It's increasingly 'do not pass Go' for wannabe house buyers

Are first home buyers being screwed?

November 26, 2020
5 mins read

Pressure is mounting on the Government to prick the housing bubble. PAT PILCHER takes a deep dive into this pernickety problem.


It’s increasingly ‘do not pass Go’ for wannabe house buyers

First home buyers are finding themselves locked out of the property market while house prices climb into the stratosphere. Clearly, something has to change, but what?

The issue is coming to the fore as the number of frustrated buyers grows steadily. Things have reached the point where the Finance Minister has asked the Reserve Bank Governor to think of house prices when setting the official cash rate – which is what banks use to set loan interest rates.

The theory goes that low mortgage interest rates have fuelled demand for homes and that this has also has driven property price increases throughout New Zealand.

According to Trademe Property, New Zealand house prices have increased by 27 percent since September 2015. The average asking price across NZ hit a record high of $717,600 in September, up 10 per cent on the same month last year. Trade Me’s Property spokesperson, Logan Mudge, says that seven regions recorded property price surges in September. “The average asking price in Wellington, Auckland, Taranaki, Marlborough, Manawatu/Whanganui, Northland and the Bay of Plenty all hit record highs in September as a flurry of buyers hit the market.”

The keys to the house are beyond the pocket of most

So, what exactly could the reserve bank do to pop the housing bubble? They could lift the official cash rate. Doing so would make mortgages more costly. While that could cool the housing market, those in the know argue that it might also come with inflationary impacts and that it could slow the economy, which could be disastrous given the current Covid-19 situation.

Although no one denies that housing prices are over-inflated, not everyone agrees the Reserve Bank will be able to help first home buyers.

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Earlier this year, National Party leader, Judith Collins, lashed out at Housing New Zealand, which she said was buying up so many Auckland homes that home buyers were shut out of the market. Her claims have since been disproven. Statistics show that at the time, Housing NZ had purchased just 249 existing homes to turn them into State homes. Housing New Zealand had also built 838 new homes.

More recently, Collins said on TV One’s Breakfast show that increasing the housing supply was the best means of tackling rising house prices and rents.

We’re too busy putting food on the table to save for a house

“We’ve got to build more houses, and build more State and community houses. I have no problem saying that, because I actually really believe in housing.”

Understandably, John Campbell’s low tolerance for hypocrisy saw him taking Collins to task on the previous National Government’s abysmal housing track record. Under the Nats, large numbers of State houses were sold. The National Government also denied there was a housing crisis while a P testing scam saw many elderly and vulnerable State house tenants turfed out of their homes. P contamination procedures were later proven to be completely bogus.

History aside, Collins could have a point. While she is grossly oversimplifying, any student of economics will tell you that increasing supply should (in theory) slow demand. In the case of the NZ housing market, this could theoretically drive a drop in house prices.

Unfortunately, the reality is far more complicated. Collins has ignored the fact that building more houses would see more speculators buying more rental properties. This would be like pouring a can of petrol on an already raging bonfire and would again see first home buyers shut out. Because speculators can take advantage of low lending rates and borrow against the equity in their existing properties, they can usually outbid first home buyers. This has the added side benefit of inflating house prices.

As time goes by the housing market just gets more and more overheated

Then there’s the issue of the practicalities involved with building all these additional homes. Currently, there’s a shortage of qualified builders and tradespeople. Then there’s the bureaucratic merry-go-round that is gaining building consents from councils. Many councils are facing massive bills to repair ageing infrastructure and are likely to be gun-shy at investing in new infrastructure for “green-field” land.

Further compounding the issue is the cost of building supplies in New Zealand. A 2018 report from Deloittes (commissioned by Fletchers), says that the cost of building materials in New Zealand accounts for 16 to 24 per cent of the cost of a home (the report stipulates that this depends on the type of building and its location). The report found that relative to Melbourne, construction costs are 1.9 to 9.1 percent more expensive across all New Zealand cities for a double-storey house. In Sydney, construction costs are slightly higher (1.9 percent) for a double-storey home than in Auckland but cheaper in Wellington and Christchurch. Construction costs for a townhouse in Auckland are 3.5 percent more expensive than in Melbourne.

While the Fletchers-commissioned report conveniently highlights a small cost gap with building materials in NZ, the most telling aspect of the report is how dominant Fletchers is in the New Zealand Market. They account for around 94 per cent of NZ’s plasterboard market via its GIB brand. At the same time, Fletcher and Holcim represent 85 per cent of the NZ cement market. Fletcher is also the only NZ manufacturer of insulation (there are four importers). Maybe the Commerce Commission could look at addressing this potential monopoly and reducing building costs by introducing more competition into the building supplies market.

Could it be that Collins’ views are just too simplistic and more about political appeal than offering any constructive solutions?

So, what are the answers to New Zealand’s housing woes? According to Orr, there is not a lot that the Reserve Bank can do.

“Monetary policy is a blunt tool. If you want to be targeting specific sectors, specific individuals, specific activities, then I would suggest that there are broader fiscal policy activities that could be considered,” he said.

While there is no single answer to solve NZ’s housing bubble, some argue tax reforms and loan-to-value restrictions amongst other measures are our best bet.

Potential first-home buyers are giving up and renting for life

These could take the form of a capital gains tax, which would target property speculators by disincentivising them from buying up large numbers of properties. This would take some heat out of the property market. A loan-to-value ratio (which measures how much a bank lends against a property, relative to the value of that property) could also help. Other steps being talked up in online forums are rent controls (like that which has been in place in New York for decades) and requiring that landlords become registered professionals.

The lack of disincentives aside, another view is that low levels of financial literacy in NZ are driving Kiwis to the property market, which they see as a safer bet than the share market. Either way, the housing issue is expected to grab an increasing chunk of the headlines as pressure mounts on the government to turn things around. Watch this space.


Pat has been talking about tech on TV, radio and print for over 20 years, having served time as a TV tech guy and currently penning reviews for Witchdoctor. He loves nothing more than rolling his sleeves up and playing with shiny gadgets.

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