The Dim-Post

November 6, 2012

The longer term?

Filed under: economics — danylmc @ 8:09 am

The Herald reports:

Shamubeel Eaqub of the NZ Institute for Economic Research said the latest Barfoot & Thompson figures – which revealed a record average house price of $618,707 – showed most buyers did not think renting was a viable alternative, yet it was better in the longer term.

“Would you buy a loss-making business?” Mr Eaqub asked, pointing out that many house buyers did not factor in the huge losses incurred through paying off a mortgage, maintenance and other expenses.

The NZX had performed on a par with the housing market in the past few years, yet people continued to favour residential property, he said.

Mr Eaqub rents in Wellington and said housing was a particularly bad investment if people examined the amount of money a mortgage and other expenses cost over a lifetime.

Economists don’t like home ownership. It’s an illiquid, non-diversified form of investment that impacts on labour mobility. And in some countries, renting for less than a mortgage and investing the difference makes a lot of sense. Most of my friends in Europe rent properties owned by family trusts, or property management companies who see their rental properties as a long term investment and budget to maintain them in good condition.

But in New Zealand if you’re renting a house, you’re almost certainly renting it off individuals who won’t want to spend any money on maintenance, and will probably sell the house on in a very short time at which point you’ll probably have to move again.

If you’re on a pretty high income you can rent nice apartments or townhouses in the inner-city, sure. But if you have a family and want to live in the suburbs, and you want your home to be insulated, not leak, not have subsidence, have a sense of security because your kids go to the local school, etc, then you have to buy a house.

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40 Comments »

  1. A home owner I presume?

    Comment by Andrew M — November 6, 2012 @ 8:15 am

  2. I’m not a home owner. but having recently done an extensive tour of units in Auckland (note, this is unlikely to become as popular with tourists as, say, the milford track) I have to agree. he’s right

    Comment by lucyjh — November 6, 2012 @ 8:21 am

  3. Maybe I could translate this for Shamubeel. There are two markets for housing services. One of them doesn’t work very well except for students and others who are not wanting a long-term deal. The other one is the market where houses are bought and sold.

    Buying a house is not a loss making “business”. Its just the purchase of a flow of housing services.

    Also, a rational investor would look at more than just the recent past when making a long-term investment. If you have a few good days at the racetrack, should you “invest” your life savings there? Over the long-term the stock market has been a minefield for investors without inside information.

    Comment by jps — November 6, 2012 @ 8:22 am

  4. I have recently returned to Auckland after the fat end of a decade living in the Bay of Islands. We are renting out our home up north because the real estate market north of Auckland has fallen 40% since 2007. Not wanting to lose hundreds of thousands of dollars by selling it we really had no choice.
    We are extremely fortunate that we have a place in Auckland because the rental market has gone completely nuts which in turn has sent the house prices the same way. 800 dollars a week for a three bedroom house within 5km of queen street is the norm. Add utilities to that and you are looking at a grand a week before you have eaten. Unsustainable idiocy.
    The banks all stopped lending when GFC hit us and it has created a huge bulge in the snake because the usual flow of first home buyers had to remain in rentals until the pressure got to much and the banks loosened up a bit. We are now in the middle of a buying frenzy fulled by a huge inflow of Chinese investors buying everything they look at.
    This will only end one way. Another massive melt down.

    Comment by Barnsley Bill — November 6, 2012 @ 8:24 am

  5. I had it suggested to me a matter of days ago, that one of the ways to move money out of the housing market was to increase tenancy rights. i.e. make it harder to kick people out and easier for tenants to demand a basic level of maintenance (leaks, mould, insulation etc). The theory being that you get the landlords who do sod all maintenance from the market, easing congestion and a better standard of living for everyone.

    Probably numerous reasons in there that that’s a bad idea but as a tenant, one I would be quite willing to entertain.

    Comment by Ben — November 6, 2012 @ 8:31 am

  6. incidentally I was recently at a talk with eaqub and two other economists. at one point one of the others pointed out how crap our tenancy laws are and said “maybe if we stopped treating tenants like lepers we’d get better social outcomes.” the implication, in context, was that more people might also want to rent if it was possible to get longer tenure in NZ, if rentals were better etc. Eaqub nodded vigorously when that statement was made. so he does get it.

