Affordable (cough) housing

• The median section cost in 1992 was $71,000 and reached a high median of $480,000 range    (there were months where distortions took the median price as high as $750,000 but I choose to ignore those months).
• Section prices went up a staggering 676% at their peak.
• Today with median section value at $322,000 that represents an increase of 453% since 1992.
• Houses by comparison rose some 330% ($160,000 to $528,000).
• What that means is that somewhere between $250,000 and $400,000 of the increased cost of homes is due to land increases (only $118,000 or thereabouts, is due to increased cost of materials and labour).
• Even if the use of medians distorts the exact position, the picture represents what is happening is accurate.
• In 1992 the introduction of GST caused median household incomes to drop to $32,800
• Household income (before tax) has doubled, houses (after tax) more than trebled.

How does this situation come about? The new biggies in the mix are taxes and levies.

• The median sale price of a home (new) is $528,000 of which $58,700 is GST.
• To develop a section you will pay the council somewhere between $20-90,000 in levy fees ,contributions and environmental compliance costs.
• Holding costs accrued from delays due to the inefficient resource management act add significantly to the increase.
• The monthly cost on a $100,000 mortgage to pay all these taxes is $640 and will use the first $10, 900 of the average household income of $67,800.
• It is an outrage committed by stealth upon the public generally.

The major cause for the rise is the subtle change in the way councils have sought to fund infrastructure. In the past infrastructure costs associated with growth had typically been funded by the government through public service debt. The  debt servicing was through community wide taxes (rates).
The current approach has been to abuse the user pays philosophy and tax the new homes via levies to fund the infrastructure.

In Sydney Australia a new home will incur infrastructure charges of $68,000 compared to an actual cost estimate of $1750 – the difference of some $66,000 is used to cover a range of infrastructure that benefits the broader community including libraries, new roading, public pools and transport. These levies may or may not be spent in the neighbourhood that was taxed. I.e.: new home buyers are subsidising the replacement and upkeep costs of infrastructure that they may not even benefit from. This is effectively happening here today in NZ.

The councils also continue to levy the community at large (rates) and seem to be able to avoid being held to account. I see no likelihood that this situation will reverse.

A further contributor to the cost increase of land is relative scarcity. In one of the worlds least densely populated lands we have a scarcity of sections – not a shortage of suitable land. Increasingly development of land has been restricted by various forms of government, essentially to reduce their contingent infrastructure costs.
Major components in the increased costs are as a result of land rationing, excessive amenity requirements, excessively expensive infrastructure fees and approval processes and a general increase in inflation – Are these factors reversible? I doubt it!

2.  We have heard calls for the removal of negative gearing taxation benefits for rental properties as an aid to increasing affordability. The same calls were heard in Australia and in 2006 Earnest & Young prepared a comprehensive report submitted to the Henry-Warburton enquiry in 2006. The report identified the following…

• The majority of Australians taking advantage of negative gearing was in the         $40-80,000 pa. tax bracket.
• Negative gearing encouraged private investment in rental housing, without which rental yields would be prohibitively low and cause investors to quit the market.
• Negative gearing helped place a lid on rental pressure by increasing the stock of rental housing and taking pressure off rents.
• Removal of negative gearing as occurred under the Hawke-Keating government in the 1990’s would immediately lead to an exodus of investment in  rental housing causing rental shortage and rapid rise in rents (the Hawke-Keating government rapidly reversed their decision).
• Removal of negative gearing in today’s climate, especially given greater land shortages and higher development costs would have a dramatic impact on the rental housing market.
• I am confident the above would be broadly similar and apply in New Zealand.

I conclude from the above that the taxation benefits of rental property ownership will remain and that we will not again see home ownership levels in the 80-90% range. Currently hovering around 63-64% in Auckland.
Home ownership will become the province of those with above average wealth, or those with parents who can help. Dependency on rental housing will increase and future generations of Kiwi’s will not be able to aspire to own a home of their own and will suffer from rising rental costs.
I have yet to see Tax/Levy reductions and have no belief that they will come about. Conversely, there is no lack of example of increases – often indirectly. The local and national governments will not relax land supply and neither will the cost of raw land or development cost of that land fall.

There will never be a better time to buy property than today and it was always so. It makes no difference whether you are buying investments for your future needs or homes for the kids or even just to move, this is a great time to do it and you can move with confidence.  If you think it is difficult today, I am sure it will be more so tomorrow.