Aside from Covid-19, the biggest challenge the government faces this year is getting on top of the rapidly increasing housing crisis. And it seems clear that public patience with its efforts is diminishing quickly. The cynical media headlines last week about Labour’s announcement that more housing announcements are coming later on is an early sign of this.
Given the depth of the problem, Labour can almost be forgiven for appearing a little gun-shy now when it comes to dealing with it.
After all, they thought they had the answer in 2017 with their bold and innovative Kiwibuild programme that was going to build 100,000 new affordable homes for young New Zealand families over the next ten years but which instead has become a byword for policy failure on a massive scale, costing the Minister who was responsible his reputation and virtually his job. (He now sits as the lowest ranked Minister outside the Cabinet and has nothing to do with housing.)
Should property owners be able to expect modest increases in the value of their properties over time, as the Prime Minister says? Click here to comment.
Labour’s recent housing announcements have focused more on what it is not going to do, rather than positive policy announcements which, we are told, are still coming.
A capital gains tax has been ruled out (every government since the 1980s has ruled out a capital gains tax at one time or another so this must surely be its end of the line). So too, it has ruled out a wealth tax and a land tax as other measures to curb rising house prices and make home ownership more accessible and affordable for young families.
While housing could yet prove to be this government’s Achilles heel, it is worth remembering that every government over the last 50 years has struggled with housing policy. Access to the market and rising affordability levels have been perennial problems that most governments have attempted – largely unsuccessfully – to deal with, no matter the amount of political resolve they have brought to the question. The present government looks to be no different in that regard.
Norman Kirk’s Labour Government sought to curb rising house prices and reducing accessibility with its bold Property Speculation Tax, introduced in its first Budget in 1973. That provided for an extraordinarily punitive tax rate of up to 90 percent on capital gains from properties sold within two years of acquisition. The tax was applied on a sliding scale depending on how long the property was held before resale. If the property had been owned for six months or less the full 90 percent rate was applied. Otherwise, the rate reduced down to 60 percent if the property was held for up to two years, and thereafter tailed off.
Suffice it to say, the tax was hugely unpopular and was seen as one of the contributors to Labour’s landslide election defeat in 1975. It was repealed by the Muldoon National Government, although not until 1979, but housing prices continued to rise, fuelled by stubbornly high, double digit inflation rates.
The median house-price in Auckland in the middle of last year was 11.5 times the median household income level. That situation is clearly unsustainable for any period of time.
By 1983, when every other of his policy measures to curb inflation had failed, Sir Robert Muldoon turned his attention to interest rates. At the stroke of a pen late that year he made it illegal for any person or institution to lend money on any building or land at more than 11 percent interest on a first mortgage, and 14 percent on any subsequent mortgage. His primary target was allegedly lawyers’ trust accounts, but whatever his target or motivation the draconian policy did not work. The interest rate controls failed to curb inflation, but made mortgages harder to come by, and pushed the price of housing up further.
When Sir Roger Douglas went the other way after 1984 and abolished all interest rate controls, housing affordability rose sharply, as did interest rates. Mortgage rates above 20 percent were not uncommon, at a time when inflation was still in the high teens. Gradually, as inflation was brought under control, interest rates declined steadily, to become much more manageable for households and businesses. But housing affordability did not start to improve until after about 2009.
Various other expedients have been tried over the years with similar success levels. Loan-to-value ratios introduced by the previous National-led Government in 2015 to dampen housing demand met with only mixed success, and were quietly abandoned, although there are Reserve Bank plans now for their return.
Housing costs have surged again since 2018, and especially in the early months of 2020, as Covid-19 influenced spending in often unexpected ways. For example, according to official statistics, the median house-price in Auckland in the middle of last year was 11.5 times the median household income level. That situation is clearly unsustainable for any period of time. Moreover, a perverse consequence of low mortgage rates over the 10 years has been to entrench the position of existing homeowners, increasing their wealth, but making it harder for first-time buyers to enter the market.
Her government’s challenge now is to balance that expectation alongside that of those still seeking to become first-time property owners. It is a task that has eluded most governments to date and now seems likely to elude this one as well.
An additional factor has been added the increase in New Zealand’s population. Since 2013, our population has grown around 20 percent to just over 5 million people, principally through immigration. While the closure of our borders for the foreseeable because of the pandemic will have some of that pressure for the foreseeable future from an immigration perspective, there is now the additional problem of New Zealanders with available cash returning home and looking for somewhere to buy.
Labour’s problem today is aggravated by its elevation of housing as a major issue of the 2017 election campaign that its Kiwibuild programme would resolve. With that clearly not having been the case, its subsequent ruling out of significant tax changes – though prudent and politically astute – has left the government looking all at sea, and bereft of ideas at a time when housing problems have become far more severe.
A renewed focus on increasing housing supply is correct but is unlikely to produce sufficient results in the short term to alleviate some of the political difficulties likely to emerge for the government over the next two years. The National Policy Statement on Urban Development with its emphasis on intensification based around transport hubs is currently being consulted upon by local government. Its fate is by no means clear given the controversy it is stirring up in some places. This is leaving the hoped-for reliability of local government delivering on the government’s wishes looking precarious, given next year’s round of local body elections where voters will have their say on how intensification might affect their areas – and their property values.
The Prime Minister put her finger on the government’s dilemma recently when she acknowledged that property owners should be able to expect modest increases in the value of their properties over time. Her government’s challenge now is to balance that expectation alongside that of those still seeking to become first-time property owners. It is a task that has eluded most governments to date and now seems likely to elude this one as well.