What it'll take to halt New Zealand's housing crisis - and why LVR, RMA changes will do little to help first-home buyers

Another week, another demoralising confirmation New Zealand's housing boom has put homeownership out of reach for more desperate Kiwis.

This time it came courtesy of the Real Estate Institute (REINZ), who announced median house prices throughout the country had risen by nearly a fifth in a single year, from $612,000 in January 2020 to $730,300 in January 2021.

The increase was hailed as "jaw-dropping" by senior ASB economist Mike Jones.

"Nationwide house price inflation lifted to an annual pace of 19.2 percent in January," he said. "That is a high not seen since 2004, a boom year for the New Zealand economy [in which] GDP growth exceeded 6 percent."

Even more staggering, Jones said, were some of the finer details.

Gisborne and Hawke's Bay's house prices had ballooned more than 30 percent. Wellington's had surged 26 percent. Even prices in Otago, a region beset by COVID-induced financial woe due to a lack of tourists, had grown by 12 percent over the year.

That's not to mention prices in the ever-expensive Auckland and Queenstown/Lakes District regions, which grew to even more unthinkably inflated levels last year.

'It's ramping up to the point we can't cope'

New Zealand's housing market is now one of the least affordable in the developed world, according to price comparison website Compare the Market - with a house price to income ratio better than just six nations: France, Japan, Luxembourg, Switzerland, Israel and South Korea.

At the same time, homeownership rates have been plummeting to their lowest level since the 1950s. A Stats NZ report released last year shows one in three households is now rented.

Shamubeel Eaqub, an economist at Sense Partners and one of the leading critics of the handling of the housing crisis, says the escalating crisis has been ignored by successive governments over decades to create the predicament we're experiencing today.

"We now have house prices that are extremely expensive, relative to incomes," he explained.

Successive governments ignored the impending housing crisis, Shamubeel Eaqub says.
Successive governments ignored the impending housing crisis, Shamubeel Eaqub says. Photo credit: Getty

"The big barrier for first-home buyers is the deposit, which is getting bigger and bigger. House prices have increased by over $100,000 in the last 12 months - and that means the deposit you have to put down has increased by $20,000 in the last 12 months."

This is making it harder for first-home buyers like Tom and Ruby Yates to find a place to call their own.

The Auckland couple had been looking for most of 2020 for a house to call their own, attending open homes and looking at new builds before settling on a two-bedroom terraced property in Swanson, on the outskirts of west Auckland, last December.

The university lecturer and primary school teacher had a few disappointments along the way. One property they thought they had a good chance of buying eventually sold for more than $50,000 over budget, and they were forced to pull out of a conditional agreement for another over contractual concerns.

Tom and Ruby Yates spent the better part of 2020 looking for a house.
Tom and Ruby Yates spent the better part of 2020 looking for a house. Photo credit: Supplied

With the Auckland housing market going crazy, the Yates knew their $650,000 budget was unlikely to get them much more than the two-bedroom townhouse in an outlying suburb. Their only real criteria was that it was low-maintenance.

"The housing market is such a beast," Tom said. "We were just really pleased to have got in."

And it seems they were fortunate to have got in when they did. Property developer Cameron Grant says there's hardly anything still going at that price point in Auckland.

Grant's been building and selling terrace homes for 25 years, but the boom over the last year has seen him working harder than ever. Skyrocketing demand from potential buyers - some purchasing their first home, others upgrading, many more investing - has meant he's struggling to keep up.

"It's now at the point I'm doing seven days a week. I am struggling to keep in touch with my clients because my phone runs red-hot... I'm doing kilometres I haven't done in years, all over Auckland," he told Newshub.

"We've gone from starting a marketing campaign after the first COVID lockdown, uncertain whether prices were going to drop, to all of a sudden the enquiry levels ramping up to the point that we can't cope."

Grant says the surge in enquiries has partly been driven by prospective first-home buyers like the Yates desperate to get their foot in the door. He agrees with Eaqub that getting together a deposit is tough, but says finding a house at the cheaper end of the market is a hurdle in itself.

