The housing market is all about supply and demand, right? If only it were that simple.
There is a huge range of factors driving up house prices both locally and globally, from the price of your new iPhone to the fact that your parents don’t want to move.
Here are five reasons for high house prices in New Zealand that you might not have considered:
1. We’re paying less for clothes, food, electronics and alcohol
Compared to our parents and grandparents, today’s households are spending a smaller chunk of our incomes on our basic living expenses. This gives us more money to spend on housing, and if everyone is prepared to spend more on a house, that drives up prices.
In 1974, New Zealand households spent 9% of their disposable income on clothing; this year it’s 2.8%1. Our spending on alcohol and tobacco has dropped too, from 4% in 1974 to 2.7% now. Even more dramatic has been the drop in the price of computing equipment: down 67% in the last 10 years, with an 83.4% decrease in the price of audio visual equipment2.
Why is our stuff getting cheaper while our houses are getting more expensive?
“The price of consumer goods has come down because of improvements in productivity,” says Westpac Chief Economist Dominick Stephens. “There’s no productivity improvement in land, and it’s in fixed supply, so the price of land has increased relative to goods.”
Stephens adds that it’s clear that high house prices aren’t crushing New Zealand households: our GDP per person is around three times as high as it was in the 1950s. We take more holidays, we enjoy better health and an improved diet, and we own far more possessions. Plus, our low interest rates make the cost of borrowing against property far lower than it was in decades past.
2. Women are earning more and creating “supercharged” families
Women in New Zealand are now more highly educated and more likely to work, and our gender pay gap is low compared to many other nations3. This means that, compared to previous generations, New Zealand has many more high-earning two-income families. These families enjoy a substantial amount of disposable income and often choose to put a massive amount of it into a house.
High-earning, well-educated women often marry similarly high-earning men, and those very high earners tend to choose large houses in the central suburbs of Auckland. This is one of the drivers of the increasing gap between our wealthiest and poorest households, says Stephens:
“People hate hearing this, but it’s a logical fact and an unintended consequence of two-income households. It can create supercharged families with two highly educated people earning super-high incomes. This doesn’t affect house prices over the whole country, but I think it goes some way to explaining Auckland’s relative prices compared to the rest of the country.”
3. We love a big OE
An estimated 45,000 New Zealanders leave the country every year on a permanent or long-term basis, and many of those return home in later years with families in tow4. They cash up their foreign earnings and put it all down as a deposit on a house in New Zealand, driving up the house prices without a corresponding increase in the national income.
You can actually see the same factors at work in some of New Zealand’s micro-markets, Stephens points out. For instance, it’s next to impossible to buy a Queenstown house on a Queenstown income – those houses are most often purchased by wealthy Aucklanders and Cantabrians.
It’s a similar story in Tauranga, Nelson and even Waikenae; wealthy city retirees drive up prices while local incomes stay disproportionately low. In a similar way, OE earnings let Kiwis pay high house prices, but contribute to those prices being out of kilter with incomes.
Other unexpected global factors are also at play: although we like to blame local councils for some of our house price woes, our prices are rising in tandem with those in major cities all over the world. Stephens say that it’s partly a result of macronomic commonalities: inflation has all but disappeared; interest rates are low; credit criteria are far looser than in the past; and more families have two incomes. There’s even a rumour – difficult to substantiate – that wealthy Chinese investors are buying up real estate in the world’s major cities, pushing up prices worldwide.
4. We don’t make mass-produced houses
Productivity in our construction industry has actually decreased since 1988, and its low compared to both other countries and to our wider economy5. There are plenty of reasons for this, and they include the fact that we don’t make use of cheap building methods like prefabrication, and that our building code is stringent on which materials and products can be used. This isn’t necessarily a bad thing – those regulations were put in place to prevent another leaky building crisis – but it does drive up the cost of houses by making them surprisingly costly to build.
“If you work out how many loaves of bread you need to pay for a house, that number has increased a lot since the 1950s,” says Stephens. “That’s because we’re much better at making bread now, but not at making houses. In China they use prefabrication and take a bulk approach on a large scale. Here it’s still a cottage industry. Also, the construction industry been a bit protected, with subtle forms of resistance to global trade that have hurt consumers.”
5. Baby boomers don’t want to downsize
Those born between 1946 and 1965 – the baby boomers – are predicted to start downsizing from their large ‘empty nest’ homes, freeing up family homes for the next generation. But so far, it’s just a prediction. While many older Kiwis say they plan to downsize or move in the future, at the moment they are staying put.
This follows a trend that has been seen in Australia and the USA, where baby boomers are hanging onto their houses for much longer than expected. This makes large family homes in good school zones more scarce, and drives up the price of those homes.
“New Zealand has terrible inequality of income between the young and the old,” says Stephens. “Partly because of superannuation, we have low rates of elder poverty, which is excellent, but it does mean that the elderly are quite wealthy here relative to young people. Older people are reluctant to downsize – the lack of a capital gains tax incentivises them to live in big houses – and that does squeeze the younger generation.”
Looking for a new home?
Westpac has handy tips, info and mortgage calculators to help: