The situation
House and apartment prices in New Zealand have been rising sharply. This increase has been going on since around 2001. The average increase has been around 8.3% a year; after an interruption by the Global Financial Crisis house prices have resumed this growth trend. New Zealand has been similar in this to several other higher income countries, such as Ireland, Canada, Australia, UK and Hong Kong.
The median house price for all New Zealand at end 2019 was $629,000 (from REINZ). But prices are higher in Auckland where the median price in was $890,000. Other regions where the median prices were over $600,000 were Wellington, Bay of Plenty, Tasman and Nelson.
The effects
If you already own your house (or other residence) you will not be harmed by the rise in prices. If you stay put then your wealth simply increases; if you sell and buy again the higher sale price most likely will make it possible to afford your next house. This is the situation of the average household – they are not moving. Stats NZ says that the average household income before tax in 2018 was $105,719 while annual housing costs averaged $17,122 or 16% of this income. The average household is doing OK, it is not immediately affected by rising house prices.
The housing problem is severe though for first home buyers. First home buyers typically do not have a household income of over $100,000. First home buyers are typically young people or young families or immigrants with lower incomes. For example, the median income from wages and salaries in mid 2019 was $1,016 a week or a bit over $50,000 annually (from Stats NZ). If a 20% cash deposit is required, this outlay combined with mortgage servicing puts home purchase out of reach for many of these people.
As a result, the home ownership rate has been declining. The recent peak was in 2006 when 67% of households were owner-occupiers. This rate has since fallen. Stats NZ estimates that in June 2019 62% of NZ households owned their own homes, 28% rented and 4% lived in free accommodation.
This has major social consequences. Households have to live somewhere. Most non-owners will rent but the competition for rentals drives up the level of rents. Some households will move in with others while some will try for social housing or fall back on benefit schemes.
This no doubt is a big reason why many young people feel that the economy does not work for them, increasing their dissatisfaction and generating agitation for changes in government policies.
The cause
The cause of high and rising house prices is basic economics – demand exceeds supply. In the short run, excess demand bids up prices. This is what has happened and continues. In the longer run, high prices will lead to an increase in supply, particularly in new construction. But we are not yet in a balanced demand-supply situation.
Demand
The increase in demand is easy to understand; there are several causes here.
Immigration as well as foreigner’s purchases of houses just to get capital gains (now restricted by new regulations) have a huge effect on demand. This is probably the largest cause. Immigration into New Zealand runs at around 50,000 people a year. (The demand for houses is based on households rather than simply people. There are possibly more than 20,000 immigrant households arriving each year.) Most of these people wish to locate in Auckland or Wellington.
In addition, many people from elsewhere in New Zealand wish to relocate to Auckland (mainly) for a better job.
Then there is normal growth of New Zealanders in their 20s and 30s wanting to buy their first home. Interest rates are relatively low such that they are not a major discouragement to demand (although demand is somewhat discouraged by the required 20% equity input required for most new mortgages). These young people further increase demand for house purchases.
The result of all of these is strong demand for houses, particularly in Auckland.
Supply
Now supply. This is the hard part. The short answer is that supply of new homes cannot keep up with demand.
The number of new dwelling consents each year is now around 35,000. This number has been increasing but still not by enough to meet demand.
Why is supply restricted in this way?
The supply of tradespeople is lower than demand. Why? Possibly it is the result on changes in government policy regarding apprenticeships.
Building materials companies have been taking advantage of strong demand to raise prices. (This is basic business behaviour, no blame should be attached.) Government regulations regarding heating, insulation etc also increase costs.
Then there is the question of local councils and the Resource Management Act. District plans and council actions restrict the supply of land for new building. There is a reluctance by some councils to release land for building because the councils do not want to incur the expenses of putting in infrastructure such as water and sewer services. Some councils will not allow division of larger rural land blocks into smaller, residential-sized blocks.
The Resource Management Act, administered by councils, also increase costs of building as a result of all the hurdles that must be jumped before getting a consent to build.
Conclusion
The conclusion is that house prices are high and are likely to keep increasing although the rate of increase may well slow. It unlikely that prices will come down (unless there is a big recession in New Zealand and Asia).
The situation imposes significant economic and social costs on people wishing to change their residential arrangements, whether by buying or renting.
What can be done about the problem? Some new ideas being circulated, such as leasing rather than selling land; these ideas may help but will not solve the problem. Getting councils to streamline and improve their policies to allow more land to become available for residential development and being proactive in investing in infrastructure would definitely help. there are not enough rentals to meet demand Similarly, modifying the Resource Management Act would help, such as reducing the scope for nimbyism (not in my back yard submissions which frequently allow existing property owners to frustrate new development) and by councils streamlining their consent procedures.
Given enough time the supply of new houses will increase which might bring demand and supply into balance. But we are not there yet. And it is not clear, particularly given council and Resource Management Act inaction, when we will get there.