I’ve long been sceptical that any government is likely to fix the housing market problems any decade soon. Some of that was specific New Zealand points: National seemed to be doing almost nothing, Labour had done almost nothing when it was in government, and Labour seemed likely to rely on the anti-development Greens if and when it formed another government. But most of the scepticism was – and is – rather more overarching: no one has been able to show me a case study anywhere in the world where intense land use restrictions had once badly messed up a housing market, and where those controls had then been successfully unwound and housing made affordable again. In principle, there was no reason why New Zealand should not have been first. But the ages of pathbreaking New Zealand reforms – whether the 1890s or the 1980s – seem well behind us at present.
It wasn’t a weekend that led my to revise my opinion. In yesterday’s Sunday Star-Times Rob Stock had a piece reporting widespread scepticism about the claims that both Labour and National are making. He began with both leaders’ reluctance to even call for lower house prices. No one much seemed persuaded by the idea that nominal house prices might hold flat and incomes rise steadily to reduce price to income ratios. On paper it could be a plausible story, but even if so it is a solution for the next generation not the current one. And the article also reported a great deal of scepticism about the apparent Labour aspiration to introduce a lot more lower-priced homes without having much impact on the prices of existing dwellings. The people Stock quoted seemed a bit more optimistic that – despite the disavowals – Labour’s plans might actually lower house prices. Fundamentally improve the land supply situation and perhaps that might be realistic. Without that, government-sponsored builds seem likely to substantially displace private sector builds.
But then there were the policy cues. Yesterday morning, National announced that, if re-elected, it would increase the subsidies offered to first-home buyers. First-home buyer grants, in a supply-constrained market, are a policy so daft that I’m not aware of any serious analyst, from any side of the political/economic debate, who thinks they are a good idea (and Treasury and the Reserve Bank have opposed them). New Zealand was mercifully free of such subsidies for most of its history – and policy people used to look across the Tasman, slightly disdainfully, at the grants there. First home buyer grants are, largely, an expensive way of getting house prices a bit higher than they otherwise would be. And here that outcome is even more likely given the announced increases in accommodation supplement payments next year. Renters will be able to pay a bit more (so investors can afford to pay a bit more), and potential first home buyers would now also be able to pay a bit more – perhaps especially in provincial areas where the grant goes a bit further. Since the policy is well-foreshadowed, most of the effects will have been compounded into prices before the first young couple can get their increased grant. And, as so often, the winners will be the people selling out of the market – those who already have. It is the sort of policy that gets adopted when governments have given up on believing that they might actually fix the underlying problems – and/or given up believing that they can convince voters that they might. Subsidies to home buyers – rather than fixing the underlying problem – is like some throwback to the early 1980s (actually the last time we had such direct first-home buyer subsidies).
The messages from the other side of politics weren’t much more encouraging. The leader of the Opposition yesterday announced her plans for the first 100 days of a Labour government. Housing appears on the list, but the three most specific items are
- Pass the Healthy Homes Guarantee Bill, requiring all rentals to be warm and dry
- Ban overseas speculators from buying existing houses
- Issue an instruction to Housing New Zealand to stop the state house sell-off
Whatever you make of the Healthy Homes Guarantee Bill, it won’t improve the affordability of housing (if anything, rather than contrary for renters). And stopping the sell-off of state houses might (or might not) make some sense, but again it won’t alter, by one iota, the affordability of housing in New Zealand. And, in fairness, both are probably being done for other reasons. And so the one specific thing they’ll pledge to pass by Christmas actually designed to improve housing affordability is the proposed ban on non-resident foreigners buying existing housing. Consistent with this, on Labour’s website, the very first thing one comes to under housing policy is
Crack down on speculators
Ban foreign speculators from buying existing homes
Reasonable people can differ on the specifics of this (and other “anti-speculation” measures – the extension of the bright-line test for investment properties, and ring-fencing). To me, it has the much the same feel as that around first-home buyer grants – it is the sort of policy one adopts when one has given up on dealing with the underlying problems. Blaming “speculators”, for the symptoms of a rigged and dysfunctional market, is a distraction strategy from way back for politicians here and abroad.
Banning non-resident foreign purchases of existing houses isn’t the worst policy imaginable – and any adverse impact on New Zealanders is likely to be small to non-existent – but as a flagship policy for a possible new government it is hardly one that suggests a serious focus on fixing the underlying long-term problems. Sure, it is probably quite easy legislation to draft (though no doubt MFAT officials will be turning their minds to the issue of how to reconcile the proposed ban with, eg, the New Zealand-Korea “free trade” agreement) and comprehensively fixing the planning system isn’t. But after years in opposition, and with policies around land supply that look promising on paper, if they were really serious about far-reaching reform in this area, one might have hoped they’d have found something specific to have done in the first 100 days – a stake in the ground, an earnest of a serious commitment to free-up land supply later in a first term. But when the previous leader never mentioned the issue, the current leader never does, and when there is nothing in the 100 day action plan, I’ll stick with my scepticism for the time being.
