House prices keep going up. In the decade to December 2007 (roughly peak to peak), real house prices in New Zealand rose by about 71 per cent. In the (just over a) decade since December 2007, they’ve risen by another 34 per cent, bringing the total increase in real house prices in little over two decades to 130 per cent. Not that it really should be a relevant comparison, but productivity growth (real GDP per hour worked) totalled about 22 per cent over the same period.
In parts of the country, notably Auckland, the housing market has levelled off over the last couple of years. But on the most recent QV numbers, real house prices across the nation as a whole have risen again in the last year.
There is no good or necessary reason why, on a well-constructed like-for-like index, real house prices should show any particular trend over time. Of course, as people get wealthier and technology improves people might reasonable demand bigger and/or better-specified houses, and they might be more expensive – in real terms – than a typical house from decades earlier. But what we’ve seen is substantial increases in the real prices of constant-quality houses. That is mostly down to the active and passive choices of successive people at the top of central and local government. In a country with abundant land, create artificial scarcity around residential land and (real) prices will rise, a lot (especially if the regulatory scarcity is exacerbated by rapid policy-driven population growth).
In opposition prior to 2008, National sometimes talked a good talk about fixing the situation. In opposition prior to 2017, Labour sometimes talked a good talk about fixing the situation. A Green Party leader, now long departed, even got herself in trouble by talking about the desirability of big drops in house prices, and the possibility of aligning policy to produce house price to income ratios of perhaps 3 to 4 (in many fast-growing US cities those ratios are under 3.5). She only said it once. I’ve been sceptical that her Green colleagues would ever allow the sort of freedom and flexibility that sort of outcome might take, even if (which seems unclear) they might be sympathetic to the end.
It has been hard to know what to make of the current government as a whole. Neither Andrew Little nor Jacinda Ardern as Labour leaders has ever openly embraced land use reform. Instead, we had all sort of policies to distract, or paper over cracks – foreign buyer bans, ringfencing, bright line tests, KiwiBuild, talk of capital gains taxes etc. But never getting to the heart of the issue, and never willing to openly embrace a goal of materially lower house prices.
But there was always Phil Twyford. Sure, he was responsible for KiwiBuild, which was never going to solve any real problem, but he showed signs of understanding the real regulatory issues. In Opposition, and on this specific issue, he’d stood shoulder to shoulder, sharing an op-ed, with the libertarians at the New Zealand Initiative. And now that he was Minister, he even had access to one or two very good officials.
But the government’s term is now more than half over, and not much action had been seen. Not even many words really, although there had been this in the Speech from the Throne
This government will remove the Auckland urban growth boundary and free up density controls.
But a couple of weeks ago Twyford was invited to address the New Zealand Initiative members’ retreat, where he gave a meaty speech on fixing the housing market.
The Initiative responded enthusiastically (here is Oliver Hartwich’s brief summary), and I have seen the speech described as “the most coherent and comprehensive political statement on housing we have seen in our lifetimes”. And, mostly, it does read well – better than anything we heard from National ministers in government, or from National’s current housing spokesperson.
The bit I liked the most was this
Our aim is to bring down urban land prices by flooding the market with development opportunities.
That doesn’t sound like a minister with a vision of (say) flat nominal house prices, taking 30 or 50 years to get price to income ratios back to where they used to be, and where they should be. It sounds like someone who is serious.
And yet, I remain sceptical. Perhaps Phil Twyford’s heart is really in this.
But is the Prime Minister’s? Even though housing was a significant campaign issue, even though she has been in office for 18 months now, we’ve never heard her putting her authority behind fixing the housing disaster at source, let alone substantially lowering house prices.
And is the Green Party on board? Quintessentially the party of well-paid inner-city urban liberals, are they really on board with bigger (physical footprint) cities, or with encouraging intense competition among landowners for their land to be developed next. Some of them seem to believe that it would somehow be morally virtuous – and “solve” the affordability issues – if people lived instead in today’s equivalent of shoeboxes.
