As a result of that widespread belief, it was taken as a self-evident truth that the most important financial decision a young person could make was to “get on the property ladder” by borrowing as much money as the bank – the commercial bank or the bank of Mum and Dad – would lend to buy as much house as possible.
That behaviour has been richly rewarded, while the behaviour of the “suckers” who lent the money – Mum and Dad or the savers at the bank – has been sorely punished.
When I was at the Reserve Bank, I used to illustrate the injustices caused by inflation by quoting the experience of my uncle in contrast to my own experience. In 1971, I had bought a home in Castor Bay, Auckland – it was a fine home with five bedrooms, two bathrooms, and pleasant sea view. I paid $43,000 for it, which was almost exactly three times my very considerable (for the time) salary of $14,000.
The same year, my uncle, who had been an apple orchardist in the Nelson area all his life, retired and sold his orchard for $30,000. Being a prudent man, he invested that $30,000 in government bonds for 18 years at the rate of 5.5%, believing that to be the safest place to invest the product of his life’s hard work.
When he made that investment in 1971, $30,000 was a considerable fortune – it would have bought him 11 Toyota Corolla cars. When the bonds matured in 1989, that $30,000 would have bought him one Toyota and a very small amount of change. He had been robbed blind by the inflation of that 18-year period.
By contrast, the house which my wife and I had bought for $43,000 – mostly with borrowed money - had increased in market value roughly tenfold. We had very considerably increased our family wealth; my uncle had been robbed of most of his.
In 1988, I became Governor of the Reserve Bank, and for a time I was renting an apartment. I still recall being phoned by a real estate agent trying to sell me a house. When I pointed out to him that the interest payments on the mortgage I would need to take out to buy the house he was proposing I buy would be considerably higher than the rent I was paying on a similar house, he pointed out that, while that might be true, the rise in the house price would more than offset that difference.
I noted that if house prices kept increasing rapidly I could well lose my job, given that my sole responsibility was to get inflation under control, so I couldn’t afford to take the risk of buying.
Fortunately for me, my wife and I did buy a house not long after that, and also fortunately for me, my responsibility as Governor was to keep inflation as measured by the Consumer Price Index under control. Had my job been tied to limiting the increase in house prices, I would have been out on the street!
Tragically for more than a generation of New Zealanders, house prices have been rising steadily at a rate markedly faster than incomes. This has been great for some New Zealanders – those who were lucky enough, or wise enough, to be able to buy residential property with borrowed money and hold on as house prices rose and the real burden of their mortgages shrank.
The widely accepted rule of thumb is that an “affordable housing market” is one where the median house price in that market is about three times the median household income in that market. Four or five decades ago, that was broadly true in New Zealand cities.
But over time that has changed so that by 2021 or 2022 the median house price in Auckland was about 11 times the median household income, ranking that city as one of the most severely unaffordable cities in the English-speaking world.
In that environment, it always made sense to borrow as much money as the bank would lend to buy as much house as possible. House prices were constantly rising – and not only rising but rising faster than other prices or than incomes. The game was to start with a modest house and then, as its market value rose, sell it and use the capital gain to buy a larger house, and so on; until in due course the buyer was well up the ladder and could live comfortably ever after.
This of course glosses over the sometimes considerable stresses involved in this kind of behaviour – when the house is found to have faulty foundations or a leaky roof.
When I was at the Reserve Bank, I used to illustrate the injustices caused by inflation by quoting the experience of my uncle in contrast to my own experience. In 1971, I had bought a home in Castor Bay, Auckland – it was a fine home with five bedrooms, two bathrooms, and pleasant sea view. I paid $43,000 for it, which was almost exactly three times my very considerable (for the time) salary of $14,000.
The same year, my uncle, who had been an apple orchardist in the Nelson area all his life, retired and sold his orchard for $30,000. Being a prudent man, he invested that $30,000 in government bonds for 18 years at the rate of 5.5%, believing that to be the safest place to invest the product of his life’s hard work.
When he made that investment in 1971, $30,000 was a considerable fortune – it would have bought him 11 Toyota Corolla cars. When the bonds matured in 1989, that $30,000 would have bought him one Toyota and a very small amount of change. He had been robbed blind by the inflation of that 18-year period.
By contrast, the house which my wife and I had bought for $43,000 – mostly with borrowed money - had increased in market value roughly tenfold. We had very considerably increased our family wealth; my uncle had been robbed of most of his.
In 1988, I became Governor of the Reserve Bank, and for a time I was renting an apartment. I still recall being phoned by a real estate agent trying to sell me a house. When I pointed out to him that the interest payments on the mortgage I would need to take out to buy the house he was proposing I buy would be considerably higher than the rent I was paying on a similar house, he pointed out that, while that might be true, the rise in the house price would more than offset that difference.
