New Zealand Property Bubble: Solutions and Alternatives

The New Zealand property market has been a hot topic lately, with many experts warning of a potential bubble. According to recent data, the median house price has increased by over 50% in the past five years, with some areas seeing prices rise by as much as 80%.

This rapid growth has led to concerns about affordability and the impact on first-home buyers. As of 2022, the average deposit required for a first-home buyer in New Zealand is around $120,000, a significant barrier for many.

To address these issues, some experts suggest increasing the supply of affordable housing. In fact, research has shown that for every 10% increase in housing supply, prices can decrease by up to 5%.

On a similar theme: Single Family Home

New Zealand's property bubble is a complex issue, but several key factors have contributed to its growth. The affordability crisis started to gain media attention in 2007, but it wasn't until 2017 that the Demographia think-tank ranked Auckland's housing market the fourth-most unaffordable in the world.

One major cause is the lack of capital gains taxes on multiple property owners, making it an attractive investment option. This has led to a trend of property investors crowding out prospective house-buyers, who accuse them of driving up prices.

The concentration of the housing market by investors is another factor, with over 22,100 homes owned by "mega-landlords" who own more than 20 properties each, as reported by property data company Valocity in 2021. This concentration of ownership has further exacerbated the affordability crisis.

NIMBY sentiment among established home-owners has also played a significant role, with many opposing attempts to relax building density rules in Auckland. This has led to a YIMBY movement of mostly younger people calling for actions against housing unaffordability, including upzoning.

The ratio between median house price and median annual household income increased from just over 3.0 in January 2002 to 6.27 in March 2017, with Auckland's figures 4.0 to 9.81 respectively. This significant increase in the ratio suggests that housing has become increasingly unaffordable for many New Zealanders.

Multiple property owners in New Zealand also have the ability to use negative gearing on their properties, making it an attractive investment option. This has contributed to the growth of the property bubble, as investors seek to maximize their returns.

Worth a look: Can You 1031 Exchange Multiple Properties into One

Policies to address the housing affordability crisis in New Zealand cover a range of areas, including land use and planning regulation.

These regulations help control the supply of housing and prevent over-development in certain areas.

State housing provision is also a key policy response, aiming to increase the availability of affordable housing for low-income households.

Rules on ownership and investment, as well as financial regulation, are also crucial in addressing the housing affordability crisis.

The Reserve Bank of New Zealand has proposed debt-to-income limits as a tool to restrict credit growth and mitigate the risk of mortgage defaults during an economic downturn.

This policy aims to reduce the risk of households being over-extended on their mortgages and becoming vulnerable to economic shocks.

Take a look at this: 2008–2014 Spanish Real Estate Crisis

In August 2018, the New Zealand Parliament passed a law to ban non-resident foreigners from buying existing homes.

This ban was a direct result of the New Zealand First Party's election promise to address housing affordability concerns. Non-residents are still allowed to own up to 60% of units in new-build apartment blocks, but existing homes are off-limits.

Annual net migration as of 2017 was approximately 70,000, a significant jump from the average of 15,000 in the previous 25 years. This surge in migration has been cited as a factor in rising house prices.

The Ministry of Business, Innovation and Employment refuted this emphasis, pointing out that many of these inflows are actually New Zealanders returning from overseas.

In New Zealand, there is currently no tax on capital gains from property investment, but the bright-line test aims to tax capital gains on property.

The bright-line test was introduced in 2015 and extended in 2018, but it has some exemptions, including the main family home, estates, or properties sold through relationship settlements.

The Labour Government's Tax Working Group recommended a tax on capital gains that applies to gains and most losses related to all types of land and improvements, except for the main family home.

However, the government abandoned their plan to introduce the capital gains tax, citing a lack of consensus within government.

The OECD and IMF have issued multiple recommendations for the passage of a capital gains tax.

A unique perspective: Capital Gains on Foreign Property

Debt-to-income limits are a tool used to restrict credit growth and mitigate the risk of mortgage defaults during an economic downturn. This is because high levels of private debt can divert a large proportion of income to servicing debts, reducing household consumption and making households vulnerable to economic shocks.

The Reserve Bank of New Zealand published a consultation paper on debt-to-income limits in 2017, highlighting the significant macro-economic risk posed by high levels of private debt.

High levels of private debt can have a ripple effect on the economy, making households more susceptible to economic downturns. In the context of the Auckland housing bubble, excessive debt levels contributed to the risk of mortgage defaults.

The Reserve Bank's consultation paper aimed to address this issue by introducing debt-to-income limits as a regulatory tool.

Here's an interesting read: Walton Reserve Income Requirements

The New Zealand government has taken steps to address the property bubble, but the effectiveness of these initiatives is a mixed bag. The Housing Accord and Special Housing Areas Act 2013 introduced Special Housing Areas (SHAs) to increase land supply, but research showed little evidence of its effectiveness in improving affordability.

In 2017, the Labour-NZ First-Green coalition government stopped the sale of Housing New Zealand properties and committed to expanding public housing. The government's flagship policy, KiwiBuild, aimed to deliver 100,000 houses in ten years, but by September 2019, it had only delivered 258 houses.

Criticism of KiwiBuild highlighted that the prices of its homes remained out of reach for many, with "affordable" properties costing upwards of NZD$500,000 in Auckland.

KiwiBuild was a flagship housing policy of the New Zealand Labour Party aimed at addressing the affordability crisis by boosting housing supply. The scheme proposed to deliver 100,000 houses in ten years, but it ultimately fell short of its targets. The policy included incentives for property developers to deliver affordable homes rapidly, such as the Land for Housing programme, which acquired vacant land and sold it to developers with conditions to make 20% of dwellings available for public housing and deliver 40% "affordable" housing.

Recommended read: Florida Land Boom of the 1920s

The prices of KiwiBuild homes remained out of reach for many, with "affordable" properties costing upward of NZD$500,000 in Auckland, and NZD$300,000–500,000 across the rest of the country. By September 2019, the scheme had delivered only 258 houses.

A "reset" of KiwiBuild was released in 2019, following the reshuffle of ministerial responsibilities for housing. The revised policy dropped the target to build 100,000 houses in ten years and introduced rent-to-buy and shared-equity options to improve affordability. The requirement for first-home buyers to hold their Kiwibuild homes for at least three years was reduced to one year.

Here's a summary of the KiwiBuild policy changes:

Land use reform is a critical area of focus for addressing New Zealand's housing crisis. The New Zealand Productivity Commission released a comprehensive report in 2015 that highlighted the need for reform in this area.

The report proposed several key changes to improve the supply of developable land for housing, including lifting restrictive planning controls in areas with spare capacity on existing infrastructure networks.

In addition, the report suggested more effective cost-recovery of infrastructure costs, which could help to reduce the financial burden on developers and make it more viable for them to build new homes.

Greater use of cost-benefit analysis for land use rules was also recommended, to ensure that these rules are fair and effective in promoting housing development.

Local urban development authorities (UDAs) were also proposed to have more power to develop housing, which could help to increase the supply of new homes.

Central government was also given powers to intervene if councils are unable to release sufficient land for development, which was implemented through the 2016 National Policy Statement on Urban Development Capacity.

Here are some key recommendations from the report:

If you're looking for alternative solutions to the New Zealand property bubble, consider renting or sharing a home. This can be a more affordable option, especially for first-home buyers.

The median house price in Auckland is over $1 million, making it difficult for many people to afford a home. Renting or sharing a home can also give you more flexibility to move to different areas or try out different lifestyles.

Curious to learn more? Check out: Can You Get a Heloc on a Manufactured Home

Some people are turning to alternative forms of accommodation, such as tiny homes or community land trusts. These options can provide a more affordable and sustainable way to live.

However, it's worth noting that the demand for alternative solutions is still relatively low, with only about 10% of Kiwis considering alternative forms of accommodation.

In 2013, the Reserve Bank of New Zealand introduced loan-to-value (LVR) restrictions to slow down the property market. These restrictions limited the proportion of high-LVR loans that banks could issue.

Banks were initially restricted to no more than 10% of loans beyond 80% LVR, but this was later revised to target price inflation in Auckland. The restrictions were eased to 15% over 80% LVR for non-Auckland loans and increased to 5% over 70% LVR for investor purchases in Auckland.

The Reserve Bank continued to tighten the restrictions, particularly for Auckland investors, who were eventually limited to 5% over 60% LVR. However, in 2018, the restrictions were gradually relaxed to 20% over 80% for owner-occupiers and 5% over 70% for investors.

Here's a summary of the LVR restrictions over the years:

Financial regulation plays a crucial role in maintaining a stable financial system. The Reserve Bank of New Zealand has implemented various measures to control credit growth and mitigate the risk of mortgage defaults.

Loan-to-value (LVR) restrictions were first introduced in 2013 to limit the proportion of high-LVR loans banks can issue. The initial restrictions allowed banks to issue no more than 10% of loans beyond 80% LVR.

Over time, LVR restrictions have been revised to target price inflation in Auckland. In 2015, the restrictions eased to 15% over 80% LVR for non-Auckland loans, and increased to 5% over 70% LVR for investor purchases in Auckland.

In 2016, the restrictions tightened further on Auckland investors, to 5% over 60% LVR. Since 2018, LVR restrictions have gradually reduced to 20% over 80% for owner-occupiers, and 5% over 70% for investors.

The Reserve Bank lifted restrictions on mortgage borrowing in April 2020 in response to the COVID-19 pandemic. This move ensured that the LVR rules did not unduly affect lenders or borrowers as part of the mortgage deferral scheme.

See what others are reading: Freddie Mac Reserve Requirements

Debt-to-income limits were also proposed by the Reserve Bank in 2017 as a tool to restrict credit growth. High levels of private debt present a significant macro-economic risk, reducing household consumption and making households vulnerable to economic shocks.

Here's a summary of the changes to LVR restrictions over the years:

Land value tax has been suggested by several commentators, including Dr. Arthur Grimes and Dr. Andrew Coleman, who believe it could be a more equitable way to fund public goods.

This tax would be levied on the value of land, rather than on buildings or other improvements, which could help reduce the burden on property owners.

Dr. Ryan Greenaway-McGrevy and economist Shamubeel Eaqub have also explored the idea of land value taxation as a way to address issues of inequality and inefficiency in the housing market.

In theory, land value tax could help keep land prices in check, making it more affordable for people to buy and own property.

Related reading: Fedral Moneys to Help with Housing

According to investment manager Brian Gaynor, a 10% drop in house prices would wipe out $60 billion of New Zealanders' personal wealth. This is a staggering amount, and it's easy to see why the thought of a housing bubble is so concerning.

The Reserve Bank of New Zealand estimates that the total value of housing loans has increased from just under $60 billion in 1999 to over $220 billion in 2016. This is a significant growth in a relatively short period.

Financial commentator Bernard Hickey described New Zealand's property market in 2014 as "too big to fail", and supports a deposit insurance scheme in the event of a banking collapse caused by a property crash. This highlights the potential risks associated with a housing bubble.

Alistair Helm, the founder and CEO of Properazzi, believes that the demand for property in areas with economic growth is not irrational, and prices are being paid based on buyers' ability to pay and service the debt. However, this is just one perspective on the matter.

The total value of housing loans was estimated to be $307.9 billion in April 2021, having grown by over $30 billion in the preceding 12-month period. This rapid growth is a key factor to consider when evaluating the potential outcomes of a housing bubble.

Here are some potential outcomes to consider:

New Zealand's housing crisis has been building for decades, with house prices skyrocketing since 1980 due to a lack of new homes being built to meet demand.

According to Te Waihanga Economics Director Peter Nunns, the country was building at a rapid rate in the 1950s, 60s, and 70s, but this slowed down continuously since then.

Between 2010 and 2018, New Zealand built new homes at a slower rate than population growth, and prices accelerated.

