Submission to Commerce Select Committee: Inquiry into Housing Affordability in New Zealand

Introduction

• The National Distribution Union welcomes the opportunity to contribute to an inquiry into housing affordability. We believe such an investigation is long overdue.
• The National Distribution Union has 20,000 members, and covers a wide range of industries. Workers organised by the Union include retail and supermarket workers, storeworkers, bus and truck drivers, butchers, clothing and textile workers, energy workers, sawmill and pulpmill workers, bakers, and ambulance officers.
• The NDU believes there is something fundamentally wrong with a housing market that is structured to deliver untaxed capital gains to those who have capital, at the same time as denying the dream of home ownership to the upcoming generation.
• We would like to see the Select Committee make strong recommendations to Government as we believe only bold measures will help arrest the home affordability crisis.

Greater numbers of New Zealanders are no longer able to afford their own home

• Affordability is now the worst it has ever been: The February 2007 ‘Home Affordability' report from the Massey University Real Estate Analysis Unit stated "Affordability is now the most difficult it has been since the series began in February 1989"[1].
• House prices are outstripping wages: In the three years from 2004 to 2006 increases in house prices outstripped wage rises by 4 to 1. House prices increased by 38.5 per cent while wages went up by 8.7 per cent. House prices increased 9.7 per cent in the year ending December 2006. The Reserve Bank expects higher levels of house price inflation in 2007 as the average number of days taken to sell a house has fallen to "very low levels"[2]. A March 2007 study showed almost three-quarters of the average take home pay is needed to service the mortgage on an average New Zealand house[3]. In Auckland a mortgage now takes up 92.8 per cent of the local average take home pay (up from 71.1 per cent two years ago), whereas in Central Otago the costs of a mortgage are now more than the average salary (105 per cent, up from 91 per cent in December 2004)
• Rents are rising faster than wages: In 1993 rents were 26 per cent of the average wage. In 2006 rents had risen to 32 per cent of the average wage nationally and 37 per cent in Auckland[4]. Between 1993 and the first quarter of 2007 rents rose by 86 per cent while wages only rose by 50 per cent. Higher rents make it harder to raise a deposit for a house.
• Increased household debt levels: Household debt as a proportion of annual disposable income has risen from around 74 per cent in 1992 to 160 per cent by 2006.
• Fewer Mortgages: While the amount of total household borrowing may have increased considerably the actual number of households making mortgage payments has fallen. In 2006 there were 405,267 households making mortgage payments, down from 448,374 in 1996.
• Demographic changes: While traditionally housing policy has been geared to conventional nuclear families, these arrangements now represent a minority of households. This has had a significant impact on the ability of New Zealanders to afford their own home, as it is significantly more difficult to buy your own home on the basis of a single income, especially as wages and salaries are now worth less in real terms than a generation ago.
  • The number of single person dwellings continues to increase, with the proportion of such households increasing from 20.7 per cent in 1996 to 23 per cent in 2006[5].
  • Many single parent families (particularly those led by women) are stuck in the rental market due to the financial constraints of a single income.
  • With average mortgage costs now taking up a high proportion of the average income, home ownership is impossible for the majority of people reliant on a single income.
• Home ownership rates are falling: Rates of Home Ownership have fallen from 73.8 per cent in 1991 to 66.9 per cent in 2006.

