Surprising fix for our housing crisis found in iron ore. And more insights affecting investors in property news this week…
Our aim is to filter only the most relevant economic, investment and property news affecting investors from the torrent of information filling the newsfeeds each week so you don’t have to. We then present them in digestible snack form so you can update yourself over morning tea.
Read on and enjoy your economic, investment and property news this week.
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In economic, investment and property news this week…
- Surprising fix for our housing crisis found in iron ore.
- ASB increases term deposit rates from not much to not much more.
- Govt brings out big tools to manage housing pressure.
- The challenge of building for an ageing population.
- Immigration good for housing affordability, but not happening.
- Put property investors to the sword says Govt.
- Listen to the loudest bird on Earth scream at potential mates.
Surprising fix for our housing crisis found in iron ore
Australia’s response to the 2009 iron ore crash could hold the key to solving New Zealand’s housing crisis.
In the heady days of Australia’s mining boom leading up to the Global Financial Crisis (GFC), iron ore was fetching top dollar and rental accommodation in Western Australia was hard to come by.
Kiwi expat Leon Styles was there to experience it first hand. He was working in Western Australia at the time and says housing was a huge issue.
“It took us months to get a rental house as there was a massive shortage. An open house would be 30 minutes and in that time hundreds of people would apply to rent it,” Styles said.
“Three years later tens of thousands of new homes had been built and our landlord was offering to lower our rent.”
This curious outcome came about thanks to the GFC and the iron ore crash that followed, which triggered a chain of events that ended up solving the housing crisis, according to Styles.
Iron ore was selling for US$195 per tonne in March 2008. By March 2009 it had fallen 68% to $63 per tonne. (Trading Economics)
The Australian mining industry experienced a “deep recession” during the first half of 2009, says Dr Ken Henry, Secretary of the Australian Department of the Treasury at the time.
“In the first six months of 2009, in the immediate aftermath of the shock waves occasioned by the collapse of Lehman Brothers, the Australian mining industry shed 15.2% of its employees. Mining investment collapsed; mining output collapsed,” Dr Henry said.
The effects of high unemployment created by mass layoffs in the mining industry was particularly felt in Western Australia.
But three programs helped save the economy and unwittingly solved the housing crisis that Styles was experiencing.
In 2008 the newly-elected Rudd government introduced the “First Home Saver Account” scheme. The scheme used government contributions plus tax and interest rate benefits to incentivise those wanting to buy or build their first home to save up to $10,000 per year.
And in October of 2008 the government announced a boost to the First Home Owners Grant to stimulate the housing industry and prop up the market in an effort to alleviate the Global Financial Crisis.
The grant offered $14,000 to first-home buyers buying or building a new home or $7,000 for an established home. “If you lived in the house for one year you kept the grant,” said Styles.
Interest rates came tumbling down in the wake of the GFC, and banks also lowered the deposit requirement, or loan-to-value ratio (LVR), for mortgages to 5%.
The government also spent $6.6 billion on social and defence housing, as well as $14.7 billion on new school buildings.
It was fortunate timing for those who lost their jobs in the mining industry.
“This created a huge, huge amount of jobs as hundreds of thousands of homes had to be built. The rental market crashed and people finally got to own their own home,” said Styles.
“So I got into a house for $25,000 deposit. I built a $540,000 house with a $25,000 deposit.”
“We need to do that here. 20% deposit is pretty much impossible for most people. I know many people who gave up trying as it simply was not possible. Sad but true.”
Would it work here?
One would think that stimulating demand by offering cash incentives to buyers and lowering the deposit requirements would make the housing crisis worse. But it didn’t. Why?
The answer is that supply increased to match the increased demand.
The government programs were designed to especially support new builds, which gave a boost to the construction industry. This would normally have led to a labour shortage but 37,000 mining industry workers had recently lost their jobs thanks to the iron ore crash. It was a lifeline for them.
New Zealand lacks such a pool of skilled and motivated workers looking for jobs.
Although there are 314,408 working-age New Zealanders on a Main Benefit – 10.5% of our working-age population – some such as sole parents and sickness beneficiaries are not able to work.
Of the ones who can work, many either lack the required skills, which requires an education intervention, or they simply don’t want to work.
The current system appears to foster too much dependency.
There is also strong political resistance to solving the problem through immigration.
Whereas Australia had an abundance of skilled workers looking for jobs, we have considerable constraints.