Changes to urban planning and transport that started in the 1970s have raised barriers to housing development.

City councils used to actively encourage population growth, but now prioritize maintaining the character of existing neighborhoods over facilitating growth.

Te Waihanga is working on a New Zealand Infrastructure Strategy to identify ways to support more housing and reverse some of these problems.

A more enabling consenting system will be critical to this effort, says CE Ross Copland.

The strategy also includes recommendations for protecting infrastructure corridors and enabling greater urban development.

Alistair Helm, founder and CEO of Properazzi, believes that New Zealand is not currently experiencing a housing bubble.

The principle of a property bubble is created when property values are out of context with affordability and financial structure, but Helm thinks the market is acting rationally in supporting debt.

He notes that demand for property is strong in areas near economic growth, but prices are being paid based on buyers' ability to pay and service debt.

The property market has already eased significantly since last year, with sales peaking in October and prices slowing down across the country.

The next 12 months will see further slowing of sales and property price inflation falling to below 5%.

Underlying the property market is a demand fueled by immigration and economic growth, which will continue to drive strong demand in the Auckland market.

Take a look at this: Debt to Income Ratio for Rental Property

New Zealand has a significant affordability crisis, with house prices increasing by 80% in real terms between 2002 and 2008. The average house price in New Zealand exceeded NZ$700,000 as of 2019, with average prices in Auckland exceeding $1,000,000 in numerous suburbs.

The ratio between median house price and median annual household income increased from just over 3.0 in January 2002 to 6.27 in March 2017, with Auckland's figures 4.0 to 9.81 respectively. This suggests that many people are struggling to afford homes, especially in Auckland.

A 2017 Demographia report ranked Auckland's housing market the fourth-most unaffordable in the world, behind Hong Kong, Sydney, and Vancouver. The median house price in Auckland rose from 6.4 times the median income in 2008 to 10 times in 2017.

Multiple property owners in New Zealand are not subject to capital gains taxes and can use negative gearing on their properties, making it an attractive investment option. However, this has led to accusations of property investors crowding out prospective homebuyers.

Expand your knowledge: Japanese Asset Price Bubble

A significant factor contributing to the housing bubble is NIMBY (Not In My Backyard) sentiment among established home-owners, particularly towards attempts to relax building density rules in Auckland. This has led to a YIMBY (Yes In My Backyard) movement of mostly younger people calling for actions against housing unaffordability.

Here are some key statistics on the housing crisis in New Zealand:

The housing crisis has led to a significant increase in homelessness, with 1% of the population living in severe housing deprivation in 2013. The waiting list for public housing doubled between 2017 and 2019, reaching a record 12,500 in August 2019.

The New Zealand property market has been a topic of interest for many, with concerns about a potential bubble. Let's take a closer look at some statistics.

House prices in New Zealand have been rising steadily, with the median residential property price expected to reach new heights in 2025, with a significant increase in the Auckland region.

The real estate industry in New Zealand has been growing, with a GDP growth rate of 3.5% in 2020, and a projected growth rate of 3.2% in 2025.

Here are some key statistics on the New Zealand property market:

The rental market has also been affected, with the mean weekly rent in Auckland reaching $550 in 2024, and a household income share spent on rent of 25.6% in the same year.

The number of residential property sales in New Zealand is expected to reach 65,000 in 2025, with the majority of sales occurring in the Auckland and Wellington regions.

Residential mortgage lending in New Zealand has been increasing, with a total of $53 billion in lending in 2024, with first home buyers accounting for 23% of all lending.

The average new residential mortgage interest rate in New Zealand has been decreasing, with a rate of 3.5% in 2024, and a projected rate of 3.2% in 2025.

Household income spent on mortgage repayments has been increasing, with a share of 35.6% in 2024.

Key barriers to buying a property in New Zealand include high prices, limited affordability, and strict lending criteria.

The rental market is expected to continue growing, with a projected increase in the mean weekly rent in New Zealand of 3.5% in 2025.

You might like: Irish Residential Properties REIT