I noted that if house prices kept increasing rapidly I could well lose my job, given that my sole responsibility was to get inflation under control, so I couldn’t afford to take the risk of buying.
Fortunately for me, my wife and I did buy a house not long after that, and also fortunately for me, my responsibility as Governor was to keep inflation as measured by the Consumer Price Index under control. Had my job been tied to limiting the increase in house prices, I would have been out on the street!
Tragically for more than a generation of New Zealanders, house prices have been rising steadily at a rate markedly faster than incomes. This has been great for some New Zealanders – those who were lucky enough, or wise enough, to be able to buy residential property with borrowed money and hold on as house prices rose and the real burden of their mortgages shrank.
The widely accepted rule of thumb is that an “affordable housing market” is one where the median house price in that market is about three times the median household income in that market. Four or five decades ago, that was broadly true in New Zealand cities.
But over time that has changed so that by 2021 or 2022 the median house price in Auckland was about 11 times the median household income, ranking that city as one of the most severely unaffordable cities in the English-speaking world.
In that environment, it always made sense to borrow as much money as the bank would lend to buy as much house as possible. House prices were constantly rising – and not only rising but rising faster than other prices or than incomes. The game was to start with a modest house and then, as its market value rose, sell it and use the capital gain to buy a larger house, and so on; until in due course the buyer was well up the ladder and could live comfortably ever after.
This of course glosses over the sometimes considerable stresses involved in this kind of behaviour – when the house is found to have faulty foundations or a leaky roof.
But as a generality, this way of becoming affluent served a great many New Zealanders well. Hence the frequent encouragement to young people to “get on the property ladder”.
But what if house prices stop rising faster than incomes, as indeed has happened over the last couple of years? What if, perish the thought, house prices actually fell from their recent ridiculous levels? In Auckland, the median house price has indeed actually fallen a little in the last few years, so that the latest data suggest that the median house price in that city is now “only” about 8. This still qualifies the Auckland house market as “severely unaffordable” but it is now well down, relative to median household incomes, on the level a few years ago or relative to Sydney or Melbourne.
Sadly, there are plenty of people who have a very strong interest in talking up house prices – people who have borrowed heavily and now need to sell, even at a loss; retirement villages which depend on new customers being able to sell their homes before moving into a retirement village; lots of real estate agents who are much more prosperous when the housing market is buoyant and houses are selling quickly.
But at last we have a Government which appears intent on dealing with the factors which have caused house prices to rise much faster than incomes over decades. And we have known since at least 2011 when the Productivity Commission concluded its report on unaffordable house prices that outrageous house prices are a direct result of local council behaviour – particularly in restricting the availability of land to build on, in requiring the cost of infrastructure to be loaded onto the price of sections (rather than being spread over the life of infrastructure like roads and sewerage), and in taking interminable time to reach decisions.
We have in Chris Bishop, Chris Penk and Simon Court leaders who are genuinely committed to fixing this problem – in particular by reforming the Resource Management Act, pressuring local councils to release more land and allow for taller buildings, and simplifying building approvals.
Dr Don Brash, Former Governor of the Reserve Bank and Leader of the New Zealand National Party from 2003 to 2006 and ACT in 2011. Don blogs at Bassett, Brash and Hide - where this article was sourced
But what if house prices stop rising faster than incomes, as indeed has happened over the last couple of years? What if, perish the thought, house prices actually fell from their recent ridiculous levels? In Auckland, the median house price has indeed actually fallen a little in the last few years, so that the latest data suggest that the median house price in that city is now “only” about 8. This still qualifies the Auckland house market as “severely unaffordable” but it is now well down, relative to median household incomes, on the level a few years ago or relative to Sydney or Melbourne.
Sadly, there are plenty of people who have a very strong interest in talking up house prices – people who have borrowed heavily and now need to sell, even at a loss; retirement villages which depend on new customers being able to sell their homes before moving into a retirement village; lots of real estate agents who are much more prosperous when the housing market is buoyant and houses are selling quickly.
But at last we have a Government which appears intent on dealing with the factors which have caused house prices to rise much faster than incomes over decades. And we have known since at least 2011 when the Productivity Commission concluded its report on unaffordable house prices that outrageous house prices are a direct result of local council behaviour – particularly in restricting the availability of land to build on, in requiring the cost of infrastructure to be loaded onto the price of sections (rather than being spread over the life of infrastructure like roads and sewerage), and in taking interminable time to reach decisions.
We have in Chris Bishop, Chris Penk and Simon Court leaders who are genuinely committed to fixing this problem – in particular by reforming the Resource Management Act, pressuring local councils to release more land and allow for taller buildings, and simplifying building approvals.
Dr Don Brash, Former Governor of the Reserve Bank and Leader of the New Zealand National Party from 2003 to 2006 and ACT in 2011. Don blogs at Bassett, Brash and Hide - where this article was sourced
8 comments:
Don, the entry level houses of today are not the same entry level houses of the 60s and 70s.