The other thing Australia had going for it was the availability of land for new house builds.
We have the restrictive Resource Management Act (RMA), eye-watering council fees, red tape for Africa, and a building materials market dominated by a very small number of dominant companies who make it extremely difficult for new entrants to get new building products or materials certified.
Competition barriers abound. Two companies control 85% of the supply of concrete in New Zealand, three companies control 85% of the supply of glass wool insulation, one company controls 94% of the supply of plasterboard, and there are only 5 major building materials retailers.
Both Australia post-GFC and Christchurch post-earthquake have shown that supply is the key to solving the housing crisis. Let’s hope the government’s intended RMA reforms make a difference.
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ASB increases term deposit rates from not much to not much more
ASB’s huge interest rate hike for term deposits is still ‘unattractive’ says economist Cameron Bagrie.
ASB on Monday bumped its five-year term deposit rate to 1.75%, up from below 1%. Smaller increases were made to its shorter term deposit rates, including 1.5% for four-year deposits (up from 1%).
The bank cited “the performance of the New Zealand economy through COVID-19 [being] stronger than anyone anticipated”.
“Banks are lending an awful lot of money in regard to the housing market, so if there’s more money going out the door you need more money coming in the door on the other side,” said Bagrie.
But investors will need to consider whether 1.75% – despite being a vast improvement – is still worth it.
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Govt brings out big tools to manage housing pressure
A steady-as-she-goes approach from the Reserve Bank puts the responsibility firmly back on government to find solutions to the housing crisis.
At last, a journalist has written something sensible and insightful about our housing crisis instead of just jumping on the investor-bashing bandwagon.
Jonathan Milne, managing editor for Newsroom Pro, has done a really good job investigating the issue of housing affordability and written an excellent article. I highly recommend it.
Milne describes the government’s two-pronged approach: Grant Robertson adjusting economic settings to slow the low-interest borrowings flooding into the housing market, and washing away aspiring owner-occupiers. And Megan Woods leads the work to increase the supply of new houses (both public and private housing) over coming years.
“Everyone agrees on the importance of increasing supply to create a sustainable fix to the housing crisis. There just aren’t enough houses and apartments, at any price, for New Zealand’s population. But it’s the imminent demand-side changes that are causing some trepidation.”
The challenge of building for an ageing population
A look at Europe today can show us what demographic change has in store for us, especially when it comes to the effects of an ageing population on the housing market, says Dr Oliver Hartwich, Executive Director of The New Zealand Initiative think-tank.
Older populations live in smaller households. And because of these smaller household sizes, more houses are needed to accommodate them.
Even a stagnant population requires more dwellings, says Hartich.
“However, New Zealand’s population is not stagnant. And it would not even be stagnant with drastically reduced net migration figures.
“We can expect a double whammy over the coming decades: a population growing while also getting older, leading to increased demand for housing. Add to that a realistic expectation of some net inward migration, and you can calculate our future housing needs.”
In his new report The need to build, Leonard Hong calculated several scenarios based on different assumptions for life expectancy, fertility and migration.
“In each of the most realistic scenarios, between 30,000 to almost 40,000 additional dwellings would be needed to cope with demographic change – per year,” writes Hartwich.
“The Government and councils know of this demographic challenge. And there is only one way to deal with it to ensure that housing supply increases. The demography-induced extra demand cannot be wished away. It must be accepted as a given.
“These sober findings put debates around New Zealand’s housing crisis into a different perspective. As bad as the housing market situation is today, there is worse to come if we do not unlock the supply side of the housing market now.”
Immigration good for housing affordability, but not happening.
As the government would like to address the housing affordability issue and allow thousands of building migrants to come into New Zealand to help speed construction, it is not going to happen, says economist Tony Alexander.
“There is a greater priority and that is seizing a once in a lifetime opportunity to permanently lift the income, health, education, and eventually housing outcomes of whole cohorts of people who were thrown on the scrapheap when the economy was undergoing necessary reforms from 1984-92.
“By forcing employers to take on lowly skilled people with minimal connection to the labour force and possibly various “issues”, rather than importing labour, these people, their families, and their descendants can be placed in much better positions.
“That is why this week the Immigration Minister noted that there is an opportunity to make some structural changes to immigration policy focussed on lifting up Kiwis rather than bringing in greater and greater numbers of migrants.”