Of course, this could be one of those issues in which National and Labour got together and pushed through major legislative change. It could have been so under the previous government, but wasn’t. Why is a solution like that more likely now?
And sometimes talk of lowering land prices is really just cosmetic. If you establish a vehicle whereby property owners will have to pay development costs in an annual rate over, say, 30 years, that will – all else equal – lower new section prices, but won’t change one iota the cost of housing. To do that, you have to be committed to removing, or substantially reducing, the artificial scarcity that policymakers themselves created.
And then there is local government, the most immediate source of the problem. Local governments actually impose the zoning rules. Local governments set their own (arbitrary) debt ceilings – and some NZIER work a few years ago highlighted how relatively low those ceilings typically are – and make their own choices about using (not using, mostly) differential rating schedules, which could help ensure costs of new development are appropriately allocated. Local governments – while often talking of ‘debt constraints’ – choose to spend money on vanity projects, or ideological agendas, like (in the Wellington case) cycleways, runway extensions, convention centres, or old Town Halls. And councils, and councillors, are all too-often champions of the know-it-all shoebox approach (we know what cities should look like, and we want people in high rise apartment blocks on this particular street, and the like). Also, for all the talk about accommodating growth, actually all any region of New Zealand has managed in recent decades is lots of population growth: large scale new private industries and associated productivity growth (the sort of thing that might really capture the imagination, including of voters) has been scarce to non-existent.
There is quite a bit to like in the speech (as well as some questionable stuff – including the laughable notion of looking to Australia for a lead on housing, or the wrongheaded notion that somehow too much resource has gone into residential property and not into the “productive economy”). But for all the fine words, how optimistic should we be?
I’d say not very. There are those domestic political factors I outlined above; for example, in a multi-party government with little that unites the parties, the only major reforms that get done will be those the Prime Minister fully embraces and champions, and our Prime Minister has shown no sign of embracing this sort of reform (or the implied fall in house prices).
There is the lack of international precedent. For several years, I’ve been posing the quite genuine question as to whether anyone can point to an example of a country or region that had once messed up its housing and land use law this badly and then fixed the problem at source. There are places that never got into the mess (including many parts of the US) and Japan is also a tantalising story, but they aren’t answers to my question about fixing a mess once created (and once an increasing share of the population becomes fearful of the personal economic risks of house prices falling – more and more of them every year). Perhaps New Zealand really could be first – single chamber Parliament and all that means far-reaching reform (for good and ill) can be done here. But aren’t you then back to the point in the previous paragraph: is there really the drive from the top (not just Ardern, but Robertson, Davis, Peters, Shaw) that is going to push through legislation and face down councils (and, in many cases, residents/voters)?
My scepticism doesn’t count for anything much on its own. But market prices should. When, for example, there was beginning to be a serious prospect of US company tax cuts a year to two back, you saw the effects straightaway in share prices. That is how markets typically work, looking forward and pricing the prospect (and probability) of change. The Minister of Housing might be entirely serious, but in this specific sense there is no sign that his words are treated as a credible indication that significant change is actually coming. Were it otherwise, we’d already see urban (and peripheral) land prices falling, a lot. Sure, some inner-city sites offering better intensification options might hold up, or even rise, in value, but across regions as a whole the thrust of the mooted reform is about markedly easing artificial scarcity. If it were to happen, as Twyford talks of, median land prices in and around our cities would already be falling quite considerably. I’m not aware of any such trends (though I’d welcome comments that pointed us in the direction of evidence that it is happening).
Perhaps the market is just wrong and the government will in the end surprise us all. But there is a certain wisdom of crowds and – even as we might welcome the rhetoric of one minister – it is wise to respect it. Courageous leaders can up-end conventional wisdom and change reality. I really hope it happens this time, for the good of the country and (more personally) for the good of my own kids. But it will take more than a pretty good speech to persuade me it is the most likely outcome.