Now Labour considers building "affordable housing"

Scratch the surface of Labour's much trumpeted "social policies" and you're likely to find another motive, which is to grease the slippery wheels of capitalist profit making. Thus Working For Families is effectively a wage subsidy to employers paying poverty wages. KiwiSaver transfers the earnings of workers worried about their retirement into a billion dollar investment fund to boost business growth. So after doing nothing for grassroots people in the face of a skyrocketing housing costs, now that the boom has gone bust Labour's "market liberals" decide it's a time to look at building more houses (in partnership with the private sector of course). Which is more important for Labour's leaders: to make housing cheaper or to prop up the housing industry during the economic bad times?

Govt considers big housing projects as industry cools 9 July 2008 by Claire Trevett from NZ Herald The Government has hinted it is considering starting large-scale housing developments to help boost the number of affordable homes. Yesterday the Prime Minister said caucus had considered the issue because, while the housing sector has cooled,"there are a lot of people looking for an affordable home ... but there is still the issue of land." Finance Minister Michael Cullen said the economic slowdown meant there was less demand on the construction industry which the Government could take advantage of over the next two or three years. Neither would reveal further details of what was proposed, but it could indicate the Government is looking at further developments similar to those under way in Whenuapai and Tamaki, which will provide a mix of cheap and mid-priced homes with state houses. The Government is already working on a stocktake of spare Crown-owned land which could be freed up for housing developments. Housing minister Maryan Street has also been considering establishing Urban Housing Authorities to undertake large-scale new housing developments. Ms Street has previously said large-scale urban housing projects, such as those established in Australia, are needed to ensure substantial growth in supply of affordable housing.

Housing value crunch: a tipping point for politics in NZ

The home value crunch may well become a tipping point for politics in New Zealand. 

For a long time the stability of the two-party system (plus a few MMP add-ons) has been based in large part on the belief by a large section of the grassroots that they can work their way into their own home, which will then rise in value. This belief, which has been under siege for quite a while, may now start to collapse altogether for most people, including many in the middle class as well as the working class.  

When that happens, it's not just an economic crisis we're talking about. We're also talking an entrenched political crisis and an associated crisis in traditional hegemonic belief systems, such as "the market knows best" and "the market means democracy".  

This opens up space for a broad left party to connect with grassroots people and provide leadership that helps build mass-based resistance to the market's efforts to place the burdens of crisis on the shoulders of ordimary people, and to collectively project a human-centred alternative to an out-of-control market.

House price crash will see a wave of mortgagee sales and bankruptcies not seen since the 1930s

by Peter de Waal

15 June 2008

British commentators are advising of a 5 year slump and 50% loss in value in the UK housing market. I believe the effects will be far worse in NZ, on the periphery of the global market.

The Australian banks have had a sweetheart deal with the NZ government allowing them to loan $200 million for every $8 million they have on deposit for housing. This compares to ordinary business loans where they can only advance $100 million for each $8 million on deposit.

This amount of loan activity has inflated house prices and the banks' profits – up until now. With the global credit crunch banks can no longer find the foreign capital needed to make such huge loans for housing. With the bursting of the housing market bubble house prices in NZ will crash, perhaps down to 2-4 times the average wage ($80,000-160,000).

The New Zealand middle class has most of its money tied up in housing after being thoroughly fleeced by the share market crash of 1987. The loss of the "wealth effect" is going to be profound, much worse than after 1987.

There will be a wave of mortgagee sales and bankruptcies not seen since the 1930s.  

See the Herald on Sunday (15 June) article The boom has turned to bust  
Also see Peter de Waal’s UNITYblog article The 2008 banking crisis: Why the housing bubble? Why the crash?

THIS is how you deal with a housing crisis, Helen

A private company got in the way of the Venezuelan government's plans to improve housing - and tried to starve its workers into submission, into the bargain. So it has been simply nationalised. If Michael Cullen had shown this kind of nerve when Toll Holdings were holding the government to ransom about buying back our trains, we would all be better off. It's also important that this decision of the Venezuelan government has not been made with dollar signs (or even bolivar fuerte signs) in mind, but on the basis of what's good for the people of Venezuela - in this case, making sure there's enough steel and concrete to build drastically needed houses. Will our government take similar measures to solve our own crisis of skyrocketing rents and housing shortages? Hardly - everything is geared to protect the profits of private capitalists first. And that's why Labour is not worth voting for, and why we need a new party that will put working people's interests first.

