"There is no easy fix to New Zealand's overvalued housing market," says Shamubeel Eaqub, principal economist at the NZ Institute of Economic Research.
In an 11-page chapter in the latest issue of the journal Housing Finance International, he has analysed how this country came to have such high house prices.
And though there are no easy solutions, there are things we can do, he says.
"Whether house prices spiral up or down, the necessary policy choices are long term and will need to be put in place as a complementary set. A Swiss-army approach to a knotty problem."
"Regulation overly favours mortgages over other types of lending - this needs to change. We need to remove the tax advantages of real estate investment. We need to ease rules slowing housing supply. We need to make renting a palatable and comparable alternative to owning."
Here's how Eaqub reads the market.
Higher & higher
"New Zealand house prices are very high, compared to history and globally. High house prices are a risk to financial, economic and social stability."
Thirty years ago, an average house cost two or three times the average household income. But prices have rocketed since then, especially since 2001. By 2007, an average house cost more than six times household income.
What's the problem with that?
While New Zealand didn't suffer Irish or US-style financial calamity after the global financial crisis, says Eaqub, "the economy was very weak. This was in part related to the housing market.
"The economy became addicted to house prices ...
"When house prices stopped their previously seemingly inevitable rise, consumer confidence collapsed and the export sector (outside of dairy) was not resilient enough to fill the void.
"The New Zealand economy has taken six years to recover from the recession, on a GDP per person basis. This is the longest and deepest recession since the great depression."
Location, location
"House price gains during 2000-07 were synchronised across regions ... But over recent years, house price gains have diverged across regions.
"Auckland and Canterbury house prices have surged over recent years."
House price to income ratio
While Canterbury had its earthquakes, "the Auckland house prices have risen without 'one off' factors and Auckland is now one of the most expensive cities in the world."
Why does this matter?
Home ownership has plunged since 1991. Back then, 76 per cent of homes were occupied by their owners, but by last year, that was down to 63 per cent.
"Home ownership rates are now the lowest since 1951."
In the 1990s, says Eaqub, a household on the average income needed 30 years to save a deposit and pay off a mortgage. In Auckland today, that would take 50 years.
"There is a sense of inequity amongst younger generations.
Home ownership rates
"If house prices remain overvalued relative to incomes, the current intergenerational difference in ability to purchase houses could increase inequality in wealth and living standards."
While the children of homeowners are in line to inherit valuable properties, "children of non-homeowners may never aspire to own their own homes."
Renting just isn't the same
"Even though more New Zealanders are living in rented homes, many are not able to enjoy the full benefits of a home because of poor rental contract arrangements."
The biggest differences between renting and owning, says Eaqub, are the length of tenure and the ability - or not - to customise your home, by making minor alterations, for example.
Compared with many countries, New Zealand and Australia "are some of the most restrictive rental jurisdictions.
"Lease terms are short, tenants can be asked to move with short notice, leases can be terminated on almost any condition as long as notice is given and personal customisation is often difficult (pets, minor alterations, etc)." On the upside, compared with incomes, the cost of renting has been stable for decades.
Land prices are the key
"Land prices have risen sharply. Though they eased following the housing market peak in 2007, they remain high relative to history." Construction costs, on the other hand, have not risen as much.
"Auckland's geography is a key constraint," but "policies on land supplying greenfield sites, density and height restrictions, and transport can alleviate these pressures."
"We do not believe the premium for Auckland house prices will continue to increase forever. Rather, recent increases reflect partly structural issues and a large dose of speculation."
So who's buying?
In many cases, investors. About 8 per cent of purchases are possibly being made by overseas cash buyers, according to data from property information and analysis company CoreLogic. But of the rest, almost half the property that changes hands - 45 per cent - goes to investors.
Another 28 per cent of purchases are by people moving from one property to another.
The investors tend to buy and hold, accumulating more and more houses. Owner occupiers, on the other hand, tend to turn over properties more often, as they move up and down the real estate ladder. But what about those wealthy foreigners pushing up prices? Information is limited, says Eaqub, but "partial data suggests that fears of an influx of foreign investors are overdone."
If the stereotype of a foreign buyer is someone who has borrowed big overseas, to buy in a posh suburb - well, they don't show up in the statistics. For one thing, evidence shows no sign of large numbers of empty houses, nor is there evidence of more people buying homes without a mortgage.
Read also:
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Instead, says Eaqub, the typical purchaser appears to be a Kiwi investor chasing capital gains.
Capital gains tax - the magic bullet?
Compared with most economically developed countries, New Zealand is unusual in not having a capital gains tax (CGT).
Then again, there isn't compelling evidence that such taxes prevent housing booms, says Eaqub, citing Australia, which has both a capital gains tax and booming house prices.
"The rationale for a CGT would be to create an even tax setting, by applying taxes on all transactions in the economy."
The law already allows for tax to be charged when a property is bought with the goal of making a capital gain, "but this test is difficult to apply, as it requires judicial interpretation of how intent is defined."
Either a capital gains tax, or just applying the existing rules more robustly, would help, but neither would "solve" high house price, says Eaqub.
What to do?
There are no easy answers, says Eaqub, but these steps would help:
• Rental contracts should offer a better balance between landlords and tenants, as they do in countries such as Britain, Germany and Switzerland.
• Land supply rules should respond to demand. The necessary land could come from new sites, infill, or building taller.
• Banking regulation needs to reverse the bias towards any one asset class. "We believe a fundamental re-analysis of the banking sector is needed." The Reserve Bank should regulate banks to hold more capital, and make other changes to reduce the preference for mortgage lending, rather than business lending.
• Apply tax rules evenly. The position on taxing capital gains should be clarified, "to reduce the actual and perceived benefit of property investment."
• Watch the market more, gathering data on things such as the types of purchasers, so policy is based on solid evidence.
Unlocking home truths: issues and policy options
Shamubeel Eaqub
Outspoken economist Shamubeel Eaqub has a background which makes him a little unusual in New Zealand.
The eloquent market-watcher, who is regularly interviewed by the media, was born in Bangladesh's capital, Dhaka. He is the son of a professor with a PhD in soil chemistry and a kindergarten principal mother.
In 1990 his father was posted to the University of the South Pacific in Samoa, so the family lived in Apia for three years. "It was a real culture shock, but lots of trips to the beach, fresh mangos from the tree, super sweet papayas and loads of trees to climb, bliss."
In 1993 the Eaqubs shifted to New Zealand, so Shamubeel and his sister Tahia could get a good education. Canterbury became home.
Shamubeel went to Lincoln High School, and recalls racial tensions were never particularly visible "because it was a university town, used to foreigners. It was a good, wholesome place".
He then went to Lincoln University, graduating with an honours degree in economics, before working at Statistics NZ, then the ANZ Bank and Goldman Sachs JBWere. He is married to Selena, who also worked at Goldman in funds management.
Eaqub then shifted to the NZ Institute of Economic Research, where he is principal economist.
"Dad always says you are blessed by what you have. What you make of it is up to you."
See the NZIER public discussion document here:
