Tackling the affordable housing “crisis” in New Zealand – a snapshot
Many countries around the world are facing issues with the sustainable supply of affordable market housing. In New Zealand, these issues have culminated into a situation that has come to be known as the "housing crisis."
Accustomed to high rates of home ownership in the past, most New Zealanders aspire to own their own home, with many considering it a basic right to be able do so. But rapidly rising house prices over the last few decades has pushed this aspiration further and further out of reach of the average Kiwi.
As of the second quarter of 2022, New Zealand ranked sixth globally for the highest house price to income ratio.1 The average cost of property in New Zealand was 8.9 times the average annual household income at its peak in the first quarter of 2022.2
Much has been written about the housing crisis; it’s a problem that attracts significant media attention and is the subject of fierce debate by politicians. But with complex and multifaceted root causes, there are no silver bullets nor easy fixes for this problem. This article highlights some key contributing factors to the housing crisis in New Zealand and how the market and government have reacted to address the problem.
Setting the scene
Looking back, we can identify a number of key factors that have contributed to the current situation. In the 1990s and early 2000s, the prevailing immigration policy and a relatively cheap New Zealand dollar led to a surge in migration to New Zealand3 and consequently, an increase in demand for housing. Another source of demand came from investors who saw real estate as a more attractive alternative to securities after the 1987 stock market crash and the Global Financial Crisis of 2007-2008.4
On the other hand, the supply of housing in New Zealand at the time was left to a market dominated by small construction firms and sole traders delivering individual standalone houses with bespoke designs.5 This was suited to the low population density of the past. But the lack of economies of scale and resulting inefficiencies around design, procurement and delivery were no match for the growth in demand. The leaky buildings crisis that plagued houses built between 1988 and 2004 was a further blow to the availability of suitable housing stock.6
With supply failing to keep pace with demand over successive decades, coupled with rising costs of construction, the average house price in New Zealand has far exceeded what most would consider affordable.
In addition, the overlay of turbulent market conditions that New Zealand is currently facing such as high inflation, the tightening of monetary policy and resulting impact on interest rates, has put further pressure on affordability.
Key contributing factors and potential solutions
We can expect transient market conditions like general high inflation and high interest rates to adjust to a new normal over time. Self-corrections in the market such as the growing number of larger developers and builders moving towards the delivery of uniform, high density and modular housing at a greater scale and pace will also alleviate some pressure on the market.7
However, addressing the more systemic issues with affordability will require targeted intervention. The New Zealand Government has attempted to do just that by tackling several of the key factors contributing to the under-supply and over-demand of housing that persist today. It’s also provided direct assistance to those struggling to purchase their first home. These measures range from legislative reform and housing development initiatives to development funding schemes and first-home buyer assistance programmes.
A historical lack of infrastructure investment from the government and local authorities has contributed to the lack of development-ready land suitable for large-scale development. In 2021, the government introduced funding schemes totalling NZD3.8 billion to unlock more land for housing development by supporting the provision of critical infrastructure to those developments and the delivery of a wider mix of housing.8 Under some of these schemes, the government may impose minimum requirements for public and affordable market housing to be delivered as part of the wider housing development.9 The enactment of the Infrastructure Funding and Financing Act 2020 provides another avenue for developers to raise long-term debt to fund infrastructure.10
The planning and consenting regime in New Zealand has also been a thorn in the side of developers, adding substantial time and costs to development projects. The government is in the midst of undertaking a significant reform of the existing resource management legislation to, among other objectives, improve processing timeframes and clarify criteria and information requirements.11
Given its geographical isolation and relatively small market, New Zealand tends to have a high cost of construction materials, which puts further pressure on affordability. This is exacerbated by a regulatory environment that’s made it difficult for new entrants to break into the market for key building supplies. To address this, the government's competition authority did a market study to identify issues with competition in the residential building supplies market and to make recommendations on how this can be improved.12 Whether any of these recommendations will be put into action by the government or make a material difference to the problem remains to be seen. But it’s a step in the right direction.
The government has also established various programmes to stimulate supply by incentivising the development of housing by private developers. These programmes operate in two main ways. Some programmes focus on creating a sustainable supply of development-ready land by acquiring vacant and under-used state and private land, completing the necessary infrastructure works and selling the land to developers to carry out housing developments with minimum requirements for affordable housing.13 Other programmes involve the government underwriting the sale of homes in a development to affordable buyers.14
Relatively relaxed lending practices in the past have driven demand for housing by highly leveraged owner occupiers and investors.15 Attempts to curb this behaviour include tightening of loan-to-value ratio restrictions by the Reserve Bank of New Zealand, increasing the official cash rate and new interest-deductibility rules. The government has also announced support for the imposition of debt-to-income ratio restrictions, but this has yet to be implemented by the Reserve Bank.16 Despite this, the existing measures appear to have already yielded tangible results, with house prices starting to fall since the beginning of 2022.17
Low transaction costs due to there being no stamp duty nor traditional capital gains tax in New Zealand have also contributed to real estate being a relatively liquid, and consequently, attractive, asset class for investment.18 While there is a "bright-line" tax to deter property speculation, to date there’s been no political appetite from any government of the day to impose a genuine capital gains tax regime for property.