Chavez to nationalize Venezuela's top steelmaker by Ana Isabel Martinez Reuters 9 April 2008 CARACAS - Venezuela will take control of the country's largest steelmaker in the second major takeover of foreign businesses in a week as president Hugo Chavez resumes his socialist drive to nationalize key industries. Just days after Chavez announced the takeover of the cement industry, his government said on Wednesday that steelmaker Ternium Sidor would fall back into state hands, sending the Argentine-controlled company's shares tumbling. Chavez increased state control of swathes of the oil-rich economy in a multi-billion dollar campaign last year, but had spent recent months focusing on day-to-day issues like crime and trash collection after voters rejected his push for wider powers in a December referendum. Venezuela's vice-president Ramon Carrizalez said parent company Ternium would be compensated for the takeover and could even stay on as a minority partner, but accused it of an arrogant attitude toward employees. "In this government, the worker comes first," he said. The leader of the union at the sprawling Ternium Sidor complex about 500 km southwest of Caracas said workers were pleased with the decision, made after months of short strikes in a fierce labor dispute with the company. "We are here celebrating in an assembly the decision that Sidor returns to state hands," leader Nerio Fuentes told Reuters. Ternium's New York-listed shares fell 9 per cent to $35.20. It pleaded with Chavez in a letter to intervene and find a "constructive solution" to the nationalization. Chavez first threatened to take over the steel firm last year, during the takeover of oil projects and telecom companies. He renewed his nationalization campaign last Thursday by ordering the takeover of the country's largest cement companies, which are all foreign run. He has also threatened in the past to nationalize banks and food companies. CHAVEZ'S COMPLAINTS Criticized by supporters for shortages of low cost housing, Chavez complains the steel and cement industries do not put a high enough priority on supplying the domestic market, and he will almost certainly now force them to change. "The takeovers of both cement and steel industries will be used to breathe new life into construction in Venezuela as well, especially in the form of lower tier housing," Lehman Brothers analyst Gianfranco Bertozzi said in a research report. Last year's nationalizations targeted US and European companies, but the latest wave has also included companies from Latin America. Carrizalez said he did not expect the steel nationalization to hurt relations with Argentina, a close ally with whom Venezuela shares debt and trade co-operation deals. Ternium, with a market capitalization of about $7.7 billion, is controlled by Argentine conglomerate Techint. Chavez is a former paratrooper who tried to seize power in a botched coup in 1992. Since winning power at the ballot box in 1998, he has implemented much of his coup-era manifesto to re-nationalize companies privatized by prior governments. Ternium Sidor was privatized in 1997. It produces about 4.5 million tonnes of liquid steel annually and has 5,600 unionized workers, plus more than 4,000 contract employees. It has struggled this year with sporadic strikes and growing worker anger at a drawn-out conflict over pay and conditions which turned ugly in March when a union leader was shot and wounded as workers and police clashed. Ternium's main operations are in Mexico, Venezuela and Argentina. For the fourth quarter of 2007, it reported a net profit of $221 million. Its holdings include steelmakers Siderar in Argentina and recently acquired Grupo Imsa in Mexico. The Venezuelan operation is 60 per cent controlled by Ternium, with the rest belonging to the state, workers and retirees. The cement takeovers, where the government wants a majority stake, include the Venezuelan assets of Mexico's Cemex as well as Switzerland's Holcim and France's Lafarge.

The 2008 banking crisis

The 2008 banking crisis: Why the housing bubble? Why the crash? by Peter de Waal Over the last three decades the economies of the western world have been driven by an expansion of credit rather than wage growth. And suddenly access to credit is now being switched off overnight as fear grips the rich over the US sub-prime mortgage losses. The house price boom was a global phenomenon coinciding with the low interest rate policies of the central banks of big economies, particularly the US, after the dotcom bust and 11 September 2001. However, a report published by the OECD in 2006 warned that the boom was out of step with economic fundamentals. (See http://www.olis.oecd.org/olis/2006doc.nsf/linkto/ECO-WKP(2006)3 Figure 4 shows how the price to income and price to rent ratios have shot past the trend line since 2001.) As with most other countries you can see that the NZ rents and income curves follow each other closely. So if house prices are rising it does not follow that rents will increase if incomes are static or falling (a fact apparently lost to many amateur property investors).

