Did state houses make much difference to housing supply?

I’ve been among those suggesting that the KiwiBuild programme –  even if it involved the government itself directly commissioning the building of new houses that no existing developer already had in prospect –  was unlikely to increase overall housing supply very much, or affect overall average house prices very much.  It was never clear how such a programme could affect overall housing supply very much.  For it to do so, there would have to be large unexploited profits left sitting on the table by private developers (properties selling for far more than it would cost to bring new developments to market).  If that isn’t so –  and we don’t see any obvious signs of such unexploited opportunities – whatever the government itself builds or commissions is just likely to mostly displace and replace houses that the private sector would have built.   (There is another possibility, that the government not only displaces most private building, but goes on building at a loss even beyond that point, but there is nothing in the PR around the programme to suggest that is what they have in mind.)

I also know the line the government and its defenders run that somehow KiwiBuild will “work” –  whatever that means –  by building particular types of houses the market isn’t providing.  But even to the extent that is so, what of it?   If the morass of regulation makes it uneconomic to build many new moderate-sized homes (although do recall that the flagship houses are four bedrooms), demand reallocates.  Decades ago many young couples started out with a brand new (small) house in a remote suburb with few facilities and not even a lawn (I’m just old enough to remember our (new) street in Christchurch where what would become front lawns were planted with potatoes, apparently to get the impurities out of the soil).  These days they don’t.   But is there any sign that the prices of the existing modest-sized houses have increased disproportionately relative to house prices more generally?  I’m not aware of any, and that isn’t really surprising, when by far the biggest issue in high urban house prices is land prices.   And KiwiBuild does nothing at all about them.

In my post earlier in the week, I mentioned the state house building programme initiated by the first Labour government, and often touted as the inspiration for today’s KiwiBuild programme.   In passing, and thinking as I wrote, I wondered if the (substantial) construction programme associated with the state houses programme had made much difference to overall housing supply.  It wasn’t something I’d ever given much thought to previously, but once one begins to think about it, of course it makes sense to doubt that that massive state intervention really made much difference on that specific count.  (It is quite probable that it materially increased availability for some –  small –  class of potential tenants private landlords were reluctant to touch.  It is also clear that it chewed up vast amounts of land, probably rather inefficiently – a couple of weeks ago I was driving through a state house neighbourhood a few blocks from where I grew up in Auckland and marvelled  –  not in a positive way – to see such small state houses on such large sections.)

There isn’t any easy way to compellingly answer my question.  Perhaps some academic researcher could turn their attentions to it at some point.   But out of interest I dug out a few charts.

This one (from Te Ara) shows the stock of state houses.

stock of state houses

(Interesting to see that the stock actually dropped a little during the term of the Kirk-Rowling Labour government).

And this chart shows annual data for both the number of new state houses built and those existing ones sold (something initiated by the 1950s National government).

state-houses-built-and-sold-graph

One way of looking at whether there is prima facie reason to think the state house programme might have made much medium-term differenc is to look at the population to dwellings ratio.

This chart is drawn from census data reproduced (up to the 1970s) in Bloomfield’s collection of New Zealand historical statistics.

person per dwelling.png

The spacing isn’t even –  censuses were skipped in 1931 and 1941 –  but all I really wanted to highlight was the strong downward trend over the 90 years from the mid 1880s to the mid 1970s.  The only interruption to the trend was in the single inter-censal period from 1916 to 1921.  It is more or less what one would expect, as people got wealthier, families got smaller (and, at least late in the period, divorce got more common).    Had the state not been building, there isn’t much reason to suppose that –  over time, and in the absence of building and land use restrictions –  the private sector would not have done so.  After all, they had done so in the decades prior to the state housebuilding programme (I was little surprised to see that even over the period encompassing the Great Depression –   1926 to 1936 –  the population to dwellings ratio fell).

Sadly, what might have been the cleanest test –  the 30000+ state houses built in the first decade or so of the programme –  also happened to mostly coincide with World War Two and the period of tight controls on all manner of things (including existing house sales) in the years following the war.  And government-imposed credit constraints remained an issue for the private sector for much of the post-war decades.

But I’d suggest that the burden of proof is really on the advocates of KiwiBuild to show that even very big government-inspired housebuilding projects really make much difference to the overall housing supply situation in the long-term.  After all, when the government owned many of our banks, most of our power companies, most of our radio and TV, and so on, mostly it didn’t supplement the stock of private businesses, it (rationally, from a private sector perspective) displaced them or crowded them out.  If the government were really serious about fixing the housing market, and making housing once again affordable for working class families, not just helping along well-paid professional couples, they’d free up the urban land market.  Sadly, there is no more sign of that under this government than under its predecessor.

