Homeowners have always believed that higher prices would make them richer.
Only a few understand the true concept of ‘being rich’ and the challenges that accompany the related efforts and investments.
It is important to note that wealth creation in the property sector depends on the ability of people to trade down to a smaller or cheaper place.
You can borrow against your property, but you have to pay interest and repay the principal amount in terms of your loan agreement.
If you wish to trade up to a bigger or better place, you must remember that property prices are constantly on the rise.
Are you better off?
A nation cannot become rich by contriving to charge more for housing.
Wealth transfer
All that happens when house prices rise is redistribution of wealth.
Homeowners are better off, but at the expense of those who do not own a home.
The latter face the challenge of meeting higher costs of renting a house.
For the most part, we are talking about transfer of wealth between generations.
The older generation gains at the expense of the rising generation, which is fine for those without children.
Parents often worry as to how their children and ensuing generations could afford to lead a good lifestyle with constant rise in cost of living.
Such thoughts would lead us to believe that rising cost of housing is not a great boon after all.
Since 1995, house prices in New Zealand have risen about 100% faster than the rate of inflation. That is, an annual real increase of 6%, whereas the conventional belief is that that prices rose by only 1% or 2%
Housing is today more expensive than most other OECD countries.
The debt trap
Higher prices for houses encouraged people to borrow more for the same level of monthly mortgage payments, with some believing that trading for a bigger house in a better suburb would prove to be cheaper.
But when so many people decide to do so at the same time, market forces of supply and demand tend to push up prices.
Housing affordability has become an increasingly acute problem.
As elsewhere, Aucklanders require some form of housing assistance. Depending on income, such assistance could be state housing or a subsidy.
Housing affordability problem would be directly proportional to demand.
According to official estimates, Auckland will have a shortfall of 90,000 homes by 2020. With the existing demand and growing population, the City would need about 10,000 additional homes every year.
It is therefore essential for the central and local governments to concert their efforts to tackle the problem.
Concerted efforts
The government in Wellington should work with the Auckland Council to consider a package of relevant, measurable indicators for housing affordability that can be applied across monitoring frameworks.
There is also a need to encourage collaboration among all stakeholders to identify and implement policy and regulatory tools, calculate the true social and public costs associated with land development and identify the right mix of peripheral development and intensification.
While making transparent choices, we should also recognise the potential trade-off between the true cost of development and housing affordability.
We should undertake more investigation of demand-side issues, including the extent to which subsidies will affect rents and the wider housing market.
Planning and strategic thinking are essential to put in place a more efficient and effective use of this funding to assist home ownership and affordable renting.
Raja Venkatesh is a banker by profession. He lives in Auckland.
