Housing affordability: Who actually wins from the housing crisis?

Abigail Dougherty/Stuff
Auckland University professor of urban planning Elham Bahmanteymouri explains why Kiwis have poured so much capital into housing, while other countries are content to rent. (Video first published in July 2021)

If you're a homeowner, it's easy to watch your house jump tens or hundreds of thousands of dollars in value and think you're benefiting from the housing crisis.

However, when you run the numbers the reality is that for most owner-occupiers the ability to move up the ladder into a bigger home or better school zone is getting harder, resulting in bigger debts, longer-term mortgages, and less disposable income.

So if the average homeowner, who has enjoyed an estimated median property gains of $215,000, is arguably still in the losing column, who is winning?

Stuff looked at the figures to establish exactly who falls into the winning and losing column, and what it means for the country.

READ MORE:
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* Nearly 99 per cent of Kiwi house sellers score big gains

The losers

Homeowners have seen property values rise almost across the board.
Alden Williams/Stuff
Homeowners have seen property values rise almost across the board.

First home buyers

In the past year this group has watched median house prices increase by 25.2 per cent to hit a record high of $826,000, according to Real Estate Institute figures.

On top of that, New Zealand’s price-to-income ratio is running higher above the long term average than any OECD country.

This translates to an exclusionary market for those hoping to buy their first home, especially with banks now predicting mortgage interest rates will rise more quickly than expected, meaning the window to ownership through cheap borrowing might be closing.

Existing homeowners (owner-occupiers without investment properties)

CoreLogic chief property economist Kelvin Davidson puts this group in the loser column, despite nearly 99 per cent of house sellers who sold between October and December last year scoring big gains.

This is primarily due to CoreLogic’s most recent Pain or Gain analysis, released in June. It showed across the main centres, the “trade-up premium” (the gap in price you pay between three and four bedroom properties) was at least $150,000 across the main centres, and more than $400,000 in central Auckland.

“It’s one of those cliches really that people forget. You buy and sell in the same market in the most part, so everything else is going up in value too,” Davidson said.

CoreLogic senior property economist Kelvin Davidson says house values are just numbers on paper until you sell, and then you usually have to buy in the same market.
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CoreLogic senior property economist Kelvin Davidson says house values are just numbers on paper until you sell, and then you usually have to buy in the same market.

“To move up [the market] you have to pay more than you’ve gained on paper. That will involve actually a bigger mortgage and being in debt for longer, or having to divert more income to pay that mortgage."

The exception are those looking to downgrade, perhaps as they retire, or people moving out into cheaper areas. They will often find themselves with more money in the bank or a much smaller mortgage.

This inability to move up the ladder was likely a reason why many would-be movers stayed put in recent times, creating another barrier for first home buyers.

The winners

Real estate contractors

Tax figures show the average income of contractors working in real estate services, which includes most real estate agents, boomed during the housing crisis.

Average earnings before tax (which included self-employment income and commissions on the likes of property sales) jumped 73 per cent between 2010 and 2019 for this group, going from $65,100 to $112,400.

Real estate agents, management, rental agency services and time-share apartment management services are all included in the data set.

Investors

Research found the number of properties in the hands of investors nearly tripling between 1986 and 2018.

A Government paper revealed in June showed property investors’ incomes from rents were low enough to indicate that almost all were banking on some capital gains to make purchases pay off.

But with the average capital gain on property hovering around record heights, it’s hard to argue that investors haven't won from the situation.

Davidson agreed – for existing investors, booming house prices often resulted in a cash windfall.

Developers

Davidson said in principle, rising land values could make it harder for developers.

“Developers have to find that land and get the house built and take a margin all within that effective price cap.”

However, he suspected buyers were willing to pay enough, and prices were rising at a fast enough rate, that developers would still see profitable opportunities.

“The problem for developers over the coming years may well the trade-off between rapidly rising construction costs but perhaps a slowdown in final market prices – and whether or not they can still make profits when input costs are rising but final property values perhaps stabilising.”

New Zealand – winner or loser, unknown

Whether the country will end up in the winners’ or a losers' column remains to be seen.

In July, ratings agency S&P said the rate of house price increases could pose a risk to the stability of the banking sector.

The same risks led global news service Bloomberg Economics to label New Zealand the most bubbly house market in the world.

Meanwhile, the Property Council recently released a report claiming property was now the country’s largest industry, contributing $41.2 billion a year to gross domestic product (GDP), or 15 per cent.

Auckland University professor of economics Robert MacCulloch says New Zealand has to move away from idealising the property sector.
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Auckland University professor of economics Robert MacCulloch says New Zealand has to move away from idealising the property sector.

Auckland economist Robert MacCulloch said the Property Council’s calculations included real estate services, and estate agent commissions, and construction, and the report spelled out a position the country actually had to move away from.

He said the report celebrated high property prices as a good thing, because they contributed to larger real estate commissions and earnings, without paying mind to the societal damage and economic risks.

“In some ways I thought, ‘How dare they?’

“I think that’s everything the Government quite rightly, both National and Labour, wish to move New Zealand away from – that too much of the economy is revolving around high house prices.”

Property Council chief executive Leonie Freeman said the study was intended to provide an opportunity to examine changes in the industry over time and was conducted at regular intervals, with the last being in 2016.

“Examining the industry’s economic significance allows [the] Property Council, on behalf of our members, to explain how changes and decisions made by central and local government impact the sector and the economy. This includes the nearly 200,000 New Zealander’s employed in the property industry in construction, development and associated services, as well as the wider community,” Freeman said.

Davidson said the Reserve Bank was already concerned about the risks the country and its financial systems faced from the housing market.

In August, the Reserve Bank prepared to crack down on housing, announcing they would enter into consultation with banks to reducing the amount of low-deposit lending.

Reserve Bank deputy governor Geoff Bascand says steps taken to reduce negative equity risks have not done enough.
ROBERT KITCHIN/Stuff
Reserve Bank deputy governor Geoff Bascand says steps taken to reduce negative equity risks have not done enough.

Reserve Bank deputy governor Geoff Bascand said the steps the Reserve Bank had taken to date had only partially reduced the risk of recent homeowners ending up with negative equity – meaning if house prices fell borrowers could end up with mortgages that were larger than the value of the home.

Given 30 per cent of all mortgage debt is now owned by home buyers who purchased in the past two years, a lot of people and banks are exposed to this risk.

If mortgages can’t be paid and more owners have to sell, the country risks having a glut of properties hit the market, forcing prices down, and potentially risking a crash.

“That’s what the Reserve Bank are talking about. They are trying to limit the riskier lending because there’s a very real possibility if house prices fall people get into trouble and the whole system gets a bit shaky. We saw that in the GFC [Global Financial Crisis] and we've seen it at times in the past,” Davidson said.