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Our housing crisis – and the unintended consequences

by Ian Apperley
There is no doubt that we are having some huge issues with housing in Wellington. Finding somewhere to live is becoming increasingly difficult and expensive.

TradeMe’s statistics in the last week show that in the rental area, there has been a drop in rental availability of 70% on December 2016, while data shows that rental prices and house prices continue to climb.

But why? And what happens next?

Systems Thinking gives us an interesting way to look at the issues. Bear with me; it’s not that difficult a concept, and it’s necessary for understanding what is happening. In its essence, Systems Thinking takes a holistic view of an entire ecosystem as opposed to focusing on its elements. In this system we have many inputs, which we’ll look at it, then a series of levers for each. For example, immigration is an input and how the government regulates immigration is a lever.

What we see with housing is many interested parties examining various parts of the housing system without taking a holistic approach, and all pulling their levers without considering the others. This means that by changing parts of the system without considering other parts, you end up with outputs that fluctuate, often wildly, and are unpredictable.

Wellington has many inputs that are impacting on housing and rental availability and cost. Here are a few.

Population growth is the obvious one. Wellington population grows because of national immigration and when a Left Government is in power. That’s because Labour grows the government forces and for each public servant who comes to Wellington they are likely to bring the family (not always) and dependents.

While immigration is likely to be slowed by Labour, it is unlikely to influence Wellington’s population and may have the unintended consequence of slowing down the very thing we need (more housing) but limiting what skilled resource can come to the city.

There are fewer rentals in the market because investors have quietly been dumping the stock, anecdotally, after central government and local government law changes, or proposed law changes. This has reduced the stock of rental properties while increasing the cost of houses generally as new homeowners and new residents move in. Investment isn’t likely to pick up until those uncertainties are resolved and adding to the factors is the 40% deposit rule on investors buying new homes.

The Housing WoF moves, minimum rental standards, intention to close the negative gearing loopholes, and potential capital gains taxes in the future have scared a lot of marginal investors out of the market. Again, unintended consequences. The government wants rentals to be healthy housing at an affordable level.

Unfortunately, the consequence has been a reduction in rentals and an increase in rental prices. This will continue for the foreseeable future.

The Government seems to have no response to this other than to point to increases in rental prices in Wellington recently as “looking like exploitation.” Well, maybe in some cases it could be, however under the current law (which isn’t being examined) landlords are perfectly within their legal rights to do just that, and as much as you find it abhorrent, they are also legally entitled to create bidding wars on rent between prospective tenants.

All house owners are facing costs regardless of whether they are owner occupiers or investors with rental properties. Consider insurance. In the past few years, the insurance on my home has gone up some 400%. I expect it to increase significantly again this year. Add to that increasing mortgage costs (creeping up slowly), and increasingly expensive rates bills (substantially increasing in the next few years), and you have costs that landlords are likely to pass on.

Particularly if they are truly negative-geared, which by the way, isn’t a rort always.

Some other anecdotal factors come into play.

House sharing apps are undoubtedly reducing the amount of rental stock, potentially significantly. A quick look at AirBnB and a back of the beer coaster calculation shows that there are around 500 houses (3 bedrooms) available for hire while on www.realestate.co.nz the total number of rentals (regardless of number of bedrooms) available in Wellington is 121 (as at the time of writing.)

AirBnB is only one of several different apps serving up houses across the city. I would assert that the rise of those services, effectively tax-free to boot, its significantly reducing rental stock.

The difficulty of getting into your own home is causing the rental population to increase, and again anecdotally, there are now more people staying in rental properties longer, further putting pressure on stock.

Wellington has limited land for new housing stock, and the cost of building a house could be regarded as highly-prohibitive due to the way that the materials market is locked up by a few players.

The only way is up. However there are issues with this.

First, any time we want to go up, local groups react badly and challenge the development often tying it up for years. Even in obvious areas like a run-down air force base, fights break out. i.e. Shelly Bay.

Secondly, after the earthquake, apartments have become unpopular. Anecdotally people don’t want to live in high-rise apartments due to their concerns of earthquakes with owners quietly exiting for traditional homes.

Eastern Suburbs in Wellington is under significant pressure for rental and property with houses in Strathmore outstripping rental rates for houses in Karori. Why? Because the movie industry is in full swing already with expected additional 900 staff coming in this year, a lot of who will have families with them.

What Wellington needs is a Housing Strategy rather than this piecemeal approach by various local governments, different agencies, and other players all pulling levers then sitting around waiting to see what happens. It is also probably worth preparing for many unintended consequences that all this level jerking is going to cause.

Reducing immigration will reduce the housing building pipeline. Tradespeople are in heavy, heavy demand and already the immigration rules are closing the supply more, or at the very least, creating uncertainty.

As house prices increase, rents will increase, and the amount of disposable income will decrease, leading to a flow on effect for businesses in Wellington.

It may be that we see agencies and companies looking to relocate outside Wellington City. Again, this would have a negative effect on the local economy.

Comprende: Better building supply is key

6 comments:

  1. Marion Leader, 22. January 2018, 11:36

    Can anyone tell me what has happened to the Gordon Wilson flats? And what has happened to the people who were kicked out and sent up the Hutt Valley?

     
  2. Busy Bod, 22. January 2018, 18:46

    From recollection, a two-person panel of Commissioners decided that the flats should be demolished. One was an appointed commissioner and the other was a councillor. A majority of councillors supported the decision to demolish.

     
  3. Citizen Joe, 22. January 2018, 19:00

    Marion Leader: Gordon Wilson Flats are gradually falling apart under the ownership of Victoria University. The Architectural Centre won an appeal mid last year against the heritage de-listing of GWF which the WCC had approved. So Vic Uni, which owns them and wanted to knock them down and land bank the site for 20 years, is now thinking about what to do next.

     
  4. syrahnose, 23. January 2018, 3:21

    Ian, excellent encapsulation of the problem. Any one or two of these factors is enough to exacerbate the issue. What we have is a perfect storm of many problems, few of which are going to be resolved easily.

    Can’t underestimate the problems with getting tradesmen to even consider, let alone estimate, work these days. I had a 1-2 hour simple roof leak fix required on our bach that we rented out at a low rental price ($1-200 under market rate). Phoned or emailed over a dozen builders or roofers. Only one roofer was willing to ‘look’ at it and quote a price to fix. Call out was $600. Renters were threatening to sue us for $4000 at the Tenancy Tribunal for discomfort. Half a dozen more phone calls finally found a handyman to do the work for $300: 2 hours relatively unskilled work. He squirted some silicon sealant. Whole episode took 4 weeks to sort out. Tenants had been behind rent for 40 of the previous 50 weeks. When their lease runs out, we will either sell or leave the house open. Previous tenants had nailed holes in roof to create leaks so they could get out of the lease early. Another one 4 years ago had tried the same trick. Two previous tenants, we found out after the fact, had been either growing/selling pot or selling drugs from the place. Mom and pop landlords like us are being driven out of the market by the droves.

     
  5. TrevorH, 24. January 2018, 7:51

    Who in their right mind would be an investor-landlord renting property long-term to the great unwashed these days? There are far more rewarding alternatives with far less hassle like Air B’n’B.

     
  6. michael, 28. January 2018, 19:44

    Another problem is that people now expect to be able to live in the city, whereas in days gone by many people accepted they would need to commute. As there is limited space in Wellington, and in the rush to build more homes, one major concern could be the development of small, cramped micro high-rise apartments with limited green spaces and natural light etc that are not designed to encourage resilient healthy communities.

    One would expect the Wellington council to consider the bigger picture and look at the mistakes of cities overseas where overcrowded and poor design has resulted in mental health and social issues. But given that developers seem to be the ones making these decisions I don’t hold out much hope.