In New Zealand, a house is an investment first and a home second, and part of the reason property is so unaffordable
After a particularly unsuccessful day of house hunting in Montreal — no new listings, a rejected offer, my husband and I wondering what exactly to commit to for the next 25 years of our financial lives — we think about the housing market we left behind in New Zealand.
My husband, who is Québecois, and I spent two years in the land down under, navigating that country’s system of home ownership, before moving back to Canada and settling in Montreal in early 2022.
We particularly like to reminisce, with a kind of schadenfreude, about one property for sale in the distant suburbs of New Zealand’s capital city, Wellington. Its listing featured a promotional video with a realtor walking through the home’s completely dilapidated interior, ending with him standing outside the house. As he delivers his final sentences, you can see the home’s off-white paint peeling or completely missing in places, sheets of corrugated metal roofing barely clinging on, gaping exterior holes revealing a darkened hallway, and in place of a front door, a fly screen curtain haphazardly hanging.
The video ends with the realtor proudly proclaiming, “So there you have it, a lovely home.” The house, more than half an hour drive from the city’s centre, sold for roughly $620,000 at the end of 2020. It was re-listed a mere five months later for the New Zealand equivalent of $860,000. This time, at least, it had been remodelled and had a door.
New Zealand’s housing market is an outlier in the rest of the world in almost every sense. Home prices are extraordinarily high even outside the big cities, it has no capital gains tax and buyers must pay thousands of dollars just to make an offer, among other quirks. Montreal’s market is also distinct from the rest of Canada in many ways, with its iconic walkup duplexes and triplexes, which are considered to be absolute bargains compared to other major Canadian city standards. These real estate oddities offer a glimpse at how policy, economics and culture combine to shape the way people buy homes.
Investment first, home second
In New Zealand, the rhetoric around real estate is that a house is an investment first and a home second. This belief is most visible in the country’s real estate policy, which permeates through every aspect of housebuying, from how homes are advertised to the way experts talk about market downturns and upswings, and is partly the reason houses are so unaffordable.
“Back in the day, shelter is why (you’d buy a house) and investment is kind of the icing on the cake,” University of Auckland property senior lecturer Michael Rehm said. “But now the cake is the investment and the icing is well…”
With few private sector pensions and frayed social safety nets, New Zealanders rely on selling their home, as well as a second, and sometimes third property, to fund their retirement years. This was made possible for decades thanks to the steady, sometimes swift, rise in prices year on year.
Investment rhetoric is fuelled by a government policy of no capital gains tax for properties sold 10 years or more after purchase. This window-to-wait used to be a little as two years. Homeowners could also claim an income tax deduction from the interest they paid on their mortgages. This has slowly been phased out as of October 2021, but Rehm said that if a new government is elected in September, owners may once again get a tax cut on their property investments.
Opaque, anxiety-ridden process
Houses in New Zealand have slowly become less and less affordable. Property prices peaked in November of 2021 at just shy of $900,000 on average, some $200,000 more than Canada’s peak in early 2022. Prices have dropped since but like the rest of the world, the drop has been met with rising interest rates that now sit at 6.35 per cent when fixed for two years.
High prices and interest rates hit first-time buyers particularly hard because they have to come up with at least a 20 per cent deposit on a house. In addition, the largely foreign-owned banks are highly risk averse. It’s typical for a lender to go through people’s finances with a fine-toothed comb to determine if they can afford a mortgage. There have even been cases where people have been denied mortgages because they buy the New Zealand equivalent of a Tim Hortons coffee each day, or purchased Christmas presents at the local version of Walmart.
When my husband and I decided to relocate to New Zealand from Canada in late 2019, we were looking to put roots in the place where I had grown up. Renting at this stage of our lives didn’t appeal, particularly because New Zealand’s supply of rental properties is very limited and renters have few rights when it comes to price or security.
The prospects we faced were grim. As an educated and decently remunerated couple, with a combined annual income well into the hundred thousands, our options were limited to euphemistically dubbed “do-ups”: properties where you could see your breath inside in winter, some with black mould, others at risk of collapse when the next big earthquake hits. There were some homes at the top of our price range, with the square-footage of the average Toronto condo, but they were located 45 minutes by transit outside the city.
To make things worse, homebuying in New Zealand is an opaque and anxiety-inducing process. Listings rarely indicate the asking price and it’s typical for homes to sell for several hundred thousand dollars more than their municipal evaluation amount. A common sales tactic is the tender process, which is essentially a closed silent auction. What’s more, potential buyers have to pay upwards of $3,000 to cover legal fees to make an offer. Because of high demand, offers contingent on a builder’s inspection or financing are tossed aside. With every rejected offer, the now poorer would-be buyers get further from their goal of owning a home.
Montreal housing’s ‘perfect storm’
By 2022 we had decided, for a multitude of reasons including the unaffordability of housing, to move back to Canada, settling in the artistic metropolis of Montreal.
