The Dim-Post

January 28, 2014

Another Orewa?

Filed under: Politics — danylmc @ 1:29 pm

A couple of weeks ago I ran into Matthew Hooton and we sat down and had coffee together and talked about politics. One of the subjects we speculated about was David Cunliffe’s upcoming speech.

I suggested that, ‘Every opposition leader dreams of replicating Orewa?’ Matthew agreed. ‘You find an issue that isn’t part of the current conversation but is hugely relevant. That ignites debate and catches the government off guard. But . . . what is that issue?’ We both tried to think of one but couldn’t, and went on to talk about other things.

~

This chart sourced from an RBNZ study shows the change in house prices to income over the past few decades.

housepricetodisposableincomeSo an average couple in the 1980s could comfortably service an average mortgage with one salary while an average couple in 21st century New Zealand struggles to service their average mortgage with two salaries.

This changes the choices facing that couple in terms of parenthood and child-raising in a way I don’t think previous generations can comprehend (especially given the boomer addiction to the fantasy that they ‘did it tough’ raising a family in the world’s most generous welfare state). Dropping to a single income for months or years for each child and meeting childcare costs when both parents are working again are huge challenges to contemporary families that – until now – haven’t been acknowledged in our political discourse.

Just as Helen Clark knew the battle against Brash’s Orewa rhetoric was doomed and instantly canceled Labour’s ‘Closing the Gaps’ policies aimed at improving outcomes for Maori, John Key seems to have grasped that Cunliffe is onto a winner. Having spent four years insisting that he’d like to increase paid parental leave but there simply wasn’t any money, he has – literally overnight – suddenly decided that Yes! There IS money! Presumably he polled on Cunliffe’s policy overnight and this is the result.

 

52 Comments »

  1. A couple of weeks ago I ran into Matthew Hooton and we sat down and had coffee together and talked about politics.

    Was it an audition for Nine-to-Noon?

    Comment by Andrew Geddis — January 28, 2014 @ 1:42 pm

  2. Averages? Ick. Medians would make much more sense. And disposable income? Isn’t that after housing has been accounted for?

    Comment by pete — January 28, 2014 @ 1:45 pm

  3. Averages? Ick. Medians would make much more sense. And disposable income? Isn’t that after housing has been accounted for?

    I couldn’t find the proper stats easily. Happy to put up an amended graph if you can generate one . . .

    Was it an audition for Nine-to-Noon?

    As Helen Clark used to tell me, you’re dead wrong.

    Comment by danylmc — January 28, 2014 @ 1:54 pm

  4. Sorry, just the pedant in me getting grumpy – that was aimed at the RBNZ report, not you. I don’t imagine a proper analysis would be qualitatively different though.

    Comment by pete — January 28, 2014 @ 2:13 pm

  5. You find an issue that isn’t part of the current conversation

    House prices weren’t part of the current conversation??

    Comment by helenalex — January 28, 2014 @ 2:32 pm

  6. What helenalex said, I don’t think I’ve had many conversations since moving to Auckland that aren’t somehow related to house prices or real estate. I’m pretty sure I wasn’t having conversations about how crotchety old racists are stealing our land pre Orewa though.

    Comment by Chris Bull — January 28, 2014 @ 3:05 pm

  7. There are a couple of points to make about the scenario, and the statistics.
    The average new house built in New Zealand has become much larger over the years. According to RV the average floor ara of a house built in the 1950’s was 117.5 sq mtrs. The average new house built since 2010 is 205.3 sq mtrs. New houses now are no longer 3 bed, 1 bath. They are now 4 bed, 2 bath at least.
    The other factor is that, at least anecdotally, the proportion of the cost of a house that is in the land value has risen. My own property, in Karori in Wellington, had a split of 40% land and 60% house when I bought it about 30 years ago. These proportions have now reversed to 60% land and 40% house. Thus for the same value of house the land increase means a 50% increase in the overall value. I suspect it is even more so in Auckland.

    Comment by Alwyn — January 28, 2014 @ 3:20 pm

  8. 5 & 6, read the post again.

    Hint: it isn’t about house prices.

    Comment by Chris S — January 28, 2014 @ 3:21 pm

  9. “So an average couple in the 1980s could comfortably service an average mortgage with one salary while an average couple in 21st century New Zealand struggles to service their average mortgage with two salaries.”

    That might be true for those living in Auckland but not correct for those living elsewhere. You seem to think there is one property market here when in fact there are many.

    By the way, in the 80s mortgage rates were very high, topping 20%. They’re considerably lower today.

