Monday, 2 December 2013

Why is this young couple subsidising the ‘Politicians Bankers Welfare Fund’?

Guest post by Hugh Pavletich from Performance Urban Planning

imageIn yesterday’s New Zealand Herald article “Buyers Turning To The “Bank Of Mum and Dad ,” reporter Russell Blackstock illustrates how young Kiwis are unnecessarily taking on excessive mortgages and pressuring their parents for financial support, eroding parents’ retirement savings and encumbering their own home—and all entirely unnecessarily.

The problem is housing supply.

Young Jamie Clark and Jenna Close have just purchased their first home for $450,000, with a mortgage load of $360,000—and a deposit largely covered by their parents. Within normal housing markets* however—i.e., those with properly functioning local governments that have not taken control of land supply while losing control of their costs—with their household income of $70,000, young Jamie Clark and Jenna Close should be able to buy a new home for about $210,000.

This would give them a sensible mortgage load of just $175,000 requiring a deposit of about just $35,000. (A $35,000 deposit is much less of an issue than an unnecessary $90,000 one.) And importantly, it would allow them to be financially independent of their parents—something no doubt all involved would prefer.

Deputy Prime Minister Bill English reminded readers in his Introduction to this year’s Annual Demographia International Housing Affordability Survey that Kiwi housing used to be about 2.0 to 3.0 times annual household incomes. The Andrew Atlins’s THE REAL DEAL poster illustrates how this is still possible, as do the Annual Demographia International Housing Affordability Surveys themselves, indicating that cities cities in which land supply is not restricted by local governments are cities in which the Jemma Closes and Jamie Clarks can still by affordable housing with a price/household income multiple of just 2.0 to 3.0.

Christchurch and Auckland however are currently touching a “severely unaffordable” 7.0 times.

This is dangerous bubble territory, as even Deputy Prime Minister Bill English and Reserve Bank Governor Graeme Wheeler have made clear. They are in no hurry to see the New Zealand economy wrecked like the Irish one.

Instead of being able to purchase an affordable home however, young Jamie and Jenna, both 25 with a $70,000 gross annual combined household income, have purchased their first home for $450,000 with a mortgage load of $360,000—and likely more, when repayments to both parents are factored in.

The 20% deposit required under Reserve Bank Governor Graeme Wheeler’s new rules was a course “a problem” for them at $90,000.

It appears that both parents came to the party—one providing $45,000 cash, the other offering security on their own home. Which means the first are eroding their own retirement savings, and the second are putting their own home at risk should the young couple experience difficulties down the track.

With young Jenna’s mum and dad not having the cash (clearly lacking retirement savings and financially vulnerable, which is of no concern to the Bank involved obviously), they were only able to put their own home up as security. This clearly makes Jenna’s parents extremely vulnerable to any difficulties Jamie and Jenna experience in the years to come.

Both the young couple and Jenna’s parents run the risk of losing both homes should things go wrong.

In addition to this, it seems likely Jamie and Jenna’s actual mortgage load will be 90% of the purchase price of the property, being $405,000, which 5.7 times their gross annual household income. (Remember, in a normal housing market it should be about 2.5 times. In this case $175,000.)

So young Jenna and Jamie’s mortgage load is about $230,000 more than it should be ($405,000 minus $175,000). The banks would be even more “generous” lending $430,000 (much higher lending multiples on higher incomes … check calculator hyperlink).

Allowing for interest over the life of the mortgage, roughly double it, so the total excess mortgage costs to the young couple will likely be in the order of $460,000.

imageOn their current household earnings, and assuming that young Jenna’s portion is about $30,000 as a childcare worker, that means about 15 years of her working life is “devoted” to being a “mortgage slave” entirely unnecessarily. Allowing for tax, even longer.

No doubt the Banks are extremely grateful to this young couple for their $460,000 excess mortgage cost “donation.”

And no doubt the governments central and local responsible for this disgrace are grateful for her contribution to their wellbeing.

This should properly be termed “The Politicians Bankers Welfare Scheme.”

Quite why dilatory politicians  and incompetent  local governments think they and the banks are more deserving of such a big chunk of this struggling young couple’s income is something of a mystery.

After all, the New Zealand public ( 75% of young and 62% of all Kiwis)  told politicians loud and clear early last December  to get on ALLOWING affordable housing to be built.

But that’s the great inertia sector of Government for you and our culture of impunity, where politicians are more interested in feathering their own nests.

In young Jenna and Jamie’s case, they are paying about $460,000 of THEIR hard-earned income for the incompetence of politicians across the political spectrum—most directed towards and “The Politicians Bankers Welfare Fund.”

What happened to our fair go culture ?

_hugh-pavletich-smlHugh Pavletich is a Christchurch entrepreneur, the owner of website Performance Urban Planning and the co-author of the Annual Demographia International Housing Affordability Survey, 2013.

* Normal housing markets, which land supply is not artificially restricted, have historically had housing prices just 2 to 3 times household income. The Annual Demographia International Housing Affordability Surveys indicate that with significant exceptions, in cities in which land supply is not restricted by local government, most English-speaking countries now have house prices in their cities of from 4 to 9 times household income!


  1. Yet another beat-up about a non-problem.

    The problem is not that NZ Houses are too expensive but that the bludging mentality forced on Kiwis - mostly by Labour governments, but supported time and time again by National.

    The move from 3.0 to 7.0 is explained by two simple factors:
    - women entering the workforce means families can support mortgages at 3 times two salaries, or 6.0
    - bludgerism pushing the nominal "mean" income down. As more and more people go on benefits, work part time, take parental leave etc, that moves the mean down.

    Taken together this easily explains the changes in NZ. The real question is: why libertarians or other nominal "right wingers" want to help people into houses who simply don't deserve them! Home ownership is not a right, it's a privilege - a privilege a family with a combined income of only 70K simply don't deserve.

    I'd expect Labour - or crypto-communists like Boris Johnson - to make a fuss about "affordable housing"

    But Libertarians? Why on earth should we care?

  2. This comment has been removed by the author.

  3. Yet another response from a tosser without a clue.

    For a start, what's with the "we," white man?

    Second, you know, those links were put up there for a reason, don't you: in that they provide what we in the trade like to call "the evidence," and lots of it, supporting the argument that restrictions on land supply have caused rising house prices, (Remember "evidence"? You might try adding some to your arguments some time.)

    One primary argument from the evidence being that there are still places in the English-speaking world in which house prices do still have a multiple of 2.0 to 3.0 , and for the most part they are those in which land supply is not artificially restricted.

    Did you bother reading any of that evidence before mouthing off? Or considering the point of it at all?

    Now I grant you that correlation on its own is not causation; in this case however this is evidence, a lot of it, that is supported by a causal explanation integrating the relevant facts--which is a fairly good standard by which to evaluate a hypothesis.

    So I invite you therefore to adduce some evidence of your own supporting your own wild speculations--anything at all would be good, outside the sound of your own voice. Because you've offered none, you know.

    Yes, *gross* household incomes have risen as women have joined the workforce. But so too have taxes--so much so that one partner in every relationship is essentially going out to work just to pay the tax bill. So that's neither pushing up the *nett* household income, nor raising the monetary demand for houses.

    Equally, if you look at when house prices began to accelerate, it was not way back when gross household incomes began to rise as a result of women going out to work. It was when the Gospel Of Sustainability really began to beset the town planning "profession," thereby severely restricting the land supply of the world's cities.

    So, unlike what we may laughingly call your hypothesis, the timing of both these phenomena does match.

    Granted again, that correlation on its own is not causation. But, again, there is a causal argument provided explaining the correlation. Whereas your "argument" lacks both.

    But thank you for reading.

  4. It's still nothing but a beat-up: there is no cause at all for the government to confiscate wealth of those Kiwis who have worked hard, and now own property as a reward for their own efforts.

    None at all.

    The entire "problem" of affordability, or of equality, is leftist in conception, analysis, and execution.

  5. There is nothing wrong with the supply side. Last time I looked we did not have a problem with people having to sleep on the street because there was no house, for rent or sale, for them to live in.