"You look at first-home buyers, how many open homes are they going to? They're trying to make the most of that 2 percent [mortgage] interest rate but they've had the shit kicked out of them at open homes and there's nothing they can do," Grant told Newshub.

"Lots of them are having to change their expectations. Apartments are now an option for people who are just trying to join the housing economy. They're going to have to try and get something, or they're going to have to save more deposit. 

"House prices are predicted to grow again this year, so it's a continually moving target. It always has been a moving target, but house prices are now growing at a rate that none of us thought possible.

LVR restrictions no godsend for first-home buyers

With the housing market spiralling out of control, it was some relief to property experts when the Reserve Bank announced loan-to-value (LVR) restrictions would be reintroduced from next month.

The restrictions had been dropped last April amid fears the COVID-19 pandemic would wreak economic carnage and cause house prices to plummet. However house prices have gone in the opposite direction since then, climbing to record highs as interest rates fell.

Their reintroduction is seen as a positive step in slowing price growth as it means speculators will from March have to stump up a deposit of 30 percent to get a mortgage, with owner-occupiers needing 20 percent. In May, the deposit required of investors will increase again to 40 percent.

But Grant says while the LVR changes will succeed in restricting speculators, they'll also make it harder for first-home buyers to get on the property ladder.

Had the changes come into play a few months sooner, Tom and Ruby Yates wouldn't have been able to afford anything.

"There's no way we could have afforded 20 percent. We would've needed quite a lot more; we would've probably needed to save for another year or so and would've needed more help from parents."

The couple scraped together a 12.5 percent deposit for their Swanson house using a first-home grant from Kāinga Ora, KiwiSaver funds and some outside financial help from family. And even then they had to move in with Ruby's parents to save for furniture and whiteware.

Tom recognises the financial assistance and ability to have moved back in with family is a privilege so many others in their position wouldn't enjoy, but says in an ideal world it wouldn't be necessary.

"It's meant a lot of sacrifices for us - the last two years of independence and routines, and some of the niceties of living independently, for living in a little shack out the back of their house," he said.

"I do feel that a more just New Zealand would have us capable of living and being able to buy a home and not necessarily have to make huge sacrifices to make that happen."

Tom and Ruby Yates outside their new build in Swanson.
Tom and Ruby Yates outside their new build in Swanson. Photo credit: Supplied

While Eaqub concedes LVR changes will make it harder for young Kiwis to break into the market, he says the Reserve Bank's decision makes sense and was "entirely expected".

"They had to be consistent," he said.

"Yes, a 20 percent deposit in places like Auckland, Wellington or many other regions is very difficult for first-home buyers, but it makes sense because first-home buyers are most at-risk if house prices fall.

"They're likely to have less equity in their house, tend to be younger and have lower incomes and are less able to absorb shocks and risks. So it's not surprising that they've had to make it more difficult for both them and investors."

RMA reform 'good stuff', but won't solve housing crisis

Another major change affecting the housing market came last week when it was revealed the much-maligned Resource Management Act (RMA) would be scrapped in favour of three brand-new pieces of legislation.

The RMA has been a political football for years, with critics lambasting it as niggly and over-complicated. Last year, a review by an independent panel came to much the same conclusion and said it ought to be repealed and replaced. Environment Minister David Parker has since obliged.

Housing Minister Megan Woods told Newshub the proposed RMA overhaul has the potential to address significant drivers of housing supply shortages and improve housing affordability.

"The RMA has contributed to housing becoming more expensive because planning for new developments has favoured the status quo, which can resist change in the local landscape and doesn't recognise the benefits of urban development," she said.

Housing Minister Megan Woods.
Housing Minister Megan Woods. Photo credit: Getty

"The reform will improve how central and local government plan for housing and urban development, such as the creation of more affordable housing, while also protecting the natural environment and responding to climate change."