    Comment by Ross — January 28, 2014 @ 3:30 pm

  10. I have had a look at the RBNZ paper that graph was taken from. In the first place the paper was produced in the middle of 2009 and the spectacular rise shown of course covers what happened in the last Labour Government’s term.
    The paper confirms my comments about land (section) prices going up faster than the actual house price and suggests it is due to the large increase in local authority levies, particularly after 2003. Although they may be new sections the increase there will be reflected in existing properties
    The other thing one should allow for is that mortgage interest rates were much, much higher in the 1980s than they are today. I can remember rates of 15% and I believe they were as high as 20% in the early years of the 1980’s. Today they are about 6% are they not?

    Comment by Alwyn — January 28, 2014 @ 3:40 pm

  11. Ross, that just means that replayments on the 3+ times larger mortgage are kinda vaguely affordable. An adult in my life position 50 years ago who’d been saving most of their disposable income for 5 years would be able to buy outright, whereas I have enough for a 30% deposit (and if I had secure employment I’d have bought, but 6 months ago I finally got my previous 4 months pay after working for someone who had cashflow issues. Then I changed jobs. In 1964 that would stop me getting a mortgage for another 5 years because it was so rare).

    FWIW, Sydney is worse than Auckland. We’ve been looking at “problem houses” to try to get within an hour’s commute time of work. Or small apartments to get under 30 minutes. But between insecure work and reluctance to commit to 15+ hours commuting every week each we’re not seeing a lot of options. By comparison, my parents deliberately bought “further out” to get more land for the same price, even though that ment a 35 minute drive each way for my father. Oh, for the days when 35 minutes was a long commute…

    Comment by Moz in Oz — January 28, 2014 @ 3:49 pm

  12. The other thing one should allow for is that mortgage interest rates were much, much higher in the 1980s than they are today

    Alwyn – it irrelevant what the interest rates were in the 80s.
    The Y-axis is a measure of relative affordability, illustrating the proportion of household income spent on servicing a mortgage.

    Comment by Gregor W — January 28, 2014 @ 3:53 pm

  13. Yes, mortgage interest rates blew out of the water in the mid-1980s, and employment rates fell for most groups. The effect of this on couples with children can be seen in graphs of parental employment based on Census data. Over the 1980s decade, partnered mothers were the only parent type to have continuously rising employment rates, while partnered fathers, and sole mothers and fathers, had falling employment rates. This means that more couples with children were becoming two-earner families in order to cope with the rising cost of servicing a mortgage.

    There was also a rising degree of family breakdown in the 1980s, leaving each parent seeking to rehouse themselves amidst rising inflation and interest rate hikes. Many lost out and as they grew older were hit by the rise in the age of NZ Superannuation. The 1970s would be a better choice of decade to compare with the present, if your point is that “earlier generations had it so good, comparative to today’s young families when it comes to housing”. But as someone pointed out above, the house you got with the generous government assistance in the seventies was very modest compared to the houses being built today.

    Personally, I think generational envy is divisive and unhelpful in political discourse. Many of us babyboomers are concerned at the situation our children are in today and just as likely to vote for policies that benefit them and our grandchildren.

    Comment by Kay — January 28, 2014 @ 4:06 pm

  14. @Gregor W.

    Fascinating. I would have thought that this graph was what the line of words across the top says.
    As I read it the heading over the graph it says

    “Ratio of average house price to average household disposable income”

    Does your one show something different because that says absolutely nothing about servicing a mortgage does it?

    Comment by Alwyn — January 28, 2014 @ 4:23 pm

  15. Another reason for the acceleration in unafordability is the relaxation in mortgage standards that occured in the late 90’s and early 00’s. Where previously you pretty much HAD to find a 20% deposit, all of a sudden banks were lending 90%-plus of the house value.

    The outcome was that a whole generation of buyers all rushed into the market at the same time. Earlier generations had drip-fed buyers into the market at a rate that much more closely resembled the rate sellers were falling out of the market (i.e. dying or selling down).

    Comment by Phil — January 28, 2014 @ 4:24 pm

  16. @Gregor, @ Alwyn
    Disposable income is total personal income minus personal current taxes.
    Discretionary income is disposable income minus all payments that are necessary to meet current bills (e.g. rent or mortgage, utilities, insurance etc)

    Comment by Phil — January 28, 2014 @ 4:28 pm

  17. Interest rates, bigger houses, land prices, whatever – the fact is, as Danyl says in the original post “an average couple in the 1980s could comfortably service an average mortgage with one salary while an average couple in 21st century New Zealand struggles to service their average mortgage with two salaries.” That’s certainly true for me – my parents, early in their careers, bought a house and raised three kids on one income (with enough left over for a trip around the world when I was eight). My wife and I have both been in the workforce for over ten years and it still takes both our incomes to service the mortgage. My wife has just gone back to work after taking a year off after the birth of our second child – as with the first, that’s meant living beyond our means for a year, chewing through our savings and piling up credit card debt until we’re back on two incomes and can make it all back. It makes me wonder what things will be like for my kids – will it take three incomes to deal with a mortgage? Polygamy ahoy!

