Thomas Bieger and Jurgen Gnoth: Second thoughts on second homes

It has been widely publicised that New Zealanders have been living well beyond their means for the past decade, buying up land and expendable assets, building homes and investing in second properties.

In recent years, about 30,000 homes have been built a year. Despite the national trend, the prices for real estate in Otago are still rising at an unexpected rate. Most of the increase in demand has been linked to increasing interest in second homes.

Last month, a Queenstown estate sold for a record $8 million.

Real estate agents have predicted prices will climb even higher as a new breed of buyer - particularly Asians and expatriate New Zealand buyers - look for top-quality homes to complement their portfolios.

What we are seeing in New Zealand replicates what happened when Switzerland had a second-home boom in the 1970s.

A combination of rapid economic growth, low (and later negative) interest rates, and increased foreign investment led to a large-scale investment in second homes and there were major developments of ski areas and mountain resorts. It was the decade of the "mountain tycoons" getting rich on real estate development in the Alps.

These days in Switzerland, one in five households has access to a second home and typically use it for only five to seven weeks a year.

But although second homes have brought income into peripheral towns and resorts, little has been invested back in the infrastructure, including roads, retail outlets, and housing for seasonal workers.

As a result of low average occupation rates, infrastructures cannot finance their own maintenance and expansion.

Such developments have led to social tensions through a huge gap between those taking advantage of the second-home boom and those suffering from it.

Upper Engadine, which surrounds St Moritz, is one example. It is facing tremendous social and environmental challenges after three decades of second-home building, to the extent that legislation was enacted to stop further second-home building in the area.

Austria, which imposed a complete ban on second-home building, has found that destinations not affected by building have a longer season, higher occupation rates, and more profitable tourism businesses.

The Swiss tourism policy is now aimed at using the low occupancy rates of second homes to its advantage by pushing owners to rent their properties to increase tourism numbers.

This has met resistance, with many owners reluctant to rent their homes for fear of damage, loss of flexibility to use the property, and loss of privacy. Others just don't need the money.

What should New Zealand and its major tourism destinations do in light of these experiences?

First, it has to become a generally accepted fact that the second-home boom of today does not lead to sustainable growth nor to sustainable income for generations to come. All international examples prove this. Second-home booms are rather short-lived events.

Therefore, as the Government has been trying to tell us, the money earned during one period should be saved for the next.

At the public level it should be used to further invest in the destination's attractiveness. At the private level it should be used to ensure the income of future generations.

To avoid the infrastructure problems of Switzerland, regional councils in New Zealand could look to improve construction codes through, for example, introducing obligations that compel owners to rent the property or reduce land use, and restrict traffic in the inner areas of the resort areas or introduce public transport.

To cater for the needs of the community, councils must encourage the provision of land and cheap apartments for permanent residents. Overall, accepting a second-home boom in a destination is a more or less active decision by the community and its politicians.

Allowing for second-home building without any additional measures fixes the position of a destination and, eventually, defines its business model. It is a question of going into real estate, or into tourism, and about short-term or long-term profits.

* Professor Thomas Bieger is with St Gallen University, Switzerland and Associate Professor Jurgen Gnoth is at the University of Otago School of Business.