Why homes are becoming unaffordable

• Low Wages: Despite record corporate profits, low levels of unemployment and high demand for staff, wage rises for workers in New Zealand have continued to lag behind the rest of the OCED in real terms. Over the 10 years between 1993 and 2003 the average annual change in real compensation per employee was 0.7 per cent, compared to the OCED average of 1.1 per cent and the Australian average of 1.3 per cent[6].
• Student Loans: The obligation to make repayments to student loans has reduced disposable incomes. In some cases banks have cited student loans as a reason for turning down a mortgage application.
• Rising Interest Rates: The costs of servicing a mortgage at high interest rates is making home ownership less affordable for first home buyers. Those already with mortgages face significant rises in mortgage costs when their fixed rate mortgage comes up for renewal. Due to recent rises in the Official Cash Rate (OCR) some will face paying an additional $200 a fortnight, despite being on a fixed income in real terms.
• Speculative Investment in Property: Speculation on secondary properties bought for investment purposes is driving up house prices.
  • According to Treasury figures, 25 per cent of residential property sales in 2005 were for properties that had been owned for less than two years. This represents a significant increase from the 10 per cent of 2001[7]. Many of these sales will have been motivated by a desire to acquire tax free capital gains.
  • Property investors are also able to reduce their tax bill by writing off "losses" on the rental property against other taxable income. Tax data from 1994 shows a trend towards greater investment in loss-making properties, with more taxpayers now reporting tax losses rather than tax profits from property investments[8].
  • While the NDU welcomes the Budget 2007 initiative to provide the Inland Revenue Department with more resources to investigate such housing transactions, we believe it would be more effective to address the structural issues in the tax system that encourage these sorts of transactions in the first place.
  • In the June 2007 Monetary Policy Statement the Reserve Bank noted that increasing overseas ownership of residential property s also driving up prices. "Overall, it seems that, in certain regions and for particular property types, overseas demand is likely to have been quite influential"[9]. This was based on Inland Revenue data on non-resident individuals claiming rental income or losses on rental property and Quotable Value Limited data on the addresses of property owners. The Reserve Bank noted these sets of data were likely to undercount the level of overseas ownership.
  • The NDU welcomes the assistance available to first home buyers through the Kiwisaver scheme. Both the first home deposit subsidy and the ability to divert partial contributions to paying a mortgage will provide a greater incentive for younger people to make higher contributions to Kiwisaver. The NDU notes that as the deposit subsidy is only available after three to five years, this may lead some first home buyers delaying buying their first home in order to take advantage of the Kiwisaver subsidies. This may mean that property investors will be able to pick up investment properties for a lower price in the short term, and sell them again when first home buyers assisted by Kiwisaver make an impact on the market. For these reasons the NDU believes strong action needs to be taken immediately to ensure property investors are not able to profiteer at the expense of first home buyers yet again.
• Land Banking: The NDU also notes the comments of the Minister of Housing, Chris Carter, who says Auckland's growth is being strangled by developers who refuse to build on their land and wait for it to rise in value. "Speculators have been buying up land and sitting on it until prices rise through the roof...This is inhibiting supply and eventually hitting first-time buyers, and it is a problem that needs to be confronted"[10]. The Minister also blamed developers for almost exclusively building expensive large homes on large sections, again pricing first home buyers out of the market.

Interventions to make housing more affordable

• The Government has a long history of intervening in the residential property market to assist New Zealanders into their own homes. William Pember Reeves, a member of the cabinet who set up the Government Advances to Settlers Office in 1898 later wrote, "It has turned out to be one of those rash experiments which, while doing real service, has involved the Dominion in no loss whatever". The Office was nationalised and renamed the State Advances Corporation in 1936.
• In 1958 a State Advances scheme was introduced to assist New Zealanders into their own homes. This offered mortgages at a concessionary rate of 3% and the ability to capitalise the family benefit to make up the deposit. Eligibility was restricted to families earning less than £1000 pounds, plus £50 pounds for each child.
• Private sector interest rates of the time (5.5%[11]) were considerably lower than they are now. The scheme did not appear to have any significant inflationary impact, as inflation did not rise above 5.5% during the 1960s.
• The State Advances policy succeeded in two policy objectives. It gave real assistance to first home buyers. It also assisted those in state houses to move into their own home, thereby making their state house available for another low income family. Largely due to this policy, by 1989 New Zealand claimed the highest rates of home ownership in the world.
• In the 1980s and 1990s the State made a steady retreat from assisting first home buyers. While the state provided half of all home lending in the 1970s, this had decreased to 4% by 1991[12]. During the 1990s the National Government sold the $2.6 billion of Housing Corporation loans that provided the income stream for further loans to first home buyers[13].
• While it is likely that a scheme designed in 1958 would have to be modernised to ensure its practical benefit for twenty first century families, the State Advances Scheme provides an example of a highly successful programme for assisting New Zealanders into their own homes that can be backed up with empirical evidence.
• It is indeed an irony that many of those who are currently speculating on the residential property market with investment properties were helped into their first house with a State Advances Loan.