The investment opportunity afforded by New Zealand real estate was just as enticing to foreign investors as it was to New Zealanders. In 2016, there was a sixfold increase from the preceding year in land sales to foreign buyers.19 This prompted a review of New Zealand's overseas investment legislation in 2018 to restrict overseas persons from buying residential land. Currently, only New Zealand citizens or residents and citizens of Singapore and Australia can buy residential land without Overseas Investment Office consent.20
Direct assistance to first-home buyers
Without a major price correction in the housing market, improving affordability by managing cost-inputs on the supply-side will not solve the affordability issue on its own. Buyer-side assistance is also necessary to make home-ownership accessible to those who would otherwise be unable to participate in the market. One demographic which the New Zealand Government focuses on is the first-home buyer.
Addressing the biggest hurdle for most first home buyers, the government provides a First Home Loan where eligible buyers are only required to pay a 5% (instead of 10-20%) deposit on their first home.21 Eligible applicants may also be granted a First Home Grant of up to NZD10,000 to assist with the deposit on their first home.22
The government also operates a NZD400 million Progressive Home Ownership Fund which underwrites funding by approved lenders via a 15-year interest free loan for those who do not earn enough to service a low-deposit home loan. These providers also partner with applicants in a rent-to-buy, shared equity or leasehold arrangement.23
New Zealanders can also tap into their KiwiSaver (the New Zealand equivalent of a pension scheme) to withdraw funds to be applied towards buying their first home; funds which otherwise cannot be accessed before retirement or in other limited circumstances.24
While geopolitical and economic conditions may vary between jurisdictions, there’s still much to learn from how other markets and governments have approached this problem.
1 "House-price-to-income ratio in selected countries worldwide as of 2nd quarter 2022, by country" (11 November 2022) Statista
2 "New Zealand’s housing affordability is slowly showing signs of improvement, on the back of falling house prices and a gradual increase in incomes, according to CoreLogic’s bi-annual Housing Affordability Report" (26 August 2022) CoreLogic
3 "New Zealand Net Migration Rate 1950-2023" (retrieved 21 February 2023) macrotrends
4 Patrick Aguiar Carvalho, Ben Baker and Ashley Farquharson Housing as an Investment Asset in New Zealand (Reserve Bank of New Zealand, Analytical Note 2022/07, June 2022).
5 Ben Schrader "Story: Housing" (accessed 23 February 2023) Te Ara – the Encyclopedia of New Zealand
6 Rob Stock "The 'Rottenomics' of the NZD47 billion leaky homes market failure" Stuff (online ed, New Zealand, 3 October 2019).
7 "Modular housing: An innovative solution to New Zealand's housing problem" (accessed 23 February 2023) Kāinga Ora Homes and Communities
8 "Housing Acceleration Fund" (accessed 23 February 2023) Ministry of Housing and Urban Development
9 "Land for Housing" (accessed 23 February 2023) Ministry of Housing and Urban Development
10 Section 3, Infrastructure Funding and Financing Act 2020.
11 "Key components of our future resource management system" (15 November 2022) Ministry for the Environment
12 "Market study into residential building supplies" (December 2022) Commerce Commission New Zealand
13 "Our Land Programme" (Accessed 23 February 2023) Kāinga Ora Homes and Communities
14 Hon Dr Megan Woods "More measures to build more affordable homes" (press release, 19 July 2022)
15 Tamsyn Parker "Housing boom: Highly leveraged investors borrow up large" New Zealand Herald (online ed, New Zealand, 21 October 2020).
16 Gareth Vaugh "Reserve Bank outlines design plans for tool it could enforce on banks to limit the debt-to-income ratio of home buyers" (10 November 2022)
17"New Zealand house prices continue to fall as interest rates hurt" (18 January 2023)
18 Miriam Bell "How does tax on NZ property compare to other countries?" Stuff (online ed, New Zealand, 3 April 2022).
19 Eleanor Ainge Roy "'Stress is huge': New Zealand's foreign buyers ban brings home scale of crisis" The Guardian (online ed, New Zealand, 17 August 2018)./span>
20 "Buying residential property to live in" (accessed 23 February 2023) Land Information New Zealand
21 "First Home Loan" (accessed 23 February 2023) Kāinga Ora Homes and Communities
22 "First Home Grant" (accessed 23 February 2023) Kāinga Ora Homes and Communities
23 "Progressive Home Ownership Fund" (accessed 23 February 2023) Ministry of Housing and Urban Development
24 "KiwiSaver first-home withdrawal" (accessed 23 February 2023) Kāinga Ora Homes and Communities