House prices

House prices keep going up.    In the decade to December 2007 (roughly peak to peak), real house prices in New Zealand rose by about 71 per cent.  In the (just over a) decade since December 2007, they’ve risen by another 34 per cent, bringing the total increase in real house prices in little over two decades to 130 per cent.   Not that it really should be a relevant comparison, but productivity growth (real GDP per hour worked) totalled about 22 per cent over the same period.

In parts of the country, notably Auckland, the housing market has levelled off over the last couple of years.  But on the most recent QV numbers, real house prices across the nation as a whole have risen again in the last year.

There is no good or necessary reason why, on a well-constructed like-for-like index, real house prices should show any particular trend over time.  Of course, as people get wealthier and technology improves people might reasonable demand bigger and/or better-specified houses, and they might be more expensive –  in real terms –  than a typical house from decades earlier.  But what we’ve seen is substantial increases in the real prices of constant-quality houses.   That is mostly down to the active and passive choices of successive people at the top of central and local government.  In a country with abundant land, create artificial scarcity around residential land and (real) prices will rise, a lot (especially if the regulatory scarcity is exacerbated by rapid policy-driven population growth).

In opposition prior to 2008, National sometimes talked a good talk about fixing the situation. In opposition prior to 2017, Labour sometimes talked a good talk about fixing the situation.  A Green Party leader, now long departed, even got herself in trouble by talking about the desirability of big drops in house prices, and the possibility of aligning policy to produce house price to income ratios of perhaps 3 to 4 (in many fast-growing US cities those ratios are under 3.5).   She only said it once.  I’ve been sceptical that her Green colleagues would ever allow the sort of freedom and flexibility that sort of outcome might take,  even if (which seems unclear) they might be sympathetic to the end.

It has been hard to know what to make of the current government as a whole.  Neither Andrew Little nor Jacinda Ardern as Labour leaders has ever openly embraced land use reform.  Instead, we had all sort of policies to distract, or paper over cracks –  foreign buyer bans, ringfencing, bright line tests, KiwiBuild, talk of capital gains taxes etc.    But never getting to the heart of the issue, and never willing to openly embrace a goal of materially lower house prices.

But there was always Phil Twyford.  Sure, he was responsible for KiwiBuild, which was never going to solve any real problem, but he showed signs of understanding the real regulatory issues. In Opposition, and on this specific issue, he’d stood shoulder to shoulder, sharing an op-ed, with the libertarians at the New Zealand Initiative.   And now that he was Minister, he even had access to one or two very good officials.

But the government’s term is now more than half over, and not much action had been seen.  Not even many words really, although there had been this in the Speech from the Throne

This government will remove the Auckland urban growth boundary and free up density controls.

But a couple of weeks ago Twyford was invited to address the New Zealand Initiative members’ retreat, where he gave a meaty speech on fixing the housing market.

The Initiative responded enthusiastically (here is Oliver Hartwich’s brief summary), and I have seen the speech described as “the most coherent and comprehensive political statement on housing we have seen in our lifetimes”.  And, mostly, it does read well –  better than anything we heard from National ministers in government, or from National’s current housing spokesperson.

The bit I liked the most was this

Our aim is to bring down urban land prices by flooding the market with development opportunities.

That doesn’t sound like a minister with a vision of (say) flat nominal house prices, taking 30 or 50 years to get price to income ratios back to where they used to be, and where they should be.  It sounds like someone who is serious.

And yet, I remain sceptical.  Perhaps Phil Twyford’s heart is really in this.

But is the Prime Minister’s?  Even though housing was a significant campaign issue, even though she has been in office for 18 months now, we’ve never heard her putting her authority behind fixing the housing disaster at source, let alone substantially lowering house prices.

And is the Green Party on board?  Quintessentially the party of well-paid inner-city urban liberals, are they really on board with bigger (physical footprint) cities, or with encouraging intense competition among landowners for their land to be developed next.  Some of them seem to believe that it would somehow be morally virtuous –  and “solve” the affordability issues –  if people lived instead in today’s equivalent of shoeboxes.

Of course, this could be one of those issues in which National and Labour got together and pushed through major legislative change.  It could have been so under the previous government, but wasn’t.  Why is a solution like that more likely now?

And sometimes talk of lowering land prices is really just cosmetic.  If you establish a vehicle whereby property owners will have to pay development costs in an annual rate over, say, 30 years, that will –  all else equal –  lower new section prices, but won’t change one iota the cost of housing.  To do that, you have to be committed to removing, or substantially reducing, the artificial scarcity that policymakers themselves created.

