New Zealand’s challenge of housing affordability

New Zealand’s homes have become increasingly unaffordable, driving inequality within and between generations.

January 31, 2023

New Zealand faces well-documented housing challenges. Many homes suffer from damp, mould and poor insulation. Adding to this, they have also become increasingly unaffordable.

New Zealand’s story is one of growth. From 2 million people in 1955, the population climbed to 3.9 million in 2000 and 5 million by 2020. Of the 33% increase since the millennium, the past two decades have seen steady growth, with almost half (16%) occurring between 2012-2022.

However, the supply of new homes has failed to meet increased need and demand. Some 568,000 homes were approved from 2002-2022, of which 474,000 were built. Average annual delivery sat at 20,455 per year from 2002-2012 and 25,491 over the period 2012-2022.

Figure 1: Proportion of private dwelling built by decade

Source: Stats NZ, Ministry of Housing and Urban Development

This has coincided with a period of historically low interest rates, fueling higher borrowing and increased capital values. In the decade prior to 2022, the Reserve Bank of New Zealand lowered its Official Cash Rate (OCR) making larger mortgages more affordable. The average mortgage rose 68% within five years, from $205,666 in 2016 to $345,095 in 2021.

The situation has created ‘winners’ and ‘losers’. This broadly aligns with those who own property and those who do not. Homeowners have seen a considerable rise in their fixed-asset wealth, improving their financial security and the resources available to be released if needed; for example, to support retirement or provide the deposit for an additional home. However, this same price growth has made it harder for those renters and first-time buyers to access the market.

The situation has increased inequality both within and between generations. The number of renters spending over 40% of their household income on housing increased from 20% in 1988 to over 40% in 2021.

There are also spatial implications. Those living in the North Island face a far greater affordability challenge, in broad terms, than those in the South Island. The affordability challenge is also particularly acute in holiday destinations and tourist hot spots where wages are often lower, and locals face competition from second-home and holiday-rental owners. 

Figure 2: 10 least affordable districts

Source: JLL

Solutions nonetheless exist. In 1962, President John F Kennedy announced that the United States would put a man on the moon within a decade. This quickly extended the role of government from fixing market failures to cocreating new products and technologies, forcing new ways of thinking, driving greater entrepreneurship, and focusing on the possibilities available through private-sector partnerships.

The same ‘moonshot’ mindset has the potential to support New Zealand’s residential sector. We can need to start by asking different, mission-oriented questions. If it’s challenging for the same-old organisations to deliver the same-old products, what new models and products exist? If demand is too hard to satisfy in certain locations, how might the economy be rebalanced to spread this more evenly?

The focus must be on supporting diversification. We can promote dense, liveable cities as an antidote to low-density suburbs. We can also seek to improve access to finance for construction firms, create new shared-ownership products, promote purpose-built rental homes and re-balance the economy. The key is to think innovatively and act proactively. The time to start is now.