I’ve been wary for some time of Labour’s approach to the disgrace that is the New Zealand housing and urban land market – a mess created, and/or presided over, by successive National and Labour-led governments.
Eric Crampton and Oliver Hartwich at the New Zealand Initiative (bastion of quasi-libertarian public policy analysis) had been consistently pretty upbeat about Labour’s proposals, and particularly about the stated desire of (then housing spokesman, now Minister of Housing, Phil Twyford) to free up the urban land market and fix problems around infrastructure financing. There was the famous joint op-ed in the Herald a couple of years ago. I have never been sure how much the NZI people really believed Labour was committed to letting the market work, how much they simply wanted to reinforce that strand of Labour’s thinking with support from a business-funded body, and how much it was just about building relationships with a party that would, one day, no doubt be back in government. Perhaps there was an element of all three?
I’ve liked the talk, but have been a bit sceptical that it will come to much. In part, I’m sceptical because no other country (or even large area) I’m aware of that once got into the morass of planning and land use laws has successfully cut through the mess and re-established a well-functioning housing and urban land market. In such a hypothetical country, we wouldn’t need multiple ministers for different dimensions of housing policy. I’m also sceptical because there is a great deal local government could do to free up urban land markets, but even though our big cities all have Labour-affiliated mayors, there has been no sign of such liberalisation. The Deputy Mayor of Wellington for example leads the Wellington City Council ‘housing taskforce”. Paul Eagle is about to step into a safe Labour seat. His taskforce seems keen on the council building more houses, and tossing more out subsidies, but nothing is heard of simply freeing up the market in land. Or even of looking for innovative ways to allow local communities to both protect existing interests and respond, over time, to changing opportunities.
There was also the fact that any Labour government was likely to depend on Green votes in Parliament, and there was no sign the Greens were keen on land-use liberalisation.
And then there was little sign of leadership commitment.
Labour’s leader, Andrew Little, devoted the bulk of his election year conference speech to housing, complete with the sorts of personal touches audiences like. Media reports say the speech went down well with the faithful…….
But in the entire speech – and recall that most of it was devoted to housing – there was not a single mention of freeing up the market in urban land, reforming the planning system etc. Not even a hint. I understand that giving landowners choice etc probably isn’t the sort of stuff that gets the Labour faithful to their feet with applause. But to include not a single mention of the key distortion that has given us some of the most expensive (relative to income) house prices in the advanced world, doesn’t inspire much confidence.
It has been no different since Jacinda Ardern took over as leader.
Sure, as defenders point out, reform of the planning system does appear in Labour’s manifesto, and there was a brief mention in the Speech from the Throne. But mostly what we hear about are the same, consistently emphasised, lines they’ve been running for at least the last year:
- the ban on non-resident non-citizens buying existing residential property,
- the extension of the brightline test (from two years to five years),
- ringfencing, so that rental property losses can’t be offset by other income, and
As well as measures to impose new higher standard on rental properties. In practice, the new Tax Working Group also seems likely to be focused on housing-related tax issues (capital gains tax in particular).
Two things in the last few days reinforced my unease.
The first was the new “independent stocktake of the housing crisis” the Minister has commissioned. Given that it was announced on 25 November, and is to report “before Christmas”, it is hard to believe that the group will come up with much new and different. Probably, that isn’t even the point.
Here is how the Minister framed the work
“Shamubeel Eaqub, Philippa Howden-Chapman, and Alan Johnson are among New Zealand’s foremost experts on housing. Their insight will be invaluable.
“This report will provide an authoritative picture of the state of housing in New Zealand today, drawing on the best data available. It will put firm figures on homelessness, the state of the rental market, the decline of homeownership, and other factors in the housing crisis.
“The Labour-led Government is already pushing ahead quickly with initiatives to make housing more affordable and healthy, including banning overseas speculators, passing the Healthy Homes Guarantee Bill, cancelling the state house selloff, and setting up KiwiBuild. This report will help the Government refine and focus that work where it is most needed.
Each of the members has some expertise in aspects of housing, but none has any expertise in – or known sympathy with arguments for – freeing up land-use restrictions, and allowing the physical footprint of cities to grow readily as the population does. And then there is the third paragraph – the same old list of direct interventions, with nothing at all about liberalisation of the land market, even though it is vital if the long-term structural problems are to be effectively addressed.
Now perhaps the Minister will argue that planning reform is proceeding on a separate track, or even point to the responsibility of his colleague, the Minister for the Environment, David Parker. But the fact remains that in all the talk about fixing the badly-distorted housing market there is little open emphasis on land-use law, nothing on reducing the price of urban land, and nothing on (finally) letting the market work effectively.
And then there was a substantial interview the other day with Phil Twyford on interest.co.nz. And it was much the same again. There was plenty of talk of the coming tax changes and the proposed foreign ownership ban. And there was great deal of talk about Kiwibuild. There was reference to using Crown and Council-owned land in Auckland to build on. But there was nothing at all, in the entire 23 minute interview, on reforming or freeing up the market in urban land. There were defensive references – it would be hard to produce ‘affordable” houses in the $500-600K range because land was ‘absurdly expensive” – but nothing, not a word, about reforms that might effectively, and enduringly, lower land prices.