And then there is local government, the most immediate source of the problem.  Local governments actually impose the zoning rules.  Local governments set their own (arbitrary) debt ceilings –  and some NZIER work a few years ago highlighted how relatively low those ceilings typically are –  and make their own choices about using (not using, mostly) differential rating schedules, which could help ensure costs of new development are appropriately allocated.  Local governments –  while often talking of ‘debt constraints’ – choose to spend money on vanity projects, or ideological agendas, like (in the Wellington case) cycleways, runway extensions, convention centres, or old Town Halls.   And councils, and councillors, are all too-often champions of the know-it-all shoebox approach (we know what cities should look like, and we want people in high rise apartment blocks on this particular street, and the like).  Also, for all the talk about accommodating growth, actually all any region of New Zealand has managed in recent decades is lots of population growth: large scale new private industries and associated productivity growth (the sort of thing that might really capture the imagination, including of voters) has been scarce to non-existent.

There is quite a bit to like in the speech (as well as some questionable stuff –  including the laughable notion of looking to Australia for a lead on housing, or the wrongheaded notion that somehow too much resource has gone into residential property and not into the “productive economy”).  But for all the fine words, how optimistic should we be?

I’d say not very.  There are those domestic political factors I outlined above; for example, in a multi-party government with little that unites the parties, the only major reforms that get done will be those the Prime Minister fully embraces and champions, and our Prime Minister has shown no sign of embracing this sort of reform (or the implied fall in house prices).

There is the lack of international precedent.  For several years, I’ve been posing the quite genuine question as to whether anyone can point to an example of a country or region that had once messed up its housing and land use law this badly and then fixed the problem at source.  There are places that never got into the mess (including many parts of the US) and Japan is also a tantalising story, but they aren’t answers to my question about fixing a mess once created (and once an increasing share of the population becomes fearful of the personal economic risks of house prices falling –  more and more of them every year).   Perhaps New Zealand really could be first –  single chamber Parliament and all that means far-reaching reform (for good and ill) can be done here.  But aren’t you then back to the point in the previous paragraph: is there really the drive from the top (not just Ardern, but Robertson, Davis, Peters, Shaw) that is going to push through legislation and face down councils (and, in many cases, residents/voters)?

My scepticism doesn’t count for anything much on its own.  But market prices should.  When, for example, there was beginning to be a serious prospect of US company tax cuts a year to two back, you saw the effects straightaway in share prices. That is how markets typically work, looking forward and pricing the prospect (and probability) of change.   The Minister of Housing might be entirely serious, but in this specific sense there is no sign that his words are treated as a credible indication that significant change is actually coming. Were it otherwise, we’d already see urban (and peripheral) land prices falling, a lot.   Sure, some inner-city sites offering better intensification options might hold up, or even rise, in value, but across regions as a whole the thrust of the mooted reform is about markedly easing artificial scarcity.  If it were to happen, as Twyford talks of, median land prices in and around our cities would already be falling quite considerably.    I’m not aware of any such trends (though I’d welcome comments that pointed us in the direction of evidence that it is happening).

Perhaps the market is just wrong and the government will in the end surprise us all.  But there is a certain wisdom of crowds and – even as we might welcome the rhetoric of one minister – it is wise to respect it.  Courageous leaders can up-end conventional wisdom and change reality.  I really hope it happens this time, for the good of the country and (more personally) for the good of my own kids.   But it will take more than a pretty good speech to persuade me it is the most likely outcome.

26 thoughts on “House prices

  1. It is very difficult to short housing. That makes prices a bit stickier on the down side than we might like. Those betting that Twyford will get the job done might sell any surplus houses they have, or even consider selling their own home and renting – although that latter option can have strong disamenities. But if you aren’t already invested in housing, it is difficult to bet on Twyford’s being right. It is easy to bet on Twyford’s being wrong though: maintain current housing assets and buy more of them.

    I expect we won’t start seeing downwards adjustment until/if the first leapfrog developments funded by the new infrastructure financing vehicles come through.

    Once that happens, anyone with an existing landbank will want to hit the market with developed properties before more new developments come in.

    There’ll then be a substantial construction boom constrained by labour and materials shortages, and by Council/UDA ability to process consents.

    Home buyers at that point will be weighing up buying existing in-town properties or the longer commute to new cheaper ones soon to come in. That puts downward pressure on in-town house prices. Land prices across the gradient start falling. The fall in land prices makes other kinds of development affordable.

    But the construction capacity constraints will bind. The government needs complementary work looking at building materials supply regulation. I understand that may be in progress, along with work that would make it easier to get pre-fab housing up. The government also needs complementary work looking at current constraints on international firms able to build to scale using their own workers and trusted supply chains [ex: North American or Japanese firms used to building in wet and shaky environments, using materials suitable to that end].

