Generation Rentby Joanna Wane
First published in the April 2015 issue of North & South. Photo of Shamubeel and Selena Eaqub by Adrian Malloch.
Shaumbeel Eaqub has few words of comfort for Kiwis who’ve had the door to home ownership slammed in their face.
There’s just no good way to spin the numbers. In Auckland, the average house price has spiralled to 10 times the average income of a couple in their 30s. That means most young New Zealanders – including those now in their teens – will never be able to afford a place of their own, says Eaqub, principal economist for the NZ Institute of Economic Research.
“Auckland is where most young people live, and it’s simply not tenable for the bulk of that age group to save up sufficiently to get into a house.”
The conversation around property has started to change. Instead of all the talk about creaming a profit through capital gains, people are asking the question: will my kids be shut out of the market forever? “That’s the crisis point,” he says. “This is not an issue of the future, or an issue of the minority. It’s an issue now. We’re looking at multiple generations who’ll be locked out unless something is done.”
Eaqub, whose parents emigrated from Bangladesh, warns New Zealand is reverting to the British class system, where a minority of landed gentry controls most of the wealth. “Even when we came here [in the mid-90s], that wasn’t the case. If people applied themselves, everyone had a chance. Now there’s very much a divide, where society is incredibly unequal and increasingly drawn along the lines of who owns houses and who doesn’t. To me, that’s not an acceptable situation for an egalitarian society like ours. It goes against the grain of who we are, but I can see it slipping away.”
In fact, home ownership has been in steady decline since peaking at close to 76 per cent of all households in the 1991 census. Half of all New Zealanders now live in rental accommodation. And that includes Eaqub, 34, and his wife, Selena, who’s also an economist.
The couple met at a Christmas party – “dangerous, dangerous places that they are” – at investment banking company Goldman Sachs. He was on the research team; she was working in asset management. They married in 2009 and are expecting their first baby in June.
Their decision not to buy a house, despite starting a family, frames a new book they’ve co-written, Generation Rent, which proposes a series of reforms, including the introduction of a standard five-year lease to give security to long-term tenants, particularly young families who’ve seen home ownership slip out of reach.
It’s not lack of capital that’s stopped the Eaqubs dabbling in real estate. Disciplined savers on a healthy income, they reckon property as a financial investment just doesn’t stack up. In central Auckland, the gross rental yield is 2.8 per cent – falling to 1.7 per cent once outgoings (rates, insurance, maintenance and vacancy) are taken into account. The average dividend yield on the New Zealand stock market over the past year was 3.75 per cent. And while house prices went up 10.4 per cent in 2014, the stock market did even better, rising 13 per cent.
“Do the numbers on weekly cashflow and it costs twice as much to own a house rather than rent at current prices,” says Eaqub, who’s been dubbed “Mr Rental” by the media. “And although you don’t have the opportunity for capital gains, it’s prohibitively expensive to pay for a house in suburbs where we can afford to rent very comfortably.”
It’s important to differentiate between a house that provides shelter, a property bought as an investment, and a home you can make your own, says Eaqub. “By the time we get to 40, we’ll be starting to think about high school for the child that’s coming now and might have to make a decision about where we want to live and if we want to buy.”
It doesn’t hurt that their current place in Epsom belongs to his aunt, who lives in Australia and isn’t likely to turf them out at short notice or raise the rent. Security of tenure is one of the biggest issues facing long-term renters. That degree of uncertainty sits more easily with Shamubeel than Selena, whose parents still live in the house they bought before she was born. A third-generation Kiwi-Chinese, she grew up in Te Atatu South; her father set up a medical practice in Henderson after studying population statistics and realising that area of West Auckland was short of GPs.
Eaqub was 10 when his family left Bangladesh for Samoa, where his father spent three years at the university as a soil scientist before they settled in Christchurch. At 16, he followed his big sister into economics at Lincoln because she told him it was fun. “It is fun,” he insists, with such boyish enthusiasm you could almost believe him. “I love it!”
A natural communicator who’s not allied to the banks or the real estate industry, he sits in the sweet spot where economics meets behavioural psychology. A favourite book is Daniel Kahneman’s bestseller Thinking Fast Thinking Slow. “What a phenomenal guy!” he says. “What a brain!