    No, it is simply a demand problem. And it is this way because we are being flooded with cheap money not worth the paper its not printed on. Stop the credit expansion by the banks and increase interest rates and we will have a housing market that will reflect the true fundamentals of the economy that is supporting it. Right now the housing market is supporting the economy, it should be the other way around.

  6. Agree with Anonymous - this is not about supply. This is simply cheap money and the speculative marketplace it has fueled. As the cheap money dries up (the party ends), the market will head in the opposite direction ... exponentially as the speculators exit. Unfortunately, Jenna, Jamie and their parents may be left holding the bag.

  7. It's astonishing that someone claiming to be "Tory" quite happily swallows the neo-Stalinist new-urbanism sustainability agenda that constrains house building, or not really since "conservatives" as a rule do absolutely nothing about statist, environmentalist or socialists measures implemented by those who truly believe them - but tinker and claim they can't do anything, or find excuses for it. The idea that letting land prices operate at market forces (i.e. allow farmland at the edge of Auckland's urban boundaries to become housing land) is confiscation is just protectionist nonsense - akin to copper producers opposing development of a new mine - except sitting on assets doesn't involve producing anything.

    The supply side is chronically strangled because of urban growth limits in the first instance, with District Plans (and the RMA) coming a distant second. If the first and the second were addressed there would be a new supply appearing on the market and the bubble would burst.

    Yes part of the problem is cheap money, but nobody in the National Party cares much about that either.

    What it smells of is existing home owners terrified that the bubble will burst and none of the political parties are keen to address that. The "reward for your efforts" assumes that there is effort involved in buying an asset and sitting on it while the state constrains supply of it, and enjoying the capital gain.

    Of course it's amusing how the Nats and the Greens indirectly conspire to price people out of housing.

  8. “As the cheap money dries up (the party ends), the market will head in the opposite direction”

    Yep if supply wasn’t an issue and it was just about credit pouring into the housing sector then there must be enough houses being built to stop rents rising.

    However despite the massive capital flow into housing rents are going up. There is still a shrinkage of housing stock.

    “Landlords increased weekly rents for homes of every size in all but two of Auckland's 30 suburbs, a four-year comparison shows.”

    What would have happened to rents without the credit creation? What is going to happen to rents when the credit is turned off and the housing stock falls further?

    Jamie & Jenna house might fall in value for a number of years but ownership in Auckland due to the lack of supply will be better than renting.

    Further the capital was turned off from 2008 to early 2011and the housing market in Auckland never really went in the opposite direction.

    “Affordable housing” is a collectivist term. Value is subjective using the term affordable is a label for applying objective criteria to value.

  9. “'Affordable housing' is a collectivist term."

    Nonsense: it's a means by which to remind folk that in housing market's without restricted supply, EVEN IN THE CURRENT ENVIRONMENT OF MASSIVE CREDIT CREATION, housing prices are no more than 2.0 to 3.0 times household income.

    "Value is subjective using the term affordable is a label for applying objective criteria to value."

    "Affordable" is a term uniting price with the long-term ability to pay. Deal with it.

  10. "This is not about supply. This is simply cheap money and the speculative marketplace it has fuelled..."

    If it were only a story of cheap credit, all markets would rise about the same (Cantillon effects aside). That these other housing markets still offer affordable housing suggests there is much more to the story than you claim.

    Yes, the world's housing bubbles are being pumped up by gobs of cheap credit. But even within that market of inflated monetary demand, there are markets that still supply affordable housing--and if you bothered to follow the links in the story above, you could read what they are, and discover for yourself that they are largely the markets in which SUPPLY is not artificially constrained.


1. Commenters are welcome and invited.
2. All comments are moderated. Off-topic grandstanding, spam, and gibberish will be ignored. Tu quoque will be moderated.
3. Read the post before you comment. Challenge facts, but don't simply ignore them.
4. Use a name. If it's important enough to say, it's important enough to put a name to.
5. Above all: Act with honour. Say what you mean, and mean what you say.