1/200 Economic Analysis - Tracking out-of-control house prices
This article is the first in a series of regular updates tracking New Zealand economic issues, digging into the data and providing critical analysis.
The mainstream media often quote commentators, utilise metrics, or infer links and causes which support their leanings. This series will also assess and critique how the media are shaping the conversation on economic issues.
Back in 2016, the IMF reported that New Zealand had the least affordable housing market among its list of the 30 wealthiest countries, with prices rising 11% in the year prior.
More recently many economists predicted COVID-19 would see a crash in property prices. Instead, it prompted record-low interest rates and a policy of inflationary asset purchasing from the Reserve Bank, along with capital seeking refuge from an uncertain investment environment. What better refuge than a residential property market which the government refuses to tax and virtually guarantees ongoing price increases?
The market took off, with 25-30% average price inflation in the last year. It can only be described as out of control.
This crisis is more deep and complex than what can be explained by looking only at house prices. For example, we know that a third of people in Aotearoa rent their homes, largely from a private market with little regulation. Moving beyond a fixation on the private, owner-occupier market is the only way there will be strong and lasting solutions.
However, to understand the scale of the crisis, and just how commodified housing has become, it seems a logical place to start.
Measuring the ratio of median house price to median income presents a grim picture. The rapid price growth in the last year will likely* have already seen the median price reach 10 times the median household income, and an absurd 19 times when household income is apportioned per person (a process called equivalisation by Stats NZ).
More shocking still, if we assume only 4% income growth and 7% house price growth annually going forward (both roughly consistent with pre-COVID trends), house prices reach a multiple of 15 times household incomes, and 25 times the equivalised figure, by the early 2030s.
It could be much sooner than that with prices growing at the rate they are, or even half the current rate.
So what is the government doing about this?
Back in March, the Prime Minister announced a package of housing reforms aimed at curbing the surge in prices. It included extending the bright-line test and removing mortgage interest as a tax-deductible expense from rental incomes. Predictably, and laughably, this was met with fury, apocalyptic predictions and empty threats to flee the market from the property investor lobby. Of course, the mainstream media was willing to amplify their outrage.
With (tax-free) capital gains ballooning at around $15,000 - $20,000 per month and interest rates at record lows, it’s hard to see how these reforms would deliver significant changes from the current trajectory.
In Budget 2021 however, the Treasury forecasted house prices would slow to an astonishing 0.9% growth in the year from July 2021 to June 2022. Although it’s early into this period, an overlay of Treasury’s forecast with the actual trends shows little change. In fact, in the month of July 2021 alone, average prices increased 1.8% – twice what the Treasury had forecast they would increase over the entire year.
Treasury later indicated that, instead of using a more comprehensive model, it was more-or-less guessing the government’s initiatives would be key to this change.
With home-ownership seen as the way to economic and housing security in this country, more and more people will be seeing their hopes for the future fade. Discontent with this state of affairs, and the government’s dismal response, will surely begin to boil over. Unless that is, the bubble bursts and the government has a different problem to contend with – one where a policy of “sustained moderation” makes even less sense than it does today.
*Based on 5% income growth forecast to June 2021. To be confirmed when the latest Statistics NZ Household Economic Survey is released.
Paul Kelland is a Data Analyst and Fiscal Policy Nerd