But the pandemic years had also flipped a switch on Montreal’s housing market. Principal economist for the Québec Professional Association of Real Estate Brokers (QPAREB), Stéphanie Lapierre, said the combination of low interest rates, lack of construction of new homes over the past 15 years, and people wanting more space and not needing to go to the office every day, made prices climb in all areas of greater Montreal. “It was the perfect storm to have an overheating on the market. The price exploded and we saw a lot of overbidding,” she said.
Now, in early 2023, prices remain relatively high if you ask a born-and-bred Quebecer, but are still a bargain by New Zealand or other major Canadian city standards, such as Vancouver or Toronto. Montreal’s iconic walkups are fetching upwards of $700,000, while large single-family homes in the areas outside the on-island neighbourhoods sell for roughly three-quarters of that.
When comparing that cost to income, the average Montreal island mortgage takes away half of a person’s paycheque each month, compared to around 44 per cent in 2019, according to Lapierre. Areas off the island are more affordable, with mortgages constituting 45 per cent of incomes, up from 30 per cent. “The (further down the road we go) the gap between income and cost increases and it’s really a problem,” Lapierre said.
Sales have now stagnated, sitting at an all time low for the month of February. But that’s not from a lack of options. The number of active listings are double what they usually are in some areas. But there’s a standoff at play. Sellers are still trying to cash in on the pandemic price jump and buyers are expecting the cheaper Montreal of old to eventually return. Plus, higher interest rates are putting would-be buyers off the market.
Lapierre said prices are slowly stabilizing and the big differences between historic prices and those today are a sign of how out of control things became during the pandemic. “The housing market is really adjusting to the economic context,” she said. As interest rates slowly fall and buyers are less rushed to buy and overbid, the market is calming down.
But for all the talk of a depressed or cooling housing market, we’ve been part of plenty of frenzied bidding wars. We’ve rushed to make our best offer, tens of thousands above asking, before a deadline of only a few days after the listing appeared.
One strategy we’ve seen used to entice buyers to bite at bigger price tags is appealing to aesthetics, with some nice tiling here or a neutral wall colour there. But many of those aesthetic improvements are actually pandemic patch-up jobs, done hastily and sometimes unprofessionally, while leaving the more difficult to fix problems, like a cracking foundation, untouched.
One home we visited, which had been purchased in the first months of the pandemic, recently had its kitchen renovated. In photos it looked modern and spacious, but in person you could see the vinyl adhesive the new homeowners had used to cover the cabinets was bubbling and peeling. They’d kept the layout of the kitchen the same, but added an extra island in front of some cabinetry, rendering an entire section of the cupboard unusable. That same house had a large crack in the foundation that meant the bricks above were buckling and sagging. The plumbing and electrical were tired, while the home’s oil-fired furnace was severely dated. The homeowners listed the property for $125,000 more than they’d paid a year-and-a-half earlier. We surmised they had moved to sell after realizing they’d made a poor choice in snapping something up quickly as COVID-19 struck. Our realtor came out with her head shaking. “Whatever you do, don’t buy that house.”
Many condos up for sale on the island of Montreal have clearly been rented for more than a decade, and landlords have done the bare minimum to fix issues. Some condo owners appear to be selling to avoid a looming bill from a provincial law that will soon require condos to have a maintenance fund and plan in place for ongoing repairs. In some of the places we’ve seen, those overdue bills will likely approach the six figures.
Montreal offers options
And yet, there is choice for house hunters. Cheaper condos or fixer-uppers are for sale on the island, that while dated in appearance, are solid. It’s also much easier for Montreal buyers to make informed choices. When we add a house to our favourites list, we’re almost instantly sent a hefty package of information about the house’s history, which may include records of any water leaks, pest infestations, renovation work receipts, tests of the quality of the foundation and estimates of how much electricity the property uses in a year. Sometimes, owners who have lived in the home for 50-plus years include handwritten receipts from tradespeople, adorned with the odd smiley face.
My husband and I share some of the quirkier house finds at dinner parties (we recently saw a listing for a home that had an Elvis-themed room, complete with Elvis pillows, and a tropical backdrop in the shower) but the conversation is very different to the ones we had with friends in New Zealand. Conversations there were often tense, with young professionals wondering how they could ask “the bank of Mum and Dad” for money towards a deposit or ask them to risk putting their house up as a guarantor for the new mortgage.
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The culture of homebuying in New Zealand is one where the dream continues to be owning a little slice of paradise, but where the reality is out of reach for an ever-growing subsection of the population. When I asked property lecturer Rehm, who himself has four kids and teaches 18- to 20-year-old students, what he sees as the future of homeownership, he laughed resignedly and let out a sigh. “I tell them ‘sorry guys… your chances are looking slim now.’”
There’s hope in Montreal.
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