Bloodless economists probably aren’t supposed to do disgust, but that pretty much summed up my reaction to the weekend story that, less than a year out of office, John Key had sold his Parnell property, at what is apparently a very substantial profit, to enable him and his wife to downsize. No doubt it is mostly about “time of life” thing – kids off their hands etc – and I’m not suggesting that the National Party’s failure to do anything much about fixing the housing market problems for nine years was mostly about personal enrichment. But this was a leader whose approach to the increasingly severe housing disaster was to glibly call it a “quality problem” or some sort of “sign of success”. As I put it 18 months ago
In a speech to an Auckland business audience yesterday – there is a report here, and also video footage – the Prime Minister repeated his breezy claims that Auckland’s “challenges” around housing and transport are “a quality problem”, and a “sign of success”, and that both the city and the country are doing “incredibly well”.
Perhaps that is how it appears when you are already wealthy, live in a large house in a prime inner suburb, and have a taxpayer-provided chauffeur at your constant disposal. Neither housing nor traffic problems must impinge terribly much.
And so, having moved on from public life, Key now extracts what is reported to be several million dollars of profits which are really just monopoly rents. Keep the land supply market dysfunctional, boost the population considerably, allow house prices to be driven up to an extent that an ever-larger proportion of the young and the poor can’t afford to buy, and then simply take your own profits. It is, in effect, money taken at the expense of the poor of Auckland – not because any of them could afford Parnell, but because most of the increase in Parnell land prices is a reflection of the same common factor that has driven prices high across Auckland. It is easy to be indifferent to a problem when you yourself benefit – even just passively – from that continuing indifference. The record, the policies, National is campaigning on today, including around housing and land, are more or less exactly the same as those of the first eight years of a National government, under John Key – who has now cashed-out millions of dollars personally, made from his government’s refusal to fix the housing market.
Putting disgust aside and returning to the numbers, one often hears the current Prime Minister talking of 10000 houses a year now being built in Auckland, as if somehow this is the answer to the past policy failure. It is often complemented by references to bureaucrats’ claims that tens of thousands of new houses are in the pipeline – I think I’ve even heard references to some multiples of Hamilton being built in the next few years. (I’m not sure why we should be impressed by that figure, when New Zealand’s population is currently growing by as much as Hamilton every two years).
Of course, as Core Logic has pointed out, the actual increase in the housing stock is much less than the number of new dwellings being consented (many new builds require the demolition of existing houses), but even just focusing on building permits, is there any sign that the number of permits being granted in Auckland is getting ahead of the population growth?
The chart below uses official data. It shows the number of building permits being granted in Auckland each (June) year relative to the (SNZ) estimated increased in the population over that same year. Comparisons that look just at consents per capita are meaningless – it is increases in the population that (are the biggest factor that) increase the need for accommodation. The data are only annual, but for the year to June, so the actual building consents numbers are almost right up to date. The population estimates for individual areas for June 2017 won’t be out until later next month. But Auckland’s population is estimated by SNZ to have increased by 2.82 per cent in the year to June 2015 and by 2.83 per cent in the year to June 2016, and there has been no material change in net migration inflows over the most recent year. So I’ve assumed a population increase in Auckland of another 2.82 per cent in the year to June 2017. It is a rough estimate, but it would be surprising if the SNZ estimate next month was materially different.
So, yes, in annual terms, the number of building permits for new dwellings per person increase in the population has increased, but not by much. But in the last two years, the rate of consenting has still been lower than in any year in the first decade of the data series. It is unspectacular at best. Sure, there is a lot of building going on right now, but then there are huge (government-abetted) increases in the population which don’t yet show any sign of abating.
And if there is a lot of house-building activity going on at present, there are straws in the wind suggesting there will be less in future. At a national level we’ve already seen some of that already in the building work put in place data released last week. But here is a chart of Auckland new dwelling permits. The data are noisy from month to month, so here I’ve taken the annual growth rate in the three-monthly total (eg May to July 2017 over May to July 2016) and shown the data for (a) the total number of new dwellings consented, and (b) for the total floor area of those consented new dwellings.
Both annual growth rates are now (a) well below where they were, and (b) actually are negative. In other words, in annual terms the volume of new housing being consented in Auckland is dropping. And there is no sign that the rate of population increase is.
Views will differ on whether these numbers reflect capacity constraints or the limits of effective demand at the prevailing (extremely high) prices. My own bias tends towards the latter story – and Rodney Dickens at SRA has done some analysis taking the same view. But whichever story you think is more convincing, the numbers don’t suggest any near-term lift in the overall supply of houses relative to the increase in the population. Taken together with the lack of much land-use regulation reform, it all provides little reason to think that housing affordability in our largest city is likely to improve much, or for long, on anything like current policies. Meanwhile, the system will remain skewed to those who have, and against those who have not, and we can only expect yet more ad hoc measures – whether from the elected government or outfits like the Reserve Bank – to paper over the symptoms of housing market failure.