    I agree with you that prices are the best indicator. In the absence of ability to short, it is difficult for those who’d like to bet on Twyford’s being right to get their information into the system.

    It is one reason that I have asked NZX more than a couple of times to run Case-Shiller indices. They’ve expected, likely rightly, that there wouldn’t be sufficient interest in the markets here to cover their costs.

    Liked by 2 people

    • Thanks Eric. I take all that on board, but I still think the lack of market price indication is telling. It is hard to sell and rent, but it isn’t hard for people with developable sites to sell now – be it individual sites within existing urban areas, or the large tracts of land around our cities and towns. Nor is it hard for those running rental property businesses to sell – at least if beyond the brightline threshold.

      It will still mean prices move more sluggishly than in my stock market comparator (and of course actual hard data is often a problem anywayl) – and thus if Twyford’s speech has really changed expectations, there is no possible way to tell that in the data less than 2 weeks on – but not that they don’t move at all.

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      • Those who own land banks are going to be drawn predominantly from the cohort most sceptical about the government’s likelihood of ever abolishing zoning rents. They also have a lot at stake, which should encourage more careful assessment. But it’s still from a particular part of the belief distribution.

        I thought I’d seen reporting last week that Auckland sale prices were dipping below RV. Attributing causality there would be tough though.

        If we had C-S futures markets in housing, we’d be able to run an event study on reporting of Twyford’s speech. Alas.

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  2. Clearly there is land scarcity in New Zealand because our Primary Industries and tourism have reached peak land use. Increments in land use in housing encroaches on land used in Primary production and tourism or vice versa. It took me a long time to figure out why 5 million people on land mass the size of Japan with 123 million people is too many people. We just do not have land available with the right infrastructure for human dwellings. It is pretty much all dedicated for Primary production and tourists. The cost to convert is the loss of Primary production revenue plus the conversion cost. In Auckland that is estimated at $30 billion. The rest of the country would likely double that number based on population growth.

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  3. Face up to it.
    We will not get any traction without:
    1. A hard-nosed attack on immigration including not easing parent and family unification and marriage contracts. getting employers to front up with a significant sum if they want to employ a new migrant.
    2. A hard-nosed tax approach to balancing out the unequal benefits that landlords enjoy using cheap bank supplied money. This does not mean CGT but more restricting gearing by making it not worthwhile tax wise to borrow heavily.

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    • Ring Fencing of Investment Property tax losses legislation is still going through parliament but the start date is 1/4/2019. That tax advantage is gone. But already I have seen my rents on my investment portfolio rise quite significantly even though I do not have any tax losses to claim. My problem is now even more tax to pay. In the current investment climate with increasing rents and falling interest rates, tax losses are actually quite low or non existent.

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  4. I agree it needs a bundled approach (politiically in particular) but that is a bundle that Labour (and even more the Greens) will never go for.

    I’m more sceptical of your second item, but I could live with it as part of a package (partly because fixing land use and immigration) would remove any great interest in borrowing heavily to buy property, except by the ordinary 25 year old lower-middle income couple just starting out and quite rationally wanting a 30 year 90% LVR mortgage.

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  5. The other useful thing the Government could do would be to overhaul the legislation around the rights and responsibilities of apartment dwellers and managing agents – the shortcomings in the current law reduce the relative attractiveness of the apartment market.

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    • With insurers pulling out of Wellington, I doubt too many developers would be keen to take on the risk of building to find buyers unable to settle on their purchase. Bank finance relies completely on an insurance policy being available prior to final loan settlement.

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  6. The theoretical framework I used for my Wellington Eco City proposal is mostly detailed here.
    View at Medium.com

    I would add that land use reforms are intensely political. So whatever affordable housing reform agenda is agreed upon it must not only be economically viable it must be politically viable too.

    Having said that Jacinda made various affordable housing promises from her Speech from the Throne – which therefore must be supported by the coalition government i.e the Green and NZ 1st parties have already given there support for these reforms.

    Liked by 1 person

      • I am not sure about that. I have heard NZ 1st say they are bound by the Coalition agreement document and the Speech from the Throne.

        Regardless I cannot see anything in my Wellington Eco-City proposal or in applying Japanese urbanism to NZ that the Green party would object to. I would think they would embrace it as a long overdue leap forward in planning, transport and housing supply.

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  7. I would have thought an obvious solution would be, rather than adjust the price of land down, adjust the price of people’s income up, over time. This would necessitate an increase in productivity, ie. reduce labour wastage arising from having 4% unemployed and 8% underemployed and/or (depending on whether you politics are more left or more right) reducing the depletion of wealth in the private sector through the government sector continually taxing more than spending (ie. having the private domestic sector running continuous fiscal deficits). Japan looks similar to this proposal (240% debt to GDP), 2-3% unemployment and maybe just reaching 1% inflation now.

