Drivers of the Housing Crisis

The Problem
Humans seek security and safety in shelter, supporting social, psychological, and economic benefits. Those without shelter are left exposed to weather, illness, and exploitation. Humans find value in shelter, and therefore markets exist to buy and sell the homes that provide that shelter.

In a free market economy, the forces of supply and demand dominate. According to Statistics New Zealand data, the number of dwellings in Auckland has increased by 30% in the last 20 years. The Auckland population has increased by 43% in the same time period. The Ministry of Business, Innovation, and Employment estimates that there is now a cumulative shortage of at least 25,000 dwellings in Auckland. Others estimate this to be larger, with the Productivity Commission estimating a shortage of 60,000 homes by 2020. Simply put, there aren’t enough new houses for new people to live in.

As a result, land prices have more than quadrupled over the last 25 years, and house prices (after inflation) have trebled in the same time period. The average house price is set to exceed $1 million in the next 12 months; this has already occurred in North and East Auckland and in some city fringe areas. The property-price-to-median-income ratio in Auckland has reached nine; the rule of thumb is that this ratio should not exceed three (although there are few big cities where this is true).

This exposes Auckland to two key risks:

  1. long-term societal imbalance as the gap between homeowners and renters increases due to growing property wealth from capital gains
  2. potential sudden burst of the housing bubble with collapsing property prices, impacting the wider economy, and disproportionately affecting the less wealthy

Owning housing has become inaccessible for a large proportion of the population, forcing them to rent while transferring wealth to existing homeowners. This disproportionately affects young people, with economist Shamubeel Eaqub coining the term “Generation Rent”. The high cost of housing keeps families in a cycle of poverty, with housing costs leaving insufficient funds for other basic needs, or in some cases insufficient funds for housing leaving families homeless. Widening inequality and increasing poverty is a key predictor of falling happiness within a society.

The Drivers
Stable pricing is predicated on a balance between supply and demand. Political parties, independent analysts, and media pundits all have differing opinions on whether the cause of the Auckland housing crisis is on the supply-side or the demand-side; in reality, it is likely attributable to both. Here are twelve drivers from both sides – some are from the Auckland Council Chief Economist, some are from the Productivity Commission, and some are from my own analysis.

  1. High net migration into Auckland, reflecting New Zealand’s current economic strength relative to Australia and Europe, as well as a booming education sector targeting international students. In 2015, net migration into Auckland was at least 30,000. Note that net migration is both more people coming into Auckland, and fewer people leaving. This is most apparent to/from Australia; a few years ago New Zealand was (net) losing 40,000 people a year to Australia, last year we (net) gained 1,600. More stats available at TransportBlog.
  2. Historically low interest rates, both worldwide and in New Zealand, reflecting efforts by central banks to stimulate their economies to avoid the long-term impacts of the Global Financial Crisis. In 2008 the OCR was at 8.25%; now it is at 2%. With low interest rates, people are more incentivised to borrow (and spend). More stats available from the Reserve Bank of New Zealand.
  3. Increasing willingness by banks to fund household lending, based on international lending standards viewing mortgages as “safe lending” that are less risky than corporate lending. Household debt is now at over 160% of nominal disposable annual income. It’s set to keep going up as interest rates keep falling. More analysis available from the Reserve Bank of New Zealand.
  4. A demographic shift towards smaller households, with smaller family units and an aging population. In 2013, almost half (48%) of all households in Auckland had only one or two people. More stats from Auckland Council and the New Zealand Initiative.
  5. Council constraints on the supply and usage of land in Auckland, leading to artificially low housing density that is inconsistent with density patterns in other large cities internationally. Auckland has a pretty uniform population density of 32 people per hectare beyond 2km out of the city centre; in New York it’s 100 people per hectare at 2km, in Barcelona it’s over 300 – it takes over 20km for population densities there to match Auckland levels. More stats from New York University/NZ Treasury.
  6. Vocal opposition to intensification by existing ratepayers (synonymous with homeowners), expressing concerns about compromising standards of living and reducing property values. Councils and governments are (arguably) democratic and dominated by older and wealthier segments of the population. It is largely in their capitalistic self-interests for house prices to rise, increasing their personal wealth. The Productivity Commission has identified this as a “democratic deficit” due to the disproportionate influence of homeowners in local council elections and consultations. More on this from Bernard Hickey (and everyone else talking about NIMBYs).
  7. Onerous and uncertain resource management requirements and building consent processes, disincentivising new developments and increasing compliance costs. It can be very risky for new developers, because they can invest millions of dollars into large-scale development, only to be blocked after a few years by rejected consents.
  8. Skills and labour shortages in the construction industry, stemming from unattractive low wages and punitive liability rules. New Zealand has maintained a net deficit of construction workers for the last 30 years. More analysis from Statistics New Zealand.
  9. Speculative investment, with foreign and domestic investors accounting for 43% of purchases, driven by tax-free treatment of capital gains attracting investors towards New Zealand housing. The exact proportion of foreign vs. domestic (and who counts as foreign and who counts as domestic) is controversial and uncertain. More stats from CoreLogic/Auckland Council (section 3.2.7).
  10. Auckland Council’s extremely high debt levels, currently at 275% of revenues (annual borrowing costs are roughly 12% of revenues), negatively impacting the Council’s ability to build the necessary electricity, water, and roading infrastructure to support new dwellings. More stats from Auckland Council.
  11. The Productivity Commission estimates that the average floor size of new dwellings has increased by more than 50% since 1989, requiring more land in order to house the same number of people. More stats from Productivity Commission (section 3.3).
  12. The “leaky homes” crisis of the late 90s leading to negative perceptions towards the construction industry and causing ongoing costs to affected families and local councils. This has also made policy-makers conservative, erring on the side of caution and stringency when it comes to RMA and related reform.

A major challenge is the inelasticity of housing supply – it takes both a long time and a lot of money to build housing and related infrastructure. This limits the responsiveness of housing supply to comparatively fast changes in housing demand, creating the opportunity for imbalances to snowball into crises. This also creates the potential for overcorrection, due to the slow response of policy outcomes.

The Conclusion
Any policy that only addresses one of these drivers will not resolve the housing crisis. A combination of policies from both central and local government is required in order to rebalance supply and demand, or at least reduce the size of the currently widening gap. Perhaps this has already been happening – there have been a number of actions taken in the last few years, and it will take many more years for the effects of those actions to be seen in the housing market. We can only wait for the market to respond.