Typically though, falling rental yields have been masked by asset appreciation. Many landlords who have moved into “property investment” in the last five years have only been breaking even, many have been losing money from day one on the basis that capital appreciation will see them right. However, once the asset class price starts stagnating or falling (e.g. studio apartments in Auckland) the illusion of capital gain can no longer mask the cash drain. Yesterday’s cheery “can’t go wrong with property” speculator is today’s stressed seller, buying food for his family on his credit card because all his income is sucked up by an empty property he can’t let at a rate that covers the mortgage on it...

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The 2008 banking crisis: Why the housing bubble? Why the crash?

by Peter de Waal Over the last three decades the economies of the western world have been driven by an expansion of credit rather than wage growth. And suddenly access to credit is now being switched off overnight as fear grips the rich over the US sub-prime mortgage losses. The house price boom was a global phenomenon coinciding with the low interest rate policies of the central banks of big economies, particularly the US, after the dotcom bust and 11 September 2001. However, a report published by the OECD in 2006 warned that the boom was out of step with economic fundamentals. (See http://www.olis.oecd.org/olis/2006doc.nsf/linkto/ECO-WKP(2006)3) Figure 4 shows how the price to income and price to rent ratios have shot past the trend line since 2001.) As with most other countries you can see that the NZ rents and income curves follow each other closely. So if house prices are rising it does not follow that rents will increase if incomes are static or falling (a fact apparently lost to many amateur property investors). Typically though, falling rental yields have been masked by asset appreciation. Many landlords who have moved into “property investment” in the last five years have only been breaking even, many have been losing money from day one on the basis that capital appreciation will see them right. However, once the asset class price starts stagnating or falling (e.g. studio apartments in Auckland) the illusion of capital gain can no longer mask the cash drain. Yesterday’s cheery “can’t go wrong with property” speculator is today’s stressed seller, buying food for his family on his credit card because all his income is sucked up by an empty property he can’t let at a rate that covers the mortgage on it. NZ Housing Severely Over-Valued The New Zealand economy has been sustained by two things: farming income from primary produce sales and attracting successive waves of cashed-up migrants to hold up the inflated values of the local housing stock. Why should a house in Auckland be worth as much as a house in London or Sydney when the local economy is many times smaller? Global warming is bringing increased instability to the farming sector, as this years’ exceptional drought has shown, and migration is tending to zero as the world economy slows. Historically the long term value of housing in New Zealand (and UK, USA, Canada) is around 3-4 times the average wage. This would make the average New Zealand house worth $120,000 to $160,000. Now that so many home owners have been hooked into “betting the farm” on speculative investment in unliveable apartment space in central Auckland, it must flow on to the assets securing these loans: the suburban 3-4 bedroom house market. (See ‘Mortgagee auctions put valuations in spotlight’, Sunday Star Times, 24 February 2008, http://www.stuff.co.nz/4413930a13.html) A few months ago NZ economists were talking of a two year correction in the housing market. A recent article gives five years as a likely correction period. (See ‘Snapshot of a slump, Auctions fail to fire, 10% drop predicted’, Sunday Star Times, 2 March 2008, http://www.stuff.co.nz/sundaystartimes/4422356a6005.html). So will the housing market come down with a thump, or will it remain stagnant for 5-10 years as wages catch up with inflated values? Given that wages would have to at least triple to restore the long-term price to income and price to rent ratios, which is unlikely, I suggest that a grinding collapse will happen in stages. NZ Home Values A nasty correction is looming. A fall from an average value of $400,000 to $160,000 could see many people thrown out of their homes as they move into negative equity. This situation is no accident. According to local investment expert Brian Gaynor: Aggressive lending by the trading banks has played a major role in the housing boom. Between January 2002 and this January bank mortgage lending surged by 115.2 per cent, from $68.6 billion to $147.6 billion. This has been encouraged by bank capital adequacy rules that allow banks to lend twice as much on residential property for any given amount of capital compared with most other types of loans. For example, banks have been able to lend $200 million on residential mortgages for every $8 million of capital but only $100 million to businesses for the same amount of capital. This has encouraged the Australian-owned banks to focus on housing loans in NZ because it minimizes the amount of capital they have had to commit to