The housing Ponzi turns septic
Fear and loathing stalk the Auckland property market.
It’s the great official Ponzi scheme of 21st century New Zealand. Allow favourable tax treatment for housing, give the banks free rein to skew their lending to mortgages, subsidise landlords with more than a billion dollars each year in accommodation supplements, let a duopoly dominate the market for building materials which keeps them expensive, invite more and more people to settle in the nation’s biggest city…
Ponzi schemes usually collapse when new entrants aren’t coming in quickly enough to supply the money to allow established customers to take theirs out. But there’s still no shortage of demand for houses even as Auckland’s average price nudges $1 million.
By rights, the scheme should have collapsed by now. Most Aucklanders simply don’t earn enough to keep propping up median prices at nearly 10 times the median salary (even with banks willing to lend on mortgages well beyond the point of reason). Rents are also way too low to help explain where the money’s coming from to sustain the boondoggle.
Blind Freddie himself would be aware that bundles of loot must be entering the market from other sources to goose prices so extravagantly.
Blind Freddie himself would be aware that bundles of loot must be entering the market from other sources to goose prices so extravagantly. In other cities favoured by overseas investors such as Sydney and Vancouver, soaring prices are openly acknowledged to be largely the result of an influx of foreign money. But here the government has very successfully tamped down that line of inquiry, in part by suddenly requiring foreign tax residents to have an IRD number (and slating critics of their immigration policy as racist). But you don’t have to be a genius to work out that outside money can easily be funneled through immigrants who have a foothold here.
When analysing the figures, the media have asserted “non-residents” or “foreign buyers” make only four per cent of Auckland house purchases. But that percentage excludes foreign students, temporary visa workers, businesses and trusts — which means the true number of “foreign buyers” is significantly understated.
Locally, family money is being funneled into the market too, via the bank of Mum and Dad. “Generation Rent” are increasingly becoming “Generation Resentment” and some are inevitably hitting up their parents for a deposit on a house to save themselves from a lifetime of paying off someone else’s house with few guarantees of permanence.
The hand-up from parents will also keep the Ponzi going longer than its normal lifespan, although it’s fraught. Several of my friends have found that stumping up money for their children’s houses has not been an entirely happy experience.
First, many offspring expect it as their due, possibly because they believe that the baby boomers have inhabited a far rosier world than the one they will inherit, including not having had to pay for their education. Gratitude often doesn’t seem to be in order when parental cash is distributed.
Second, many parents are uncomfortable about nailing the specifics of the money they are handing over: is it a loan or is it a gift? If it’s the former, is it specified in a legal document? But whether it is or not, all you can say is “Good luck with that!” in getting it back at some point in the future. Hitting up your children for money — even if you have lent it to them on very favourable terms — is never going to be a popular move within a family.
Children also can be very difficult about any strings attached to the money. I know someone who was outraged that his in-laws wanted their name on the house’s title alongside his and his wife’s, even though the parents had put in $300,000 as a deposit. What was an act of extreme benevolence turned into a poisoned chalice in their relationship with their offspring and partner.
The middle classes are becoming conflicted about the whole game. Instead of rising house prices being an unadulterated joy making them feel far, far wealthier than their salaries suggest they should, they are increasingly being asked to put their own money at risk in a market that has the distinct sound of a runaway train. Or face the prospect of their children renting for the remainder of their lives; or perhaps them shifting overseas where prices may not be much lower but salaries are substantially higher.
Suddenly, the lucrative pleasures of home ownership are not quite as straightforward for the affluent middle-aged as they first seemed.
Suddenly, the lucrative pleasures of home ownership are not quite as straightforward for the affluent middle-aged as they first seemed. Do you put $150,000 on the line for your child’s new dwelling or do you accept you’ll be flying to Melbourne or Singapore each year to celebrate your grandchildren’s birthdays?
The housing market — once a site of smug satisfaction over booming wealth for home-owners — has turned septic.
The government is now caught between those who don’t own a property and increasing disquiet among those who do. When an arch-capitalist like expat billionaire Stephen Jennings tells the right-wing NZ Initiative that the overheated property market is exacerbating social divisions and that we’re heading to an “economically ugly place”, National is clearly in trouble even with its friends.
But it’s a devilish political conundrum: if the government collapses the housing market, they’ll be swept out of office by the 64 per cent of New Zealanders who own homes.
If they do nothing substantial, popular resentment at an impotent administration may well force them out of office anyway.
Nothing John Key does about housing makes the electorate feel better.
Nothing John Key does about housing makes the electorate feel better. A billion-dollar loan to fast-growing cities for new infrastructure was dismissed as too little, too late; a recommendation urging the Reserve Bank to get a move on with tweaking loan-to-value ratios was widely seen as intruding on the bank’s independence (even if it has now suddenly played ball and restricted loan-to-value ratios to 60 per cent for nearly all rental property investors).
You could hear Key’s chagrin in his petulant remark recently when he complained about having introduced a “bright-line test” in 2015 — that anyone selling a property within two years would be subject to a capital gains tax. “I remember when everyone said to [introduce] the equivalent of a bright-line test… it will solve the issues,” he said. “Well, it really didn’t.”
(This, of course, could not have come as a surprise to him since Key had previously steadfastly maintained that a capital gains tax was ineffective in restraining house prices; in fact, he won the 2014 election in part by opposing Labour’s CGT proposal. That the man who knows no shame would introduce a tax he believed wouldn’t work shouldn’t come as a surprise to voters either.)
Labour are not doing a lot better than National, even if they have recently seized the initiative and appear to be doing something constructive. The Labour Party’s cornerstone Kiwibuild programme announced at their centenary celebrations seems impressive but only until you look at some of the details, or perhaps the lack of them.
When Guyon Espiner asked Andrew Little on Morning Report to explain the mechanics of the scheme (affordable Auckland houses would be priced at no more than $600,000), Little sounded tetchy and exasperated. But no one has convincingly explained how a Labour government could sell a house at a discount and ensure the taxpayer wasn’t merely subsidising a windfall profit for the buyer. Even if the attached conditions stipulate that anyone who sold within a few years would have to pay any capital gain back to the government, if you held onto it for longer than that you’d still be picking up a windfall when you sold if prices rise; and if the market collapsed at any point, you’d still be better off than your peers who had to stump up the market price.
And in the event of Labour forming a government and implementing the proposal, who will be the lucky ones to get a discounted house? Will very recent residents, for instance, be able to apply or will the houses be reserved for citizens of longer standing?
The plan is a recipe for unadulterated fear and loathing — fear of missing out and loathing directed at those lucky enough to make the cut.
Both Labour and National are wildly flailing about as they search for a plausible solution because neither party really wants to stop the Ponzi scheme.
Unfortunately, both major parties are now firmly in the realm of the absurd. Key and Little have publicly adopted the same ludicrous position — both say they want affordable housing but without house prices falling.
And so the Ponzi rolls on.
Main image: Getty/Piero Damiani.