We need to think differently about solving housing affordability
New Zealand is in the midst of a multifaceted housing crisis. For many the cost of housing is far too high, soaring house prices mean rents are unaffordable and first time buyers are either unable to buy or are taking on unsustainable debt. At the same time the quality is far too low, too many New Zealanders are paying a large proportion of their income to live in cold and damp homes. Many other New Zealanders are becoming incredibly wealthy because of these market issues — further perpetuating equality issues.
This has all been exacerbated by long term underfunding in the construction and urban planning sectors which has resulted in low sector productivity and dilapidated infrastructure. This means that building new homes is more expensive and time consuming than it should be.
The question needs to be asked at this point — in the midst of a housing affordability, quality and access crisis — and climate, biodiversity and pollutions crisis — it is appropriate for the only tool we use to ‘solve’ the housing crisis to be one that worsens our environmental ones?
Building our way out of this crisis is not consistent with our climate goals
A very tempting response to the housing affordability crisis is to attempt to build our way out of it. Undoubtedly, new homes are needed, but this is not a silver bullet. From a climate change perspective, building new stuff is one of the worst things we can be doing.
Each new home built to today’s standards is another 250T of emissions which we can ill afford. 40,000 new houses per year will add 90 million tonnes of emissions — not to mention the emissions attached to the infrastructure construction that would be required to connect it all up.
So a key part of New Zealand’s emissions reduction response actually needs to be using every other tool at our disposal to reduce housing costs. We then need to take a more nuanced approach to new construction, avoiding it where we can and when we do build, placing a focus on low emissions buildings and communities that enable low emissions travel.
There are a number of other market and system failings that are contributing at least as much to our affordability crisis.
Market conditions
The mechanisms for selling houses are highly geared towards generating the maximum possible sale price. Auctions are designed to be emotive environments that push up the price. Blind tenders allow the vendor to create competition to get the best price and subvertly hype prices creating a fear of missing out. Real estate agents also largely work for the vendor, getting paid based on a percentage of the sale price and have every incentive in the world to escalate house prices.
Supply into the ‘housing market’
Home ownership is at the lowest rate in 70 years (Stats NZ). This is because there is very little incentive for people to actually sell housing unless they have to. When people move, unless they have to sell they hold onto properties as ‘investments’. This limits the amount of pre-existing housing that is actually traded and creates an environment where the amount of demand is much higher than the amount of supply at any given time. As a result offered prices soar and house prices go up.
Unoccupied houses
On Census night 2018, some 41,724 people were severely housing-deprived. This suggests an urgent need for around 15,000 homes. Other information sources suggest there is currently a shortfall of 40,000 (infometrics) and 56,000 (Core Logic) homes.
The census also collects information on unoccupied dwellings, which have averaged around 10 percent of total dwellings for the last four censuses. This 10% includes 94,197 (5%) empty dwellings recorded on top of 97,449 (5%) dwellings where the residents were away. The empty dwellings will be both holiday homes and investment properties. It won’t be popular, but we need to clearly draw a line around what it is acceptable in our society for the wealthy and privileged do at the expense of those less privileged. If you choose to buy an investment property or holiday home you reduce the number of homes available for those less privileged. You have contributed to the unaffordability in the housing sector.
Rent settings
Renters have been the big loser in this housing crisis. In 2018, just over 1.4 million people lived in houses they did not own, including 120,000 children under five years of age. In 2021, there were only 7,100 people who own more than four rental properties (MBIE). They control 50% of the rentals and the decisions they make (largely based on generating tax free income) affects the life of 700,000 New Zealanders.
These homes are generally of a very low quality and rents have risen dramatically. This has been driven partially through landlords having an expectation of what rent should be as a % of market value. Amazingly, 70% of private renters in New Zealand are receiving a housing rental subsidy, which is in effect a subsidy to landlords. This holds up the price which landlords can receive for rentals and in a well-functioning society is not sustainable.
GDP Growth
Between 2011 and 2021 growth in mortgage and rental payments ($9bn) was the single largest source of GDP growth in New Zealand. When combined with construction sector growth this combines to make up 26% of total GDP growth in that period.
We can’t comment on the degree to which this growth has been driven by our housing crisis. However, the fact that escalating house prices contribute directly (mortgage and rent payments) and indirectly (construction in response and increased household spending) to the way that the New Zealand Government measures it success, creates perverse incentives that need to be addressed.
Low carbon options to resolve these issues
When it comes to resolving housing affordability it is not good enough to focus only on building new houses. We need to be using every tool in our toolkit. This would include:
- Introduce a tax on holding land, (collected in a similar way to rates) that would be an excise tax on an activity that we need to discourage — i.e. holding non-productive assets. Unlike a capital gains tax this would create a tax incentive for people to sell and would likely ease some of the demand>supply pressure. A simultaneous reduction in income taxes could adjust the burden of taxes to be more equitable between wage earners and asset owners.
- Regulate the real estate market in a way that makes transactions more transparent from the buyers perspective. Removes any marketplaces (i.e. blind tenders and auctions) which are designed to hype prices. Detach realtor fees from sale prices so that agents have no incentive to hype prices.
- Regulate the way in which rental yields can be set. This needs to be done in a way which encourages improvements to the asset but discourages speculation in land values. Pegging rental yields to a % of the value of capital improvements would be one way to do this. This % could be pegged to an affordability metric based on wages.
- End government rental subsidies. This may drive a significant number of rental properties that are not economic without these subsidies into the market and resolve supply issues as well as rental affordability issues.
- Remove housing related cash flows from how we measure GDP and GDP growth to disincentivise the government from letting it run.
The affordability crisis is multifaceted. We should use all tools at out our disposal to bring more houses into the market. Building new needs to become our last resort. Making the most of our existing stock will stop us emitting unnecessary carbon.
Keep an eye out for the next parts of our series
Among other opportunities we see that the critical moves to get this right being:
- Solving the built environment — what are the issues and the opportunities (part 1)
- Build better buildings and start right now (part 3)
- Design urban environments for the future not the past (part 4)