Speculators, not first home buyers, should carry the responsibility for inflation.

• Those that wish to defend the status quo or hands off "free market" approach to the property market claim that any measures taken to make homes more affordable will have the effect of increasing inflation. Yet this argument ignores at least three sources of inflation created by the current "hands off" approach.
  • Investment properties: As investments in property is seen to be less heavily taxed than other types of investments, those with capital often direct it towards the residential property market, thereby creating more buyers, and therefore inflation of house prices.
  • Bank lending practices: The banks, particularly the four major Australian-owned banks, have a strong bias towards the housing market. Economist Brian Gaynor observed in July 2006 that "residential mortgages now represent 50.5 per cent of total bank lending compared with 47.7% per cent at the end of 2004. By comparison, residential mortgages have fallen from 36.6 per cent to 35.2 per cent of total Australian bank lending over the same period."[14]
  • Real Estate Agents: The real estate industry conduct aggressive marketing campaigns to increase sales and prices. As most commissions are based on the sale price, real estate agents have a vested interest in creating a market where prices escalate. Many real estate agents are also key players in the residential investment property game as property managers. In the Auckland and Northland regions Barfoot and Thompson undertake the property management for over 6,500 investment properties[15]. LJ Hooker Development Services, a real estate agency that sells many investment properties, entices investors with the claim that a new apartment can be bought "for just $1000 down"[16]. The investor usually borrows the entire purchase price, plus a bit more, and secures the lot with a mortgage also covering their existing home. Not only do such schemes encourage escalation of house prices, they also carry risks largely not borne by the developer or the real estate company.
• Why should first home buyers be denied assistance to make their first steps onto the property ladder, when little to no action is being taken against the inflationary actions of others in the residential property market?

Urban sprawl is not a solution

• While we acknowledge that restrictions on Metropolitan Urban Limits (MUL) can have an impact on land, and therefore, house prices, we do not believe that relaxing these limits is going to address the housing affordability issue.
  • For example, the population of Auckland City is projected to increase by 68% by 2050. An additional 200,000 people will need to be housed in an area where there is no rural land on which to expand the city[17].
  • The way in which land is made available is as important as any extension. While the Centre for Housing Research supports some extensions to MULs they also warned that "dribbling new land onto the market in a pre-specified pattern allows existing landowners to retain monopoly rights and high land prices"[18].
  • Creating an expectation that MULs will continue to expand encourages speculation and high prices for rural land on the city fringes.
  • In a world becoming more and more aware of the effects of global warming, there are real questions regarding the financial and environmental sustainability of allowing uncontrolled urban sprawl[19]. Allowing expansion of the city limits will add to overall commuting time and the hardest hit will be those on lower incomes forced to live on the city fringe.

