March 26 2009
How To Argue With a Deluded Homeowner
posted by Ana Samways at 10:30 am
The house I grew up in was purchased in 1980 for around $35K. The median income in 1982 was $29K — even with high interest rates of the era, it’s a better scenario than today.
There may be a big Westpac ad splashed across his Interest.co.nz site, but Bernard Hickey disagrees with the red bank on why house prices haven’t reached fair value yet. He’s not wanting to sell me a house or a mortgage, so I’m more inclined to believe him!
He says longer term interest rates are already rising (to try and dupe people into thinking the housing market is on the mend, maybe?), unemployment is rising, income and rents are static and the top tax rate is falling, meaning higher earners don’t have enough incentive to buy rentals.
If that wasn’t enough reason to believe the housing market is still overpriced, the highlighted comments below resonate with my own experience as an above average income earning, 38 year old, with a kid … who still rents.
If you’re ever in an argument with a babyboomer who reckons you blow all your money on lattes, about the overpriced property market and the inequities therein, throw a few of these arguments (sourced from the comments at interest.co.nz) below at them. (BTW the latte argument is easy; it’s because you can’t afford a house that you figure you may as well throw your money away on lattes)
1. “The joke that high mortgages are the new contraceptive is becoming no laughing matter. Young women used to be afraid of getting pregnant, now, as they approach 40, they are afraid of not getting pregnant. We have to get back to the situation where a couple can pay off a mortgage on one income so they can start a family in their late 20s, not in their late 30s or early 40s.”
2. “Housing prices should not exceed three times annual household incomes. New Zealand is grossly over inflated at 5.7 times income – Auckland 6.4; Christchurch 6.1; Wellington 5.9; Dunedin 5.5; Tauranga 6.6. Australia overall is at 6.3….I would urge responsible public and private organisations to stop using these clearly technically unsound “mixed measures” – where essentially they generate hokus pokus numbers to entice unwary buyers in to inflated housing and excessive debt. Surely – we are now past these silly games.
3. “Annual rents have typically been 7 to 9 per cent of housing value. Currently they are under four percent. Landlords have been taking massive losses for the last four years…”
4. “Home owners have better health, their children do better at school, they move less frequently, they are more involved in their communities…….in communities where home ownership is higher, crime is lower, household incomes are higher……divorce rates lower……”(from an address by Australian real estate expert Bob Day erudito.livejournal.com/710656.html)
5. “The escalation of house prices has led to A CONCENTRATION OF HOME OWNERSHIP IN THE HANDS OF THE OLD AT THE EXPENSE OF THE YOUNG. This has produced inequity between generations that will only be fully realised over time.” (from an address by Australian real estate expert Bob Day erudito.livejournal.com/710656.html)
6. The so-called ‘land shortage’ is a matter of political decision, not of geographical reality. (also Bob Day)
7. “The people I am most sorry for, is the first home buyers who get bankrupted when the bubble bursts after they stretched to the limit to get on the home ownership gravy train. They were set up. They deserve a government bailout. The investor class can just take a bath, the colder and deeper the better.”
8. Brian Gaynor nailed this whole issue in the Weekend Herald a couple weeks ago. People talking about land shortages, building costs etc etc, totally miss the point which is that house price appreciation over the past decade has been primarily driven by credit growth. That is G-O-N-E and it is not coming back any time soon.
9. Headline in the UK Telegraph,,, Rents fall as properties flood the market . (Full story here)
March 26th, 2009 at 3:19 pm
There is no question that houses are very unaffordable but this does not mean they will become more affordable in the long term. The market is not perfectly informed or educated and people will continue to buy based on less rational reasons than you suppose. People have become numb to unaffordability relative to their parents’ days. They will continue to pay a premium for houses to live in rather than rent more cheaply for sentimental reasons. People’s memory for housing prices is long so it would take another generation to see long term affordability fall. Short term dips will be met with demand by a market fearful of missing the opportunity and convinced that long term, prices will continue to rise.
