End of the free market for mortgages

There's no place like home for Malcolm and Phyllis Davis. Picture / Dean Purcell

It seemed bold - or crazy - when it started. But after less than 14 years, New Zealand's experiment with leaving home lending almost entirely to the free market is about to end.

Jim Bolger's National Government put the state-owned Housing Corporation on a commercial basis in July 1991. All its mortgages to first-home buyers, which had been below market interest rates since 1906, were to be moved to full market rates and sold.

A year later, the first third of the corporation's mortgages were sold for around $1 billion. The rest followed over the next six years.


Private lenders filled the gap with gusto. Apparently limitless credit fuelled a rise in the prices of low-end houses in Auckland from 3.4 times the income of a typical low-income working family in 1991 to 5.1 times the typical low income a decade later.

But as prices soared, the proportion of homes owned by the people who live in them, once the highest in the world, dropped from 73.8 per cent in 1991 to 68 per cent.

Now Prime Minister Helen Clark has signalled that the free-market experiment is over. Already Kiwibank - ironically, chaired by Bolger - has made 750 loans totalling $87 million under a pilot state-backed mortgage insurance scheme to help low-income people into homes. More is promised in the Budget on May 19.

"Our Government is concerned at falling rates of home ownership," Clark told Parliament last month. "The mortgage insurance pilot introduced in September 2003 was this Government's first step back into this area of policy. How to encourage savings which could lead to home ownership is under consideration."

An influential bunch of cheerleaders is urging her on. Over the past few months the New Zealand Institute, a new think-tank with a 25-strong board of business luminaries, has published three reports on the need to encourage savings.

This week a more surprising group chimed in: the Salvation Army. Traditionally more concerned with picking up the casualties of social problems, the army established a social policy and parliamentary unit in Manukau last year to draw the lessons from its social work into ideas for fixing the problems.

It surveyed Salvation Army workers around the country to find the top 10 issues that concerned them. Number one was the need for affordable housing. A house, it found, is not just shelter from the weather. A stable home is a key to enduring relationships both within a family and with neighbours, friends, schools, health services and jobs.

Renting is not stable, as the report's authors found when they talked to a volunteer social worker in their office, Epeneza Fonoti. She and her husband had to move three times in two months last year after the houses they rented were sold. On average, more than half of all tenancies end within 10 months.

Although the 5.8 per cent drop in home ownership since 1991 looks small, most people who were then over about the age of 30 had already bought their first homes. But the impact on the next generation has been huge. The proportion of people who owned their homes by the time they were 30 to 34 dropped by a fifth from 68.8 per cent in 1991 to 56.3 per cent a decade later. Those who owned houses by the ages of 35-40 fell from 76.1 per cent to 65.7 per cent.

The causes are complex. In part, they are to do with social changes affecting all developed countries. The pill, the welfare state and democracy have freed women to pursue paid work as well as motherhood. The median age at which New Zealand women give birth has risen from 25 to 30.

Young people are staying in education longer, then working for a while and going overseas before thinking about a house or children.

"Thirty years ago the central model was that once you got your qualification and you got your job, the next thing to tick off was your house," says Berl economist Ganesh Nana.

"There are other things in there now, like travel, holidays and other consumer items. One of those choices is OE [overseas experience], and they are coming back with a lot more purchasing power and that is what we see holding up a lot of the housing market."

These social changes intersect with economic changes summed up in the word "globalisation". The industrial monoliths that employed people for life to supply protected national markets have gone, mostly to China. Now most people in developed countries work for companies which only design and market things - both inherently less stable jobs than making things.

New Zealand intensified these effects by cutting taxes on the top income-earners from 66 per cent to 33 per cent (partially restored to 39 per cent in 2000). Welfare benefits were cut. Unemployment soared, unions shrank, and wages dropped from 55 per cent of the national income in 1983 to 43 per cent today.

The result is two-sided. On one side, home ownership has dropped because wages have slipped relative to house prices. The other side of the same coin is that higher-income earners have more spare cash to buy the houses that first-home buyers once would have bought.

Massey University property professor Bob Hargreaves says people who have got over the first-home barrier are being lured to buy second and third properties to get capital gains and tax advantages.

"As people have begun accumulating properties, perhaps going to a seminar - 'Become a millionaire in five years' - they tended to shut the first-home buyers out to some extent," he says.

New beasts called "loss attributing qualifying companies" (LAQCs) can be set up to own the rented properties. If you already have a mortgage on the house you live in, you pay off as much of that as you can by raising the mortgages on your rented properties. The interest on those mortgages is an expense for the LAQC. If it is greater than the rents being received, the net loss can be transferred to your personal income, reducing your income tax.

Since banks now lend up to 95 per cent of the value of a property, you can acquire a $500,000 house for as little as $25,000 up-front. If property values rise by 5 per cent pushing the value of the house up to $525,000, you double your investment, tax-free.

First-home buyers, who get no tax deductions for their mortgage payments, can't compete.

Housing NZ says that in 1991, 62 per cent of Auckland households headed by working adults aged 20 to 39 would have been able to service a mortgage on a low-end two- or three-bedroom Auckland home. By 2001, only 31 per cent could afford it.

PERHAPS we should not worry. Angela Maynard of the Auckland Tenants Protection Association says renting could provide all the security of home ownership if the law was changed to stop landlords evicting tenants without "just cause".

"What's wrong with renting? Rich people in New York rent. It's a mindset," she says.

Having a mortgage makes it harder to move or take risks. Ownership may encourage a "walled castle" mentality, objecting to anyone moving into the neighbourhood who might lower property values.

But when Hargreaves surveyed 360 renters in 2002, he found that most still wanted to buy a home. Only 21 per cent didn't want to be "tied down by owning a house", and 81 per cent said the reasons they had not bought were either financial or uncertain job prospects.

David Skilling of the NZ Institute cited evidence last year that home ownership was associated with stable marriages, less domestic violence, better physical and mental health, better education of children, more involvement in the community and generally "giving people a much greater sense of independence, control and security".

Singapore has achieved 90 per cent home ownership by selling flats in high-rise blocks to their tenants, financed by a compulsory saving scheme. Families eat and play in the common facilities at ground level, combining secure individual ownership with strong community spirit.

New Zealand is not Singapore, and our solutions will be different. Some are already being tested.

This week the Housing Foundation handed over two new houses in Mangere to families who could not get a deposit together to buy a house on the market even though they both earned at least $55,000 a year.

The foundation will share its profit on the houses with the two families, allowing them to buy the homes at cost plus 25 per cent of the excess market value above cost. Director Brian Donnelly says the foundation "could easily do 100 of these a year" with finance from the ASB Bank and an effective underwriting by Housing NZ.

The Government has allocated $64 million over four years to Housing NZ's "housing innovation fund" to seed similar community initiatives.

The Salvation Army suggested a range of other options, including giving tenants a right to buy state houses at discounted prices - a policy the Government has ruled out.

Both the Salvationists and the NZ Institute are also keen on a British scheme that pays 250 ($660) into a long-term savings account for every new baby and allows the account to build up tax-free by up to 1200 ($3150) a year until the child turns 18.

Both have also picked up on another British scheme called the "Savings Gateway" which matches savings dollar-for-dollar for the first 18 months of a long-term savings plan for low income earners.

The Budget is expected to include a workplace savings scheme, proposed last year by a group led by former union economist Peter Harris, which will require workers to contribute to a retirement savings fund unless they actively pull out of it., But that will not cost the Government anything, and so far the signs are that the Budget's housing measures - which might cost taxpayers money - will be cautious. Housing Minister Steve Maharey says they will be targeted narrowly at people who earn enough to service a mortgage but can't save enough for a deposit.

However, Skilling says a highly targeted initiative would fail to deal with the broader factors holding back families' ability to save.

"If you are of the view that this is a pretty profound challenge, you can't say, 'Here's our $100 million initiative, we've solved that'," he says.

"This is not just the bottom 20 per cent of the population, it's also middle New Zealand. So any solution has to be capable of assisting many, many New Zealanders to get ahead."