and Crown guarantees. As we have seen with everything from the South Canterbury Finance extortion to the AMI bailout the public ultimately bears the risks and costs for such creativity. As well these corporate partners will clip the ticket on these creative deals and probably cost us hundreds of state houses in the transactions.
The housing crisis will be with us for some time yet and even with considerable Government effort and commitment. Expectations that the fix is quick and cheap need to be re-set immediately. For this to happen the Government needs to get real about the costs and risks involved and take the public into its confidence as it discovers the difficulties and challenges which lie ahead.
Alan Johnson is a policy analyst for the Child Poverty Action Group and the Salvation Army