this country. The housing market has a huge impact on the New Zealand economy because in terms of the total housing values/share market capitalisation ratio and total housing values/GDP ratio we are far more dependent on residential property than any other western country. There has been a great deal of comment and analysis about the wealth effect of sharemarket falls on the United States economy but we should be much more concerned about the wealth impact of a decline in house prices on retail spending and the New Zealand economy. (‘Falling house prices start ripple effect’, NZ Herald, 15 March, 2008, http://www.nzherald.co.nz/section/3/story.cfm?c_id=3&objectid=10498271&pnum) The government’s capital-adequacy rules were a cornerstone of this particular south seas housing bubble – a state-sponsored housing Ponzi-scam! (See http://en.wikipedia.org/wiki/Ponzi_scam) What a gift to the banks! NZ Savings + Re-Financing Loans New Zealand has an abysmal savings record, mainly brought about by the pitiful wages paid here and the very high real cost of living. So NZ bankers have turned to the lucrative Japanese Yen-NZ Dollar carry trade to provide funds to inflate house prices (and their profits) to their current astronomical levels. However this convenient trade is collapsing: The yen “carry trade” - borrowing cheap in Tokyo to chase yields from New Zealand, to Brazil, Iceland, and above all Britain - has juiced the global asset boom this decade by $1,000bn. It is perhaps the biggest liquidity pump of them all, yet it stopped pumping in August. Indeed, it is sucking the money back out again. The yen is soaring. (‘Japan is the next sub-prime flashpoint’, Telegraph, 13 February 2008, http://www.telegraph.co.uk/money/main.jhtml?view=DETAILS&grid=&xml=/money/2008/02/10/ccjapan110.xml) And, The currency has appreciated by 19pc against the (US) dollar to yen103 since July as Japanese investors retreat from global markets. Foreign hedge funds that borrowed at near zero-rates in Tokyo to chase higher yields abroad are scrambling to unwind ‘carry trade’ positions, estimated at $1.4 trillion in its varied forms. Fukoku Life, the giant life assurance company, said it planned to ‘pull out’ of US bonds in preference for Japanese debt, a move underway across the Japanese corporate sector as the US yield advantage vanishes. ‘People are reconsidering the risks (in the US), and see the subprime problems as not being solved at all,’ said Yuuki Sakurai, the group’s finance chief. (‘Japan may cap yen to stave off slump’, Telegraph, 5 March 2008, http://www.telegraph.co.uk/money/main.jhtml?view=DETAILS&grid=&xml=/money/2008/03/04/ccjapan104.xml) The question for all those New Zealand mortgage holders, many of whom will be refinancing this year, is where will the money come from? Now that the capital is being drawn back to the “saving” economies (Japan, Russia, the Middle East oil states and China) following the huge losses on US sub-prime loans, the Australian and local banks are going to have a hard time finding money to lend to NZ homeowners. So brace yourself for painful rises in interest rates as money becomes much harder to borrow. Although it will be a world-wide deflationary crisis, interest rates will rise sharply in New Zealand. NZ Landlords Response: Fleece the poor The NZ Herald describes the reaction of one landlord to the fall in house prices and rising interest rates: Withers, who has been investing in property since his university days, said rental property owners should look at improving their properties and reviewing their rents. He estimates some properties in Auckland have rents that are up to 15 years out of date. All the landlord is doing is subsidising someone else’s living costs. (‘Expert advice: Hold on tight for the housing crisis sales’, NZ Herald, 9 March 2008, http://www.nzherald.co.nz/section/1/story.cfm?c_id=1&objectid=10497016&pnum) Perhaps Mr. Withers should also note that most workers’ wages in NZ are 24 years out of date! House prices rose into the stratosphere while real wages are a fraction of what they were. That’s why there is a ‘correction’ taking place! Negative Equity The problem for the average worker will be if the value of the house they “own” falls below the amount the bank has mortgaged over the property. Banks are then entitled to ask for cash to restore their equity in the mortgage. In past slumps (UK early 1990s) they typically gave 30 days for such money to be produced before resorting to mortgagee sales. In the UK in the early 1990s there were 3000 such sales every week. Whether the banks resort to such practices again depends on how panicked they become. Much of banking practice seems to be a matter of whim, for example widespread lending with no reference to borrowers’ ability to pay, mortgages for 95%, 100% or more of the value of the property. Last year, another Sunday Star Times article stated that such essentially unsecured lending accounted for over 40% of the New Zealand mortgage market: Wellington-based Mike Pero broker Tony Sule estimates that about 40% of first-time homebuyers are opting for 100% loans as they are desperate to get into the market in case it becomes even less affordable. Adam Parore, founder of Adam Parore Mortgages, agreed saying buyers with cash deposits were