Intensification

• Some greater facilitation of housing intensification may be required, alongside careful planning to ensure housing quality is not substantially compromised, and heritage values are not put at risk. In 2001 the population density of the main New Zealand urban areas was 522 per square kilometre. Generally speaking these densities are less than half of those found in Australian capital cities and a quarter of North American and European cities[20]. Vancouver in British Columbia has a population density of 5039 per square kilometre, yet it rated as the world's third most liveable city in April 2007[21] (Auckland rated 5th equal in the same survey).
• Well planned intensification could also lead to other benefits, such as greater demand for regular public transport.
• Lift New Zealand's low wage levels
  • New Zealand's low wage levels represent a fundamental structural problem in the economy. Between 1980 and 2001, wages fell 6.5 per cent in real terms, at the same time workers in comparable countries saw significant increases in real wages. Real wages in Australia rose 28.8 per cent while Finnish workers saw a 68.2 per cent increase.
  • New Zealand's low wage environment is not due to an inability of companies to pay more. A study by the Reserve Bank showed corporate profits rose 11 per cent between 2000 and 2004[22]. According to a NZ Herald survey in April 2007, the chief executives of New Zealand's 56 largest companies got an average pay rise of 8 per cent last year, with an average pay packet of over $1 million[23].
  • A stronger mechanism is required to increase pay rates on a multi-employer and industry basis. The NDU strongly endorses the view of the New Zealand Council of Trade Unions that an examination of home affordability should also consider how incomes, in terms of declining real wages, are having a negative impact on the ability of New Zealanders to afford their own home.

Build more state houses

• State Houses: The NDU would like to see a significantly greater number of state houses built each year. This will help to keep overall rents at a lower level, giving people more ability to save for a deposit.
• The NDU would like to see more co-ordination between Housing New Zealand and Maori, creating greater possibilities for state housing and new home ownership programmes on papakainga[24] and Maori title land. Maori mental health providers have linked stable residence and home ownership as an influencing factor on improved mental health of communities in economic distress.
• State housing is currently in practice provided as a last resort to those with the greatest housing need. This is a far cry from the significant role state housing played in housing working class families en route to home ownership. The concentration of extreme poverty and its consequences in state housing areas is a result of this reduction of the role of state housing.

Shared equity

• The NDU supports the provision of a shared equity scheme, which would allow those on modest incomes to buy a house that would be normally out of their reach, particularly in more expensive locations such as Auckland.
• Under shared equity, home buyers are provided with the difference between the maximum they are able to borrow and the amount they need to buy a house in the area they live. When the home is sold the equity share is repaid as a percentage share of the sale price.
• Previous Initiatives: We note that a kind of shared equity scheme was piloted by the Housing Corporation in 1985. Mortgage repayments were set at 25% of the household's gross weekly income, with an interest rate of 3% plus the rate of inflation. Only a 10% deposit was required, with the Housing Corporation advancing a loan of up to 90%. Then Housing Minister Phil Goff explained "Effectively it means that if the property is sold, the owner will not get the full capital gain provided by inflation. The lending institution will share in the capital gain to the extent that the value of the loan is protected against erosion by inflation."[25]
• Structure: The NDU would prefer to see an equity sharing scheme administered and funded by Housing New Zealand, Kiwibank and/or other non-profit agencies such as housing associations. This would allow all proceeds from a shared equity scheme to be used to help other first home buyers, and may allow the scheme to eventually self funding. The Government should seriously consider using Reserve Bank credit rather than money borrowed in the private (and generally overseas) market for this purpose - avoiding negative consequences for our balance of payments deficit and a windfall for creditors. The commercial banks will also benefit from a shared equity scheme as they will gain mortgage business from additional customers seeking the private portion of the loan.
• Australian Example: The HomeNorth Shared Equity Loan in Australia allows low to middle income earners to buy 70% to 99% of a property, with the Northern Territory Government purchasing the remainder. Borrows can also buy out the shared equity stake when their circumstances improve. A total of 810 new loans (including 404 fee assistance loans) were processed in 2005/2006 with a value of $61 million[26]. The scheme is administered by the Territory Insurance Office (TIO) which is owned by the Northern Territory Government. In operation since 1999, the HomeNorth portfolio is now valued at close to two hundred million dollars[27].