“The whole beauty of economics is it tries to explain how society works, because you get behaviour that doesn’t seem to make sense or isn’t in our best interests, because often people think with a very short-term perspective.”
North & South: Is it time for Kiwis to give up the home-ownership dream and accept lifelong renting will become the new normal?
Shamubeel Eaqub: That connection to our land – to our little bit of New Zealand – is still very strong in our fabric, in our DNA. But it’s a complex problem that requires leadership and vision, which are in very short supply in policy making. Over the next 10, 20 or 30 years, can we make sure future generations don’t face the same challenges we’re suffering from today? And for the current generation who may never own a home, particularly in Auckland, how do you fake some of the benefits of ownership to give people a stake in their house? The easiest way is to improve conditions for renters.
N&S: Long-term renters are still a real underclass here.
SE: We’ve made renting such an awful thing, relative to owning. If you don’t own a home, you haven’t made it. Your place in the community, your cultural acceptance, your financial stability – everything is at risk. There’s a perception home owners are better citizens, and I find that really hard to believe. In places like Switzerland or Germany, where the ownership patterns are flipped, it’s hard to argue they’re bad people or less law-abiding.
For Generation Rent, the big challenge is where they get stability in their lives to be part of the community, whether they have children or not. Otherwise you’re saying to these people they’re second-class citizens and not part of what it means to be a New Zealander.
N&S: You’ve described us as having one of the least renter-friendly policies in the OECD.
SE: For people in a transient, flatting situation, it’s perfectly fine. But we’ve never had professionalism in the [residential] rental market. Most investors in New Zealand are moms and pops who hold their houses for a long time, waiting for the value to go up. Tenants are just an in-between thing. The average tenure is 11 months and that’s not long enough for people to have security. What if we changed the standard lease to five years, with an agreement on how much rents could rise over that period? You could still negotiate a shorter term if you wanted to.
The other thing that makes you feel invested in a place is being able to make it your own – put up pictures, paint the walls, have pets. That’s a lot of wear and tear, so when you leave, everything would have to be put back the way you found it. Tenants would pay a big bond – but compare that to the deposit you need to buy a house.
N&S: What if circumstances change and one party wants to get out early?
SE: You can still break the contract. In some countries, landlords who renege have to pay for search and moving costs, to compensate. And if the tenants decide to move, they’re responsible for covering any losses the landlord incurs, including any shortfall in rent before a new tenant moves in. Commercial [rental] properties have a lot of those features already.
N&S: Do you like the idea of a Warrant of Fitness for rentals?
SE: Generally New Zealand has crap houses. Until very recently, we haven’t had strong standards in place in terms of insulation and that shows. In Christchurch, the house I grew up in had no insulation. Open up the walls and it’s just empty – two bits of wood with air in between. The costs in terms of health is huge, particularly in South Auckland, where overcrowding is coupled with poverty and you get Third World diseases, like rheumatic fever, which is just unacceptable. We need investments made to improve the quality of housing over time. But you have to understand that will impose a cost. If anything, it would make housing affordability worse.
N&S: Almost 70 per cent of New Zealand’s net wealth is tied up in housing – an imbalance you see as a threat to our economic stability. What’s the answer long-term?
SE: Reform in the banking sector – imagine how quick that’s going to be! Banks are reckless with their money, pouring more and more credit into housing. It’s a disaster and needs to be changed. So does the tax advantage that favours investment in real estate. Then there are policies around land and house supply.
There’s an ingrained negativity towards expansion, whether it’s green fields or densification; an excessive focus on things like character and heritage and very little weight given to the needs of population growth and where young people might want to live. We have to find some middle ground. And we know that if we allow a little bit of height, we can accommodate most of the increase predicted for Auckland within its existing blueprint.
N&S: Do you think the housing bubble is ready to burst?
SE: You can’t have prices going in one direction forever; you’ll run out of fools to buy houses. At some point, property values need to be in better alignment with rents and incomes, but I don’t see how that’s going to happen.
N&S: So what will it mean when Mr Rental finally makes his move...?
SE: Watch for it – when I buy a house, it will probably be at the absolute peak of the housing market. Having held out this long, it’s inevitable.
Generation Rent, by Shamubeel and Selena Eaqub will be released as an e-book at the end of April, followed by a limited print run of 1000 copies. bwb.co.nz
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