On which note, there is a column today on interest.co.nz by Peter Dunne in which he begins thus

Kiwibuild is beginning to look more and more like no more than one of Edmund Blackadder’s cunning plans.

He has some good lines

It is worth recalling that in its election policy just one year ago Labour promised that it would “build 100,000 high quality affordable homes over 10 years”. The policy went on to talk about curbing homelessness through building affordable homes in the $350-450,000 price range.

The implication was unambiguous – Labour’s approach was going to be far more activist than National, and Kiwibuild would be Its primary policy to deal with homelessness and the housing crisis.

and

So far, just 18 Kiwibuild homes have been built, and another 447 are on track for completion by July 2019, leaving a shortfall of 535 on its first year 1,000 homes target.

Put another way, a first year achievement rate of just under 47%. And there has been a subtle but clear rewrite of the Kiwibuild objective.

According to the Kiwibuild website, the objective is now the much more passive one to “deliver 100,000 homes for first home buyers over the next decade”.

So, no longer will the government build “100,000 high quality affordable homes”. And no longer does “affordable” mean $350-450,000, but $650,000.

Moreover, now the plan is merely to “deliver” 100,000 homes, which, in the best Blackadder fashion, means accumulating all the new homes already being built over the next 10 years by the private sector anyway, and dressing them up as Kiwibuild homes.

But it is perhaps worth recalling here that Peter Dunne was a minister in the previous National-led government, and in particular held the one vote in Parliament that was sufficient to block the reforms (inadequate and insufficient as they would have been) that National was seeking to make.  I hope I don’t need to say again that I’m no defender of National’s record –  and lack of courage –  in this area in government, but it is a little rich for Dunne to snipe from the sidelines (legitimately in substance perhaps) when he personally blocked beginning to tackle some of the root causes of our obscene housing market failure.

 

26 thoughts on “Did state houses make much difference to housing supply?

  1. the best role any govt building programme can perform is to assist with:-

    1. underwriting the critical mass need to get market projects moving ( e.g. most larger subdivisions roll out 50 lots max at any time and cut into the undeveloped blocks as they sell the first 50) but getting to that stage which then can be self financing against deferred settlement sales to spec builders, often requires large up front consenting costs [it is unsurprising the govt has had to target people who can afford to buy, to sell them affordable housing. Homeless derro’s and beneficiaries usually don’t get mortgages]

    2. assist with smoothing / speeding up that consenting process ( something the Nats said they were doing) and the conversion of land at the boundary into housing sites

    3. fund the large infrastructure like the new $1bn or $2bn sewer Auckland needs to cope with intensification of housing along the great north road and other volcanic semi circle ridges, the govt has the cheapest credit lines, off balance sheet structures still handcuff rate payers’ ability to pay, if income and gst tax was to be given back to the auckland based payers this way surely this is a sensible and common good way to use some surplus and invest it with massive central buying power [ and keep ownership of it away from auckland council or soon enough it will try to tax it or sell it]

    Tony Gavigan Director Joint Action Funding Limited anthonyjgavigan@gmail.com +64 21 32 62 72

    >

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    • The first thing that government can do is to get rid of some of that legal corruption that the Maori Iwi groups get up to. Any Auckland development project which requires earthworks, Council will notify Maori Iwi to register their interest. Any Maori Iwi group anywhere in NZ can require that the developer sign a contract of payment with them which they will invoice the developer for earthworks monitoring. The threat usually is a unwritten indication, usually at a development meeting that they would object to the development if a contract is not signed.

      But I must add that for my personal experience from a small 3 site subdivision I had to pay $6000 plus another $2,000 for an archeological assessment. I was told by Council that I was lucky I had only one Maori Iwi group that registered an interest. I know a developer who had to deal with 20 Maori Iwi groups.

      The asbestos removal contractor was even worse. They wanted $4,000 to vacuum any asbestos that may have fallen off onto the grounds before the existing house was moved. Then they wanted another $11,000 after the move saying that they were not informed that the house needed to be rotated and therefore there was now a larger area to deal with. They threatened a Worksafe shutdown of the site if the $11,000 was not paid. We negotiated and threatened the use of another contractor and they dropped the asking price to another $4,000 making the payment for vacuuming unseen signs of asbestos at $8,000. Legal corruption again.

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    • If it was only $1 or $2 billion, it would be so easy. Unfortuntaley Phil Goff indicated around $20 to $30 billion was needed in infrastructure spend.

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  2. right, but his focus appears to be credit supply

    the experience in the US is that places without land use restrictions find that housing/land supply responds quite quickly, and credit availability tends to be a second order issue.