    Comment by lucyjh — November 6, 2012 @ 8:33 am

  7. I sure I have been hearing this sort of statement for most of my working life from various banking type wizz kids
    Thing is you could buy (possible build) a house for $10,000 when I left school, the PM was on $12,000
    Those houses have probably beaten inflation since then plus kept the rain off, money in the bank, finance companys or shares less well and minus tax
    You don’t have to be a whizz kid to see what was best and what we might do to change that outcome

    Comment by Raymond Francis — November 6, 2012 @ 8:35 am

  8. Isn’t this precisely what y’all have been bitching about re Treasury’s education “policies”? That you’re making economic assessments that include motivations that aren’t monetary? I bought my first home 12 months ago. And yeah economically it’s probably not the best decision I’ve ever made. But goddamit I own a house now. And that little slice of mental joy is worth more to me than economic gain.

    Comment by David C — November 6, 2012 @ 8:47 am

  9. I’m more interested to know what the better investments are. I can’t say I see any. Do I want to listen to doomsayer Bernard Hickey who made out he owned interest.co.nz when he did not and who will soon be moving elsewhere thanks to the profits from his Epsom home. or listen to Gaynor and invest my money in shares which for New Zealand means it’ll eventually be purchased by some company overseas for a meagre amount of return and a small increase in price share. Yay how exciting.

    Also bit unfair to landlords. What about the many tenanted New Zealanders who don’t treat the home they rent like a home and instead treat it like crap. Plus remove the landlords. Who wants to use Property Managers. Awful people to deal with.

    Comment by gingercrush — November 6, 2012 @ 8:56 am

  10. Just did a quick calculation, if you borrowed $500,000 to finance you into a $618,000 home, paid the current variable rate from Kiwibank (5.65%), for 25 years, you would pay $434,077.32 in interest. So maybe Eaqub is not so stupid after all.

    Comment by Stephen Doyle — November 6, 2012 @ 9:46 am

  11. I have to agree with you analysis of renting in NZ. We used to rent and the experience was – repeatedly – so bad we have bought houses ever since. On the other side of the coin, I have also been a landlord…and I currently have two tenants in two flats. I’m not a ‘business’ person, so have spent several thousand dollars recently replacing un-safe steps at the entrance and making the places water tight. The mortgage is higher than the rent. I’m also paying $250 / month to WaterCare for the water (now THERE is a scam). But I bought it for the section and plan to build a new house there eventually….and either rent or sell our current house. Once a house is paid off, thee rent is income (less maintenance)…and someone renting 4-5 homes that are completely mortgage free can have a fairly good retirement income from that alone…never mind any additional income from other sources. This makes MUCH more sense than the share market.

    Comment by truthseekernz — November 6, 2012 @ 9:49 am

  12. To be fair Eaqub was talking about the return to someone who wants to invest in property, given that the yield is so low it doesn’t seem like a good investment. If you own zero houses you are effectively “short” the housing market, which given the unusual gap between the yield on housing and the yield on other assets seems like a good move. Your point that part of the difference in this yield represents other “costs” of renting through current tenancy laws is an excellent one, and I don’t think there is really any inconsistency between what both of you are saying :)

    Economists aren’t against home ownership, we just like to point out that there are costs and benefits associated with it. Whether current housing policy is “socially optimal” involves asking a lot more questions, and thinking a lot more deeply, than the question he was answering here – which was simply whether buying a house “on average” seems like a good investment.

    Comment by Matt Nolan — November 6, 2012 @ 9:51 am

  13. depends on what it would cost you to rent that place for 25 years. breakeven (for today) is about $540/week on that loan, plus another $45/week in foregone earnings on your $118k deposit.

    Comment by jps — November 6, 2012 @ 9:53 am

  14. @ Stephen Doyle – don’t forget a big chunk of that interest ‘value’ will be inflated away over 25 years.

    Comment by Gregor W — November 6, 2012 @ 10:12 am

  15. True, but it would be interesting to see a true $$ comparison over time.

    Comment by Stephen Doyle — November 6, 2012 @ 10:16 am

  16. I remember being advised some time back that if you take into account all expenses – interest, rates, insurance, maintenance etc. – over a 20 (possibly 25?) year term, the rule of thumb is you shell out 2x the purchase price in nominal value.

    Comment by Gregor W — November 6, 2012 @ 10:28 am

  17. Just did a quick calculation, if you borrowed $500,000 to finance you into a $618,000 home, paid the current variable rate from Kiwibank (5.65%), for 25 years, you would pay $434,077.32 in interest. So maybe Eaqub is not so stupid after all.

    But you would have an asset with increased value – well, depending on where you bought, The Bay of Islands hasn’t done well but then it will most likely pick up if one can wait.

    And it’s very unlikely a bank would lend $500,000 to invest in the stock market. So it’s an investment comparison with one option being not possible.

    But even if one could then the interest cost would most likely wipe out dividends and one would be left looking at capital gain, just like in housing. Any CGT would hit share investments as well as property so it’s not necessarily going to redirect investment. There’s just not a lot of great opportunities in the share market. Well there probably are but how does one know.

    Comment by NeilM — November 6, 2012 @ 10:30 am

  18. I rent in central Auckland, have a pre approved mortgage to buy a first home for more than $830k – so not quite enough to buy a decent house in the area where I live. I’ve given up on the idea of buying here and will invest my deposit elsewhere. That way I can take my money with me when I line up with everyone else leaving this country instead of sinking it into an asset that will force me to live out my life in a shit city paying more than half of a combined income into a mortgage on an overpriced do up.
    This country won’t change while the current kiwi dream is to become a slum lord. There is no political will to do anything about property investment and putting in real capital gains and creating protection for people who rent because most people over 55 are currently benefitting from the status quo.

    Comment by lolo — November 6, 2012 @ 10:34 am

  19. Renting a house would be great if there was some sort of long term tenure. And it could be nice to have a change of scene by shifting across town. Some argue that it is much cheaper to travel by taxi than by own car. Must work that out again. Depreciation. Insurance. Repairs. WOF. Maintainance. Whims. Status? etc Same for owned house? I knew a bloke who would ring through an order for his fish and chips, then phone for a taxi. Driver would pick up the order, pay for it then deliver it. Cheaper than driving down himself.

    Comment by xianmac — November 6, 2012 @ 10:40 am

  20. Thinking of the long term – where will I live when I retire? Can I afford to pay rent out of my pension? Probably not.

    I’ll be mortgage free long before retirement which gives me a decade+ to save an extra nest egg. I would expect that nest egg to (a) lose value between saving it and spending it when inflation is taken into account because I will save it somewhere conservative like bonds or term deposits and (b) actually be there, something I doubt will be the case of my Kiwisaver investment after 20+ years.

    To me buying a modest house and paying it off and investing in its maintenance makes more sense that renting and saving any difference in a scheme that has a high chance of collapsing over the long term. Home ownership does have lots of costs apart from mortgage repayments but done well it is a very safe investment and also provides you with a roof over your head and some security of tenure.

    Comment by MeToo — November 6, 2012 @ 10:51 am

  21. Some argue that it is much cheaper to travel by taxi than by own car. Must work that out again…

    The house/car comparison doesn’t really work given that car values don’t (generally) appreciate.
    If you’re not too worried about status, you can grab a very cheap, fairly efficient modern car (post 2000) and expect to keep it in running order for very little.

    Comment by Gregor W — November 6, 2012 @ 10:53 am

  22. likewise, having children of your own is a really lousy business decision – it’s much cheaper to borrow someone else’s

    Comment by kahikatea — November 6, 2012 @ 11:00 am

  23. “…“Would you buy a loss-making business?” Mr Eaqub asked,..”

    This sums up the entire problem with our mindset around housing. Deborah Hill-Cone had a piece in the Herald that I agree (reluctantly, dragged kicking and screaming to) with (http://www.nzherald.co.nz/opinion/news/article.cfm?c_id=466&objectid=10845083). Not only have we lost sight of the fact that a home is place to live and offer security to a brood of off-spring rather than (as Hill-Cone puts it) “…a temple to our self-actualisation or a reflection of our identity and worth as a person…” but we’ve also come to view houses not as homes but as residential investment vehicles. I know that NZ’s moribund brand of crony capitalism leaves Joe and Jane Sixpack with anemic range of other safe investment options, but we have to do SOMETHING to break the baby boomer mindset around housing.

    Comment by Sanctuary — November 6, 2012 @ 11:43 am

  24. Waiting till the inheritance comes through. Will then buy freehold in Otago and/or Southland.

    Comment by Dan — November 6, 2012 @ 12:38 pm


  25. I know that NZ’s moribund brand of crony capitalism leaves Joe and Jane Sixpack with anemic range of other safe investment options, but we have to do SOMETHING to break the baby boomer mindset around housing.

    You and I know what that something is. We also know why that will not happen.

    Comment by George D — November 6, 2012 @ 1:57 pm

  26. I harp on a bit about it, but I know quite a few landlords. All of them are tradesmen. So they buy a cheap doer-upper, expend some cash and a lot of elbow grease on it and get a superior rental and a capital gain in return. Only an idiot would buy a house for $830,000 (say) and then rent it out, the economists are right, that doesn’t really work for most people.

