Typically Market Demographic for New Home Mortgage by ziw16390

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Government policies for increasing the supply of affordable housing

Blair Badcock
Chief Advisor Housing Sector Policy
Housing New Zealand Corporation


Background
During the recent housing boom in New Zealand the price of „ent ry level‟ homes rose beyond the
reach of many first home buyers. As a consequence, Government housing policy now has a
much stronger focus on enabling housing supply to respond to demand for more affordable
housing. Economic and demographic changes transforming New Zealand society have given
rise to a so-called „intermediat e‟ housing market. This is the segment of the market occupied by
wage earners on modest incomes who earn too much to qualify for state housing assistance but
not enough to buy a home on the open market. Households with only one worker on average
wages, especially those raising children, face an especially high hurdle as prospective home
buyers in the Auckland housing market.

When is housing ‘unaffordable’?
                                      2
The New Zealand Housing Strategy states that „…..affordability typically becomes a concern
when the housing costs of households in the lower 40 percent of the income distribution exceed
25-30% of their (gross annual) income‟. Beyond this level, spending on housing reduces the
residual income available to low and moderate inc ome households for ot her essentials like food,
heating, clothing, travel to work, schooling and healthcare. A growing number of those
households receiving the Accommodation Supplement spend more than 50 percent of their
weekly income on renting privately.

What’s the problem?
In the case of home purchase, housing affordability is determined by the level of house prices
and interest rates relative to household income. During the first half of the decade, escalating
house prices and higher mortgage rates made first time ownership unaffordable for many working
New Zealanders. Between March 2002 and March 2007, real house prices increas ed by close to
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80% while the cost of land roughly doubled. Fortunately, for those unable to buy and dependent
on renting, the rise in private rents hardly exceeded movement in the Consumer Price Index (CP I)
due to the ex pansion of investment in residential rent al property.

Market conditions have eased since peaking towards the end of 2007. Over the foll owing 12
months, the national median house price fell by close to 7% while average rents ros e by almost
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3%. Nonetheless, it is not yet clear how the adjustment that is underway will ultimately impact
on the affordability of either first homes or rents for households on lower incomes. For example,
while mortgage interest rates are settling at more affordable levels, the banks have reverted to
stricter lending criteria, including a 20% deposit requirement. So while mortgage repayments are
now more manageable, the down payment on a first home has almost doubled.



1
  All published material is unavoidably time-bound: policy, in particular, is continuously evolving.
  At the time of publication, the Government‟s housing manifesto was the only source of its
  intentions for the housing sector.
2
  Housing New Zealand Corporation (2005) Building the Future: the New Zealand Housing
  Strategy
3
  Department of the P rime Minister and Cabinet (2008), Final Report of the House Prices Unit:
  Hous e Price Increas es and Housing in New Zealand.
4
  Median house price derived from Quotable Value dat a and average rents from the Consumer
  Price Index data compiled by Statistics New Zealand.


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A graph prepared by BRANZ (Fig. 1) indicates that, even under optimistic assumptions, house
prices and mortgage rates will still have to fall a long way relative to earnings before the
affordability of a newly built home returns to 1990s levels.




Source: BRANZ (2007) Changing housing need. Study Report No 183.


        Figure 1: Affordability of newly built housing


Home ownership trends are symptomatic of deteriorating housing affordability over the longer-
term. Since 1991, the home ownership rate in New Zealand has fallen from almost 75 percent to
67 per cent. Projections suggest that under some assumptions it could fall to 62 per cent by
       5
2016. No other OE CD country has experie nced a fall in home ownership of this magnitude – nor
will the United States once the full shak e-out of the sub-prime market has run its course.

Still, New Zealand is not alone in facing housing affordability difficulties: although home
ownership rates have remained reasonably steady in countries like the UK and Australia, and
even though house prices are now falling, housing affordability remains a political priority in all
three countries.

What’s made housing unaffordable?
In May 2005, the New Zealand Housing Strat egy warned that „housing markets [are] under
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stress‟. As house prices continued their climb, a number of reports and inquiries were
commissioned to identify the key drivers and suggest what might be done to moderate market
distortions.

Almost 12 months later a joint report prepared by the Reserve Bank and Treasury for the Minister
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of Finance on „supplementary stabilisation instruments‟ was released.

5
  DTZ New Zealand (2007), The Future of Home Ownership and the Role of the Private Rental
  Mark et in the Auck land Region. Centre for Housing Research Aotearoa New Zealand.
6
  At the time, the Housing Strategy also noted that:
“…. in a buoyant housing market, the supply-side is hard-pressed to respond quickly enough to the surge in
demand for extra housing. It is difficult for planners, property developers and builders to quickly ramp up
production and bottlenecks appear in the supply chain for new housing” (p.14).
7
  Reserve Bank of New Zealand/The Treas ury (2006) Supplementary Stabilisation Instruments.
  An Initial Report.


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This covered a range of changes to taxation policy , improvements to the supply res ponse, and
forms of regulatory tightening aimed at subduing hous e price inflation. The report concluded that
„…. there are no simple, or readily implemented, options that would provide large payoffs‟ (p. 1).

Then, in March 2007, with still no sign of the market cooling, the Commerce Select Committee
announced an inquiry into housing affordability with a particular focus on restraints on land supply
for new housing, building compliance costs, bank lending and the tax treatment of property
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investment. The report was presented in August 2008.

The most comprehensive analysis of hous e price inflation and affordability issues was prepared
by an expert group assembled by the Department of the Prime Minister and Cabinet in the last
                 10
quarter of 2007.     Demand side drivers identified by the House Prices Unit included:
     growth in household numbers fed by a „spike‟ in net migration during 2003;
     real growth in earnings combined initially with low int erest rat es and increasing availability
        of mortgage finance;
     competition from residential property investors based on heightened expectations of
        capital gain.

Analysis of the housing supply chain indicated that:
     although housing output almost kept up with population growth, that came with large
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         increases in costs for land, labour, materials and finance (Fig. 2);

        while multi-units now comprise about 25 per cent of housing starts in Auckland and
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         Wellington, far fewer affordable „starter‟ homes are being built.
        in a housing boom, regardless of the amount of available land in the pipeline, new
         supply is unavoidably „sticky‟ because the housing industry and utility companies cannot
         subdivide and service land, and build homes quickly enough to put downward pressure
         on house pric es (i.e., new dwellings only account for about one in five houses being
         sold).

The House Prices Unit was unable to do any econometric modelling to assign weights to these
drivers of house pric e growth. This might have helped to remove the conjecture surrounding the
impact of land use policies, such as Auckland‟s Metropolitan Urban Limit, upon section prices.
During the boom, some property developers and commentators argued that this was the main
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reason new housing had become unaffordable.             In the event, the House Prices Unit concluded
that „no one factor can account for the increases in house pric es since 2001‟ and that because of
this, „mitigating the future effects of declining affordability will require a mix of new policy
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settings‟.

8
  For example, stricter enforcement of the capit al gains provisions and the „ring-fencing‟ of
  operating losses on investment properties.
9
  Report of the Commerce Committee (2008) Inquiry into Housing Affordability in New Zealand.
  http://www.parliament.nz/en-NZ/SC/Reports/c/7/9/48DBS CH_SCR4170_
  1_Inquiry_into_Housing_Affordability_in_New_Zealand.htm
10
   Department of the P rime Minister and Cabinet (2008) Ibid.
11
   On the other hand, survey data suggest that regulatory compliance is only a small part of these costs.
While varying around the country, on average the extra costs attributable to code compliance, developer
contributions, holding costs, or delays in processing local government documentation only accounted for
about 2.5% of the price rise on a newly built ho me.
12
   With average floor size ju mp ing fro m about 160m² in 1998 to 200m² in 2007, clearly builders were
targeting the more profitable upper end of the market which placed new supply beyond the reach of most
young families seeking a first home.
13                           rd
   Demographia (2007), 3 Demographia International Housing Affordability Survey: 2007
  Ratings for Major Urban Mark ets.
14
   Department of the P rime Minister and Cabinet (2008), op. cit., pp. 23-24.


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 Source: Department of the Prime Minister and Cabinet ( 2008) p. 45

Figure 2: Increases in factor costs for a standard dwelling 2001 -07


Why is an emerging „intermediate market‟ segment a concern?
Shrinking home ownership has been blamed on the affordability gap. There is an „intermediate
market‟ segment of working households emerging in countries like the UK, Australia and New
Zealand who are earning too much to qualify for social housing, but not enough to buy their own
home without some assistance. In New Zealand, „intermediate‟ renters grew by 117,000 b etween
1996 and 2006 and will continue to grow numerically in absolute terms regardless of improving
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affordability. As a result, future governments could face mounting expenditure on the
Accommodation Supplement.

The prospect is for more „intermediate‟ renters to be stranded in a changeable, and therefore
precarious, private rental mark et throughout their working lives and on into retirement. While
many qualify for the Accommodation Supplement to help with housing costs, they cannot
realistically look forward to buying and that cuts off access to the dominant form of wealth
creation for most New Zealanders.

Affordable housing is also a concern for central and local government when shortages begin to
hold back regional economic growth. Often employers cannot recruit essential workers and some
work ers cannot afford to live in the community where they want to work. Modelling of the
linkages bet ween housing, employment, infrastructure and regional development in the Bay of
Plenty identified a growing „intermediate mark et‟ made up of working households on moderate
incomes priced out of home ownership, and households on lower incomes that would have
difficulty paying their rent. The gap bet ween housing costs and average earnings was most
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marked in the ret ailing, local government, hospitality, health care, and transportation sectors.


What can be done about unaffordable home purchase?

15
   DTZ New Zealand (2008) The Intermediate Housing Mark et in New Zealand. Centre for
  Housing Research Aotearoa New Zealand.
16
   Capital Strat egy/SGS Economics and Planning (2007) Affordable housing in the Bay of Plenty
  region –
a solutions study. Centre for Housing Res earc h Aotearoa New Zealand.


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After the sale of the Crown‟s sizeable mortgage port folio as part of the housing reforms in the
1990s, Housing New Zealand focussed supply-side assistance more narrowly on a few small -
scale home loan products aimed at poorly serviced segments of the market. These included low
deposit home loans for buyers in rural areas, papakainga loans for hous es on Māori land in
multiple ownership, and loans for people wanting to build a home as part of a Group Self -build
venture.

The second stage of the housing work programme initiat ed by the Department of the Prime
Minister and Cabinet in 2007-08 moved on to a consideration of policy options more suited to
prevailing market conditions. This heralded a shift in housing policy from reliance throughout the
previous decade on the Accommodation Supplement, to a greater role for supply -side initiatives.

Government policy on home a ffordability
The Government‟s housing manifesto, which was released in September 2008 prior to the
election, sets out the main issues that it wants policy development to focus on during this term. In
the case of housing affordability, this includes addres sing “the core policy and legislative issues
that have given rise to housing supply and housing affordability problems, as well as lending a
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helping hand to thos e with home ownership aspirations”.

From a demand-side perspective, the Government aims to ease the burden of mort gage
repayments and help those saving to bridge the deposit gap by:

           lowering personal income taxes;
           taking the pressure off interest rates by growing the productivity of the New Zealand
            economy and eliminating low quality government spending;
           continuing the Welcome Home Loans scheme which assists households missing out
            under standard lending terms (close to 4,000 Welcome Home Loans have been
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            underwritten by the scheme) ;
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           continuing the Shared Equity pilot , while giving current applicants the option of
            switching to a new affordable ownership product that operates as much through the
            supply-side (the Gateway Housing Initiative);
           permitting the withdrawal of savings from Kiwisaver accounts aft er three years to buy a
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            first home .

The following key initiatives to increase the supply of affordable homes for first time buyers will
form the focus of housing policy development over the next three years. This will involve working
closely with a number of other government agencies like the Ministry for the Environment, which
regulates the planning system via the Resource Management Act, the Department of Building
and Housing, the Ministry of Social Development, and Te Puni Kōkiri.

Timely release of land for affordable housing development
Land availability is crucial to an efficient housing supply chain. Research on the res ponsiveness
of the supply-side during the housing boom identified sources of cost escalation, including land
being held back from the market and cumbersome resource consent, planning and zoning

17
     National Housing Policy Paper (09/09/ 08) p. 1, www.national.org.nz

18
   www.welcomehomeloan.co.nz
19
   A two-year shared equity pilot was launched in July 2008 for up to 700 households living in
  high cost areas. The Crown takes an equity share up to 30 per cent in a modestly priced first
  home, bridging the gap between a household‟s income and the mortgage repayments which
  would otherwise be unaffordable. Given the market uncertainty continuing into 2009 it is still too
  early to decide how much demand there is likely to be for shared equity mortgages.
20
   www.kiwisaver. govt. nz/benefits/benefits




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procedures. The Government expects changes to the Resource Management Act to see more
land released for development and to speed up consenting, both of which should help moderate
the cost of a new home.

Other Government proposals to streamline the planning system include:
    issuing a National Policy Statement to ens ure that local councils adequately plan for a
       forward supply of new house sites;
    making it easier to redevelop underutilised land within built -up areas for affordable
       housing;
    ensuring councils have the tools to encourage landowners and developers to releas e and
       subdivide their land reserves for development in a reasonable timeframe.

A Gateway Housing scheme
Policy work has begun on options for a new Gateway Housing Initiative whereby land in public
ownership is developed for first-home buyers or in partnership with community housing
organisations. National‟s Housing Policy Paper indicates that households qualifying would have
free use of the „ready-to-build‟ site on a leasehold basis for up to 10 years so long as they started
building within 12 months. By year 10, or before that if possible, the home buyer would have the
right to purchase the land at its original capital value plus 3% for each year that had elapsed. In
effect, this amounts to a subsidised low interest loan on the land which could be quite significant
in some locations.

House sales to Housing New Zealand tenants
The opportunity to purchase the state house they live in will be extended to Housing New
Zealand tenants. The proceeds will be reinvested back into replacement stock so that the Crown
maintains the current size of the portfolio. Policy has to be developed to fit with Housing New
Zealand‟s asset management strategy and around terms and conditions applicable to the offer.

Targeted Housing Innovation funding
The Government proposes to refocus the Housing Innovation Fund, which has provided funding
to community housing providers and to councils to help modernise or build local government flats.
In the Government‟s view, “Such groups are better positioned than Housing New Zealand to offer
first-home ownership opportunities, whether through shared equity, sweat equity, rent -to-buy or
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other avenues”.

Relat ed policy work will be directed to: exploring ways to make Housing Innovation funds go
further; giving banks more confidence to back community housing projects; and, leveraging other
sources of private sector funding.

Develop papakāinga housing
The Government proposes to work with councils to remove any obstacles to the development of
housing on communal land, especially Māori land in multiple ownership. Iwi will have access to
the Housing Innovation Fund for papakāinga housing projects, while work will proceed on what it
would take to gain the confidence of the financial sector.




21
     National Housing Policy Paper 2008. www.national.org.nz




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Conclusion
The concerted research and policy effort that has gone int o gaining a better understanding of,
and responding to the causes of house pric e inflation and declining home ownership helped to
place housing affordability near the top of government business. In a statement issued in
conjunction with the release of the Government‟s housing policy paper, the Hon. Phil Heatley,
Minister of Housing, said that “National is determined to ensure future generations have the same
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opportunity for home ownership and wealth creation that previous generations had”.

Although New Zealand is one of a number of countries grappling with housing affordability issues,
we have been fortunate to have largely escaped the „r ental housing crisis‟ that Australia faces
due to a serious shortfall in new supply. How the privat e rental mark et will adjust in New Zealand
now that the market correction is underway is uncertain. What is clearer is that home purchase
will become more affordable as house prices and mortgage rates continue to ease, while the
policies developed to respond to unaffordable first homes will pay dividends in the years ahead.
But whether thes e supply-side initiatives will be sufficient to slow, let alone arrest, the decline in
home ownership remains to be seen.




22
   “2008: Housing – Putting the Kiwi dream back in reach”,
http://national.org.nz/Article.aspx?ArticleId=28497




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