What is to become of our housing post Covid-19?
We need to be wary of the law of unintended consequences as we contemplate what our post-Covid-19 future might look like.
Many commentators are talking up the forthcoming recession as being the worst since the great depression while others are suggesting that we will become kinder and less materialist as a consequence of the threat and disruption we have faced.
Amidst such speculation two things are certain to me – our Government is spending up a storm and capitalism will prevail. These two certainties suggest to me a number of implications which might guide us in where we might be in a year or two from now.
‘Never let a serious crisis go to waste’
As Rahm Emanuel, Obama’s former Chief of Staff once said ‘never let a serious crisis go to waste’ and there is ample evidence of such crisis opportunism across the political spectrum. Two examples are Federated Farmers’ call for the Government to call a halt to its environmental reforms.and TOP’s renewed call for a universal basic income.
The crisis narrative may soon extend to housing once the extent of job losses and business failures resulting from the Covid-19 shutdown become apparent. It will be a great shame if such a narrative is allowed to become entrenched for at least two reasons.
We already have a housing crisis for poor families and individuals and a shift in this narrative to a housing crisis for the middle class not only risks ignoring the homeless and poorly housed but could make things worse for them. The other reason a post-Covid-19 crisis narrative is not helpful for housing is because this might otherwise be an opportunity to correct some of the market and policy failures which have contributed to the pre-Covid-19 housing crisis.
For example, it seems likely that rents and house values will fall over the next six to 12 months at least. This can’t be a bad thing for tenants and first-home buyers.
How far house prices will fall remains to be seen although we probably should look to Australia for a guide to what might happen. Australia’s housing markets and especially those in Melbourne and Sydney are even more vulnerable than New Zealand’s. House values as a proportion of GDP in Australia reached 342% at the end of 2019 while they were at 282% in New Zealand. Household debt as a share of GDP was 124% in Australia at that time while it was almost 100% in New Zealand. A recent Guardian article suggested that house prices could fall 20% in Australia although it noted that auction clearance rates have remained buoyant in Melbourne and Sydney over the past few weeks.
The Australian banks which are exposed to the risks associated with an extended recession and a meltdown in house prices are of course the same Australian banks which dominate New Zealand’s mortgage and other debt markets. It seems unlikely that they will have much regard for New Zealanders’ mortgage stress if they are scrambling to stay afloat back home. For the banks this is literally a house of cards because they cannot afford to push struggling debt ridden home owners and landlords to the wall for risk of a further collapse in house prices and a further fall in the security they have over the rest of their mortgage portfolio.
However, a 20% decline in house prices in Australia and New Zealand shouldn’t be too catastrophic for the banks or most households with mortgages especially given the very low interest rates we have presently. Declines of more than 40% are probably quite dangerous for the whole stability of our financial system.
Housing shortage looms
But this isn’t a free lunch for housing policy because any significant slump in rents and prices will most likely lead to a slump in house building and residential investment. In other words, there is a good chance of a looming housing shortage within two years without some form of government intervention. But what will drive this shortage?
Immigration has buoyed our housing market and has richly rewarded existing home owners with unprecedented capital gains over the past decade or so. Half of the total growth in New Zealand’s population over the past decade – that is around 308,000 people of an increase of 619,000, has been from immigration. This net migration flow of 308,000 people saw a net of almost 170,000 New Zealand citizens leave the country permanently and almost 480,000 citizens from other countries move here on a permanent basis.
This net migration of 308,000 people represents around 100,000 additional houses depending on your assumptions around house occupancy rates. Over the past decade there were almost 240,000 consents for new dwellings issued while Statistics New Zealand estimates that the national housing stock grew by just over 206,000 dwellings.
It would be quite wrong to blame migrants for our housing problems. These problems are due to successive policy failures which range from our unwillingness to tax wealth, our inability to plan for and pay for urban growth, our reluctance to deal to price gouging in the building materials sector and our inability to curb bank lending on over-priced housing.
Many of these failures won’t matter much in the immediate aftermath of Covid-19. Certainly some wealth gains will be wiped out and banks will become far more reluctant to lend to over-geared homebuyers and investors. Depending on the extent and nature of the post-Covid19 recovery. these shifts may only endure for two years however. This will especially be so if we get back to a business as usual world where markets and the owners of capital determine our priorities.
Housing future depends on immigration
In the absence of an alternative vision from Government this seems likely.
In many respects our housing future beyond the middle of 2021 lies in what happens around immigration. While some experts have suggested that we shouldn’t think about any overseas travel for at least 18 months, there will be economic and political pressure to open up our border long before then. The reality is that New Zealand’s growth model has relied on immigration for the last decade or so. This immigration buoyed markets for housing and consumer goods and plugged labour shortages brought about by our aging population. This alternative supply of labour and what at times has appeared to be unchecked employer abuses of migrant labour have helped to depress wages for unskilled workers. For example Government estimates from late 2019 suggest that as many as 242,000 workers, or around 9% of the workforce, are now receiving the statutory minimum wage In 2014 this proportion was just 5%.
Not only will it be difficult, for economic reasons, to turn off the immigration tap - it will be difficult to do so for political reasons as well. While a net of 170,000 New Zealand citizens left New Zealand permanently over the past decade this figure represents the balance of 520,000 leaving and 370,000 returning. Many of these half million or so Kiwis who have left New Zealand and not returned may have a change of heart about their mother country if, or more likely when, the economy of their country of residence moves into recession and they find that their access to income and social assistance is very limited. Australia is the obvious example here. How are New Zealand politicians really going to keep the border closed to tens and perhaps hundreds of thousands of New Zealanders wanting to come home?
If immigration numbers grow even higher over the next one or two years there will be increasing pressure on our housing stock and probably at a time where private sector house building is weak. Many and perhaps most of these returning Kiwis are unlikely to be cashed up so won’t be candidates for the $600,000 + houses/apartments which appears to be as cheaply as the private sector can build and average sized house for.
Most likely Government will come to the rescue. In part this will be because house building is an obvious way of restarting the economy and in part because of the potential for an even greater shortage of affordable and social housing.
It would be a shame however if this rescue was driven by a crisis narrative which shifts the focus from the homeless guy in the street or the family in a motel unit to developers going broke and CBD apartment prices plummeting. Most likely there is actually limited mileage in using house building as an economic lever in part because it appears that the biggest job losses will be in the service sector – especially hospitality, and because such investment may feed into monopoly profits for building materials manufacturers and for land bankers.
A more measured approach to a new housing strategy might include measures across a number of parts of the housing policy kitset including:
- The relaxation of building regulations to make it easier for people to build smaller units or so-called tiny homes for themselves and whanau.
- Strengthening of tenancy laws in favour of tenants including the criminalisation of exploitative landlord practices like bond theft and the renting of the worst of sub-standard accommodation.
- Development of an institutional rental housing option which no longer relies on mom and pop landlords farming capital gains but on purpose built rental housing with sound and efficient institutional frameworks.
- Capital support for the NGO not-for-profit housing sector to begin the build at scale and in particular to develop below market secure tenure rental housing to supplement social housing.
The next few months will probably determine the nature of any recovery driven housing package. As this is designed and rolled out it is important that we learn from the past and don’t simple recreate the system we already have. If the muscle of the state is to be used to rebuild the economy let us hope that the economy we end up with is fairer and less unequal. Our choices around housing policy are critical to such a transformation.