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  8. https://www.interest.co.nz/news/98933/review-things-you-need-know-you-go-home-tuesday-no-rate-changes-qsbo-sinks-higher-rents

    “RENTS NOW HIGHER IN WELLINGTTON THAN AUCKLAND
    The national 3 bedroom house rental is up to a record-high $480/week in March, according to MBIE data. That is a +6.7% rise in a year. In Auckland, the rent for that house is $660/week, equal to the rate in October 2018 and a +1.5% annual rise. In Wellington the new rate is up +7.3% to $665/week. In Christchurch, the year-on-year gain is +7.3% but only to $430/week, and a long way below the 2014 peak of $450/week.”

    The rental levels are insane. Simply too few houses overall – too expensive to buy and too expensive for the poorer in NZ to rent.

    The only way out of this is to manage the immigration rate down in the short term until more houses can be built.

    Our governments are incompetent. Twyford clearly pointed this out in his speech when he noted successive governments had failed to implement national standard.

    Overhaul the RMA and get rid of zoning, density controls, and urban growth boundaries, and replace with national effects based regulation.

    Get rid of developer contributions to bring down the front end capital cost & replace with targeted rates

    The government should abandon kiwibuild and focus on providing housing for the poor and those living in garages – it criminal. Housing(shelter) is a need not a commodity.

    Give the COmCOm the power to free up the building supplies market.

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    • Agreed with your comments but managing the immigration rate down in the short term is difficult – having gone through it myself I know it takes many months just to process an application. However logically when the subject is house prices it is not immigration but population growth that is causing the problem. Isn’t the solution in your name? We need more Kiwis to go overseas. It would be easy – just get our govt offer a $5 one way ticket to Perth or Darwin and the wealthy won’t be attracted but our underclass living in garages, struggling to survive on minimum wages, etc will grab the opportunity especially in winter and it will take them a long time to save up their return fares. The govt could even continue paying them their accommodation allowances to help them settle down in Australia.

      Liked by 1 person

    • Oh, and force local government to rate only on land value to drive land use efficiency.
      Central government can have its capital gains tax (but which should be on the improvement value only) if local government is taxing land.

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      • I wish I could find an argument against your rates on land only but I can’t. Pity I live in a battered 55 year old house on an extra large section; my rates would increase dramatically and the inhabitants of apartments would do well. They might increase to the extent that being retired I would have to move. Maybe permit appeals for owners of land that cannot be developed economically – half my section is very very steep?

        The CGT if it is introduced should be on all property including owner occupied – in the UK my relatives develop, move in for 12 months, sell as owner occupied and repeat the process. The tax should be on increase in land value minus inflation only; it just doesn’t seem right that our only investment property is getting $4,000 of investment as I write (professional house painters) and if I sell that $4k will be reflected in the selling price so I will be paying the painters 15% GST and then paying ~30% on the increased value. Certainly a disincentive to maintain or improve investment properties. Meanwhile since I owned the property the land value has increased from ~$150k to ~$450k and CPI increased at a guess by 50% which is equivalent to $75k. It seems fair and reasonable that I should pay a windfall tax on the $225k that I had no responsibility for (well other than selecting the property more wisely than those who bought in certain other locations).

        With more thought I have found a rather weak argument against rates on land: Auckland Council is so greedy they are giving councillors an 11% pay rise (actually I reckon they earn it but very few ratepayers get that kind of pay rise) so they will redouble there continual efforts to keep land prices spiralling ever upwards.

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  9. There absolutely is a good reason that on a well-constructed like-for-like index, real house prices should show any particular trend over time. That trend is down, along with everything else over the last 20,000 years. It should cost a small fraction of what it would have 30 years ago to construct a like for like house,for many reasons, all to do with efficiency and productivity. It’s far easier faster and less wasteful to produce basically every component, should be easier to organise supply chains, to transport, to design and to survey the land, to communicate all that goes with it via internet not brown manila folders. The reasons why this productivity has been stolen from us you document well, but its not the increase in real terms that’s been taken, it’s the difference between the massive deflation in real house prices we should have seen vs the increase we have actually seen. The number of man-hours it takes to build a like for like vs 30 years ago may have fallen by 80% or more.

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    • Thanks

      I didn’t want to go pursue that possibility in that post, partly because we have seen a signif increase in real construction costs (ie ex land) in the last 15 years, for reasons that aren’t really clear (some probably regulatory, but how much isn’t clear). Also, one would only expect a fall in the real price of like-for-like houses if productivity gains in construction were consistently faster than the average for the whole economy.

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