Low deposit lending to landlords more than doubles; Banks scrambling to deal with massive volumes; ASB economist sees return of high LVR restrictions as inevitable
The Labour government need a comprehensive housing affordability package that takes into account the systemic effects of the housing, transport and land-use system. There is some recommendations in the following paper based on this sort of analysis.
Thanks Brendon. Great post. What does success look like for affordable housing? Rent costs as a share of disposable income? House price to income multiple?
Success could have many different measures depending on the target - productivity, the environment or inequality. My preference would be for NZ to adopt a target for the most ill-served housing crisis group. NZ could have a target that the bottom 20% of income earners should pay no more than 30% of their disposable income in rent.
Beneficiaries being able to access state housing would solve the problem for that part of the housing continuum. For minimum and living wage workers (i.e.the low income workèrs part of the housing continuum) if they are a single income household then they should pay no more than 12 hours work (30% of a 40 hour week) to meet their weekly rent payments. So weekly rent payments should be no more than 12 times the minimum or living wage. The market place cannot deliver rents at these levels therefore in my opinion NZ should adopt something like the Austrian housing model to achieve this. This is detailed in the 'build for the full housing continuum' section of my paper.
slight correction - beneficiaries being able to access *more* state housing *(the state housing stock is increasing by 2000 new builds a year)* would solve....
By my calculation 30% of a living wage earners income is $254. Given your rent data Bernard in Mt Cook, Wellington it would take two low income workers to afford a two bedroom rental unit. With the living wage being just under 30% and minimum wage workers spending more than 30% of their income on rent.
This sort of analysis shows why NZ has a problem with overcrowded rental housing, housing related illnesses, bad child poverty statistics etc.
Enjoying your commentary Bernard. This is beyond any measure of insane, if you look at Monthly borrowing figures compared to the size of the economy it's just... I don't have words to describe it.
Our GDP figures don't accurately represent the ability to generate wealth or 'ability to repay debt'. What I think everyone is missing is that our GDP figures are obviously measuring transactions of goods and services but these very transactions are enabled by the massive household debt that is being taken on each Month. So the economy is feeding of the debt.
The GDP figures are not representative of true demand from earned money (or created wealth).
Ultimately this had to be massively deflationary, the more debt the more deflation and the lower they try and drop rates and so it continues. NZ house ‘values’ at 6.4 times the size of the entire economy are obviously a giant illusion. The answer is less state meddling, not more regulation to try and control price rises. The market is SCREAMING for deflation but no, the central bank knows better. The market will always win.
Let the market set rates for 5 minutes and see what happens. Houses are FAR easier to build than they were 30 years ago and our massive abundance of land is far easier to carve up around the edges of all our provincial towns than it ever was before.
Interesting prompt on GDP. The problem is the marginal cost of supply. Land costs are inflated by shortages of available land on the fringes. Councils refuse to pay for the marginal infrastructure needed for these houses, instead loading the cost up onto the developer (and therefore buyer) of that home. Land is then drip-fed out slowly to ensure landowners don't drive down the price of land in front of them. Landbankers and Councils work together to ensure ratepayers (who love house price rises) don't have to pay for the infrastructure in big lumps. Everyone wins. Except the poor renter and first home buyer, and the Government, which has to pay over $2b a year now in accommodation supplements. cheers
Agreed, however 'everyone wins' is just everyone thinking they have a lot of money where it's just someone elses debt which cannot be backed up by the production of goods and services. We can just keep dropping rates more and taking out bigger mortages but this does nothing to change the value of houses, for example if we ease credit a lot more and cut rates further, essentially giving anyone who wants one a million dollar mortgage then 'prices' will quickly rise to a million but what has changed? The 'value' of NZ houses has increased by 75 billion in a few Months, really? Where has this wealth creation come from? Also I like to use the phrase 'tax payer' in place of Government! Keep up the great work.
Thanks Rob. I get the point about illusory 'wealth'. But it is real in that you could borrow against the value of your home to fund a holiday or a failing business or to engineer the purchase of another home for a family member or yourself to rent out or holiday in. It does convey real value. cheers Bernard
Absolutely yes, it allows for real purchasing power and real use of resources now and thus becomes aggregate demand.
However every dollar borrowed now is a fresh dollar in the system and once the borrower has spent it once, it must be forever 'honored' for future transactions that people make with it. The borrower used it once and then unless they borrow more or reduce consumption they cannot keep up the spending. Meanwhile they have to 'back up' the dollar they borrowed as it now belongs to someone else, the borrower is responsible for not only paying it back (thus having to reduce spending at a later time) but also for paying interest on it as well (hence lower rates). If they default on interest or principal then the money is destroyed and real purchasing power removed from the economy. To take it to an extreme, if the borrower just kept borrowing and consuming resources and thus stimulating aggregate demand, someone else must be willing to hold the dollars created by their borrowing and to believe they too can use them to swap for resources in the economy. I guess that's why debt to GDP ratios are all important as its a measure of promises to be able to use resources vs resources that are actually there to be used.
The present cost of infrastructure is illusionary in that it is nearly twice as expensive as it needs to because of the non-value added costs due to monopoly restrictions that councils hold onto. What we call waste is what they call revenue.
For example, modern sewer STEP systems are cheaper in time and money and more environmentally than what councils require you to subscribe to.
But to allow the private sector to do this, would require councils to give up control, or at least share their power, with them being stuck with a less competitive model.
Cheers Dale. It's worth digging into those assumptions around Councils' actions and motivations. The councillors and mayors and their staff are often under pressure from ratepayers who vote (less than 40% of voting age population typically) to avoid any extra debt or rates increases. Therefore their incentives are to avoid new infrastructure. A rational response to the political and economic parameters set by our laws, particularly around who gets the tax revenue from population and GDP growth. cheers Bernard
Yes, sadly by design and their own reaction to having to play by those rules, councils have evolved (mutated?) to survive, as they do, but at the expense of the total system.
The capital side is more costly than it needs to be, eg if they had used STEP wastewater systems, but gives them the control that any bureaucratic organization always hunger.
And conversely, on the operational side, councils do not receive enough, because they don't have funding access, plus they are afraid to increase the rates due to ratepayer backlash.
It's a fun exercise to say 'what if housing was 50% cheaper, and rates were 50% dearer than the present status quo? Which one would be better off over say 50 years.'
But even the operational side does not have to be any dearer for both the homeowner via rates, or councils not been able to do more for less. For example, in a STEP system, since the solids are generally handled on-site, if the homeowner flushes things down the system they shouldn't, then they only stuff up their system, and only they get the bill. Residents soon become more efficient, and councils and ratepayers do not have to pick up the cost for such behaviour that presently happens under the status quo.
The Labour government need a comprehensive housing affordability package that takes into account the systemic effects of the housing, transport and land-use system. There is some recommendations in the following paper based on this sort of analysis.
https://medium.com/land-buildings-identity-and-values/if-not-now-when-f995dd596c1
Thanks Brendon. Great post. What does success look like for affordable housing? Rent costs as a share of disposable income? House price to income multiple?
cheers
Bernard
Success could have many different measures depending on the target - productivity, the environment or inequality. My preference would be for NZ to adopt a target for the most ill-served housing crisis group. NZ could have a target that the bottom 20% of income earners should pay no more than 30% of their disposable income in rent.
Great target. How does that compare with now? What would rents have to do to get there? cheers
Beneficiaries being able to access state housing would solve the problem for that part of the housing continuum. For minimum and living wage workers (i.e.the low income workèrs part of the housing continuum) if they are a single income household then they should pay no more than 12 hours work (30% of a 40 hour week) to meet their weekly rent payments. So weekly rent payments should be no more than 12 times the minimum or living wage. The market place cannot deliver rents at these levels therefore in my opinion NZ should adopt something like the Austrian housing model to achieve this. This is detailed in the 'build for the full housing continuum' section of my paper.
slight correction - beneficiaries being able to access *more* state housing *(the state housing stock is increasing by 2000 new builds a year)* would solve....
That's useful. By my calcs, 30% of the take-home pay for someone on minimum wage is $192 a week. Then you'd have to work out what the threshold for affordable rent would be. For example, Tenancy.govt have stats by region and suburb that includes lower quartile, median and upper quartile rent. For example, in Mt Cook, where I live, a lower quartile 2 bedroom flat's rent is $500 a week. https://www.tenancy.govt.nz/rent-bond-and-bills/market-rent/?location=Wellington+-+Mt+Cook&period=147&action_doSearchValues=Find+Rent
By my calculation 30% of a living wage earners income is $254. Given your rent data Bernard in Mt Cook, Wellington it would take two low income workers to afford a two bedroom rental unit. With the living wage being just under 30% and minimum wage workers spending more than 30% of their income on rent.
This sort of analysis shows why NZ has a problem with overcrowded rental housing, housing related illnesses, bad child poverty statistics etc.
Enjoying your commentary Bernard. This is beyond any measure of insane, if you look at Monthly borrowing figures compared to the size of the economy it's just... I don't have words to describe it.
Our GDP figures don't accurately represent the ability to generate wealth or 'ability to repay debt'. What I think everyone is missing is that our GDP figures are obviously measuring transactions of goods and services but these very transactions are enabled by the massive household debt that is being taken on each Month. So the economy is feeding of the debt.
