A survey that finds residential property in Auckland and Tauranga is now less affordable than in New York is a reminder that something must still be done for people seeking their first homes.
New York, where many apartments are rent controlled, may not be the most expensive market for comparison, but then rent controls are the sort of regulation that can be demanded when a market is not functioning as it should.
House prices in New Zealand rose out of all proportion to incomes during the last boom. The reason they do so is probably that residential property is the safest investment available, particularly in a small economy with few alternatives. The attraction of property in this country is further distorted by the reluctance to tax capital gains as other countries do.
There may be other reasons, too. Urban planning is said to restrict the supply of low-cost housing by zoning too little land for residential development on the periphery of cities. Planners, however, accuse developers of keeping new residential zones vacant until demand drives prices high.
Young families struggling to afford a mortgage on an average income probably do not care which side is right. They know only that home ownership remains a dream that seems to be coming no closer.
The old rule of thumb, that a mortgage should not exceed three times annual income, no longer applies. They need to borrow about five times their annual incomes to get a house in the main centres.
House prices have fallen little more than 5 per cent since the bubble burst in 2007, or 13 per cent against inflation-adjusted values. Volume has dropped far more drastically. People have taken homes off the market rather than lower their price. They have invested for capital gain and they are willing to wait.
And they can charge higher rent in the meantime. The longer first homes remain out of reach, the greater the number who need rental accommodation.
The demand drives rent higher, increasing the difficulty of saving for a deposit. First-home seekers are caught in a vicious cycle. Sooner or later, something has to be done for them.
The answer does not lie in government grants or loan subsidies that would only drive prices higher. One bank economist, Westpac's Brendan O'Donovan, suggests relaxing urban land limits, taxing those who hoard land and reducing the costs of compliance with building regulations.
The Government heard, and dismissed, land tax proposals from an advisory group this time last year. Soon it will receive the results of a similar working group on national savings. The group's interim report last month estimated that it could take another two and a half years of flat house prices and rising incomes to restore housing to former levels of affordability.
Households have been reducing their debts steadily since the financial crisis, probably because they have been on fixed interest rates. But the low floating rates of the past few years have not caused a resurgence in investment property values. It may be that residential property investment will be a long time regaining its lustre for all but those looking to own their first home.
Established households could be ready for alternative investments and it is the task of the savings working group to suggest how the Government might encourage or support alternatives. Compulsory KiwiSaver funds are one possibility, likely to be a Labour Party election policy if it is not adopted by the Government in this year's Budget.
But compulsory saving is only half the task. The wealth that has been locked in residential property needs to find more productive purposes so that incomes can catch up with house costs and everyone will have a stake in a stronger economy.
<i>Editorial</i>: First-home seekers need relief
Opinion
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