    Comment by Josh — January 28, 2014 @ 4:29 pm

  18. @Phil – You are quite right. I didn’t take into account other costs ex mortgage that would eat into disposable income and shouldn’t have assumed it was an ‘all things being equal’ scenario.

    @Alwyn – not sure what your point is. You posited a connection between higher interest rates and affordability. Unless I misread your comment, you seem to be infering that higher interest rates were a factor in making housing more affordable (i.e. consuming proportionally less nett income that it does today). You haven’t really demonstrated why this should be the case.

    Isn’t it more likely, as Phil has described, that weaked loan criteria is responsible for the inflation? Or without actually stating it, did you mean to infer that when rates were higher, committing to a mortgage was less attractive which supressed pricing, therefore making homes more affordable?

    Comment by Gregor W — January 28, 2014 @ 5:09 pm

  19. Orewa bouncing would be nice, but I’d settle for a slow steady rise of 5% over a year. The thing with Brash at Orewa was that his point was so fucking anathema to the political center that they were taken aback that he would even go there. Whereas there is only a very small sector of the population that isn’t worried about house prices, since they account for most of the capital in the country, and generating a surprise could only come from coming up with a novel solution.

    And that ain’t easy. Like the causes of WW2, the drivers of price inflation are many and various. Some are:

    -Not enough supply, not enough houses being built
    -Too much demand, foreign capital has virtually no impediment, so a rising world population will drive up property prices.
    -The long term returns make property a fantastic investment, safe as houses. This can’t last, but it’s also too big to fail.
    -Debt is still money so increased debt is increased money supply. This is an economic crankhandle, and slowing it slows the economy. No one wants to do that, which is why the Reserve Bank has been threatening to raise the OCR for fucking YEARS now and yet is too damned scared to do so, knowing the economy would instantly choke. The lead time is surprisingly small – economic growth is very strongly correlated with the second derivative of debt over time, ie the rate of debt acceleration.
    -Property is actually getting better in quality, so of course it’s worth more.
    -NZers do not save, for the most part. They rely on property for their retirement.
    -We tend to develop by sprawling, which is not really cost effective in the long run, and can make development of infrastructure increase over time. Our roading costs are mostly about getting people from their remote houses to other places, and of course that cost has to be passed back one way or another to the underlying cost of housing.
    -NZ is a desirable place to live for considerably more people than live in NZ, and it’s becoming more so, the richer they get.
    -We don’t tax profit from property price inflation, for the most part.
    -Our incomes are not rising rapidly enough. We wouldn’t really care about the price if we were rich as heck. But we aren’t, and fixing that is a conundrum that challenges even the brightest minds. This is mostly because it’s competitive, wealth being a relative idea. And we’re competing with the entire world.
    -Most of the solutions that people think of tend to involve actually harming the most vulnerable property owners the most. This is never going to look good for a left wing party.
    -Most of the solutions that would actually work tend to involve relative harm to the richest and most powerful people. It’s hardly a surprise that politicians don’t want those solutions, nor do banks, nor do the rich people we revere and look to for advice.
    -Most people simply don’t understand economics and don’t care. So support for a genuine solution is hardly going to be a big Orewa moment.

    Comment by Ben Wilson — January 28, 2014 @ 6:09 pm

  20. Gregor W. I most definitely didn’t propose that higher interest rates made houses more affordable. I would certainly never say that you can say, from ONLY the ratio of average house price to average income whether you are consuming more or less income on housing today that you were in the 1980s.
    However I will offer an example
    I have assumed a disposable income of $70,000/annum, that a deposit of $42,000 of the price will be paid, and that you have a 30 year mortgage.

    In the 1980’s the average price to disposable income was about 3. I will therefore look at a $210,000 priced house. Let us assume that the interest rate was 20% (and quite a lot were).
    You would have to pay out $2,807 per month. That is about 48% of your disposable income.

    Today the ratio is about 6. The house will cost $420,000. I’ll leave the deposit at $42,000 so as not to confuse things by changing multiple variables. However the interest rate is 5.75%. Your repayments will be $2,206/month or 38% of your disposable income.
    The property would, in spite of the fact that it is twice the price, be MORE affordable.

    As for the reason for house prices going up faster than general inflation, and therefore for the ratio of price to disposable income rising, I think it because higher priced land, due to both a shortage of available sections and local body levies has carried over to the existing stock. There is also a marked increase in the average house size that is putting “average” prices up.

    Comment by Alwyn — January 28, 2014 @ 6:13 pm

  21. > There is also a marked increase in the average house size that is putting “average” prices up.

