Wednesday, February 13, 2008

those two housing (un)affordability policies

Catcus Kate and the New Zealand Herald editorial writer comment on how Labour makes policy. A housing policy. Not sure how many houses, where they will be built or how much they will cost. In other words they could be unaffordable
Housing New Zealand chairman Pat Snedden today conceded a couple would need to earn more than the average $68,000 household income to meet mortgage repayments on an affordable home at the Government's flagship Hobsonville housing development.

Mr Snedden [said] he he expected the 500 affordable homes planned for the 3000 home project, which has been billed as a model for such developments, to have a price-tag in the mid $300,000 range.

Couples would need to be earning about $70,000 to service a mortgage on the homes.

Mortgage calculators show repayments on a 30-year 90 percent loan at a current two-year fixed interest rate of 9.35 percent would be $603 a week before rates and insurance. At a rate of 8 percent, repayments would be [$27.716 a year].
One policy - policy A - is where the taxpayer pays for a third of the value of a house as a deposit and gets it back when the house is is sold. The other policy- policy B - is to increase housing stock to make housing more affordable - ie to reduce the price. According to Catcus Kate, policy B reduces the benefit of the policy A in the long run as it will reduce the price the taxpayer gets when the house is sold - a capital loss. Yet the Herald says the policies will increase demand for the lower price housing (more than increased supply) - which will push house prices up - meaning the the taxpayer gets a capital gain on resale.

Who's right? I`m no economist. If there is huge demand on low priced houses, the Herald maintains that successful policy B will increase future proceeds of policy A, meaning taxpayers eventually pay more for each house in the short run as the price increases. If so, how can policy B be deemed successful without greater supply?

Catcus says successful Policy B will REDUCE the future proceeds from Policy A as house prices reduce Catcus puts it this way
Policy A: The taxpayer is now becoming a party to (as defined in the US) subprime lending and fronts with 30% of the purchase price of a home to low income and potential squatters. The pay-back for the taxpayer is that when the home is sold, they get their 30% back and keep 30% of the proceeds. This is the only cash flow for the “investment”. No interest needed to be paid for this 30% share. This long-awaited policy is to be rolled out in July 2008.

Policy B: A raft of “housing affordability” measures are introduced such as increasing housing stocks (although reports `state that housing stocks need to increase a massive 80% to cope with population growth) and freeing up land. All designed to make houses more affordable ie. to REDUCE the price of homes. This will have a longer time lag obviously while property is built and land is freed up.

So the peace of mind collateral (security) for Policy A for the taxpayer is the capital return and 30% profit on future sale. But Policy B is purposively designed to actually reduce the return as profit on Policy A.

Successful Policy B will REDUCE the future proceeds from Policy A.

Successful Policy B will REDUCE the value of the equity private taxpayer has themselves and make taxpayers net wealth decline.

And announced on the SAME DAY
Sounds like policy B will fail, leading to failure of Policy A. And that's even assuming the houses are affordable.

Nobody wins.


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