Renters can buy to solve problem

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Tuesday, May 1st 2012, 11:26AM 1 Comment

by Philip Macalister

I've been wading through the Productivity Commission's tome on housing affordability and pondering this so-called rental crisis in Auckland. It seems there is one solution.

We may have a 300-plus page report on housing affordability, but the reality is that the Government isn't likely to do too much to bring down the prices of houses.

Most of our wealth is tied up in residential real estate. If house prices as a whole were forced down to make houses more affordable, then the wealth of Kiwis would decrease.

The follow-on effect comes from a thing called the wealth effect. In a nutshell, it says that the more wealthy people feel the more they will spend and businesses and the economy need spending to oil the wheels of commerce.

The funny thing about this affordability storm is that it isn't something which has just happened. It's been going on for a long time and it isn't likely to be changed overnight.

The much-maligned thing called the market is at work. People sell houses and buyers are prepared to pay what seems like way too much money to buy them. But it's a willing transaction.

If people are prepared to pay these prices for a house, what vendor in their right mind would say no? "Please give me less money for my property," is not something I've ever heard.

As for the renters, the economics of the situation are pretty basic. It's supply and demand. In Auckland and Christchurch there are not enough properties, therefore the prices, namely rents, will rise.

Some people may well say, "Greedy landlords at it again." But that's typical tall-poppy-bashing.

For years, economists have said the property investment equation does not stack up. The main downfall has been that the yields, or income, from residential property investing are just not good enough.

Now that's beginning to change and people complain.

And while we are at it, some of the blame needs to be laid at the Government's door. It decided to remove the depreciation allowances property investors could claim. At the time, investors told the Government that such a move would mean that rents would have to increase to make up for the removal of depreciation.

This is exactly what has happened.

There is one solution available to renters. Buy a property. Right now the conditions are good. Interest rates are low and Reserve Bank governor Alan Bollard tells us that interest rates in New Zealand will not start to rise soon.

When they do start increasing, the rises will be pretty muted compared with previous economic cycles.

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