Grant says the RMA overhaul is good news, but believes it's the bureaucrats at local government level who have been slowing down developments, increasing costs and stalling the completion of homes that could ease the housing crisis.

He believes councils, in partnership with the Government, need to release more land, then come up with a way to reduce the amount of time it takes to get developments off the ground.

"They'll start processing a building consent, but something's not quite right and they'll make a request for further information (RFI). But they don't necessarily process the whole consent and list RFIs, they'll just make an RFI on a particular issue," he explained.

"So that 20 days to process a building consent could actually take six months, because they stop the clock. If you take that long to get resource consent and another six weeks to get a building consent, you're already down three months and that takes developer costs."

Economist Shamubeel Eaqub says there's a lot of work to do to make up for the shortfall of housing.
Economist Shamubeel Eaqub says there's a lot of work to do to make up for the shortfall of housing. Photo credit: The AM Show

He says if developers could build quicker, they'd be able to make more affordable housing.

"We've got so much red tape now, and I don't know how you unwind it. I know the Government has announced changes - and good on them, because they need to - but whether it's going to be enough? I don't know."

Eaqub told Newshub we're still not building enough affordable properties, like apartments and terraced homes, and are instead still sticking to the old model of building larger homes than we need.

Grant agrees, but explains that's because building bigger allows developers to spread the cost and get better value for money.

"The cost of building apartments is astronomical compared to a terraced home. Apartments cost a hell of a lot more for the same square meterage," he said.

"Why do developers build 300sqm homes? Because they can spread the cost. A three-bedroom terraced home with 2.5 bathrooms has all the same appliances and stuff as a 200sqm home."

But there are signs of a mindset shift, Eaqub says. The economist believes the favouring of big, expensive homes over small, affordable ones is "slowly changing".

He says under Auckland's unitary plan in particular, we're seeing more units, apartments and terraces being built - and that's bringing down the median price of new supply.

But that momentum needs to be kept up.

"We need to build at these record rates for a decade to catch up with the shortfall that's accumulated in the last 30 years," he explained.

Shamubeel Eaqub says we need to build more affordable housing, like this KiwiBuild development in Otahuhu.
Shamubeel Eaqub says we need to build more affordable housing, like this KiwiBuild development in Otahuhu. Photo credit: Supplied / KiwiBuild

"The RMA reforms are part of the long-term structural changes that are needed, but we need to have rules and regulations that allow more land supply that's close to amenities, transport and other things. That means both densification and green fields, because we want choice for people."

He says it'll take a long time for the RMA overhaul to have a material impact on New Zealand's housing issues - and even then, he doesn't expect it to be the silver bullet that some are hailing it as.

"I think anyone that says [RMA reform is] a big solution doesn't understand the housing crisis," Eaqub said.

"We also need to see significant changes in the way councils work, we need to see financing of infrastructure change, we have to do transport differently. There's a whole bunch of stuff that needs to come with RMA reforms to make it effective.

"And it's going to take some time for RMA reforms to be bedded in. So it's good stuff that needs to happen and be moved forward quite aggressively, but it's not going to be part of the solution for the next few years."

Housing Minister vows to act on speculators

The Housing Minister admits there are significant barriers to home ownership in New Zealand - particularly now, after the dramatic surge in prices seen over the last few months.

But Woods says the Government has been reviewing ways to cool the market and vows to address the huge demand from property speculators, who she says have been "adding more fuel".

"The Government is making an announcement on this by the end of this month," she told Newshub.

"We also recognise that we simply need more houses to be built and I will be making related announcements in Budget 2021 as part of our response to the crisis."

Woods points to the National Policy Statement on Urban Development the Labour Government introduced last term as an example of its commitment to addressing housing unaffordability.

She says the Government has also been investing in affordable KiwiBuild homes for first home buyers, infrastructure and large-scale projects.

In terms of direct support for first-home buyers, Woods says there are a range of strategies in place, including its First Home Products and Progressive Home Ownership scheme, which aims to help up to 4000 Kiwi families buy their own homes.