New Zealand May Be Beautiful and Covid Free, But Can You Afford A House There?

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Despite global market forces, households in New Zealand are experiencing double-digit price growth for even the most dilapidated homes.

In addition to its successes tackling the pandemic, stunning mountain scenery, and no-nonsense prime minister, New Zealand has now come to be known for another thing — being among the world’s most expensive housing markets.

In the opinion of Femke Burger, the market is pretty brutal at the moment.

In Wellington, the country’s capital, the 32-year-old insurance case manager has been looking for a home for 10 months, often squeezing into the same room with up to 100 other people at open houses.

In the time that followed, asking prices soared, forcing her to stretch her initial budget of NZ$700,000 ($493,000) to four times its limit just to get the property she wanted. She saw more than 60 properties and had 10 offers rejected before finally succeeding.

She said that after 10 months, she had to fork out upwards of NZ$150,000 due to house price appreciation. “I don’t know what to do about that. I will have absolutely no savings left.”

In the OECD’s ranking of housing markets by income, New Zealand stands out among the most expensive. Auckland, home to one-third of the country’s population, is rated the fourth least affordable city in the world, says the consulting firm Demographia.

Many people are concerned that house prices have entered bubble territory. The national median rose by 20% by February, taking it to NZ$780,000. In Auckland, it soared to NZ$1.1 million.

There is an explosion of property prices worldwide due to ultra-loose monetary policy and a rush into higher-yielding investments such as property. Those determinants are driving up values globally, but New Zealand stands out as a poster child for economic recovery, thanks to their handling of the COVID-19 pandemic situation.

The number of stories of unimaginable prices being paid recently seems to grow week by week. In March, a modest three-bedroom townhouse in the Auckland suburb of Greenlane sold for a much higher price than its local council's valuation, according to real estate site OneRoof.

New Zealanders will often pay top dollar for dilapidated houses. In January, a three-bedroom house with peeling paint and boarded-up windows sold for NZ$1.81 million in the Auckland suburb of Avondale.

Jacinda Ardern, the Prime Minister who promised to bring down the divide between the rich and the poor, is under increasing pressure to cool down the market since more and more first-time buyers find themselves priced out of the market.

Homeownership drops to its lowest level since the 1950s, a whopping 65%, in a country where owning your own house has always been seen as a cultural sign of accomplishment. According to government statistics, homeowners tend to be 14 times wealthier than those who don't own a home.

Katy and Blair Duckett live in Wellington and have battled to save 20% of a mortgage  deposit to buy their own house while raising three more children and renting a home in an area with quality schools.

A 46-year-old surveyor, Blair, says, “If we didn’t need a deposit, we would have a house by now. We have always paid our mortgage on time, so we don’t have issues making rent. Saving up the needed NZ$200,000 for a deposit and still having enough to live on is the problem.”

Katherine, 47, says they prioritized the education of their children above buying a house but making that decision didn’t come easily.

It has a stigma for us to say we rent, she said. “People would say our time has passed.”

Statistics from Infometrics indicate that median house prices are 6.7 times the average household income. To return to the affordable multiple of about three, the economics consultancy estimates that house prices would have to drop by 55% or household incomes would have to increase by 123%.

A set of measures has started to be implemented to alter the market to put first-time buyers on the winning side, away from investors who have benefited from tax deductions in the past and can often outbid newcomers.

It is a massive problem, however.

A number of regulatory reforms were passed in February, Finance Minister Grant Robertson, including one that passed part of the responsibility for moderating house price gains to the central bank. This might see investors faced with further macroprudential measures such as limits on interest-only lending and debt-to-income ratios.

Last month Ardern modified tax rules that restrict speculation on residential rental property. Under these rules, investors are no longer permitted to claim mortgage interest as tax deductions, and taxation on profits on sales of investment properties will increase to ten years from five.

CoreLogic Senior Economist Kelvin Davidson said the measures will have little impact on prices given the pull of demand. “What we would expect is a reduction in sales, a decrease in activities, but in terms of prices, just slower growth, rather than drops.”

NZ Property Investors Federation has criticised the changes, saying they will affect rental property supply and drive-up rents. The real issue, they say, is a lack of housing supply.

A period of high building rates is essential if New Zealand intends to address the housing crisis, said Brad Olsen, a senior economist with Infometrics. “The government’s housing package is an important start, but more is required to release land in order to build more houses.”

Blair Duckett says that he has little faith in the government’s measures for them. “It’s a tease,” he said. “You get your hopes up, but then they get dashed, and just lose hope.”

For Femke Burger, her exasperating house-hunting drama is finally over. Her offer on a two-bedroom semi-detached home for $825,000 has been recently accepted.

“I spent significantly more than my initial budget, and I got something I would not have looked at in the beginning. There were some tough decisions to make, but I am still pleased with my purchasing decision,” she concluded.

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