Financialisation of NZ’s housing market driving house price increases

The reality of undersupply: This infographic shows that in the 1960s over 35% of new builds in Aotearoa New Zealand were in the lowest quartile of value. By 2003, only eight percent of new builds were in the lowest quartile of value.

In Aotearoa New Zealand, our housing stock is now seen as a commodity and this financialisation of the housing market is driving exponential increases in house prices. At the same time, home ownership is a dominant aspiration for New Zealanders.

Evidence from Building Better Homes, Towns and Cities National Science Challenge shows that it is not land costs that determine whether houses are built or not, it’s what people can sell those houses for on the open market, and a profit margin that is attractive to banks and equity lenders.

When this occurs, and in the absence of strong policy direction, housing becomes a vehicle for investment and financialisation is normalised – delivering often untaxed, windfall gains for only some sectors of the market, such as property investors, speculators, and owner-occupiers.

“Our evidence shows this financialisation is fuelled by, and fuels, heated housing prices, cycles of liquidity and constraint, and reduction of access to owner occupation,” explains Challenge Director Ruth Berry. “We see this play out in the report released last week by Statistics New Zealand that shows our home-ownership rates are the lowest they have been in 70 years.”

The Housing in Aotearoa report reveals a sobering picture – only 64.5% of kiwis own their own homes and house prices have been rising at a faster rate than wages over the past five years. For Māori and Pacific people, home ownership rate statistics are much worse with fewer than 50% of Māori and fewer than 40% of Pacific people owning their own homes. Māori and Pacific people home ownership is declining at a faster rate than for those with European ethnicity.

In Auckland, the median house sales price in mid-2020 comes in at about 11.5 times the median household income.

The evidence shows the flow-on effect is that market forces influence what is being built and bought.

As a result, it becomes unprofitable to build lower quartile value housing because it only suits a certain sector of the market. Without intervention or support, the market will not deliver homes in the lower quartile of value – our most needed.

“This leads to the type of environment that we are seeing now with runaway house prices and a lack of low cost, new and affordable housing being available to low and modest income people,” says Ms Berry.

BBHTC researchers looked at the availability of financing for developers to understand how the housing market has slowly become financialised.

What the evidence shows is that banks do not accept risk, instead they require developers to make substantial margins and limit their exposure by imposing minimum equity requirements. Developers must provide equity through their own capital or by using equity finance, which is expensive.

Overall, financier practices will ensure that the commodity value of the house remains and their investment is not at risk. What gets built is often determined by how attractive the deal is to financiers.

Research by BBHTC into Special Housing Areas (SHAs) in Tauranga has revealed that even in markets where there is high demand and residual demand with people moving from Auckland, still developers may or may not build, depending on the perceived financial gains.

“Until we have a housing system where there is clear policy about price points, mechanisms to support delivery of affordable housing, and that gives people an opportunity to use and enjoy secure housing at every level of society, our evidence shows that house prices will remain at levels that are unaffordable for many,” says Ms Berry.

Tactics, such as a capital gains tax, the brightline test, and the IRD intention test (designed to determine whether activity is speculatory) may in time support a change in the market, but the evidence proves such tactics won’t be quick enough.

How then do we stop re-producing this wicked problem of a lack of housing for all?

According to research done for BBHTC by the University of Waikato’s Iain White and Graham Squires, one of the many answers required lies in systemic changes to housing policies – both in New Zealand and internationally. Policies over the years have favoured economic resilience that has privileged stability and recovery (return to normality) rather than economic adaptation and transformation to a state that is less exposed to the systemic risks associated with flows of global capital, debt, and speculative activity.

“To create more resilience, Iain and Graham’s research shows that in order to achieve real change, policies that favour economic resilience through adaptation and transformation need to be considered alongside policies that favour stability,” explains Ms Berry.

Read the research

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