Guest Post: Housing

A guest post from a reader:

The country has painted itself into a bit of a corner.  Not everyone is able to own a house, so many have to rent a place to live. A lot of rental houses are older ones that have fallen off the bottom of being places where owners want to live.  I am not saying they are all cold and mouldy dumps … just like not all tenants are feral.  It is what  it is.

House prices are set by supply/demand and the cost/feasibility  of borrowing.  So lower deposits and mortgage interest rates mean higher house prices.  Add to that the ability to rat your tax-subsidised  Kiwisaver pension fund plus  various grants and you get relentless upward price pressure at the first home level.  Rents on the other hand are sort of tied to capital values and (of course) also influenced by what tenants can afford.  On the face of it as prices have inflated way above incomes this has created problems for both renters (rent hard to afford) and landlords (rent not generating enough return).

The sad fact is that if you are renting a house and want to buy one just like it for about the same as what you are paying in rent, you need a deposit of 40-50%.  Do the math and don’t forget rates, maintenance and insurance.  So a high LVR lets you get into paying a whole lot more per week, but at some point – looking at 10 years income to buy –  it eventually becomes sort of impossible.  It has never been easy to buy a first house, but it is only getting harder.  The “how many years income” thing just goes up and up.

As prices outpace rent growth, the rate of investment return on residential housing drops off.   This leaves a potential investor with little or no income and hanging out for the eventual capital gain. The show may be run at a cash loss for a while as the 40-50% deposit also applies if you want to buy a cash-neutral rental.  Ring-fencing the loss just makes life harder.  The corner we have been painted in to is that – generally – building houses to for income makes no sense.

None of the first-home buyer incentives lead to the building of more houses – they kick the can down the road and pour a bit more petrol on the bidding fire.  This is particularly true at the bottom end of the market – so-called “affordable” homes.   The RMA and high land prices do not help.  When Kiwibuild was announced there was a lot of noise about how prefabricated homes were going to take off and dent the price/availability problem.  There would have to be thousands of such homes under construction to have this effect.  This has not happened. 

So there are not a lot of new private sector low end houses being built, and rental houses make no sense as an income proposition. The $ profit is too low to interest many developers – why would you build a low price house on high price land?

And yet – if you drive around the country, every small or large town has significant collections of reasonably solid State houses largely built in the late 1930’s to the mid 1950’s. The bulk of them have since moved into private ownership.  One sort of wonders how it was all managed – Kiwibuild was an unsuccessful attempt to sort of replicate it.  National’s previous “Special Housing Areas” solution had been a bit of a fizzer.  

The corner just keeps getting smaller.  Unfortunately the State is the only player with the scale to do anything about it.