The GDP figures are not representative of true demand from earned money (or created wealth).
Ultimately this had to be massively deflationary, the more debt the more deflation and the lower they try and drop rates and so it continues. NZ house ‘values’ at 6.4 times the size of the entire economy are obviously a giant illusion. The answer is less state meddling, not more regulation to try and control price rises. The market is SCREAMING for deflation but no, the central bank knows better. The market will always win.
Let the market set rates for 5 minutes and see what happens. Houses are FAR easier to build than they were 30 years ago and our massive abundance of land is far easier to carve up around the edges of all our provincial towns than it ever was before.
Interesting prompt on GDP. The problem is the marginal cost of supply. Land costs are inflated by shortages of available land on the fringes. Councils refuse to pay for the marginal infrastructure needed for these houses, instead loading the cost up onto the developer (and therefore buyer) of that home. Land is then drip-fed out slowly to ensure landowners don't drive down the price of land in front of them. Landbankers and Councils work together to ensure ratepayers (who love house price rises) don't have to pay for the infrastructure in big lumps. Everyone wins. Except the poor renter and first home buyer, and the Government, which has to pay over $2b a year now in accommodation supplements. cheers
Agreed, however 'everyone wins' is just everyone thinking they have a lot of money where it's just someone elses debt which cannot be backed up by the production of goods and services. We can just keep dropping rates more and taking out bigger mortages but this does nothing to change the value of houses, for example if we ease credit a lot more and cut rates further, essentially giving anyone who wants one a million dollar mortgage then 'prices' will quickly rise to a million but what has changed? The 'value' of NZ houses has increased by 75 billion in a few Months, really? Where has this wealth creation come from? Also I like to use the phrase 'tax payer' in place of Government! Keep up the great work.
Thanks Rob. I get the point about illusory 'wealth'. But it is real in that you could borrow against the value of your home to fund a holiday or a failing business or to engineer the purchase of another home for a family member or yourself to rent out or holiday in. It does convey real value. cheers Bernard
Absolutely yes, it allows for real purchasing power and real use of resources now and thus becomes aggregate demand.
However every dollar borrowed now is a fresh dollar in the system and once the borrower has spent it once, it must be forever 'honored' for future transactions that people make with it. The borrower used it once and then unless they borrow more or reduce consumption they cannot keep up the spending. Meanwhile they have to 'back up' the dollar they borrowed as it now belongs to someone else, the borrower is responsible for not only paying it back (thus having to reduce spending at a later time) but also for paying interest on it as well (hence lower rates). If they default on interest or principal then the money is destroyed and real purchasing power removed from the economy. To take it to an extreme, if the borrower just kept borrowing and consuming resources and thus stimulating aggregate demand, someone else must be willing to hold the dollars created by their borrowing and to believe they too can use them to swap for resources in the economy. I guess that's why debt to GDP ratios are all important as its a measure of promises to be able to use resources vs resources that are actually there to be used.
Any thoughts you have on this are appreciated.
The present cost of infrastructure is illusionary in that it is nearly twice as expensive as it needs to because of the non-value added costs due to monopoly restrictions that councils hold onto. What we call waste is what they call revenue.
For example, modern sewer STEP systems are cheaper in time and money and more environmentally than what councils require you to subscribe to.
But to allow the private sector to do this, would require councils to give up control, or at least share their power, with them being stuck with a less competitive model.
Cheers Dale. It's worth digging into those assumptions around Councils' actions and motivations. The councillors and mayors and their staff are often under pressure from ratepayers who vote (less than 40% of voting age population typically) to avoid any extra debt or rates increases. Therefore their incentives are to avoid new infrastructure. A rational response to the political and economic parameters set by our laws, particularly around who gets the tax revenue from population and GDP growth. cheers Bernard
Yes, sadly by design and their own reaction to having to play by those rules, councils have evolved (mutated?) to survive, as they do, but at the expense of the total system.
The capital side is more costly than it needs to be, eg if they had used STEP wastewater systems, but gives them the control that any bureaucratic organization always hunger.
And conversely, on the operational side, councils do not receive enough, because they don't have funding access, plus they are afraid to increase the rates due to ratepayer backlash.
It's a fun exercise to say 'what if housing was 50% cheaper, and rates were 50% dearer than the present status quo? Which one would be better off over say 50 years.'
But even the operational side does not have to be any dearer for both the homeowner via rates, or councils not been able to do more for less. For example, in a STEP system, since the solids are generally handled on-site, if the homeowner flushes things down the system they shouldn't, then they only stuff up their system, and only they get the bill. Residents soon become more efficient, and councils and ratepayers do not have to pick up the cost for such behaviour that presently happens under the status quo.