    While that’s true, my own property has gone up over $200,000 with almost no improvements at all in the 10 years I’ve owned it. I had it professionally valued to find this out. I haven’t added any rooms or floor space. This growth is pure inflation, and is around 65% tax free profit if I sell today. It’s not phenomenal as an investment, only about 5% p.a compounding, but it was almost entirely on borrowed money. I only put up $64,000 originally, so that puts the true profit for me at around 7.8% compounding and tax free. I would have had to spend pretty much the mortgage money on rent, so this really does make it an incredibly compelling investment, compared to the dangers of, say, the stockmarket, or running my own business (something I tried and failed at over the same period). My other significant investment, my super fund in Australia, has outperformed most of the other funds over there, and yet fallen well short of trebling my money the way property has.

    Comment by Ben Wilson — January 28, 2014 @ 6:27 pm

  22. Is this not in part due to the fact that overtime the city had expanded?

    50 years ago new sections were much closer to the centre than they can be now. Those sections that a were cheap back then ie Pt Chev etc are now much more valuable since they are now the beneficiaries of being comparatively much closer to the centre.

    As well as that there’s been a huge growth in a generation of people who want to live in Grey Lynn – which used to be shunned by anyone how could live elsewhere.

    More people want an urban rather than suburban lifestyle and the peculiarity of Auckland is that urban environment is dominated by heritage villa suburbs that no one will date touch for something more inner city a al Haussmann.

    And yeah, interest rates etc and it’s not a new issue.

    Comment by NeilM — January 28, 2014 @ 6:43 pm

  23. Matthew is wrong. The idea that Maori were getting more than their fair share was always part of the conversation. ACT had been banging on about it, essentially fruitlessly, for ages. What changed was that the same old words were coming out of the mouth of a major party.

    This means, in order to replicate Orewa, Cunliffe needs to nick a policy flavour generally seen as too extreme for Labour, probably from the Greens. It’s a high risk endeavour, though.

    Comment by kalvarnsen — January 28, 2014 @ 6:54 pm

  24. ‘Every opposition leader dreams of replicating Orewa’.

    Maybe they do, but they should have bigger dreams. Orewa – and all its associated aggro – gave National a huge boost BUT from a position of hopelessness (which Labour aren’t in now). And then their support fell away again. And not only did they lose the ensuing election, they actually reached their recent peaks under Key by (implicitly) rejecting Orewa. Cuddling Turia and Sharples (not Hone) has done National more good than John Ansell ever would. The old “good Maori versus bad Maori” works better in middle NZ. We like our racism to be respectable.

    A smarter opposition leader should dream of replicating Clark, who had no single “Big Issue”, but demonstrated basic competence and commanded (sometimes grudging) respect. As did Key, to a lesser extent. Even Bolger.

    Unfortunately highly-paid political advisers don’t get those fat fees for telling their clients: “Just do your homework, know what you’re talking about, and don’t be a dick”. That’s all there is to it, really.

    Comment by sammy 2.0 — January 28, 2014 @ 6:55 pm

  25. That’s a bit disingenuous Alwyn. Even by your calculations, you’ve forgotten to mention that while the 2014 mortgage may cost you 10% less of your disposable income every month, it will also take you more than twice as long to pay off (remember you’ve quoted payments in the order of $2000 a month for both the $200k and the $400k mortgage).

    Comment by Milla — January 28, 2014 @ 7:50 pm

  26. >This means, in order to replicate Orewa, Cunliffe needs to nick a policy flavour generally seen as too extreme for Labour, probably from the Greens. It’s a high risk endeavour, though.

    My biggest concern is that actually solving the housing problem fucks with a strong core demographic of Labour’s. It might reach out to people who didn’t vote, but it could equally alienate people who did, who would go to National. Which group is bigger? They would have to turn two unvoters for every vote lost to National to actually gain ground. TBH, this is really the whole problem with expecting any kind of socialism from Labour – it’s really not in their interests, because their support currently includes far too many people who are not disadvantaged. They have to come up with solutions that don’t have losers, which don’t really exist (or more precisely, they’re not perceived to exist). If anyone is going to reach out to the non-voters, it’s going to be minor parties, not the main ones.

    If Labour is to defeat National, I think it’s going to come down to credibility, rather than policy. They have to seem more competent and less corrupt. The minor parties can be the policy battleground. Hell, they already are – the two main ones pretty much just posture and offer policy weaksauce.

    Which is not to say that they shouldn’t have good policy. Of *course* they should, they’ll be running the country if they win. They should probably be nutting that out in secret with the Greens on a constant and ongoing basis. I just don’t think it’s what wins or loses elections for the major parties. Cunliffe has to go head to head with Key as often as possible, so that people see the scary side of Key and the clever side of Cunliffe. They have to hammer every slip, something that the Opposition should have an advantage in. People who think about policy probably won’t vote for either of them.

    My prediction: It’s going to be very close, and minor parties will decide the winner. I don’t think that Colin Craig has done NZF any favours by emerging now, and could pull off a defeat for them that will end that party as a viable force. The only question is whether Craig will get enough votes himself. If he does, we’ll probably get National. If not, I think Labour-Greens will win it. The ideal outcome for the Left is that CC splits the NZF vote and neither party gets anything, taking around 10% for no seats. Dunne and the Maori will always side with the winner, because they always have, and they will not have enough to put National in on their own.

    Comment by Ben Wilson — January 28, 2014 @ 8:09 pm

  27. @Milla. Clearly you didn’t read what I said.

    I said that it was done with a disposable income of $70,000, a deposit of $42,000, AND A 30 YEAR MORTGAGE.
    So it takes exactly the same time, 30 years, to pay it off.
    The 1980s mortgage interest rate was so much higher that, even though the amount was less than half as much, the payments per month were more.
    If you don’t believe the numbers there is a mortgage calculater on Westpac’s website.
    The actual mortgages were actually $168,000 and $378,000 by the way.
    If you now claim that I didn’t predict thet in the future the interest rates were going to fall that is true.
    Did anyone pick that interest rates were going to drop that much, and even if they had it wouldn’t be very consoling, in 1983 to be able to tell yourself that I had to pay these high rates for only ten years or so and then things would be better would it?

    Comment by Alwyn — January 28, 2014 @ 8:22 pm

  28. @Alwyn, fair enough, I didn’t see that bit. I was wondering how your 1980s guy covered his interest so quickly. And yes, I was rounding, since the difference is still circa twofold it didn’t seem like a massive problem. It’s not like I was using the numbers in actual calculations.

    Forgive me, but the fact that your 1980s mortgage-holder didn’t actually have to pay the numbers in your example does seem significant. What you’re saying is that, in fact, your 1980s mortgage-holder didn’t end up paying 48% of their disposable income for 30 years; their mortgage became a lot more affordable a decade later. True, they didn’t know that at the time they took it out;* but that doesn’t change the fact that they did an awful lot better than people taking out a mortgage now can realistically expect to do. Which somewhat lessens your ability to claim that you had it as tough as I will have it, should I be stupid enough to buy a house in NZ in the near future.

    *I, for example, did not know when I took out my student loan that it would, miraculously, remain interest-free even after graduation, provided I stayed in the country. At age eighteen, I fully expected that I would be accruing mega-interest by now. But despite having held that belief at the time I opened my student loan, I would not claim that I am in the same position as people who actually did accrue mega-interest after graduation. I’m not, I’m many thousands of dollars better off, and extremely grateful for it.

    Comment by Milla — January 28, 2014 @ 8:45 pm

  29. The ideal outcome for the Left is that CC splits the NZF vote and neither party gets anything, taking around 10% for no seats. Dunne and the Maori will always side with the winner, because they always have, and they will not have enough to put National in on their own.

    If the CC and NZF aren’t in Parliament, and Dunne and the Maori “will not have enough to put National in on their own”, who exactly holds the balance of power in this scenario? Kim Dotcom?

    Comment by Flashing Light — January 28, 2014 @ 8:55 pm

  30. Labour & the Greens nearly had an Orewa moment with the NZ Power announcement last April. It succeeded on multiple counts: halving the projected number of investors in MRP, tapping into economic nationalism, as well as public concerns over a cartellised electricity market – itself part of a wider concern over high living costs via industry cartels – and catching Key & Co unawares. It hasn’t yet succeeded in delivering a sizeable gain for a Labour-led bloc in the polls, but at the same time it hasn’t particularly hurt it either.

    Other factors in house prices since the 1980s are the relaxation of immigration laws, and the half-baked assumption that anything taller than a few storeys belongs in the Bronx. The Labour-led bloc just has to repackage restrictions on non-resident buyers as capital controls, but thankfully the ‘chan-ban’ meme seems to have fizzled out despite attempts by some to foment it. In any case, the long term trend for Auckland and the other major urban centres is Manhattanisation/Vancouverisation, whether people like it or not.

    Comment by deepred — January 28, 2014 @ 9:08 pm

  31. Deepred, yeah, you’re basically right, although for some reason an increased focus on earthquake risks has made insurance on inner city apartments a little pricey in Wellington. Which gets in the way of this trend a little bit…

    Comment by Dr Foster — January 28, 2014 @ 11:28 pm

  32. “…seems to have fizzled out despite attempts by some to foment it…”

    One half of the “some” in this comment is currently experiencing a karmic moment DDoS.

    Comment by Sanctuary — January 29, 2014 @ 7:12 am

  33. Alwyn, interest rates were not thaqt high for the whole 30 years though. Even the dumbest homebuyer with a fixed rate mortgage would eventually realise that refinancing at 10% rather than continuing at 20% would save them money. One of the more annoying facts of my childhood is that after we lost the farm (most because of 30% interest on seasonal finance!) we could immediately buy a house on an 11% mortgage.

    Even if you’re right, that explains perhapos 5 years of a 40 year period.

    Comment by Moz in Oz — January 29, 2014 @ 9:19 am

  34. @Moz and Milla.
    No they didn’t remain at anything like that level for the whole 30 years.
    However while they were at that sort of level they would have been very, very painful.
    I’m not sure that I would have been very consoled by the thought that I would only have had to pay out those amounts for five years, say, and then everything would be easier because my income had ben inflated by the inflation of the era.

    It was however the comment in the original post that I was really objecting to.
    The bit that says “An average couple in the 1980s could comfortably service an average mortgage with one salary while an average couple in 21st cetury New Zealand struggles to service their average mortgage with two salaries”. I’m sorry but that is a rosy and false view of history.

    We should of course thank Roger Douglas and Don Brash for their policies and leadership of the Reserve Bank which squashed the inflation that bedevilled us in the 1970s and 1980s. It is that that has meant we have so much lower interest rates.
    Let us pray that Economic illiterates like Norman don’t bring it back with their mad use of the printing press to expand the money supply.
    Here endeth the first lesson.

    Comment by Alwyn — January 29, 2014 @ 10:06 am

  35. I’m sorry but that is a rosy and false view of history.

    Again, I can only offer anecdotal evidence, but in my experience it is a 100% accurate picture of history.

    Comment by Josh — January 29, 2014 @ 11:05 am

  36. I don’t know, Alwyn, in the 1980s my dad’s solid-but-not-astronomical salary was supporting our family (three kids, two in private school) and paying the mortgage on a 4-bed, 3-bath house with a huge backyard in a nice middle-class inner-city suburb. Granted, accountants aren’t exactly minimum wage-earners, but I challenge you to find many one-professional-income families who can afford three kids, private schools, and a nice house in the central suburbs these days. Like Josh, my evidence is only anecdotal, but still.

    Comment by Milla — January 29, 2014 @ 11:23 am

  37. If the CC and NZF aren’t in Parliament, and Dunne and the Maori “will not have enough to put National in on their own”, who exactly holds the balance of power in this scenario? Kim Dotcom?

    @FL:

    Assuming they get the numbers, the GP? Presumably, they would be in a position to either (i) go with Labour and form a govt with a narrow majority, or if the offer is no good (ii) stay out and cut a support deal with either a National or Labour minority government on confidence and supply.

    I imagine option two wouldn’t see any govt lasting the full term though and the GP would eat the backlash.

    Comment by Gregor W — January 29, 2014 @ 11:39 am

  38. I challenge you to find many one-professional-income families who can afford three kids, private schools, and a nice house in the central suburbs these days.

    It can be done, if you turn the yard into a French Bulldog puppy-mill.
    You can get a lot of those little blighters churned out per square metre, and it smells less than a clan lab.

    Comment by Gregor W — January 29, 2014 @ 11:43 am

  39. >The bit that says “An average couple in the 1980s could comfortably service an average mortgage with one salary while an average couple in 21st cetury New Zealand struggles to service their average mortgage with two salaries”. I’m sorry but that is a rosy and false view of history.

    No, it’s not. It’s an acknowledgment that prices have more than doubled relative to incomes, which is a simple fact. It’s not a view, it’s data. You can fudge around talking about the period of high inflation during the late 70s and early 80s, but the inflation was in incomes as well as prices, and people who are already in property love general inflation. You could easily find by the end of a period of high inflation that your annual income is equal to the total debt you owe the bank, indeed I’m pretty sure my parents had exactly this happen to them – they bought in Herne Bay for about $100,000, and by the end of the decade Dad was earning not much less than that annually, and the property was worth more like a million dollars. I’d be pretty stoked if my 300k loan melted away to nothing as my salary trebled, even if I had to pay twice the mortgage – I’d be able to afford it because I’d have three times the income, and at the end of it the property would have trebled in value as well. Sux if you didn’t get in on the gold rush, though. Now you have to stump up 900k. And that’s exactly where people who don’t own property are right now.

    Comment by Ben Wilson — January 29, 2014 @ 2:59 pm

  40. Further to that, the main people who don’t like high interest rates and inflation are actually banks, not mortgage holders. The reason for this is because inflation erodes the value of debt, and also makes new debt unattractive. And debt is their bread and butter. It’s a far, far better situation for banks to be charging a small amount of interest on a large debt than high interest on small debt. The income is the same but it’s locked in for a far, far longer period, during which the bank pretty much still owns the asset. This obsession with low interest rates is something that mostly preserves very high profits for lenders. They don’t ever want it to end, and would indeed like to explore the vast infinity of rates between what they are now and , each drop magnifying how much they can lend, fuelling more borrowing and more price hiking. It must be an awesome thing to be able to print money, and they never want anyone else getting their hands on that power.

    Comment by Ben Wilson — January 29, 2014 @ 3:10 pm

  41. errata: explore the vast infinity of rates between what they are now and *zero*

    Comment by Ben Wilson — January 29, 2014 @ 3:12 pm

  42. @alwyn In your analysis, are you presuming that a $70k income in the 1980’s is the same as a $70k income today? What was the average income in your 1980’s example, compare to today? And how does that compare to the assumed house price (hint, it was probably a lot less that 200k)

    Comment by Fooman — January 29, 2014 @ 4:22 pm

  43. @Ben. After you have had five years of inflation, and your income has gone up a lot, of course you don’t find your mortgage payments such a problem. However in the first few years after you take out the mortgage, it is bloody difficult. One can suggest that this is only for a tiny part of the time you are in a house but it isn’t so. I believe that people change homes on average every 7 years and usually take out as big a mortgage on the new property as they can.

    The people who most love inflation are politicians. They get higher tax takes because of bracket creep and don’t have to explain that they are putting up tax rates. This is even more so whan you have a capital gains system. If everything was to double in price, and I mean everything no one would be any better off would they. However the Poli’s would claim that the increase was “capital gains” and tax an entirely spurious “profit”. They also get to tax your “income” from interest, even though the pre-tax interest rate may not even be keeping level with inflation,

    @Fooman. I just left the amounts the same to make the explanation easier. I thoght it would help make the situation clearer if you didn’t have to do conversions, and it made it clear that the proportion of the income servicing a mortgage was higher than than in the 1980’s. Just think of the numbers as being “units of currency” of the day. They don’t have to be the same value then. Convert them, say halve the 1980’s numbers, if you like but don’t then think that the $1403 dollars per month for the mortgage is really less of a burden than the $2210/month today.

    Comment by Alwyn — January 29, 2014 @ 5:19 pm

  44. >If everything was to double in price, and I mean everything no one would be any better off would they

    Yes, a lot of people would be, because whatever debt they had taken out early on to buy assets would be significantly less as a proportion of the total portfolio.

    >However the Poli’s would claim that the increase was “capital gains” and tax an entirely spurious “profit”. They also get to tax your “income” from interest, even though the pre-tax interest rate may not even be keeping level with inflation,

    Tell me even one country in the whole world that does capital gains on real estate like that? The capital gain is usually inflation adjusted. It’s normal for your own residence to be exempt from capital gains tax. Yes, bracket creep is a problem. Income tax should be inflation adjusted and inflation should reflect all the major life costs, rent/mortgage being the biggest one by far for most people.

    >However in the first few years after you take out the mortgage, it is bloody difficult. One can suggest that this is only for a tiny part of the time you are in a house but it isn’t so.

    If you stretched yourself as far as you could go just before a rate rise, yes, that’s a bugger, but them’s the breaks in investment. Suggestion: Don’t do that. If rates were volatile, there should be controls about the kind of debt people can take out to prevent defaults. But defaults would not be terribly serious and banks would probably let a lot of them slide just by revaluing the house (which has risen) and allowing more borrowing. That’s very much in their interests. Only in an absolute cash-flow disaster would people be better off selling just because of an inflation induced rate rise, and they would not lose out when it happened.

    How many people were forced to sell their houses because of inflation in 80s? I don’t know anyone that happened to. But now, with inflation really, really low, and debt really, really high, even tiny rate rises are disastrous for families.

    Comment by Ben Wilson — January 29, 2014 @ 7:13 pm

  45. If you stretched yourself as far as you could go just before a rate rise, yes, that’s a bugger, but them’s the breaks in investment. Suggestion: Don’t do that.

    Back in the 80s, the news media ran plenty of sob stories featuring people who’d put the highest mortgage they could afford to pay on their bourgeois dream home, then found interest rates shot up to 18%. “Don’t do that” did seem to be the obvious conclusion to draw from these stories.

    Comment by Psycho Milt — January 30, 2014 @ 7:38 am

  46. >“Don’t do that” did seem to be the obvious conclusion to draw from these stories.

    Except for the fact that all those who did manage to make the payments found themselves extremely well off only quite a short time later. Those who may have been forced to foreclose, after the bank had probably offered to extend their mortgages on account of their substantially improved equity position, would have only made a modest profit.