Likewise landlords will react greedily to price dips as they factor presumed capital growth into their investment calculations. They don’t care about low rental return because they work on the theory that in 10 years someone will give them 2 Million dollars for a weatherboard box in Glenfield.
Of course immigration drives price growth too. Many of these migrants are from places like Mumbai, London or Sydney where affordability is far worse than in NZ. That doesn’t stop people living, renting and buying in those cities so the immigrants rationalise “why will here be different?”
March 29th, 2009 at 3:26 pm
Dear Ana, thanks, it is nice to see someone saying something about this.
Just a couple of comments.
Immigration doubtless has an effect — I would suggest that this is a reason to make sure that immigration rates into a region are kept in line with rates of increase of housing stock in that region (note: I am only speaking about immigration, I don’t suggest it is practical to target migration).
As you imply a major factor is the proportion of housing stock owned as rental property. I believe that in Auckland city, as of the 2006 census, 44% of the housing is rental (http://www.stats.govt.nz/NR/rdonlyres/C9A86DBD-5B34-402D-8947-7F705104026B/0/RegionalSummaryTablesTerritorialAuthority.xls). If you live in a road with 20 houses then just under half, ie. 9, are rented (at least statistically speaking). The law of supply and demand will tell you that this has had a great effect on the price of the housing stock (if we regard the baseline of demand from people who own their dwellings then this is almost an extra 80% demand over that baseline).
There are things that can be done about this, the problem is of course a complete lack of political will. A couple of years ago, when there were some reports on the dire state of housing affordability, I sent emails to various members of parliament on this issue. Apart from Jim Anderton (who was very sympathetic although he pointed out a complete lack of political will) and, perhaps surprisingly, Michael Cullen (although it may just have been his polite staff) I got no constructive responses. Substance free form letters issued from the Nats and the then minister of housing, Chris Carter (who incidentally is a landlord and who, around that time, had been waxing lyrical at some conference of investment property owners about how ‘rental property will solve the housing crisis’). The Greens (Sue Bradford) were more intent on stopping foreign ownership of NZ land.
An obvious step in the right direction would be the imposition of a tax penalty on the ownership of second (third, fourth…) dwellings. The advantages of such a policy:
1) An increase in home ownership rates with associated social and financial benefits.
2) By removing some of the demand, from prospective landlords, the inflationary pressures on the housing market would be reduced.
3) Capital otherwise used to inflate the housing market would find itself redirected towards the productive sector creating jobs.
I can think of more effective strategies — for instance we could license rental properties and then restrict the issuing of licenses — but one step at a time.
Some hope that the credit crunch and ensuing ‘great recession’ will somehow improve housing affordability. Certainly prices are decreasing but this isn’t the same as increasing affordability. Housing is often seen as an inflation hedge and, although conditions are currently deflationary, long term interest rates (which as you noted are rising) and the hopes of most non European central bank governors point to future inflation. Perhaps robust future inflation. In view of this, and absent some enlightened government policy, I am guessing that housing affordability pain will remain.
Shelter and a home is, like food, a necessity of life. Allowing the price of said necessity to be bid up unnecessarily (by so called investment property); allowing the concentration of housing assets in the hands of a diminishing group; allowing the growth of investment in non productive assets — housing instead of factories — the so called financialisation of the economy; are all recipes for long term disaster (I don’t believe I am using hyperbole here).
Cheers, Mark
March 30th, 2009 at 4:05 am
The first figures showing $22K for a 1982 average income sounds a bit off the mark to me. Are you sure you haven’t got the decimal place in the wrong location????
March 30th, 2009 at 7:28 am
Thanks ‘Check Your Facts’…Brian Easton says it’s $29K here, which means suggests a much smaller gap between cost of housing and income than it is today. BTW, the house was a four bedroomed in Balclutha.