    Liked by 1 person

  3. Right wing economists and historians love to do counterfactuals on the big achievements of the other side. Economic historians missed the government loan default in the 1930s, since corrected by Malcolm McKinnon. Remember that the State Advances system had been financing urban owner occupation to a large extent in the 1920s. From early 1931 there were people deserting these houses, and over 4000 were taken over by the State as a landlord. The housing market had collapsed. The State Rental Housing Scheme involved the construction of entire suburbs, in Lower Hutt, if not cities (Porirua), at a time when the central government could not borrow overseas, and the Depression meant that savings were limited. Labour did not borrow from banks because of the punitive measures the Associated Banks had enforced between 1931 and 1934, when the RBNZ was created. There would have been none of the 30 000 houses built without Reserve Bank ‘credit’, a fact conveniently ignored by all of the RBNZ historians, right wing historians like Dr Schrader, and yourself.

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    • Actually I support credit guidance and the teaching of Richard Werner and Steve Keen. I also believe banks should not be allowed to control the amount of credit creation and where it is allocated.

      Liked by 1 person

      • Credit creation is limited to a percentage of local savings within the banking licence covenants as required by the RBNZ. That is why our Australian banks have monopoly power over the giant Chinese banks that behave like mice against the Australia tigers in NZ. President Xi should do some whispering to Adrian Orrs ears to start allowing the Chinese dragons to start competing in NZ like dragons instead of like dumb mice.

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    • About one year ago listened to a book review (on the radio) about building of state houses in a Wellington Suburb during or just after WW2. Don’t know the title of the book or the name of the suburb. Apparently American and local armed forces were used in some of the development. 1000 houses were built in 6 months

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      • I live in a ex state house. But it originally only had 2 bedrooms. Now it is a converted 7 bedroom house. It was rather too small for 3 of us, that 2 bedroom ex state house.

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    • Sorry not to have responded sooner. Take your point about the pre 1935 events etc. But I guess your own “big counterfactual” is the claim in the final sentence. I’m not really persuaded by the claim, and I doubt it is even possible to conclusively resolve the matter one way or other other. After all, the pre-war construction (and RB credit) was part of what ran us into the fx crisis in late 1938 and the subsequent decades of capital and current account controls, and of the building in the immediate post-war credit, access to international capital markets was, by then, not much of an issue (domestic inflationary pressures were more of a problem).

      It would be interesting – altho I don’t have the data – to do a cross-country study of what was going in in other similar places (Canada, Aus, US) that didn’t suffer war damage and had growing populations in the same decades.

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  4. I was just adding to the thread. The whole urban built environment of South Auckland, and north of Wellington, would have looked completely different if it wasn’t planned by the Ministry of Works. Just looking at aggregates of housing units over time so misses the point.

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    • I’ll come back to your longer comment later, but of course I don’t disagree with you on this one. The focus of my post though is one the overall housing supply/demand balance (including as reflected in prices)

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  5. Getgreststuff

    You remind me of a poster on interest.co.nz who calls for a diverse immigrant society but mocks people who can’t afford a home.

    Ps Banks do not create money they purchase securities

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    • Not sure why you would think I am mocking anyone. I am just an old guy with a personal $9 million dollar investment portfolio built up over the last 15 years who is actually trying to help better decision making by pointing out the issues that need to be considered.

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      • PS, I do not comment on interest.co.nz. Dominated by too many extreme left wing pro Labour/Greens commentators live there.

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  6. Have other readers noted how Shamubeel Eaqub seems to be justifying Kiwi build with an almost a religious blind faith in the worth of it. May I suggest economists make poor accountants and even worse property investors / developers. Our society seems to have a problem with people who build and create things for profit. Is this not better than building and creating things for a loss. When a builder makes a loss someone does not get paid. When someone does not get paid they are hurt. It is morally wrong to hurt people. I wonder if Kiwi build will hurt more people than get helped.

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  7. “But is there any sign that the prices of the existing modest-sized houses have increased disproportionately relative to house prices more generally? I’m not aware of any, and that isn’t really surprising”

    I don’t know what signs you’d be looking at, but I took a look at trademe data over the last three years from September 2015 to September 2018 and I have to say you scepticism bears out.

    Multiplying the year-on-year price increases for various categories reported by trademe gives:

    September 2015-2018 three year price increase, New Zealand wide:
    5+bedrooms: 18%
    3-4 bedrooms: 13%
    1-2 bedrooms: 17%
    Apartments (any size): 17%
    Townhouses (any size): 11%
    Units (any size): -3%

    https://property.trademe.co.nz/market-insights/property-price-index/wellington-property-prices-reach-new-record-and-edge-closer-to-600k/
    https://property.trademe.co.nz/market-insights/property-price-index/property-prices-on-hold-as-election-drags-on/
    https://property.trademe.co.nz/market-insights/property-price-index/the-property-market-levelling-off-in-flight-mode/

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