In the lead-up to last year’s September general election, I praised New Zealand Labour’s housing platform because it promised to address both supply and demand distortions via negative gearing reform, banning foreign buyers of existing homes, tighter capital gains taxes, removal of urban growth boundaries, plus bond financing for infrastructure.
I also praised Labour’s plan to reduce immigration by around a third, which would help to relieve chronic housing and infrastructure pressures (especially around Auckland), as well as its plan to build 100,000 public houses over a decade (named ‘KiwiBuild’).
Over recent months, clear indications have emerged suggesting that the Government is not serious about addressing housing affordability.
Back in March, Immigration Minister Ian Lees-Galloway played down immigration cuts by claiming there was no target for an overall reduction in numbers.
Housing Minister Phil Twyford also backslid on Labour’s commitment to remove urban growth boundaries by force-feeding intensification rather than focusing on the key issue of lowering lot values, and in turn land prices.
And last week, the Government backslid on its ‘KiwiBuild’ program to build 100,000 public houses, delaying the start date and changing the policy from “build” to “facilitate” the “delivery of 100,000 affordable dwellings”, as well as changing the definition of “affordable”.
Now, the New Zealand Herald reports that the NZ Government is examining a shared equity scheme for first home buyers:
People struggling to buy a home could soon be given the opportunity to co-own a property with a bank or government agency to make it more affordable.
A shared equity scheme, which is being considered by the Government, could save first-home buyers up to $100 a week compared to a commercial mortgage…
Housing Minister Phil Twyford said that price was still out of reach of a large portion of the population.
“I’ve got officials working on shared equity because we know that even the Kiwibuild price brackets are not affordable for lots of people,” he said.
“There’s no way they could take on a $600,000 mortgage – a $400,000 mortgage, maybe, then you’d get a much bigger group of people.”
The shared equity scheme would allow a third party such as a bank or a government agency to co-own a property by taking on a share of the mortgage. That would reduce the owner’s deposit and weekly mortgage payments.
The owner could then buy the remaining share off the third party when they could afford to, including any capital gains.
This is the antithesis of a housing affordability program.
Shared equity is likely to increase housing demand and therefore prices (other things equal), thus becoming self-defeating from a housing affordability perspective. This is because:
- A new pool of lower income buyers that would not qualify for a conventional mortgage would suddenly be able to enter the market and bid up prices; and
- Buyers that do already qualify for, say, a $400,000 conventional mortgage may choose to take advantage of a shared equity scheme so that they can purchase a more expensive home than they could otherwise afford.
Thus, shared equity arrangements would further fuel price rises in the housing market, resulting in further reductions in home affordability.
Another important drawback is that any private sector involvement in shared equity arrangements is likely to involve the equity provider sharing a disproportionately high share of any capital gains, and a disproportionately low share of capital losses (if any).
Thus, such shared equity schemes will at best erode the value of the home as a store of household wealth, and at worst in a declining market increase the likelihood of home owners holding significant negative equity in their home.
The NZ Government’s new found fondness of shared equity schemes is hardly surprising, given it offers them the avenue of providing the impression that they are doing something to help first home buyers, while really only further juicing demand and inflating home prices.
But the truth is that housing affordability cannot be improved by pumping yet more buyers and credit into the system.
A scheme like this would be the biggest single signal that NZ’s housing racket is permanent and there is no sincerity from the Government to achieve actual housing affordability.