We sure as hell didn't have any tiles, flash showers and bathrooms, fancy kitchens, clever lighting and all the features of the houses of the 2020s.
We had to be happy with 900sq ft , compared with the 1500 of today.
No landscaping, no flash furniture.
You, as are so many, are comparing apples and pomegranates.
Don't forget that most of us had a very basic OE, if at all, and didn't mess around until our 30s before coming home and expecting to jump onto the housing ladder at the same level as our parents after 40 years of being conservative.
It is nonsense to solely blame councils for restricting the availability of land for building houses on the issue of "unaffordability". This article completely ignores the fact the average size of a house has doubled in the last 50 years.
The typical house in 1970 was about 110 sqm. By mid the 90s it was 175 sqm. In 2006 it was 209 sqm and more recently 220 sqm.
It could therefore be argued Kiwis are themselves are to blame for demanding bigger houses even though we have smaller families.
Also doubling house size requires "more than double" the materials and constructions costs.
Kiwis love affair with McMansions, the "fad" for open plan living, ensuite bathrooms and home renovation has also help contributed to the issue of unaffordability.
We are looking at a cultural shift as the norm of home ownership gives way to a new norm of renting for life. Roughly half of all young people in NZ and Aus are looking down the barrel of lifelong tenancy. Without a rich and generous Daddy on at least one side and two good incomes for the next quarter century, a young couple today have no chance of home ownership.
The term 'renter' is not a flattering one - in Aus it is a pejorative term used to put people down. Home ownership has become the distinction between the haves and have-nots. A new form of classism has emerged. It would break the heart of yesteryear's migrants from Britain and Western Europe who came here because, as a common saying was until 50 or so years ago, "any man with a pair of hands can support a family and do so in their own home."
First house is always tough. When I was buying a man still had to guarantee a loan to a woman in some cases. No bank of mum and dad. And interest rates were about 20%. For many people there was the interest only second mortgage because of the way borrowing was regulated. I had no car, no TV, no furniture and no cappuccino. And the spouting around the roof had rusted through- it took several years to afford to replace that.
At the end of the month the spare cash could be counted in cents.
Tough - hell yer.
Did I grizzle - no, I took prIde in my efforts and determination. So too did many of my peers.
You want a house - of course it is going to be tough.
Governments used to greatly encourage "savings" which most took to mean bank deposits.That master of business acumen, Shipley, maintained it was the cure for all NZ problems. Despite that even our most basic industries are overseas owned; forests and rubbish. In earlier bouts of inflation some protection was provided by govt Inflation Bonds; as I recall tax free plus a small interest on top!!! Not unreasonable as many paid 67% tax. Those well aware of inflation took to the Finance companies and, unless they chose Hubbard's, lost the lot. In the 50s and 60s household income was comprised of the man's wage. When it became normal for women to work house prices increased to absorb the extra income. With the Equal Pay Bill rejected we have just escaped a similar bout of inflation. The capital cost of housing was artfully removed from the price index on the curious basis that effectively savings, like money in the bank, are not consumable expenditure. It is not so much houses which have appreciated but the sections. Like for like prices not dissimilar overseas, except America where vast land and little resistance to absurd commutes. Apartments are touted as entry to the property ladder but very dubious. With an avaricious body corp, or a few state tenants can be a disaster. Now the threat of 3 stories hard alongside or, vaguely near railway stations. six plus stories, even those lovely mature premium price city properties may prove a bigger disaster than the flood prone. Unlike the flooded , no compo. The most rational citizens are state tenants. Consume all spare money, avoid the time consuming drudgery of work, time for leisure, hikoi and other larks, income secure and inflation compensated, no savings to depreciate, inflation compensated income, no inheritance worries. The main drawback; the neighbours.
Maintaining two good incomes over 20 plus years has been "normal" even since from the 60s. But it's not the only formula to get on the property ladder.
The "no chance" attitude that is being sold here is defeatist and weak. Certainly, there is no chance if you can't make sacrifice and commitment to holding down a job - which is the first step and better measure of distinguishing between the have and have nots.
So, enough with the false appeal to some delusional utopian yesteryear which never existed...at least not on the planet I live.
And enough of that resentful tone aimed at those who had the fortitude to succeed.
Weepy sentimentalism and odes to tragedy are best left to poets and artists.
It is all the fault of the councils for not borrowing untold sums to lump onto rates forever. Nothing to do with successive governments encouraging unlimited immigration so they can pretend we have a rockstar economy at no cost.
There is no incentive for any government or council to deflate the value of people’s homes. None. At all. Any power that tried it would be hanged and quartered in public. Our housing Ponzi scheme will never improve through democratic means.
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