Let's build strategy to make housing affordable

Young adults hoping to buy their own home in New Zealand must take out enormous mortgages. Photo / Supplied

The most interesting aspect of the recent Budget was the acknowledgement by Mr English that almost 75 per cent of New Zealanders earn $40,000 or less.

Sadly it is a stark admission that we are a low wage aspirant to the status of being a developed nation.

Kevin is the son of a close family friend. He is a skilled tradesman with a wife and two children. He headed to Australia two years ago.

A key reason for leaving was that he could not get ahead in New Zealand. He owned a house in an average suburb in Auckland. He couldn't see how their household income would allow them to make inroads into their mortgage while raising a family.

This is a common and tragic New Zealand story. We are the Irish of the South Pacific with a growing economic dispirit.

Let's do the simple maths. The median house price is $370,000 nationally and $470,000 in Auckland.

A 20 per cent deposit still leaves a very hefty mortgage. At the current floating interest rate of 6 per cent this means interest payments alone on an average house for a first home buyer in New Zealand will likely cost $18,000 a year or just under $360 per week.

In the past 10 years New Zealand has become a far harder country to live in with regards to meeting basic living expenses. The process can be likened to a frog in a pot of water slowly being bought to the boil. We appear to be nearing boiling point.

During this decade the median house price in New Zealand has risen by 104 per cent. Median household incomes have risen by 43 per cent. Some of this increase in household incomes is the result of more spouses being required to work to meet the bills. Population growth has been 12 per cent.

These statistics don't make sense. House prices up 104 per cent, incomes up 43 per cent and population up 12 per cent means there was something else in the equation.

Since 2000 I have lived in Dunedin, Wanganui and Auckland. In Dunedin and Wanganui average house prices doubled from 2000 to 2007.

As an economist I found this hard to reconcile with the fact that neither population nor median incomes had increased substantially in either centre. Auckland did at least experience significant population growth though the relationship between income and population growth and housing inflation was way out of kilter.

Real estate pundits attributed a large part of the housing boom to wealthy migrants flocking to New Zealand. Real estate prices did surge in 2003-04 during a spike in inward migration.

But if wealthy migrants are the cause then what are they doing to earn a crust in their new country? They certainly haven't caused average incomes to surge.

So we are a low-wage economy with high priced houses. How is it possible to explain this apparent anomaly?

The answer is debt. In the past 10 years New Zealanders have acquired a massive debt mountain. We have acquired debt to allow us to bid against each other for our own houses.

There is an interesting statistic compiled by the Reserve Bank. The statistic is called M3. It measures the New Zealand money supply which is largely made up of bank lending.

From 1990 to 2000 M3 increased by $40 billion. From 2000 to 2008 during the housing boom M3 increased by $78 billion. This is the missing part of the housing equation.

Bank lending was the key driver of our housing market. Our parents and grandparents had to go cap in hand to the local bank manager to get a mortgage.

Lending was tightly controlled by the government. Banks were required to keep a certain percentage of deposits as reserves.

If the government was concerned about excessive lending it would require the banks to hold more reserves. This was the post-war Keynesian consensus. There were no credit crunches during this period. The dogs of finance were on a tight leash.

This all changed with deregulation of the financial sector in the 1980s and 1990s. In New Zealand and overseas the deregulation of finance lead to massive increases in lending and the emergence of all sorts of exotic financial products.

Banks operating in New Zealand no longer had direct controls on their lending practices. They also had access to cheaper funds from overseas which they could lend in New Zealand at higher interest rates, generating massive profits. The result is we are a low-wage economy living in expensive houses. Young adults wanting to own a home must take out massive mortgages.

They will spend most of their working lives as virtual indentured labour providing profits for the overseas shareholders of our banking system. They will be unable to save the funds necessary to grow our economy.

Others, like Kevin, will head abroad. They take with them the skills and experience vital for New Zealand's economy to grow.

Housing affordability should be a key objective of government policy to alleviate the mess created by the credit splurge of the past decade. It needs to address both the supply and demand sides of the housing market.

- Peter Lyons teaches economics at Saint Peter's College in Epsom and has authored several economics texts.