becoming rarer. “I suspect another 50% are at 5% deposit, 10% at 10% deposit and almost none with a bigger deposit than that. The number of first home buyers with the standard 20% is basically zero you get one every now and then, but they are like hen's teeth.” The rise of the 100% mortgage, now available from all major banks, began in late 2005. They have become increasingly popular as house affordability drops a recent Massey University report found it had declined 70% in the past five years. New Zealand’s mortgage market is worth about $148 billion, of which about 40% matures each year and must be re-fixed. It is not known how much of that is 100% mortgages. (‘100% loans new norm for buyers’, Sunday Star Times, 7 October 2007, http://www.stuff.co.nz/stuff/sundaystartimes/4228640a6442.html) The availability of such mortgages allows the cheapest houses to be “bided up” by buyers who previously would not have been able to enter the market. Low or no deposit mortgages further raise the profits of the estate agents and the banks. Liquidity Crisis The sub-prime housing crisis has been characterised as a glut of mortgage lending to people who couldn't afford it. The US housing market has fallen 9.1% on a year-to-year basis, and 18% in the last quarter. (See ‘Ninja loans explode on sub-prime frontline’, Telegraph, 4 March 2008, http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/03/ccsubprime103.xml) In the UK building societies and banks are raising the minimum deposit for a new mortgages to at least 10% and as high as 25%. This will further collapse the market. (See ‘Buyers who do not have 10% deposits are left out in the cold’, The Times Online, 29 February 2008, http://business.timesonline.co.uk/tol/business/money/property_and_mortgages/article3456174.ece) Many other people in NZ with substantial amounts paid off their mortgages are also at risk, should the banks decide that with a collapsed lending market and falling house prices the banks’ equity is under threat. If negative equity becomes widespread expect a letter asking for the difference between what you bought the house for and what it is now worth, payable in 30 days! Failure of the Stock Market & the Flight to Commodities The failure of stocks, bonds and housing as investment vehicles has caused a speculative flight to commodities: It is taken for granted that China will continue gobbling up the world's resources with a limitless appetite, the world faces an inflationary fire and that the dollar will slide further. However, these assumptions are less certain than they look. “The strength of base metals is absolutely bewildering given that the US is falling into recession,” said Stephen Briggs, a metals analyst at Société Générale. “America matters. There is economic contagion in Europe and it is spreading to emerging markets as well, yet people don’t seem to care. They are taking no notice of the economic fundamentals, or they’re betting that supply will continue to fall short even if demand slows. This is dangerous. Base metals are highly cyclical. Sentiment can change overnight,” he said. Is China really big enough to offset construction slumps now engulfing the US, UK, Japan and much of the Eurozone? One cannot ignore 60pc of the world's economy. (‘Fears of a commodity crash grow’, Telegraph, 4 March 2008, http://www.telegraph.co.uk/money/main.jhtml?view=DETAILS&grid=A1YourView&xml=/money/2008/03/04/cccomms104.xml) Will today’s high commodity prices be transformed into tomorrow’s collapse as demand slumps? It appears that the deflationary crisis is gathering speed. Calls to slash Federal Reserve interest rates to 1% as a massive decline in demand across the whole US economy driven by the sub-prime housing crunch is eerily similar to what happened in Japan 20 years ago. Land/house prices have not recovered in Japan to this day. What started as a crisis in one particular sphere of the market has extended to all others. A general crisis of capitalism is in the offing. For example the entire US mortgage market has entered a negative-equity crisis: The Fed is becoming increasingly concerned about the “wealth effective” as plummeting house prices and losses on the stock market combine to crimp spending. Its “Flow of Funds” report this week showed that household assets had dropped 1pc to $57.72 trillion in the final quarter of 2007, the first fall in six years. Mortgage debt is now greater than home equity for first time since records began. (‘US Fed pins economic hopes on $200bn liquidity boost’, Telegraph, 9 March, 2008 http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/08/cnusfed108.xml This is spinning off into the larger US economy with devastating results. Workers are being hit hard as the US ruling class attempt to avoid ruin: Grim jobs data released by the Labour Department showed that employers had cut the workforce by 63,000 in February, the sharpest drop since the dotcom bust. (‘US Fed pins economic hopes on $200bn liquidity boost’, Telegraph, 9 March, 2008 http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/08/cnusfed108.xml Decoupling Theory Some economists have been pushing the idea that the economies of the emerging “third world” countries have become self-sustaining: the so-called “decoupling theory”. They asserted that they would