A house is a home, not an asset

With house prices sky-rocketing in many countries questions are being asked why. One of the fundamental questions is: is a house a home or an asset? The answer depends on who you are asking, and there lies a big part of the problem.

A home is not a right as such, but it is a fundamental need for well-being, along with other fundamentals such as food, water and clothes. Everyone would agree that people should be housed for their health and safety. However, in many places people have resorted to living in inadequate alternatives such as garages, caravans, tents and in too many cases, on the streets.

The housing crisis in New Zealand, for example, is dire. The International Housing Affordability Survey describes New Zealand’s housing with a median multiple of 7.5 as ‘severely unaffordable’. Median multiple is the median house price divided by the median household income. A median multiple of around 3.0 is considered affordable. Consequently, the home ownership rate in New Zealand is the lowest it has been in almost 70 years. It is not just home ownership that is much less affordable either. Since rents tend to increase as house prices increase they have become unaffordable as well.

The Kiwi dream is what is colloquially known as ‘the quarter acre pavlova paradise’. Unlike some places where a rental culture is common, like New York and many cities in Europe, Kiwis have always aspired to own their own homes. It provides freedom and security and potentially a way to minimise the cost of housing by paying off your home.

In New Zealand in the early 1980s houses were deemed affordable based on the median multiple formula. However, since the mid 1980s a variety of drivers caused by deregulation of the economy conspired to make house prices to escalate. For 35 years house prices have been going up at rates much higher than general inflation and general wage increases.

Many people have bought into the housing market expecting prices to go up, which they have continued to do. However, many of these people have huge mortgages which are serviceable at the current low interest rates but when interest rates increase, which they will inevitably do, many people won’t be able to afford their repayments.

There are a variety of reasons for the escalation of house prices, and one of them is to view a house as an asset, and not a home.

House as a home

If you live in a dwelling you own, it is a home and not an asset. As a home a house offers all the considerable benefits of shelter, including comfort, privacy and safety. These all aid a person’s well-being. If you own the dwelling you have the added benefits of being more secure as well as the freedom of being able to do improvements as you like.

Initially, as a person/family pays off their house their liability (debt) decreases and ultimately they can be debt-free meaning they don’t have interest payments. The house then becomes an asset of sorts because ownership has reduced a person’s living expenses.

However there is another sense in which a house can be an asset and that is when it provides a return on investment. If you are living in a house it is not really providing a return, unless you have boarders or tenants on the property. In this case a house is still very much a home and not an asset.

There are at least four different ways in which speculators view a house as an asset, that provides a return.

House as an asset

Rentals

As house prices have risen rents have also risen to cover this extra cost and to supply landlords with a decent yield from their investment. Also, with the neoliberal ransacking of publicly-owned assets, the New Zealand government sold off a large proportion of state housing stock, and it didn’t invest in new housing.

High rents and the reduction of rental stock has meant that people are driven to other alternatives which range from moving to another area, to living in garages, caravans, cars, tents and even on the street.

Ghost houses

In 2020 it was estimated that there were 40,000 empty houses in Auckland alone. At the same time there were over 12,000 people on waiting lists for community housing. There are some valid reasons that houses are empty for short periods but some people buy a house on purpose to leave it empty for long periods because they don’t want the ‘hassle’ of tenants but they do want to realise the capital gains from house price increases. Many of the owners of these ghost houses are foreign nationals.

Of course, the more people do this, the more house prices will increase because of the increase in demand from the shortage of available housing.

There could be an additional tax on houses that are empty for more than a year, say. All of the money collected from this ‘ghost house tax’ should go to creating community housing.

Developers

People make a business out of buying property, developing it into housing and subsequently selling it for big profits.This happens at different scales from single houses to huge housing sub-divisions and apartment developments. Developers do help create higher density housing but paradoxically whilst the housing might be a little cheaper it is not proportionately cheaper. 

By way of illustration, consider the following hypothetical scenario that is the type of thing that is going on constantly. There is a single house on a large section that cost say $2,000,000 and is removed and replaced with four luxury townhouses which cost say $2,000,000 to build altogether (including financing costs etc). The developer has outlaid a total of $4,000,000. Each townhouse is sold for say $1,500,000 for a total of $6,000,000. The $2,000,000 difference between income and costs is pocketed by the developer as a speculative margin over and above a proper profit margin. Normal lending criteria for business loans is that there is a 40% deposit. The developer would need $800,000 deposit and would end with $2,000,000. That is a 150% profit margin in probably less than two years.

In this hypothetical case, the value of the land has increased from approximately $1,500,000 to $4,000,000. The $1,500,000 townhouses are effectively as unaffordable for a first-time buyer as the original $2,000,000 house.

So developers create new housing, which is good, but they sell the houses at market rate and pocket huge profits. This is bad because it escalates prices further.

Home owners

Many existing homeowners saw their paper wealth increase by many hundreds of thousands of dollars during the past 30 years. Many enterprising people have reinvested this windfall by refinancing and funding a second, third or more houses which they then rent out.

If owners see a house as a financial asset, they want prices to go up and certainly not go down. Any sort of government initiative to make housing more affordable is a political hot potato because of the competing wishes of voters.

What is the solution?

There is no easy solution. Are wages going to increase three-fold in a hurry? Of course not. Are house prices going to decrease three-fold in a hurry? Of course not. 

One solution will be use regulatory control to dis-incentivise the use of homes as assets. The recently introduced capital gains tax in New Zealand will help somewhat. Another solution is for local and central government to build a lot more community housing and also invest in more infrastructure for higher density housing to be built. Local governments need to relax rules about subdividing and initiatives like tiny house communities. There could be the aforementioned ‘ghost house tax’ or some other disincentive for empty houses.