    Comment by Ben Wilson — January 30, 2014 @ 9:49 am

  47. For anyone interested in looking at “proper data”, there are several useful tables on household incomes, before and after housing costs, in Bryan Perry’s annual report, “Household Incomes in New Zealand: trends in indicators of inequality and hardship 1982 to 2012”, particularly sections C and D.
    https://www.msd.govt.nz/about-msd-and-our-work/publications-resources/monitoring/household-incomes/index.html

    Table 3C on page 66 shows that all age groups experienced a worsening of the cost of housing relative to income over the period 1988-2012. The proportion of individuals in households with housing outgoings-to-income ratios (OTIs) greater than 30 percent more than doubled between 1988-2012 for 25-44 year olds (from 15 to 33 percent – the change was similar for children under 18); almost quadrupled for 45-64 year olds – “baby boomers” (from 5 to 19 percent); and trebled for those aged 65+ (from 3 to 9 percent).

    Comment by Kay — January 30, 2014 @ 10:49 am

  48. @Ben. “The Capital Gain is usually inflation adjusted”, you say. Please tell me countries that inflation adjust capital gains? Australia did it whan they first brought in a CGT but they don’t do it now. I suspect they were losing to much tax that way. They changed in 1999.
    In the CGT proposals of The Green and Labour parties in the last election I don’t remember any proposal to index the value. I admit that I didn’t read them that carefully as I didn’t expect them to get in, but I don’t think they were going to do it.
    The operative words were “everything double in price” by the way. It is quite possible to set up loans such that they have a real interest rate and that the principal goes up with inflation. They might not be common but they can be devised.

    Comment by Alwyn — January 30, 2014 @ 4:39 pm

  49. @Ben. You also commented that “Whatever debt they had taken out early to buy assets would be significantly less as a proportion of the total portfolio”
    That statement is true but could be misleading. The reason it is less is because the interest you were paying was, in effect, a repayment of capital in order to keep the nominal amount owed approximately constant.

    As an example consider that you borrow $100 from a kind friend who will charge you 0% real interest and asks only that you will pay him back the whole real amount that you borrowed. No capital repayments are required until the end of the loan.
    If there was zero inflation you wouldn’t have to pay him anything at the end of the year.
    Suppose however that inflation was at 15%. At the end of the year the nominal amount of the loan would have to be $115, if no interest was paid. That is the same real $100 you borrowed. Alternatively you pay him the $15 at that time, which is called interest, and you still owe him a nominal $100.

    It was the high inflation that occurs that required you to pay such a high rate of “interest” in order to keep the nominal debt the same.
    You can extend this to include a real interest rate and capital repayments of course. It is just easier to demonstrate this way. You aren’t really any better off. The banks aren’t fairy godmothers. They are just charging a very high interest rate to ensure that they get back the real, as opposed to the nominal money you borrowed.

    Comment by Alwyn — January 30, 2014 @ 6:02 pm

  50. @Alwyn#48 Ireland and Israel do it outright. Other countries have various “tapering” systems (eg the UK) which come to much the same thing. And very few countries take CGT on primary residences, so we’re talking about a tax that primarily affect property investors seeking income from their property. Taxing that is very fair.

    Also, Australia changed the indexation method to a 50% discount in the taxation (why they didn’t just halve the tax rate, I don’t know, it comes to the same), when they dropped indexation. So I doubt they did it to collect more tax, especially not since it was accompanied by substantial drops in the income tax rates.

    @Alwyn#49 Yes, they can be much the same either way in theory. I’ve lost track of why we’re bothering with this argument. Did we somehow end up in agreement that inflation is not the horrendous bogeyman that some would have us believe?

    Comment by Ben Wilson — January 31, 2014 @ 9:48 am

  51. Time to move on. I too forget the reason it started.
    And yes it is, although a bit complicated, possible to get around in a fair manner the side effects of a reasonable level of inflation.

    Two points I do believe, but I am not going to debate.
    I think if you have CGT it should include the primary home. Look at the McMansions in Western Sydney.
    The tax affects people who invest in shares and other property besides housing as well. In most countries I think that would be more money than property investors have.

    Comment by Alwyn — January 31, 2014 @ 11:30 am

  52. >I think if you have CGT it should include the primary home. Look at the McMansions in Western Sydney.

    I tend to agree, since it’s usually the biggest property you own by far, could be worth many, many millions. But that’s unlikely to happen, because it would hit too many people. Political suicide.

    >In most countries I think that would be more money than property investors have.

    I’m not sure about that one. Real estate dwarfs the stockmarket here and in many other developed countries. Investors own about half of it.

    I don’t think it’s a big problem to have CGT on stocks and shares. Profit is income and should be taxed as such.

    Comment by Ben Wilson — January 31, 2014 @ 12:02 pm


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