It’s clear that New Zealand is in the depths of a housing crisis, with the lack of supply and new development in our main urban centres in particular.
Many commentators have proposed several solutions to try to fix this and there is merit to many of these solutions. However, without properly understanding the underlying causes it will be difficult to identify an effective course of action that addresses both the short-term and longer-term challenges.
So how did we get here?
New Zealand historically was a country of small, low density townships which enabled residents to own large sections despite having relatively modest dwellings. The historic opportunity to own a quarter acre section was the embodiment of what we now call the “Kiwi Dream”.
Over the past 50 years our population has doubled, and the size of the average dwelling has increased. Over that time Tauranga has grown from a beachside town to a major urban centre and seen its population more than triple, outpacing the national average growth rate and creating challenges for future urban development.
Over the past two decades the average 2-year fixed mortgage rate has gone from a high of almost 10% to as low as 3.5%, and the average house price from $175,000 to $820,000 according to REINZ.
It seems that a combination of population growth, increasing size of new dwellings and lower interest rates each have their part to play. However, the other major factor often overlooked is equity leverage.
A first home buyer or investor purchasing into a rapidly increasing market, the 20% (now 40% for recent investors) will have seen the equity they have in their property grow at that rapid pace. If, for example, a buyer had purchased even in the past 12 months and experienced the average gain of 25% this would result in more than double a first home buyer’s equity (on a 20% deposit) and a 63% increase in an investor’s equity (on a 40% deposit) in the property they had purchased.
Subject to meeting their lender’s income requirements, this would often allow them to leverage that equity gain to purchase another property which many do. The growth in property values thereby feeds itself for as long as equity gains satisfy the lender’s capital requirements.
What does this all mean for the solutions to our crisis?
It seems obvious that increasing supply is part of the solution to keep pace with the population growth New Zealand has experienced over the past 50 years. However, what this supply might look like is perhaps the more important part of the discussion. Many of us are conditioned to aspire to the Kiwi Dream or at least a downsized version of it.
The juxtaposition to the Kiwi Dream is “smart growth” involving more apartments, high-density development and greater reliance on public transport. Whether widespread acceptance of this alternative to the Kiwi Dream will be realised in our urban centres outside of Auckland remains to be seen. In Tauranga, where living in self-contained single dwellings with a decent sized backyard is seen as one of the major lifestyle benefits, it’s difficult to imagine widespread acceptance of “smart growth” in the short-term. Nonetheless this is probably the long-term key to overcome Tauranga’s housing challenges given the infrastructure difficulties the city has been facing in getting large scale housing developments off the ground.
Due to strong economic growth (2.8% in the last quarter), “maximum sustainable employment”, and inflationary pressures, interest rates are on the rise which will place further pressure on housing affordability and may moderate price growth in the short-term. Longer term however it seems a low interest rate environment is here to stay and its unlikely that interest rate rises hold the key to fixing our housing crisis.
The Reserve Bank is looking at other tools such as debt to income ratios to limit how much finance borrowers can obtain which may also moderate price growth in the short-term and proposals such as requiring a capital contribution to the deposit on all residential properties rather than leveraging equity gains could further moderate price growth. However, whether tools such as these are able to achieve what the LVRs have failed to so far remains to be seen.
Whatever the ultimate solution is, there is no apparent quick fix. A “smart growth” strategy is potentially a decades long endeavour and not without its challenges and drawbacks, particularly regarding public transport development and adoption which is a necessary feature of higher density urban living. Nonetheless the actual implementation of a “smart growth” strategy would be an exciting opportunity to future proof the growth of cities like Tauranga which will continue to experience strong population growth over the coming decades. We may just have to accept that one of the major lifestyle benefits of living in our city will not be as widespread as it was historically but with the myriad of other lifestyle benefits available and the benefits of higher density urban living perhaps, we can afford to let this go.