“Market failure” or failure to let the market work

Brian Fallow has a piece in the Herald today, prompted by the Productivity Commission report,  that champions more active government involvement in the housing market, with barely a hint that anything governments do ever goes wrong.  The words “masterplanned”, when uttered of the activities of government entities, other than tongue in cheek, should send something of a shiver of alarm through the citizenry, rather than a frisson of excitement.  The track record isn’t good.

But what struck me was the claim that the Productivity Commission’s report “is unequivocal about the fact that we are dealing with market failure here”.    Where, I wondered, was the evidence of the market being allowed to work?   One might more accurately sum up the Auckland property market as the most probable outcome of two sets of government policies.  Restrict the supply of land, and at the same time actively take steps to maintain rapid population growth, and what would one expect but high land prices?  One might more accurately call it “policy success”  (predictable outcome of deliberately chosen measures, if anyone had actually done the analysis) than “market failure”.  But surely no politician was ever dumb, or venal, enough to have wished for the sorts of outcomes we’ve seen in Auckland in particular in recent decades?

Which is not to disagree with Fallow’s concluding observation “the status quo is perilously unsatisfactory”.  Well, yes, but instead of proposing providing new compulsory acquisition powers –  not just to elected ministers, as at present, but to unelected, barely accountable, appointees – how about giving the market a chance?  Free up land supply (zone it all residential, as a default) and urban land will quite quickly become affordable again, and arguments about “hold-outs” surely become moot (if any land can be built on).  Oh, and our ancient freedoms are respected as well.

It is a sobering reflection on the growth of the regulatory state that yet more encroachments on peoples’ liberties, with even fewer protections, are proposed in the week in which we mark the 800th anniversary of Magna Carta.

12 thoughts on ““Market failure” or failure to let the market work

  1. I would have thought offering Auckland Council a carrot (e.g. letting them set their own congestion charge) in return for removing all height and density limits would work wonders.

    Are you going to comment on the GDP figures?

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    • I hadn’t been going to. I’m always wary of putting too much weight on one number, especially when it seems to support my story. I guess, at the margin, it is probably further reason to think the OCR will be going back down to at least 2.5%

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  2. Hi Michael, any thoughts on the Finance Minister’s comments about the RBNZ today? —
    “He’s been out of the zone for years now, below the midpoint for quite a long time,” English said in an interview late Thursday, referring to Wheeler’s 2 percent inflation goal. “He’s meant to be following the Policy Targets Agreement, that’s the bit I look at, and one day somebody will start asking the minister of finance questions about whether he’s actually following the agreement or not.”

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  3. It’s not just land supply, but the ability to build on existing residential land that’s severely constrained.

    What was opposed as part of the unitary plan (3 story monstrosities in places such as St Heliers) was just daft.

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  4. What?

    ” Free up land supply (zone it all residential, as a default).”

    Steady on Michael, we don’t want to actually solve the problem.

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  5. Interesting thoughts, Michael.

    Funnily enough, a few weeks ago I remarked to my long suffering wife that compulsory acquisition has always been a prerogative of government, both local and central. And I wondered why it had never been mentioned in serious discussions on the problem of land banking. So I’m pleased ProdComm has raised the option.

    I have to say your proposal of open slather horrifies me as it simply means more sprawl, more playing catch up on transport, and increasing costs of getting to work for the great unwashed, like me. But I totally support densification, as you do, and surely this option should be fully exploited before considering extending urban limits. And I support compulsory overriding of nimbyism, too. For example, we have a large section, 20 mins from the Auckland CBD, yet we are prohibited from building a minor dwelling that would largely secure our retirement income!

    Compulsory acquisition is a good tool for thwarting rentiers – Keynes didn’t like rentiers either, so I’m in good company there!

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    • Luc

      We obviously have some different perspectives, but the only thing I’d add to clarify my point is that if all land were zoned residential it would not necessarily lead to much more sprawl, but what it would do is markedly lower the price of land, and there would be no gains to anyone from, eg, trying to “land bank”,
      But yes, restrictions on infill do seem crazy.

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