Immigration Minister Kris Faafoi told RNZ political editor Jane Patterson the focus will be on getting New Zealanders working, not importing labour.
“The initial pain will be borne by the business sector who will have to accept that their lobbying to the government for more offshore workers is not going to yield the results which they have become used to in the past three decades,” says Alexander.
“There is no doubt that extra labour is needed because the skills and motivation which businesses want is not immediately available here. Ahead of the GFC just 4% of jobs in New Zealand were held by migrants on working visas. Ahead of the Covid-19 shock that proportion was 8%.
“When elected in 2017 the Labour government said it wanted principally to address two key issues in the labour market. One was the low level of wages and slow pace of growth in remuneration for average Kiwis. The other was exploitation of migrants.
“They can address both issues in one go by restricting working visa numbers going forward.
“Will this retard the pace of growth in the New Zealand economy to something below what it would otherwise be? Yes. Reduced inputs of a key resource will do that.
“While one might theorise that productivity will eventually lift to compensate for reduced availability, in practice this is fairly unlikely.
“But we have to remember that the government has already strongly signalled that it is no longer pursuing strong GDP growth just for the sake of it and has given high priority to wellbeing issues – of which employment opportunity is clearly one.
“What can businesses do to handle this structural shift in labour availability?
“First, recognise that broad lobbying for more labour from overseas will not yield results of the past and could be a costly diversion of effort away from addressing the issue domestically.
“Second, lift capital expenditure on labour-saving (productivity boosting) machinery, systems, and premises.
“Third, shift towards outputs with less reliance on labour than other products.
“Fourth, restrict output by dropping production of low yielding outputs. Cease distribution to low yielding locations, and layoff low yielding clients. Also, focus on products in which one has some pricing power. This will help finance higher labour costs.
“Sixth, establish a system for finding local labour of less quality than accepted in the past, work with an outside agency if necessary to figure out how to integrate them in your business and train them up over time.
“Seventh, anticipate that much as you are already facing upward pressure on labour-related costs from the new Matariki holiday, higher minimum wages, leave provisions etc. – you’re going to be hit again by a majority Labour government looking to structurally change the outcomes for many hundreds of thousands of people.
“Eighth, make sure you change the way you think about positioning for the future. Do not follow the old practice of focussing attention on acquiring new customers and then sourcing labour, land, capital, materials and finance.
“Instead, figure out how much of each of these resources you will be able to reliably command over the next few years, then calculate what that means in terms of the pace with which you can grow your output.”
Put property investors to the sword says Govt.
The Government is making noises about putting housing investors to the sword. But will it follow through? And will this help? David Hargreaves poses the questions and discusses the difference between investors and specuvestors…
“Tired of the same old duck shooting season? How about a bit of housing investor hunting this year instead then?
“Yes, those naughty housing investors.
“The Government, having for some reason chosen not to blame itself for New Zealand’s median house price rising by $200,000 (to $730,000) since it came into power in late 2017, has decided to find a fall person – the investor.”
“When I think investor, I think of someone who is buying property for the purpose of the rental yield they will derive from said property. So, it’s a proper business. The provision of shelter in return for a revenue stream.
“I reckon that a speculator thinks capital gain first. That’s the focus for buying the property. The rental is incidental to the motive to make a capital gain.
“Some commenters on this site like to use the term ‘specuvestor’. And I like that. It kind of implies someone who’s in it for the capital gain but will take the rent for as long as is necessary to bag that capital gain.
“I’ve rented from both ‘specuvestors’ and what I would term ‘real’ investors. I know which I prefer,” writes Hargreaves.
“I say, subjectively, we need the investors – people who are providing liveable accommodation with the purpose of making an income from the rental stream.
“We don’t need the specuvestors, since it’s always going to be capital gain first for them.
“But, aha, how will the Government actually tell the difference?”
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And finally, in not-property news this week something too good not to share…
Listen to the loudest bird on Earth scream at potential mates
Turn your volume up!
The white bellbird, which lives in the Amazon, is the loudest bird on the planet.
Its birdsong peaks at around 125 decibels. That’s louder than chainsaws and rock concerts.
Research published in the journal Current Biology found male bellbirds sing [scream?] loudest when they are trying to court a female, swivelling their body mid-song to sing the final note directly at the female.
Here’s screaming at you, babe.
That’s it for property news this week, thanks for hanging in there.
Cheers, Brandon 🙂
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