There was. of course, lots of talk of how “we have to build more houses”, but no attempt to seriously address the argument that, given land-use restrictions, there may not be any material unmet demand for houses at the prevailing price. Talk about a shortage of 71000 houses – or whatever the latest guess is – is mostly nonsense unless the land market is fixed, and the price of land falls considerably. At much lower land prices, I think there is little doubt that there would be more effective demand for housing – and no obvious reason why the private sector would not meet that additional effective demand. That would be a highly desirable outcome, but in his interview the Minister studiously avoided any suggestion of land prices falling. And at current (very high, but currently stable) prices, there isn’t obviously any unmet effective demand in Auckland at present.
All the Minister’s talk seems to be of state-led projects to build more houses, including more ‘affordable’ houses, and more state houses. In some cases, it seems, it will just involve the state participating in developments that were already planned. But unless land prices are going to fall materially, it is really hard to see how any big increase in state-associated housebuilding isn’t going to largely displace private sector building that might otherwise have taken place. For all the talk about building at different price points, and actually building more so-called “affordable houses”, houses are substitutable, to a greater or lesser extent. A new small place on a tiny amount of land at, say, $600,000 (a price point which even the minister conceded would be a stretch) is going to be competing with existing houses in that price range in, say, Manurewa. Perhaps additional state-led building can alter relative prices a bit but (a) if so, it seems likely too be only by use of government subsidies (the Minister indicated that the government will not be charging for the development risk, in a way that any private developer would need to), and (b) nothing about the underlying scarcity (regulation-induced) of land will change.
In their recent Monetary Policy Statement, the Reserve Bank indicated that it was assuming that half of the Kiwibuild activity displaced other construction. They didn’t elaborate on that point, but I have an Official Information Act request in with them asking for the analysis they did in support of that assumption.
(Incidentally, while I am keen to see LVR restrictions come off – since they never should have been put on – it would be quite curious to see them beginning to be removed at just the sort of time when – on government policy – the risks around housing lending might increase quite considerably. If the government is to be taken at its word, and we really are to see a massive increase in housebuilding, led by government initiatives rather than market forces – and at a time when many forecasters expect net immigration to be dropping away – the risks of an oversupply of physical housing (as in Spain, Ireland and parts of the United States) would have to be considerably greater than they’ve been in recent decades. Of course, weirdly, LVR restrictions have never applied to the most risky type of housing lending, that for houses being built.)
Two final points:
The Minister indicated, again, that one of the government’s motivations in its housing reforms is to “shift investment”, so that people don’t so much buy houses, as buy shares etc. On this point, they seem as confused as ever. If there really is a physical shortage of, say, 71000 houses and that is to be met over the next few years, there will have to be much more physical investment in building houses. And someone will need to own those houses – whether owner-occupiers, the state, or private rental businesses. Real resources devoted to one use can’t be devoted to another use. And, for any given stock of houses, it isn’t that evident that it is likely to make much difference to economic performance who (among New Zealand residents) owns those houses. I’m all for home ownership, but if owner-occupiers buy houses (with large mortgages) it isn’t obvious why capital markets etc, or investment choices by businesses elsewhere in the economy, will be much different than if rental property owners buy houses (with large mortgages).
In his interview, the Minister was also lamenting large boom-bust cycles in residential construction, and suggesting that was part of the problem in New Zealand. I was a bit puzzled by that suggestion, and wondered if there was any evidence that the fluctuations in residential building activity were larger here than in other advanced economies. It was possible they were – after all, our population growth rates are quite variable, mostly because of swings in the flow of New Zealanders going to Australia. So I dug out the data, for residential investment as a share of GDP, going back to 1995 (when complete data is available for most OECD countries). This chart shows the coefficient of variation (ie the standard deviaton divided by the mean).
At least over this period, residential building activity (as a share of GDP) in New Zealand has been less variable than in the median OECD country, and far less variable than in the countries to the far right of the chart. Over a longer period, back to 1970, there is no sign that New Zealand’s residential investment cycles have been larger or more variable than those in Australia or the United States. Investment is variable – typically the most variable component of GDP. It is how market economies work.
Where does all this leave me? With the new government’s apparent determination to continue to pursue a “big New Zealand” approach, without any material change to immigration policy, the need for additional housing will continue to grow largely unabated (tax changes and foreign ownership bans won’t make much more sustained difference here than they have abroad). Perhaps the government has plans, currently kept quiet, for far-reaching land use reforms that will enable the market to meet changing demands, at genuinely affordable prices – as happens in much of the US. But at present it looks disconcertingly as though the centrepiece is going to be a government-led house building programme that (a) never gets to grips with the land issues, (b) will substantially displace private sector building, and (c) runs all the sorts of risks that government-led investment projects are often prone to.
Perhaps it will work. But it is hard to be optimistic at present.
UPDATE: An interesting piece from today’s Herald on the way land prices render even moderate intensification not really consistent with more “affordable” house prices in Auckland.
UPDATE (Friday): Twyford speech on the government’s housing policy does nothing to allay any of the concerns in this post. Land use reforms appear, a little cryptically, very briefly and near the end of the speech.