What we can all do to help the housing crisis

It’s not just media hype. We are in a full-blown housing crisis.

What’s driving our out-of-control real estate market?

• Historically low interest rates. Never before has it been so cheap to borrow money to buy houses (or keep them as investments).
• Ridiculous amount of red-tape involved in building or development. 50-60%+ of a residential building development budget can be spent before any dirt gets moved. On planning, design, consent, consultation etc. This discourages owners from subdividing and slows the building process.
• Decades-long shortage of new homes being built.
• Out of control market trapping baby-boomers in homes that are un-suited to their needs.

Low interest rates (the number one contributor) hurt in more ways than you might imagine.

The obvious problem is that they increase the amount of money first home buyers can borrow with their current income. Allowing them to pay more for any home they go after.

Competitive buying situations like Tenders and Auctions force buyers to their limits, drawing out every last possible dollar from purchasers desperate not to miss out. As interest rates keep dropping, house prices keep increasing.

But it goes deeper than that.

Cheap interest rates allow move-up buyers to easily keep their existing home as a rental.

Why sell if you can afford to keep owning property in a raging market? Low interest rates make nearly every property ‘cashflow positive‘ as a rental. This reduces the number of houses going on the market, forcing first home buyers to fight over what’s left.

The resulting feeding frenzy amongst buyers means most properties are sold via competitive situations, with sellers being able to choose from multiple offers (sometimes 10 or 20+). In a competitive situation, you need to have few or zero conditions to have any chance of winning.

Sadly, this stops down-sizing buyers from entering the market.

There is an entire generation of empty-nesting baby-boomers out there with large homes in established suburbs that are no longer suited to their needs. These homes should be occupied by young families with the disposable income required to complete upgrades and repairs. But the current owners can’t move because they need to sell before they can buy a more suitable, low-maintenance, 2-3 bedroom, single-level home.

If they could find a home to move to, Their only palatable option would be to make an offer ‘subject to sale’ of their own home but in this market, those 2-3 bedroom houses are selling like hotcakes and no owner is going to consider their highly conditional offer when they have 20-30 first home buyers ready to pay cash straight away.

These empty-nesters could sell first and then buy (thereby becoming a cash buyer), but most empty-nesters have a house full of furniture and memories, and the idea of selling without a confirmed location to move to is so stressful to consider that it’s not even laid on the table as an option.

So instead, they stay put.

It’s a strange and sad truth that a hot real estate market actually traps homeowners in their homes. Unable to move because no one wants to consider offers that are conditional on a house sale.

So now that you know what’s behind the problem, where does that leave us? What can be done to help the situation?

Below is a list of ideas broken into categories for buyers, investors, sellers and government. If you have a suggestion, please add your thoughts in the comment box below!

What we can all do to help the housing crisis…

Let’s start with property investors:

• Avoid buying houses that might suit a first home buyer. Don’t make it harder than it already is to buy a home by competing with young families trying to get on the ladder. If you are looking for an investment, stick to houses that first home buyers won’t touch – like multi-flat properties or houses with serious (but fixable) issues.
• Sell your properties with poor yields. If you have a home in your portfolio that should belong to a first home buyer, then commit to selling it when the current tenants move out (please don’t force them out of their home). Swap it for a better-suited investment style property like multiple flats on one title.
• Don’t go crazy upping your rents. NZ landlords are in a ridiculously powerful position, especially in the current market. Consider yourself extremely fortunate to own multiple properties right now. Don’t be greedy by charging as much rent as you possibly can. You have already hit the real estate jackpot just by being an owner during the past year.
• Subdivide your sections! Or add a minor dwelling without subdividing. Don’t try and buy another property, build another one. If you have land than can be developed, please do so. We need to increase housing supply asap.
• Invest in something else. Our country will never get rich buying and selling houses off each other. We simply end up increasing the gap between the ‘haves’ and the ‘have-nots’. If you already have a few properties, invest in other options, like small businesses, equities, or other property sectors, like commercial and rural.
• Do up and sell. If you are determined to stay in the residential market. Buy dilapidated properties, do them up and sell them. That way you are at least improving the overall housing stock along the way.

