Why do we have a Crisis?

1. Overseas People Have More Money

One reads many reasons given for why median housing prices are up to 10X median household income, but they avoid the obvious. People overseas, including expat Kiwis make more money than they do in NZ, thus they can pay more. And Tourism NZ promoted NZ, more international money became aware of NZ. In a country of 5 million on a planet of 7.8 billion, it does not take many new buyers to drive up the NZ market.

Prior to 2000, the Kiwi market was mostly domestic, meaning what people earned in NZ drove the market. But then it shifted to a global market. A combination of wealthy migrants, expat Kiwis who sold up and returned home, and grey-money from China seeking capital preservation drove up prices.

Why did they drive up the market? Because the median income overseas is higher. And in China (1.4 billion population), guanxi capitalism saw the rise of a new class of people with significant capital gains vulnerable to state confiscation, thus a few sought capital protection in NZ real estate. It did not take many such investors to trigger the market .

Domestically, the Kiwi sellers did well, polarising NZ into those on the property ladder and those left behind. Once fired up by overseas money, the market adjusted to domestic haves and have-nots. In 2020, it was expected Covid would kill the property market, but those expectations did not factor in the Kiwis returning home. Selling an ordinary home in London or New York gave that expat Kiwi purchasing power they used to compete against each other, thus the market rises to record heights. Yes, corrections will happen, but not to the extent that the ordinary Kiwi can graduate school, get a job and buy a home – as was the case before the market went global.

To be clear, price adjustment to a global market does not revert to national level by enacting legislation prohibiting overseas buyers as was passed in 2018. Once the price rises, it sets domestic expectations where the domestic “haves” can pay the global price because of the equity they earned during the global price rise. It also will not go back to national-market levels by enacting capital gains taxes or increasing interest rates. The only effective solution is to increase median household income to match the global rates so the median home to median income rebalances at 3X. Or to introduce new development patterns – like the Market Town – that are outside market expectations

New Problem: If the government were to enact measures that would drive housing prices back down to their levels of 20 years ago, it would create a new equity crisis. Too many New Zealanders count on their house value. Too many are mortgaged based on 2020 values, not 1999. As recently reported: “Prime Minister Jacinda Ardern says she would like to see small increases in houses prices, acknowledging most people “expect” the value of their most valuable asset to keep rising. What we also accept is that for most New Zealanders, their house is their most significant asset… A significant crash in the housing market – that impacts people’s most significant asset”.

2. The cost of building rose as a side effect of extreme regulation

A perfect storm means when many factors come together to create a most destructive force. The irony is that these factors, almost all driven by government regulation, were intended to do good. However, they now are so deeply entrenched that changing them is beyond the realistic capacity of anyone who simply wants to provide affordable housing.

RMA It began with the Resource Management Act that is supposed to enable people and communities to provide for their social, economic and cultural well-being, health and safety while protecting and preserving the environment. In the process, the supply of new developable land did not keep up with demand. Buyers competed for land, prices rose.

The RMA also added direct cost and delays.

• Councils shifted to self-funded planning, meaning the application approval process has a pecuniary interest in earning fees.
• As a local monopoly there are no checks and balances – do what the planners require or don’t get the consent.
• This is further aggravated by forward-thinking planners who combined career planning with their job drafting complex, jargon-laden plans. Outcome:  With the plan approved, numerous council planners left public service to become planning consultants who file applications to navigate the very rules they wrote.
• Consultant reports became the norm, again adding cost and delay.
• Finally, development contributions became policy under the theory that new development adds fiscal burdens for new roads, pipes, utilities and services like parks, libraries and animal control.

The RMA is broken. It does not enable people and communities, and ironically, it perpetuates environmentally-degrading development, most notably because it is transport based – moving people every day to accomplish the mundane chores of daily life. Electric cars are not the solution, nor is mass transport. Daily destinations must be moved to within walking distance if our true environmental footprint is to be reduced.

Building Act: Within years of becoming law, the Building Act 1991 catastrophically collapsed in the rotting house crisis.

Billions of dollars in damages were assessed, and the courts – applying joint and several liability – held the councils responsible for damages. Parliament reacted with the Building Act 2004 that created more cost-driving factors:

• Councils shifted to self-funded planning, meaning the application approval process has a pecuniary interest in earning fees.
• Councils are terrified of being held liable, thus they require every detail to be both documented by expensive engineers, architects, licensed consultants and then to be extensively examined to ensure all liability is externalised.
• Creation of Licenced Building Practitioners (LBP) saw the cost of skilled construction labour triple. The industry had attracted a disproportionate number of workers who suffered reading disorders but who were excellent builders. They were screened out by a lack of literacy required for the paperwork. This cannot be reversed. Instead, affordable housing must shift from bespoke to factory-made.
• MBIE made a practice of establishing Code-writing committees loaded with industry trade associations. In the name of health, safety and alleged unique conditions in NZ, the rules were written in ways that created effective, defacto barriers to better products made overseas that exceeded the specifications of the NZ Code. A global company making products for billions of people world-wide looks at the 5 million population NZ with its unique-to-NZ requirements as not worth the trouble. When Kiwis try to import such products, they find the costs of approval – before a single unit can be sold – crush them.

Bottom Line: Every dollar billed to an intermediary, such as the builder, is passed on to the end customer – the homeowner or tenant. Combined all these factors increase the price of a new home, and drive the market price of all homes to 10X multipliers.