Housing - stop crying poor
Ross Gittins explains why we shouldn't be crying poor when it comes to housing.
There are two ways to tell the story of what's happening to housing. One is the usual, poor-little-you story of families obliged by ever-rising house prices to take out huge mortgages, which they struggle to pay while an unfeeling central bank raises interest rates every month and the greedy banks add more on top.
The latest chapter in this story is that with high levels of immigration causing the population to grow at its fastest rate in 40 years, we're not building nearly as many homes each year as we need, and this shortage of supply is putting a lot of upward pressure on house prices, to the disadvantage of young people trying to break into home ownership.
But a recent speech by the deputy governor of the Reserve Bank, Ric Battellino, put the story in a different and unfamiliar light. He pointed out that households are choosing to spend more on housing than ever before.
In the past decade, more than 6 per cent of gross domestic product has gone on private investment in dwellings, up by a fifth on earlier decades. That's spending on building activity, not on the purchase of existing homes or land.
And the first part of the explanation for it is that we're building much bigger and grander houses and apartments. On average, the cost of each new dwelling is now 60 per cent higher than it was 15 years ago - and that's after stripping out the effect of inflation.
This means our new homes are the largest in the world, with an average floor size of 215 square metres, compared with 202 in the US and 196 in New Zealand. A lot of houses being built on the edges of our cities aren't for first-home buyers. They're McMansions built for people moving on to their third or fourth home.
The next part of the explanation for our huge spending on building work is almost half that money goes on alterations and additions to existing homes. Whether it's new buildings or old, we're making them bigger and better each year.
The third part of the explanation is we're knocking down more old houses to replace them with new ones. Ten or 15 years ago, less than 10 per cent of the new houses we built were replacing houses that had been demolished. Today it's 15 per cent.
The last part of the explanation is we now have 8 per cent more dwellings - houses or apartments - than we have households. And that excess has grown over the past 20 years. How's it possible? Holiday and second homes.
See what a different picture emerges when we stop forcing the housing facts into the gosh-aren't-we-doing-it-tough formula beloved of the media and our politicians?
Doesn't sound like we're doing it too tough to me. Is it the government or the banks forcing us to live in houses with more bedrooms, en suites and garages? Is there some law that obliges us to acquire a holiday home?
Well, actually, there is a law - tax law - that encourages us to pour money into our homes, even into holiday homes if we can wangle it so the interest payments are tax deductible. But I doubt if that's the main reason we're doing it.
Being human, we love having our cake and eating it. We buy ourselves a fabulous new house, take on a huge mortgage then, when we find the payments a bit of a struggle, think of ways to blame it on the government or the banks.
And the media and the politicians - which sell themselves using self-pity rather than truth - encourage us. We take what's clearly a self-sought rise in our material standard of living and, driven by self-pity, mentally convert it into a rise in the cost of living.
The truth is most families' real incomes have been growing strongly over the past decade and more. Mortgage interest rates, whether they're up a bit or down a bit at present, have been a lot lower in this decade than they were in the previous two. We've taken this increased income and lower interest rates and chosen to put more of our money into our housing. If there's been a hidden factor forcing this choice on us, it's this: our unrestrained urge to keep up with the Joneses.
Does this mean all the sob stories we hear about ''housing stress'' are so much bunkum? In so far as they're supposed to describe the position of established, middle-aged, upper-middle-income home owners like you and me, yes. But as they relate to many renters - young and old - no.
The fact is almost all the nest-feathering has been done by well-established home owners. And it co-exists with our failure to build nearly enough additional houses and apartments to meet the needs of our rapidly growing population.
The more the well-established do to push up the quality and price of housing, the tougher we make it for young couples trying to get a seat on the home-ownership gravy train. First-home buyers now need a deposit equivalent to about 1ΒΌ years' income, almost twice what they needed 15 years ago.
An inadequate supply of additional housing puts upward pressure on rents, to the disadvantage of young couples saving a deposit and older, poorer households who face a lifetime of renting, including pensioners.
To give it its due, the Rudd Government is doing a lot to alleviate the problem, with its building of additional ''social housing'', its encouragement of non-profit community housing schemes and its housing affordability fund to grease the wheels of progress at local council level.
But it's mainly the role of the state governments to reduce the impediments that land-zoning, infrastructure costs and the council approval process present to supplying a lot more, more affordable housing.
Ross Gittins is the Herald's economics editor.
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