The role of the Accommodation Supplement

• Comprehensive Review Required : The NDU believes there needs to be a comprehensive review of the role of the accommodation supplement, as it effectively acts as a public subsidy to landlords. There needs to be a through investigation to examine the extent to which landlords have simply pocketed the accommodation supplement through increased rents, and capitalised the subsidy into house prices when they sell. It is possible the accommodation supplement has had a negative impact on home affordability for those wishing to buy.
• While the accommodation supplement can be used to help pay off a mortgage it is fair to say that this function is not as well known. Perhaps this function of the accommodation supplement could be repackaged as a new and expanded benefit, with the option of capitalising the subsidy with the aim of raising a deposit and reducing overall interest payments.

Tax and Banking Changes

• Capital Gains Tax: The NDU supports the introduction of a capital gains tax on all properties apart from the family home.
  • Such a tax could have significant downstream benefits for the New Zealand economy as more locally based capital would become available to finance local businesses. This would allow greater investment in staff through higher wages and greater spending on research and development.
  • The sharemarket would get a boost, and less overseas ownership of New Zealand companies would help to reduce the current account deficit.
  • Between 1989 and 2005 the residential property market provided investors and owners with a tax free gain of 319%[28].
  • The NDU challenges the assumption that a capital gains tax would be unpopular. In February 2006 Treasury and the Reserve Bank noted that developed Asian economies had used a variety of measures to curtail booming property markets, including adjustments to capital gains tax thresholds: "It is worth emphasising that, in these cases, rapid house price inflation had become highly unpopular (as housing affordability had come under such strain), which meant that there was considerable public support for actions to tackle house prices (indeed, in some cases, competition to generate the most politically attractive measures)" [29].
  • As a measure to improve home affordability a capital gains tax is likely to have more impact in the medium to long term, as investors redirect their capital into more productive assets. Even if a capital gains tax resulted in only a small improvement in home affordability, the NDU believe this step is still a worthwhile step as part of a wider policy mix.
• Land Tax: A tax on undeveloped land should also be considered as a way to encourage the development of unutilised land within Metropolitan Urban Limits and to discourage "land banking" in times of high inflation of land values.
• Tax Loss Claims: Treasury and the Reserve Bank[30] have considered restricting the operating losses that could be claimed on residential properties. While it may be tempting given that the current arrangements are used by some taxpayers to avoid paying their fair share, measures would need to be put in place to ensure those modest incomes did not face sharp rent increases as landlords seek to recover "losses". A capital gains tax on investment property is less likely to lead to this outcome.
• Identify Mortgages Used for Investment Properties: Perhaps there should be some investigation by the Reserve Bank and Inland Revenue to look at ways to identify mortgages that are taken out for the purposes of purchasing residential investment properties. This could allow a levy to be placed on such mortgages, providing a way of cooling the housing market without disadvantaging own-home buyers. Identifying such mortgages would also aid enforcement of the Income Tax Act 2004 that makes investments in housing for the purpose of making a capital gain taxable.
• Stamp Duties: The introduction of stamp duties, on a progressive basis, could help to slow demand and act as a revenue source for affordable housing measures. Many Australian states have a transfer/mortgage or stamp duties applying to residential housing, with rebates available for those purchasing their first home.

Tenancy law changes

• Tenancy Law has an impact on investment in rental accommodation and needs to be strengthened as increasing numbers of people rent for longer periods of time. The security once experienced by working families in state houses, or still experienced by those who own their own time is deserved by all. Tenancy law has not been adjusted to reflect the role played by rental housing in meeting the housing needs of families. A lack of long-term security for private tenants is adding to the problems associated with frequent changes of housing arrangement - especially in families with children.

Conclusions

• In March 2001 then Housing Minister Mark Gosche floated the idea of a return to state-assisted mortgages[31]. While the NDU welcomes initiatives such as "Welcome Home" loans, the impact of such programmes has been limited due to their small scale. The NDU believes that bold policy is now required to deal with the growing home affordability crisis.
• In the context of ongoing investigation into additional measures to curtail the inflationary impact of an overheated housing market, such as loan to value ratios and increasing capital requirements for banks, policy should also aim to ensure such measures do not unfairly punish first home buyers. The NDU believes that the mere fact such measures are being contemplated strengthens the argument for state intervention to assist first home buyers.
• The current housing affordability crisis is one element of a wider problem with macroeconomic, tax and investment policy. We have focussed in this submission on those tools that relate directly to housing. However it is clear that a general re-direction of resources away from housing and into productive assets is needed, along with policy that focuses on housing as a need rather than a primary form of saving or profit-making.

