About DPMC

1. Executive summary

Housing affects a variety of social outcomes and is a critical component of household assets

Houses have a long life and vary greatly by type and location, and households typically make infrequent and long-lasting choices about housing. Housing provides a flow of services to households and is also an asset. As a flow of services, housing adds to individuals’ and families’ health, safety and well-being. Most of the benefits from housing services arise from the quality or the stability of housing arrangements, rather than from home ownership. Without stable, quality housing, households are at risk of poor outcomes.

Home ownership is important through housing’s role as an asset. Housing makes up just over 70% of household net wealth. As an asset, house prices can follow long, protracted cycles, with changes in prices affecting household wealth and decisions about spending and saving. Changes in house prices can contribute to wealth inequalities, with increases effectively providing a wealth transfer from non-home owners to home owners. The effect of these changes in asset values on household spending and saving decisions means that house price increases in the past five years have affected the macroeconomy, encouraging household spending, adding to inflationary pressures and pushing up interest rates and the exchange rate.

A surge in demand lifted prices, and while the number of dwellings has risen in line with the population, the cost of supplying new dwellings has increased sharply

Real house prices have increased by 80% since 2002.[1] Population growth, lower interest rates than during much of the 1980s and 1990s and increasing availability of credit have all boosted demand. Expectations of future price increases have also played a role, driving prices higher. The magnitude of this impact is highly uncertain. Meanwhile, the tax system has encouraged investors into housing, putting further pressure on prices.

Supply responses in the housing market tend to be slow as it takes time to turn undeveloped land into new houses or to subdivide land. While the response was slow, the construction industry has responded to population growth, adding over 120,000 dwellings between 2001 and 2006 (with 110,000 new occupied dwellings). Not all regions have seen an increase in dwellings to match population growth, with shortfalls in supply emerging in some areas, particularly Manukau. In addition, demand has not been met in all segments of the market, particularly for lower income earners.

New supply has tended to come in the form of large, relatively expensive houses on the fringes of cities, which adds to pressure on infrastructure, or multi-unit dwellings, such as apartments. This surge in demand increased the construction industry’s need for resources and increased the prices of sections, materials and labour as well as lifting margins in the industry. The impact of regulations and council-imposed infrastructure levies has also added to costs.

The housing market is cooling, but prices are likely to remain high relative to incomes

House price growth has slowed and is likely to continue to ease over the next 12 to 18 months as interest rate increases begin to bite and expectations of future house price increases diminish. While expectations have been important, the judgment of the Unit is that longer-term structural factors have been the primary driver of high real prices. As a result, in the absence of an economic shock, adjustment to house prices is likely to be gradual, and it is possible that real prices could fall modestly in the next 1 to 2 years, rather than record a sharp fall.

Rising prices have contributed to lower home ownership rates and constrained the housing market choices available to a growing group of New Zealanders

All measures of affordability have declined. By 2006, only 29% of renting couples and 2% of renting non-partnered individuals, with both groups including those people with and without children, could afford to buy a lower-quartile-price house in their region, and pay a maximum of 30% of their income in mortgage repayments. At current incomes and interest rates, even small falls in prices are unlikely to make a marked change in affordability. There is a growing group that cannot afford a mortgage on a house and is ineligible for state housing assistance that is likely to require secure long-term tenure arrangements in the private rental market.

Households require access to a wide range of choices, including the tenure and location of housing

As there is no single driver of house price inflation, mitigating the future effects of declining affordability will require a mix of new policy settings. The growing group that cannot afford home ownership needs access to a wider range of choices, including access to home ownership, longer-term rental arrangements to achieve security of tenure, a mix of providers of housing services and a wide range of choice of location of housing, particularly as fuel costs rise.

Reducing costs provides a sustainable way of making housing more affordable

Lower costs of sections and construction are the most likely way of achieving a long-term reduction in housing costs. A focus on streamlining regulatory systems, especially around the Resource Management Act and building consents processes, may help. Increasing the amount of land available for housing would also help, as would sustainable development, either in the form of intensive housing developments or new settlements built using sustainable methods and located outside of cities.