Monday, August 14, 2006

Encouraging home ownership

I'm pleased to see that the government is moving to help people own their own homes by expanding the current loans scheme. Like KiwiSaver, this is a solid, social-democratic programe, aimed at promoting greater equality and enhancing the lives of its citizens.

Policywise, there are two key barriers to home ownership: the deposit, and the ability to service the loan. Both KiwiSaver and the "welcome home" scheme target the first problem, the former by helping people save for a deposit, and the latter by removing the need for it entirely. But with house prices still skyrocketing, the lattr is increasingly becoming a problem too. A shared equity scheme might help, by reducing the amount the buyer has to service, but ultimately the long-term solution has to be an increase in wages to make up the lost ground. Which is what the government's "economic transformation" agenda (and recent union campaigns such as the fair share campaign) are all about.


How about a heavy capital gains tax? I think it would help deflate the market if houses were seen as homes instead of assets to make a profit on again.

Posted by Commie Mutant Traitor : 8/14/2006 02:04:00 PM

Brining investment properties into line with other investments wouldn't be a bad thing either - but I suspect thats one of those third rails we just can't do in New Zealand society (yet; it might be possible if home ownership slips far enough - but by then it might be too late).

Posted by Idiot/Savant : 8/14/2006 02:18:00 PM


My mother got her house the same way.

Posted by Muerk : 8/14/2006 03:31:00 PM

Im right behing CMT on that one (for once!) Clearly a CGT is the key policy tool to make an impact on home ownership. Making lending harder (not easier!) would also help. Almost everything else just hands money to property investors and prices more people out of the market.

I don't think putting it in is as hard as you think - home ownership is ALREADY low. You just have to make it clear that the lack of a CGT is offset by higher income taxes.

Posted by Genius : 8/14/2006 06:34:00 PM

The loans scheme affects only the demand-side of the housing equation, further increasing it (demand). Without action on supply, you're just going to get(all else being equal) higher housing prices. Higher real wages will have the same effect (as well as inflationary impact).

CGT is indeed a third-rail, unless you drop income tax-rates to compensate. But only a fool would accept such a trade-off, as it's so much easier to (later) increase income taxes again, than it is to get a CGT in.


Posted by Anonymous : 8/14/2006 09:53:00 PM

M'Lud: so what you're saying is that we need the government to embark on a massive (cheap) house-building program, to put property developers and those with investment properties out of business?

I don't think I'd object to that at all...

Posted by Idiot/Savant : 8/14/2006 10:34:00 PM

You would need to loosen up council regulations and so forth so you can make places like auckland sprawl more.

Your pretty cynical there!

Posted by Genius : 8/15/2006 07:37:00 AM

"make places like Auckland sprawl more" - so people can afford houses, but not the petrol to get from the "edge city" they live in to the one where they work?

More density is what's needed. Not necessarily towers, although they suit quite a few people, but medium density terraced housing. Part of NZ's housing problem is too many people living in $50k properties on $400k sections.

The trouble with these low deposit schemes is that if you can't afford a 10% deposit as a one-off, how are you going to afford 8% interest *every year*.

One option I have thought of is to promote a form of "virtual rental" where the mortgage company gets some or all of any capital gain on the property. The home "owner" still gets security of tenure and the ability to "nest", but when they sell they won't profit from any increase in the land value. Which means that you get a place to live that's secure, but opt out of the real estate speculation aspect.

Posted by Rich : 8/15/2006 05:04:00 PM


> so people can afford houses, but not the petrol

If you want you can have big houses on the outside and small ones on the inside.

> More density is what's needed.

I like that idea- if they had tube apartments like japan I would have bought one long ago.

> One option I have thought of is to promote a form of "virtual rental" where the mortgage company gets some or all of any capital gain on the property.

banks have little insentive to speculate on proprty, why speculate when you make 8% rain or shine?
You could get a property investment fund to do it but they would probably rather invest themselves since this would sem to lock them in and restrict their fredom of choice

Posted by Genius : 8/15/2006 08:16:00 PM

Rich's comment about density has merit, although you could also argue that inner-city appts cover a good part of that niche. I suggest the best way to address supply-side issues is to take a leaf out of Australian state and federal practice, and offer a first-home buyer grant (something I've availed myself of in Australia). In Oz that grant is credited with starting the building boom that resulted in thousands upon thousands of new homes.


Posted by Anonymous : 8/16/2006 11:53:00 AM

Had I had the guts a few years back I could've borrowed freely to buy houses. Yes, me, distressing as that should be to any serious economist.

If I'd baught 10, I'd have a free house by now, because the banks would have had their "mobile morgage managers" convince the next round of people to buy it for me.

That's what you call a pryamid scheme. They're illegal, unless you're a bank.

Rent to own solves all that, just like the fundy muslim countries. 10% deposit gets you a 10% cut in your base rent (AKA interest payments) and 10% of the resale value. Buy extra chunks of the asset as you will.
Own by paying, not borrowing.

Same for companies buying companies solves the debt load currently forced on public companies. Capital rich indeed.

Posted by tussock : 8/17/2006 05:28:00 AM

good idea (for houses anyway, im not sure if I would want to encourage mergers of companies that much), but the problem is "who would pick up the other 90% untill you paid it off"?

The government?
That makes the government a huge property speculator - that could be dangerous...

previous owner?
They probably want the cash and don't want the risk

The bank?
that might screw up their cosey morgage roundabout. Besides, why speculate when you can make good profits with the curent system?

Making normal lending ilegal might solve the problem and give us the islamic solution - but do we want that?

Posted by Genius : 8/17/2006 07:25:00 AM

The big problem is always "who owns the other bit". And I agree - if you can't afford the mortgage payments you're not going to be able to pay a commercial rate on the rest of the property, so selling the capital gain is the only thing left. Problems as above...

The new home buyers grant in Australia just added that much to the cost of houses, it didn't help the supply side.

Agree that the best solution is to increase supply, and directly building large numbers of houses is probably the only way it'll work. It worked in the 60's, let's try it again.

I thin a public-private partnership approach might actually work - partly fund the development by selling every third section to devlopers on the condition that the new building match the surrounding ones to a fair degree. Then build a high-density mix of cheap and expensiving housing, with public transport corridors and pedestrian access etc etc.

The only hard bit is getting the land - compulsory acquisition of 500Ha in Auckland would raise a few eyebrows... but that's what you'd be looking at. perhaps the slumlaws from the US - either you redevlop the land, or we take it and do it?

Posted by Moz : 8/19/2006 11:56:00 PM