[1] Massey University (Feb 07),"Home Affordability Report Quarterly Survey Volume 17, Number 1", Real Estate Analysis Unit

[2] Reserve Bank (8/6/07), "Monetary Policy Statement: June 2007" , p. 11

[3] NZ Herald (28/3/07), "Survey shows crisis in home affordability"

[4] Professor Bob Hargreaves of Massey University quoted in NZ Herald (25/4/07), "House prices leave rents behind"

[5] Source Census 2006

[6] OCED, "Employment Outlook" 2006

[7] Reserve Bank and Treasury (10/2/06), "Supplementary Stabilisation Instruments: Initial Report", p 14.

[8] Reserve Bank and Treasury (10/2/06), "Supplementary Stabilisation Instruments: Initial Report", p. 19

[9] Reserve Bank (8/6/07), "Monetary Policy Statement: June 2007", p. 14

[10] Chris Carter (23/4/07), "Column on High Cost of Housing", www.beehive.govt.nz

[11] New Zealand Official Yearbook 1960, ‘The Housing Situation', p. 648

[12] Kelsey, Jane (1993), "Rolling back the State", Bridget Williams Books, p. 88.

[13] Timaru Herald (1/3/01), "Govt eyes prospect of reviving state-assisted mortgages".

[14] NZ Herald (8/7/06), "Profits for banks, loss for New Zealand", Brian Gaynor

[15] As of 31 October 2006. Source http://www.barfoot.co.nz/about/company.asp

[16] Sunday Star Times (17/6/07), "Tax trap in $1000 down flats", Greg Ninnes and Sunday Star Times (17/6/07), "A Wellington Deal from LJ Hooker"

[17] Motu Economic and Public Policy Research (March 2007), , "Housing Supply in the Auckland Region 2000-2005", Prepared for the Centre for Housing Research (March 2007), p. 16

[18] Motu Economic and Public Policy Research (March 2007), , "Housing Supply in the Auckland Region 2000-2005", Prepared for the Centre for Housing Research (March 2007), p. vii

[19] Massey University Real Estate Analysis Unit (March 2007), "NZ Residential Rental Market: March 2007". Quarterly Survey Volume 10, Number 1.

[20] Massey University Real Estate Analysis Unit (March 2007), "NZ Residential Rental Market: March 2007". Quarterly Survey Volume 10, Number 1.

[21] CBC News (2/4/07), "Vancouver leads Canadian cities in world survey"

[22] Khoon Goh, "Developments in New Zealand Corporate Sector", Reserve Bank Bulletin, Vol 68 - No. 2, 2005.

[23] NZ Herald (7/4/07), "Price of success - what our chief executives earn".

[24] Land utilised for housing for an iwi/hapu or whanau group

[25] Housing Newsletter (December 1985), "New Home Lending Scheme", Number 3

[26] TIO Annual Report (2006), p. 22.

[27] TIO Annual Report (2006), p.5

[28] Figures collated by economist and Infometrics Director Gareth Morgan, quoted in Sunday Star Times (17/6/07), "The Rent Trap", Jenni McManus.

[29] Reserve Bank and Treasury (10/2/06), "Supplementary Stabilisation Instruments: Initial Report", p 11

[30] Reserve Bank and Treasury (10/2/06), "Supplementary Stabilisation Instruments: Initial Report"

[31] Timaru Herald (1/3/01), "Govt eyes prospect of reviving state-assisted mortgages", p. 2.

Contact

Joe Hendren

Researcher

National Distribution Union

(09) 622 8431