Wednesday, February 27, 2008

Confused Commentary?

Adolf greatly admires Fran O'Sullivan and enjoys her commentary, even when he disagrees with it. Today is such an occasion as she writes on the vexing problem of so called housing affordability.

The broad tenor of her piece is that National should get on board with the thrust of Labour's policy in this regard.

It seems to me that she, along with most other commentators, has confused housing 'affordability' with housing 'cost.' Among other things she says:-

"Increasing take-home pay and bringing down interest rates is a much harder feat to conjure up in the short term for either side. Anyone who believes an incoming National Government could perform that feat overnight must have been seriously astray in the mushroom patch."

The real key to housing affordability is that part of the equation which Fran and others seem to ignore. It is 'after tax income available for debt servicing.'

An overnight tax cut will solve the problem without recourse to hallucinogens.

Cutting tax rates across the board by 10% puts an extra $10,000 or $833 per month into a $100k salary earner's take home pay. That will service an extra $100k of debt which solves the affordability problem instantly.

Then the far more difficult problem of excessive housing cost can be dealt with over time.



I agree that after-tax income is an important part of housing affordability.
However, rising take-home pay will just help fuel further house price rises.
New Zealand needs to look at the supply side.
That means lowering the cost of housing production.
That means the land must be made cheaper by releasing more land for building.
Bureaucratic regulations must also be eased to redeuce such costs there.
So, for example, if a section costs $100,000 instead of $200,000 ; thats $100000 of the cost of a house.
If the councils can reduce their compliance costs by a further $50,000, say, there's another $50,000 saving.
The Herald on Sunday reported some tale about it costing someone $18,000 or so in consent fees just to move a toilet.
Builders were quoted on the costs of such regulations, plus the price opf land, all contributing to the final house price.
yes, higher take home pay will help, but not as much as increasign the housing supply.

Adolf Fiinkensein said...

FFM, your argument suffers under close scrutiny. Do you and others realise that the housing supply in NZ increased by say 1,370 units last year as 41,000 people fled to Australia? Nearly 1400 homes is a large number to dump onto the market in one year. By what rate did this extra supply reduce median prices? Zilch. Just how many 'extra' new homes do you think are required to depress the price from $450k to $350k?

You are dreaming, mate.

ManukauMum said...

Your calculation of tax cuts looks great, but how many people trying to buy a house earn $100k? Average salary is $42,000 and many peolpe at that level have kids and tax credits. A tax cut for them won't add up to much.
I'm with Fairfacts on this one: the supply side needs a fix.

Adolf Fiinkensein said...

MM, I expect the majority of couples looking to buy their first home would have joint incomes close to or exceeding $100k. Your average couple would be on $84k.

Clunking Fist said...

Yep, increases in income (after tax cash in hand) will increase demand, which increases prices.

So problem not fixed, although those of us already blessed with a mortgage will be better off.

So I'm all for the tax cuts! At the mo, take home pay on $100k is $68,434 pa. And extra $10 pa is an after tax pay rise of 14.6%. Whoopie!

Clunking Fist said...

"Street points to the fact that household incomes are up in real terms by 25 per cent in the past eight years over and above cost of living increases."

I suspect that is not true, in terms of:
- after tax disposable income
- CPI is not a measure of inflation that I believe replicates the average kiwis' experience of the movement in their living expenses. Amongst my major outgoings, petrol, food, childcare, insurance (I think) and rates all went up by much more than 3.x% in the last year, and the year before that. Sure, if I was in the market for giant plasma tvs, Hard-drive DVD recorders, etc, i'd be laughing all the way to China.