    Lolo @18: it isn’t the property investors (or “slum lords” as you call them) that are responsible for the price of property in NZ. If you get past your cultural cringe, you’d see that it is a complex equation of land use laws, low incomes, building codes and the desire of most New Zealanders to own their own home. Thankfully, by heading overseas, you’ll help take the pressure of the housing market. Attending an open home shortly after returning from overseas, the real estate agent remarked that it was amazing how, of the 6 couples in the room, five had just returned from the UK. The sixth couple had just returned from time in the US. So returning kiwis with pounds/greenbacks don’t help, but we ain’t slumlords.

    On inner city apartments (and perhaps apartments generally): there is a real fear that our aprtments in NZ are a little bit shit in terms of quality. How many swanky developments have gone up, only for the new owners to discover that they leak or fail code in some way? We don’t have the history of building quality, lasting, developments that they do in Europe. Most of us are not used to the high density living, either, unless we’ve lived overseas in a big city and have experienced the advantages that it brings. (The Greens get it, but in their stupid way they want to impose it on the populace.)

    George D @ 25, what needs to be done?

    Comment by Clunking Fist — November 6, 2012 @ 2:32 pm

  27. “…Most of us are not used to the high density living, either, unless we’ve lived overseas in a big city and have experienced the advantages that it brings…”

    The other HUGE problem with apartment/rented living is our antiquated laws around security of tenure. If you are renting, you can be tossed out of your home with three months notice at more or less the landlords whim. Tenancy law reform occurred fifty years ago in most western countries, giving tennent considerable rights and security. In this country, I doubt it was regarded as an issue until recently. We need to bring our tenancy laws up to date and align them with the changing lifestyles and expectations of New Zealanders in the 21st century.

    Comment by Sanctuary — November 6, 2012 @ 2:43 pm

  28. Mr Fist; we must build one million houses.

    Doing so will destroy huge amounts of wealth in private property, require an increase in taxes or borrowing (most likely both), and ratchet down interest rates. The stimulus side will flow through in the short term, and the benefits to the productive economy from banks that are forced to shift to balanced business lending at lower rates will be considerable, as will the actual benefits to those able to live in a house, and the benefits to the country in staunching the loss of young citizens.

    Why won’t it happen? Labour is not a party of vision. They will soft-peddle anything the Greens try to propose, before claiming it as their own in a dissolved version. Any such provision would be limited in scope and impact, and almost worse than none at all, because it would foreclose our future options.

    Comment by George D — November 6, 2012 @ 2:52 pm

  29. “which revealed a record average house price of $618,707″ Yep keep believing the CPI numbers. Bit of inflation to get employment number moving.

    “that it is a complex equation of land use laws, low incomes, building codes and the desire of most New Zealanders to own their own home”

    Bollocks comrade after 3 yrs of no growth M2 has exploded and not showing any signs of slowing down. The wise planners at the reserve bank know what they are doing.(*S) Got to shore up those Aussie banks looking a bit sick across the tasman. Stock market on a tear as well.

    Comment by Simon — November 6, 2012 @ 2:55 pm

  30. Mr Fist; we must build one million houses.

    George D – I believe CF prefers to be addressed as Herr Professor Doktor Fist.

    that it is a complex equation of land use laws, low incomes, building codes…

    CF – as per Simon’s comments, I think you missed out ‘lashings of easy credit’, ‘voluntary and effectively un-policed disclosure of capital gains’ and ‘historical tax asymmetry favouring property’ from your equation.

    Comment by Gregor W — November 6, 2012 @ 4:10 pm

  31. What economists omit is that housing is the only highly leveraged (direct) investment available to the moderately well off.

    If you asked a bank to borrow 80% of the value of a share portfolio, they’d throw you out. Houses, no problem. So even if the price only tracks inflation, your equity will grow at five times that rate.

    Also, there is an actor that could provide secure, sound housing on a long term rental basis. It’s called the state, and we’d be way better if state housing was for everybody instead of just down-and-outs.

    Comment by richdrich — November 6, 2012 @ 5:17 pm

  32. CF@26: “[I]t isn’t the property investors (or “slum lords” as you call them) that are responsible for the price of property in NZ. … it is a complex equation of land use laws, low incomes, building codes …”

    “[T]here is a real fear that our aprtments in NZ are a little bit shit in terms of quality. How many swanky developments have gone up, only for the new owners to discover that they leak or fail code in some way?”

