Last week, Housing Minister Chris Bishop gave perhaps the most important speech by the new Government since the election.
In a speech to the Wellington Chamber of Commerce, he said he wanted the ratio of house prices to median household income to more than halve to between 3 and 5 over the next 10 to 20 years.
Of course, he’s not the first minister to express grave concern about the ridiculously unaffordable housing which is typical of most New Zealand cities.
During the 2008 election campaign, John Key made it clear that Auckland house prices were on average far too expensive – at that time, the median house price in Auckland was 6 times the median household income in the city, and he promised to bring it down.
Shortly after the Productivity Commission was established by the Key Government in 2011, the Minister of Finance directed the Commission to investigate why New Zealand house prices were so over-priced relative to household incomes. The Commission investigated the issue and concluded that there were four main reasons why house prices were so high, three of them, and the most important of them, relating to the behaviour of local governments.
Local governments, the Commission concluded, push up house prices by strictly rationing the availability of land on which to build, thus causing section prices to be wildly out of line with nearby rural land; by making it virtually impossible for home builders to buy large blocks of contiguous land, in turn reducing the scope for efficiencies in the actual building of houses; and by taking far too long to grant relevant resource and building consents.
In 2014, National’s Housing Minister announced that the Government’s goal was to reduce the ratio of the median house price to the median household income to 4 – at the time, the ratio in Auckland had already risen to 7.
By the time the Labour-New Zealand First Government took office in 2017, that ratio had reached 9.
Labour’s Housing Minister, Phil Twyford, understood that the key to getting Auckland house prices down – and therefore putting downward pressure on house prices all over the country – was to reduce the price of land by abolishing the so-called Metropolitan Urban Limit around Auckland, and the Speech from the Throne outlining the new Government’s programme made an explicit promise to abolish that limit. Sadly, we must assume that Mr Twyford was rolled by his Cabinet colleagues because that Government not only did not abolish the Urban Limit despite the explicit promise to do so, Jacinda Ardern eventually made an explicit promise not to do so. Mr Twyford was made responsible for the dopey KiwiBuild programme, and when that inevitably failed his reputation was irrevocably damaged.
Mr Bishop seems likely to succeed where Mr Twyford failed, not least because Mr Bishop is a very senior minister – indeed, the third ranked Cabinet minister. And he is not only Minister of Housing but also Minister of Infrastructure, Minister Responsible for RMA Reform and Associate Minister of Finance, all portfolios relevant to the task of returning New Zealand house prices to a more affordable level.
He is also being helped by the fact that house prices have fallen quite significantly, relative to household income, over the last couple of years. According to the Real Estate Institute, in January 2022 the median house price was 8.8 times the median household income for New Zealand as a whole; by January 2024, this had fallen to 6.6 times. For Auckland, the fall was from an absolutely ridiculously unaffordable 11.5 times household income in January 2022 to a still grossly excessive 8.1 times.
It’s important to put that fall in perspective. “Affordable housing” is generally regarded as that where the median house price is 3 times the median household income in that city or area. New Zealand house prices are still grossly excessive and they are largely responsible for the extreme pressure under which far too many New Zealand families survive.
And that in turn is very largely the result of the utter failure of most local authorities to make sufficient land available.
At the moment, the asking price for 455 square metre sections in Drury – 36 kilometres from Auckland’s CBD – is $732,922 plus GST, or a total of $842,860 including GST. This is the equivalent of over $18.5 million per hectare. Remove the GST component, and the price is still equivalent to over $16 million. And yes, the developers have to incur all kinds of costs to make these sections ready for building on, but something is seriously wrong in a country which is as sparsely populated as New Zealand is when sections measuring not much more than a tenth of an acre cost over $700,000.
The Minister noted in his speech that one of the reasons why local authorities are so reluctant to zone more land for housing is their concern for the costs of the additional infrastructure required if additional land is opened up. And local authorities understandably don’t want to load the cost of additional infrastructure on the perimeter of our cities onto existing ratepayers. But release sufficient land and developers can undertake large scale developments where it is feasible to borrow long-term money to fund new infrastructure, with the cost of that funding being added to the rates on the new sections.
The Minister noted the possibility of sharing the GST revenue arising from new housing developments with local councils, as ACT has suggested.
One way or another, ways can and must be found to reduce house prices relative to household incomes. It can’t be done overnight without enormous trauma to people who have bought their homes in the recent past, but we owe it to the large number of people who currently have not the slightest chance of ever owning the roof over their head to get the process started.
Just a few days before the Minister’s speech, the New Zealand Herald ran an editorial on housing in which they contended that “for better or worse, it is hard to imagine a booming economy in this country that isn’t underpinned by strong house growth”. What an appalling indictment on the imagination of then editor. It is precisely the strong house price growth of the last several decades which lies at the root of most of our social and economic problems.
The consequences of our ridiculously unaffordable house prices in terms of social distress are all around us. Solve that problem and many other social problems melt away.
And not just social problems. The fact that we have come to expect house prices to keep rising faster than incomes is a significant contributor to New Zealand’s lousy household saving rate – why save when homeowners are convinced their wealth keeps rising without any saving required? – and therefore to a persistent need to borrow from overseas.
Because a country’s balance of payments deficit is effectively a measure of the extent to which investment exceeds saving, it’s no surprise that New Zealand’s balance of payments deficit is currently the highest in the developed world.
I wish the Minister every success in his ambition to sharply reduce house prices in New Zealand relative to incomes over the next decade. He would solve a lot of social and economic problems by doing so.
Don Brash was Reserve Bank Governor of New Zealand from 1988 to 2002, and National Party Leader from 2003 to 2006. First published here.
Related Items:
Read: Demographia International Housing Affordability – 2023 Edition
