Anne Gibson from the NZ Herald, recently wrote an article about a report NZIER Economist Shamubeel Eaqub wrote on the state of the housing market in NZ. Shamubeel has become quite vocal in his opinions on housing over the past couple of years and produced an interesting piece. However, much of the data that Eaqub uses is meaningless without explanation and is used in such a way that it supports his point of view. For instance, in the section on “Renting just isn’t the same” …
Typical Lease Term
The implication is that NZer’s are getting an unfair deal because leases are generally only 6-12 months. That is not at all in the landlord’s interest. Finding new tenants is one of the worst parts of owning rental properties. I would far rather that tenants stay for as long as they like. However, tenants rarely want to sign for more than 12 months at a time. I have been investing in property for 12 years and only once in that whole time did a tenant ask for a longer tenancy agreement, although I’ve had a few end up staying for several years.
Notice Period for Landlords
The 30 days is actually wrong. A landlord must give at least 90 days notice for a periodic tenancy and at least 21 days before the end of a fixed term tenancy. A landlord can also give 42 days notice on a periodic agreement if family are to move in. A tenant only has to give 21 days notice for periodic tenancies and in practice, a fixed term tenancy is often ended early by a tenant because the landlord can’t be bothered chasing them to see out the term if rent isn’t being paid.
Reasons Lease can be terminated
Again, this is misleading. A periodic tenancy, which the tenant accepted instead of a fixed term can be terminated with notice as above but the fixed terms cannot.
Minor Alterations
The reason alterations are considered normal is that in some European countries, rental properties don’t come with either carpet or kitchen units. I dream of the day that a tenant asks to re-carpet a house for me!
So, presenting a NZ tenancy agreement as “restrictive” is grossly unfair to NZ landlords, who in some ways are actually far more restricted than in Europe. It is actually the tenants getting the better part of the deal here!
There are other aspects of the report that are also misleading…
Tax Advantages
This one gets trotted out again and again. I always thought that depreciation was ridiculous but that has been removed. Capital gains has not reduced house prices in other countries and like property investment, neither shares nor business sales have a capital gains tax. The same issue with “intention” exists in these areas. The financial services sector has been pushing for years for capital gains tax as they know that property out-performs shares. The real tax dodgers are not investors like myself but the Mums and Dads who buy a house to move into, do-up and flick on or build to resell in a year or two. It happens a lot! Real property traders pay tax
Home Ownership Rates
Eaqub makes much of home ownership rates falling but what he fails to mention when comparing with Europe, is that our home ownership rates are now in line with European home ownership levels and higher than some that he uses as an example. Oddly enough, the countries with the highest home ownership rates are also among the poorest. This possibly says more about our Western consumer society than our housing policies.
NZ 64.8%
France 63.7%
UK 66.7%
USA 65.2%
Denmark 64.3%
Germany 53.3%
Austria 57.5%
Netherlands 67.5%
Hong Kong 49.3%
House & Land Prices
House prices are good for headlines but the focus is always on Auckland and to some degree, Christchurch. In most of the provinces, what you’ll find is that house prices have moved very little, if at all in the past 7 years and rents have also stagnated.
Yes, Auckland house prices are high but that does not mean there is a bubble. Auckland is the first to feel the pressure of immigration (which is soaring) and so prices will continue to climb. Much is made of comparisons to historic income requirements, which are completely irrelevant to the current situation in NZ. Thirty years ago, less women worked for an income that could be used to leverage more debt, and debt was much harder to get. There has also been significant upward pressure on land prices due to increased requirements for subdivisions from council and climbing development contributions. Building material costs are also soaring due to international competition for resources such as China’s demand for copper (which has been massive) and oil prices. Locally, we also suffer from high prices due to a lack of competition between suppliers.
Also, the endless media comparisons with property prices in other countries is becoming ludicrous. New Zealanders seem to think that a first home buyer should be able to get a nice little three bedroom house with a big section a few minutes drive to central Auckland. Say goodbye to the 1950’s! Comparing Auckland’s prices with London or any other major city doesn’t work because the construction and specifications of the building, land, infrastructure and culture are completely different. London is far more expensive and an average income earning, first home buyer could never hope to own a stand-alone house with a garden anywhere near central London. In my opinion, Auckland prices are coming into line with other major western cities.
Shamubeel is quite right that the banks have a lot to answer for. Remember the ASB adverts in the early 2000’s about “putting a boat on the house”? Not exactly encouraging responsible financial management is it? However, I’m a little confused by his policy options on page 28 of his report.
- Make Renting More Attractive
I think he’s just got this completely wrong. To make renting more attractive than it currently is, there has to be more in it for the landlord or rental terms and quality will not improve. If tenants want more security of tenure, most landlords would be happy to offer a longer fixed term to keep a good tenant who will carpet and renovate the house. Conversely, the tenant needs to be more liable than they currently are for maintaining the standard of the property. - Land & House Supply
Land and house supply is a huge part of the reason that prices are so high in Auckland. Throughout the country councils are raising contribution fees and making development more difficult and less and less profitable. Without a supportive council, these kind of restrictions will only cause higher prices - Property Investment Bias in Banking
Shamubeel ignores the reason that banks prefer to lend on property than shares or business (it’s safer) but I do agree that banks encourage irresponsible borrowing. - Clarify the Tax Rules
I don’t agree that the tax rules are unclear or inconsistent with regard to real, long term property investors. However, I do believe that there needs to be a clear cut-off for how long a property has to be held before there is no capital gains tax. I personally favour a staggered CGT as used in some parts of Europe with a 0% tax only after holding for ten years. However, it would need to be inflation-adjusted. - Improving Data
This might remove much of the media speculation about causes for price fluctuations. It could also help to catch traders who aren’t paying tax.