Sellers:

• Consider offering your home to your wider network first. If you are already financially secure and don’t need every last possible dollar from the sale of your home, then you may want to consider offering your home up to family and friends at a fair price first. Get a registered valuation before you do this, so you know roughly what current market value might be. You might miss out on getting top dollar but you will be doing some lucky young family an incredible, life-changing favour, all while still selling for a fair price.
• Offer buyers all the information you can. Provide a builder’s report and LIM report upfront so you don’t end up with multiple buyers digging into their deposit savings for the same information. I recently heard of 8 buyers all paying for separate builders reports on one Wellington property being sold via Tender. That’s an incredibly inefficient way for real estate to change hands.

Next up, buyers:

• Don’t fall for the now-nows. In a crazy market, it’s tempting to throw all your eggs in with every offer just to get the job done. Remember that every time you pay over the odds and help set a new ‘record’ sale price, you increase the expectations of every future seller coming on the market in the near future. The next buyer will have to pay more than you did, and so on. If you miss out once or twice, have patience and stick to your guns. Look for decent value and learn your local market thoroughly before you start putting in offers.

Don’t panic! And don’t buy on the rebound.

• Consider buying in a different area. I was speaking to one of my coaching clients recently and he put it this way:

“Optimists hope prices will drop. Pessimists think prices will keep rising. Realists get a remote job and buy in a cheaper location.”

There is still value to be found in locations even just 1-hour drive outside main centres like Auckland and Wellington. If you can work remotely, it’s worth trying this approach. If you find after 6-12 months that living further out is just not for you, then you could always go back to renting in town and keep your property as an investment.

What should the government do?

Jacinda, in case you are reading this, here are my suggestions:

• Up the Homestart grant limits ASAP. These are way too low in every area. Increase them asap and make the price limit the same for the entire country (rather than more in Auckland and less in regional areas). This will encourage buyers to move to the regions where houses are more affordable and take some pressure off prices in the main centres.
• Increase the Homestart grants. From $10k max to $20k. First home buyers need every bit of help they can get. While you are at it, let’s up the income caps too.
• Up LVR’s for investors only. And remove LVR’s for first home buyers. This tip is more for the reserve bank but LVR’s should only change for investors. What people don’t seem to realise is that whatever LVR you set for investors, most can still buy another property without handing over a cent of deposit, because they already have so much equity in their existing home(s). This allows them to easily meet LVR requirements which are worked out across an entire portfolio, not property by property.
• Force councils to make it easier to subdivide and build. Yes, the resource management act needs to change (or go) but that will take years so this is more of a long-term issue. The suggestions above can make a small difference right now.
• Break up the building supplies duopoly. It’s ridiculous that we pay 25-30% more for our building supplies than we would in Australia. It’s time for some new players in the building supply industry.
• Build more state houses. We need a bucketload more housing quick fast and the commercial market, which is optimised to build McMansions in the burbs, is just not going to provide it. We need thousands of 100 sqm, 2-3 bedroom homes with insulation and heat pumps and we need them right now.

Suggestions for the media:

• Stop bashing Kiwibuild. Yes, it didn’t produce the results as promised but at least it was an attempt at trying to help. Bashing it and criticising those in charge gets us nowhere. In any good business, you look at your strategy, determine what went wrong, make adjustments and keep moving forward. Sometimes things don’t work but that doesn’t mean you stop trying. Let’s not discourage action by constantly labouring the issue when a well-meaning policy doesn’t work as hoped.
• How about interviewing people with ideas of what might help the crisis? Rather than just interviewing opposing politicians who are determined to stick the boot in and score points rather than offer up any workable solutions of their own.
• Keep showing off the regions, interviewing families who have made the move. We need to encourage more people to move to smaller towns. This should reduce pressure on house prices in our main centres while helping regional areas grow.

A note for homeowners…

No one wants there to be a housing crisis, but most owners also get upset when someone tries to subdivide and build a new home on the section next door. We can’t have it both ways. If a developer wants to build some new properties in your street, please realise that allowing that development to go ahead will help young families gain a path to home-ownership. Or provide another home for someone to rent.

Developers and builders who take on small subdivision projects are looked down on by most kiwi homeowners, who consider them to be greedy types, trying to squeeze more houses in where there shouldn’t be more houses.

Remember that the only thing that’s going to fix this housing crisis long term is more supply. Yes, those developers are doing it for profit, and not to solve the housing crisis, but at least they are doing something.

It’s important to maintain leafy suburbs and no one wants 100-year-old trees being cut down to make way for apartments. But at the same time, we don’t want people living in cars or worse still, under bridges. Our little country is growing and we simply need more housing close to local amenities if we want to solve our housing crisis.

Please add your positive thoughts and/or suggestions below!