Preface
Housing prices soared again, and “economically affordable housing” grew the fastest. There are indeed many factors at play, which is not surprising. The market instability caused by COVID-19 is driving asset acquisitions-real estate is a classic port in investor storms. Interest rates are at their lowest point in history and may remain in this state. The pandemic has reduced people’s consumption, cancelled expensive holidays, restricted social activities, and family work reduced travel expenses. Overall, homeowners have more disposable income. This has led to an increase in house renovation, renovation and real estate activities. The media reports breathlessly reported the rapid rise in prices that fueled the fire. First-time homebuyers panic and they will miss the opportunity.
The bottom line: the conditions for skyrocketing housing prices are in place. The CEO of the Real Estate Investors Association stepped into this lively atmosphere, claiming that first-time homebuyers have caused recent price increases. The reason is that people moving out of apartments to buy houses (previously rental houses) actually reduce the available housing. This is unfair at best. It shifts the responsibility to the young and poor people to reduce cost efficiency and return on investment. Those buyers may want to settle down and start a family. Due to the depreciation of speculators and investors, they have been largely excluded from the real estate market.
Rent increase
For many years, real estate investment has been the main way for New Zealanders to increase their wealth and retire. For individuals with surplus wealth, developing a real estate investment portfolio is a tax-saving and cost-saving choice. Capital growth from previous acquisitions uses funds to make further acquisitions so that the process can be self-sustaining. Even better, investors can congratulate themselves for providing rental accommodation options not provided by the state government. The government tried to restrict investment through capital gains tax or other mechanisms, but suffered a huge setback. New Zealanders want to invest in real estate freely. The result is that the proportion of the population in the rental housing continues to increase, followed by a decline in the total number of owners. In the past 40 years, the homeowner occupancy rate has dropped from 74% nationwide to 62% currently (close to 50% in Auckland).
Market alone cannot solve
Housing prices (not related to media narratives) are not driven by production costs. They are driven by the residual value of existing houses. Like any commodity, scarcity drives value up. Abundance forces a decline in value. Investors and first-time homebuyers seeking the same properties can create artificial shortages. Then, the question is, given that housing construction is not a fast process, how to quickly produce enough housing to meet demand. No matter how many specific types of new houses are needed, capacity will be limited. At best, the additional “emergency” housing inventory will take several years to build. New houses are usually commissioned and purchased by individual customers, and each house is unique. To date, most of these developments have involved large independent houses (not expensive). This is not a market that provides large-scale housing in a short period of time. The market where the creation of housing surplus will drive down prices is certainly not a market.
The government should think like a builder
The options are clear-demand exceeds supply and houses are built before the market. But successive governments have failed to realize that the builders will not take action on their own. The so-called “special housing area” failed because the market promoted the development of independent sections rather than high-density plots. KiwiBuild, the previous government’s ambitious housing construction policy, failed completely. Again, it is because the government believes that builders will expand production and productivity without having to provide funds and contract commitments in advance. Starting a large development contract without guaranteeing the customer is risky. The builders have limited resources and will not engage in speculative construction. On the other hand, housing shortages lead to normal operations and reasonable profit margins. In a turbulent economy, this is a good place. In a free society, we cannot just force builders to build more houses. We can only encourage and motivate them through big contracts. Here, the government needs to provide development funds to seize market opportunities, in other words, to become first-hand customers. This has indeed caused the second problem of the country’s entry into the commercial space. The use of public funds to support certain projects and providers is sure to trigger a whistle of “unfair competition” on par with those unpopular projects.
However, various measures can be used to limit demand restrictions to limit real estate investors and meet the urgent need to free New Zealanders from real estate investment by: Limit the amount of property that an individual or family trust can hold Limit the number of trusts an individual can hold Encourage divestiture (for example, to facilitate the sale to first-time home buyers). The elephant in the room is the capital gains tax on second-hand housing and rental housing-this government has given up during its first term.
In the end, although there is a choice between helping first home buyers buy homes or restricting cost-effective real estate investment, a left-leaning government may endure social demands in optimizing capital formation. Otherwise, its voter base will be unacceptable. In the final analysis, the Real Estate Investors Association may be very disappointed with future policies.