    So … building codes are responsible for the price of property in NZ (assumedly because they are so onerous on those wishing to construct), yet building codes are also responsible for the (at least perceived) poor quality of our apartments (assumedly because they are so lax – or, at least, are so laxly enforced).

    Those building codes sure do get around! It’s almost as if they can be blamed for any problem that you can think of!!

    Comment by Flashing Light — November 6, 2012 @ 5:45 pm

  33. I cannot think of anyone I know who has built up any sort of nest egg for their retirement, who has achieved without using property as an investment vehicle.

    Comment by Arkhad — November 6, 2012 @ 5:47 pm

  34. No most of us aren’t used to high density living. I’m a city person by nature (albeit I do like old country areas and do believe in policies that encourage dairy farms and I’m not opposed to caged hens) but, even so, if I’m in a small city on a hot day and a lot of other people are out, I start to get claustrophobic.

    I think the results are skewed a lot because of Auckland’s huge prices. The government should build more in smaller cities, which would lower the cost of the average house and take some people out of Auckland, which currently has about a third of the population living there, which is too much.

    Comment by Dan — November 6, 2012 @ 11:15 pm

  35. The plague of double garages with internal access currently sweeping through Grey Lynn is bound to put people off eventually.

    Some house prices are driven up by people realising that some suburbs are actually nice places to live. They then set about to make that not he case.

    Comment by NeilM — November 7, 2012 @ 12:40 am

  36. “… The government should build more in smaller cities…”

    This would require having a thing called a “plan”, something this government is loath to create lest it incur the wrath of the Gods of the free market.

    Comment by Sanctuary — November 7, 2012 @ 7:41 am

  37. Auckland is a funny place. You can buy a decent 3 bedroom home in Beach Haven / Birkdale for about $450,000 (maybe less). Off-peak, you can drive to Auckland CBD in about 15 minutes. At peak, take the bus and be there in 30 minutes thanks to the bus lanes. It’s *MUCH* easier to get around the North Shore than Auckland city. Plus it’s warmer. :-) If I go over the bridge and down the Port highway I can be in Parnell in 14 minutes (off-peak) from a standing start in my driveway.

    Comment by Steve (@nza1) — November 7, 2012 @ 9:10 am

  38. Interesting. When I departed from Australia in 2001 I left behind just under $15,000 in compulsory Aussie super contributions, invested with one of the dedicated funds with a moderate risk setting – so about 75% of the value was in shares. After the ups and downs and the fee deductions, the value of the investment 15 years later is …. $15,930. Property looks like a much better investment, thanks all the same.

    Comment by The Economic Illiteracy Support Group — November 7, 2012 @ 1:10 pm

  39. The only entity that owns a house/property is the mortgagor. The mortgagor NEVER loses money.

    Comment by peterlepaysan — November 7, 2012 @ 8:30 pm

  40. Simon, Gregor W, yes fair call: we are 3/4 the way to the next bubble, without having relieved the last one. (And you can call me Susan if it makes you happy.) Let’s tighten monetary policy settings right know, eh? Just don’t tell the Greens, lol.

    Flashing Light @ 32 “So … building codes are responsible for the price of property in NZ” Not the land, sweetie. But they underpin the construction cost. And a lot of the housing stock is now valued with one eye on replacement cost.
    The codes are quite prescriptive, yet quite useless at ensuring the building is watertight. Having built in recent years, this is my experience. You rely (hope) on the skill of your architect and builder. You overlooked my comment on land use laws, i.e. zoning, incomes and desires.

    “39.The only entity that owns a house/property is the mortgagor. The mortgagor NEVER loses money.” Crikey, there are a few banks and finance companies, their bondholders and shareholders, that might disagree with you.

    George D @28 So the answer is to magic-up a million houses? I’m not sure you make sense: if you destroy the private wealth in the property, fine, but that will destroy the banks, so there will be nothing left for them to lend to the “productive” sector. That’s wishful thinking. Just ask the Irish. “benefits to the country in staunching the loss of young citizens.” Well, when you increase their taxes to pay for those million homes/repay the loans, having already destroyed their inheritance, they will have no choice but to seek their fortunes overseas. But I do agree somewhat with you: ease restrictions on land use, bring in tiered building standards, allow insurance companies to stand behind newly built homes (christ knows the councils didn’t, did they?) and you’ll make housing more affordable. You’ll threaten the equity of those already on the ladder, but you’d be doing the right thing by our “young citizens” and others on low incomes.

    Comment by Clunking Fist — November 7, 2012 @ 9:56 pm


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