KEY POINTS:
With respect, Keith Rankin's Rented Houses are Homes Just the Same supposition appears to be that the normal market clearing price of a house is a function of its rental value. And that because since 2003 rental values have not increased much, reflecting little growth in demand for places to live in Auckland, consequently there is no housing crisis.
There is a lot of sense in other things he says, but not that. The latest statistics available from the Department of Housing show that in 1991 the ratio of owner/occupied homes to rented homes was 73.8 per cent to 26.2 per cent respectively.
Whilst the proportion of owned homes is believed to have fallen since then (projected at 61.8 per cent by 2016), the owned home sector is probably still well over twice as large as the rental sector. Therefore, the vast majority of home buyers are buying a home to live in.
They don't care (or probably even know) what rents are. So it is difficult to see how rents could drive the entire housing market.
Furthermore, if Mr Rankin's rent/value equation were true, market values would have slowed from 2003; however, they continued to grow rapidly until very recently.
I don't have any statistics, but this view is borne out by anecdote and observable behaviour in the property industry. Landlords invest in residential rental property primarily for long term capital gain, rather than rental returns.
This is why they are prepared to accept returns as low as the typical 5 per cent when one could get 7.3 for government bonds risk free. They generally take an unsophisticated long term view that by the time they retire the property will be worth a lot more than they paid for it (and the gain on sale will be untaxed), or at worst the mortgage will be paid off (largely by the tenant) and the rents will be enough to live off.
They are usually happy if the rental covers the mortgage at purchase. Other incentives are that it is possible to find the time to manage several rental properties whilst remaining in full time employment and the tax deductions on interest paid, home office expenses, maintenance and depreciation can offset tax paid on this and other income.
Entry to the market is easy if one has equity in one's own home. When one compares residential property to other investment prospects this is rational and most investors' expectations have been realised historically. Most residential property investors wouldn't recognise a P/E ratio (price to earnings) if one bit them on the nose and don't even consider other types of investment. However, they feed off the housing market, they are not driving it.
One might think that the rental market should influence ownership decisions, therefore home values, on the grounds that renting is the only real alternative to owning (leaving aside the caravan, tent, car boot or the legendary hole in middle of the road). In New Zealand, the link is very weak and a premium is paid for ownership. This is a cultural factor and may be due to the fact that many of our forefathers migrated here to get away from being beholden to others, including landlords.
Renting is only for the young and mobile, recent immigrants (and even then only temporarily) or the have-nots. The fact is that, rightly or wrongly, New Zealanders want to own their homes and due to demand, side factors - immigration, rising incomes, and the supply side factors such as rising building costs and they aren't making any more land, home prices have risen dramatically. In view of this cultural aspiration, I believe there is a housing crisis when the dream has become unobtainable for most of a whole generation. (NZ median house price is 9.9 times median income according to interest.co.nz).
Like Mr Rankin, I think the problem will largely self correct (though the bubble will just stop growing for a long time, rather than burst) and I also think the Government should stay well clear of subsidising low income owners into home ownership, or (although it's too late for this one) trying to force developers to include low cost housing in their projects.
Government could help by:
* Removing regional authority policies that limit suburban growth/constrain land supply. * Reviewing council obligations to reduce building consent fees/speed up consents.
* Reviewing the building act/regulations to enable new homes to be built cheaper.
* Stop trying to kill the housing market with high interest rates that cripple the rest of the economy and inflate the dollar.
* Reducing taxes overall, so that investors become less driven towards property.
Although the effect would not kick in for decades, schools should also be made to teach all children the basic principles of economics, budgeting and how interest rates and other financial matters operate. Most New Zealanders leave school bereft of any clues on investing (or for that matter, spending, wisely, unless you consider alco-pops, beer, cigarettes and a big-bore exhaust system for the car to be investments).
* Graham Barton is senior manager transaction advisory services at Ernst and Young.