be able to ride out the financial storm in the West. OECD reports of declines in India and China show this is not true: Japan’s machine orders dropped 2.8 per cent in November and a further 3.2 per cent in December. January housing starts fell to the lowest in 40 years, down 18 per cent on the year. Tokyo property was off 22 per cent. Can this still be blamed purely on a change in building rules? “Recession is a clear and present danger in Japan,” said Tetsufumi Yamakawa, chief Japan economist for Goldman Sachs. “The leading indicators are deteriorating very sharply. Inventory is piling up at a rapid pace. There are clear signs of deceleration in exports of steel and semi-conductors to China,” he said. Yes, China. It turns out that the intra-Asia trade that was supposed to immunise the region against a slump is a disguised supply-chain ending up in the US market. American shoppers still make 30 per cent of global demand, just as it did a decade ago. Nothing has really changed. (Telegraph, 13 February 2008, http://www.telegraph.co.uk/money/main.jhtml?view=DETAILS&grid=&xml=/money/2008/02/10/ccjapan110.xml A Generalised Crisis The UK banks are struggling to borrow money, despite having a strong well diversified economy: Bear Stearns is perhaps the most severely exposed American bank to the sub-prime mortgage crisis sweeping the world's biggest economy. Peter Spencer, economic adviser to the Ernst & Young Item Club said: “I'm afraid this is now tending towards the apocalyptic scale. This is really the second stage in the credit crisis. This will have a definite impact on British households. The point is that mortgage lenders here were until recently raising around a quarter of their funds from international markets. These are now frozen, as we can see from what happened to Bear Stearns. And if the international banks aren’t lending to anybody that money’s not coming back. I'm afraid this is now tending towards the apocalyptic scale.” (‘Bear Stearns crisis sparks UK recession fears’, Telegraph, 14 March 2008, http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/14/nbearsplash114.xml) This does not bode well for the safety of the New Zealand banking system. In a remarkably candid comment the Herald noted: Arguably, the prospect of further bank failures overseas and by extension here in New Zealand - where more than 90 per cent of the banking system is owned by foreigners - is more likely than it has been for years. New Zealand and Australia remain the only two OECD countries that do not have some form of insurance to protect depositors' cash should their bank go belly up. (Adam Bennett, ‘Are our banks safe?’, NZ Herald, 15 March 2008, http://www.nzherald.co.nz/section/3/story.cfm?c_id=3&objectid=10498295&pnum=0) Given all of the above you would have to say that no bank is safe in this environment, particularly not a New Zealand one, relying heavily on the goodwill of foreign lenders. What to Do Although capitalism achieved a massive reduction in real wages in the 1980s and '90s, that victory now poses a grave danger to the system. In the previous crash of 1987 residual levels of savings and mass home ownership meant that the working class had both the means to survive the crisis and could also be tapped for more money to prop the system up. This was done by the ruthless imposition of “user pays” schemes and the reduction of the social wage, such as the ending of free education, attacks on the right to public housing, the rationing of medical care, attacks on unemployed and the harassment and punitive case management of the injured by the Accident Compensation Corporation. Today most families survive on two, three or more jobs and credit cards. Earlier this year we saw the collapse of many finance companies. These organisations are in effect private banks with draconian terms and usurious rates of interest. Like the money that flowed to third world investments internationally, these companies were a local means of recycling the surplus cash piling up in the bank accounts of the rich. It should have been obvious to any economist that paying people less than they need to survive and then forcing them to borrow those stolen wages back at high interest had to be an unstable situation. The necessity of this “compensatory borrowing” of consumer credit had a useful spin-off for the system: it sustained mass consumption in the face of stagnant or falling wages. But there is also a political bonus – it reduces pressure for higher wages by allowing workers to buy goods they couldn’t otherwise afford. Having a large monthly credit card or finance company bill is a great conservatising force, making strikes and other forms of rebellion less attractive. The sub-prime housing crisis is tearing the world economy apart and will hit New Zealand very shortly. It is more than likely that many of thousands of homeowners could face eviction when massive interest rate rises and falling property values force them into negative equity. There must be a political response to this crisis from the left, calling for a moratorium on mass foreclosures. Ordinary people who worked hard and played by the rules imposed on them should not be made to pay for the criminal greed of the slick conmen and finance sharks, or their apologists in government.

Greater numbers of New Zealanders are no longer able to afford their own home

Excellent report on housing affordability in New Zealand from the NDU's Joe Hendren here.

Greater numbers of New Zealanders are no longer able to afford their own home

• Affordability is now the worst it has ever been: The February 2007 ‘Home Affordability' report from the Massey University Real Estate Analysis Unit stated "Affordability is now the most difficult it has been since the series began in February 1989"[1].
• House prices are outstripping wages: In the three years from 2004 to 2006 increases in house prices outstripped wage rises by 4 to 1. House prices increased by 38.5 per cent while wages went up by 8.7 per cent. House prices increased 9.7 per cent in the year ending December 2006. The Reserve Bank expects higher levels of house price inflation in 2007 as the average number of days taken to sell a house has fallen to "very low levels"[2]. A March 2007 study showed almost three-quarters of the average take home pay is needed to service the mortgage on an average New Zealand house[3]. In Auckland a mortgage now takes up 92.8 per cent of the local average take home pay (up from 71.1 per cent two years ago), whereas in Central Otago the costs of a mortgage are now more than the average salary (105 per cent, up from 91 per cent in December 2004)
• Rents are rising faster than wages: In 1993 rents were 26 per cent of the average wage. In 2006 rents had risen to 32 per cent of the average wage nationally and 37 per cent in Auckland[4]. Between 1993 and the first quarter of 2007 rents rose by 86 per cent while wages only rose by 50 per cent. Higher rents make it harder to raise a deposit for a house.
• Increased household debt levels: Household debt as a proportion of annual disposable income has risen from around 74 per cent in 1992 to 160 per cent by 2006.
• Fewer Mortgages: While the amount of total household borrowing may have increased considerably the actual number of households making mortgage payments has fallen. In 2006 there were 405,267 households making mortgage payments, down from 448,374 in 1996.
• Demographic changes: While traditionally housing policy has been geared to conventional nuclear families, these arrangements now represent a minority of households. This has had a significant impact on the ability of New Zealanders to afford their own home, as it is significantly more difficult to buy your own home on the basis of a single income, especially as wages and salaries are now worth less in real terms than a generation ago.
• The number of single person dwellings continues to increase, with the proportion of such households increasing from 20.7 per cent in 1996 to 23 per cent in 2006[5].
• Many single parent families (particularly those led by women) are stuck in the rental market due to the financial constraints of a single income.
• With average mortgage costs now taking up a high proportion of the average income, home ownership is impossible for the majority of people reliant on a single income.
• Home ownership rates are falling: Rates of Home Ownership have fallen from 73.8 per cent in 1991 to 66.9 per cent in 2006.

Why homes are becoming unaffordable

• Low Wages: Despite record corporate profits, low levels of unemployment and high demand for staff, wage rises for workers in New Zealand have continued to lag behind the rest of the OCED in real terms. Over the 10 years between 1993 and 2003 the average annual change in real compensation per employee was 0.7 per cent, compared to the OCED average of 1.1 per cent and the Australian average of 1.3 per cent[6].
• Student Loans: The obligation to make repayments to student loans has reduced disposable incomes. In some cases banks have cited student loans as a reason for turning down a mortgage application.
• Rising Interest Rates: The costs of servicing a mortgage at high interest rates is making home ownership less affordable for first home buyers. Those already with mortgages face significant rises in mortgage costs when their fixed rate mortgage comes up for renewal. Due to recent rises in the Official Cash Rate (OCR) some will face paying an additional $200 a fortnight, despite being on a fixed income in real terms.
• Speculative Investment in Property: Speculation on secondary properties bought for investment purposes is driving up house prices.