I suggested on Twitter yesterday that the Green Party’s new housing policy – as articulated on BusinessDesk here by Julie Anne Genter – was absolutely right about the urgency of the issue (actually reform has been overdue for the best part of 30 years) and the need for boldness, but quite wrong about proposed policy responses, which seemed to tackle symptoms while failing to get to the heart of the matter. BusinessDesk invited me to submit a piece offering my solutions. That column came out this afternoon, and is here (not behind the paywall).
Since people tend not to click on links, and I haven’t given the copyright to BusinessDesk who published it a couple of hours ago, I’ve set out my full text below.
Bear in mind that I had only 800 words. That meant I had no chance to do anything much more than set out the key points of my own proposal – even then briefly – and in particular could not defend claims like “Banks aren’t the problem, and the tax system isn’t the problem either. Nor are those popular scapegoats, “landlords” and “speculators” “, or elaborate on a whole variety of points, and qualifications, that a fuller treatment of the issue would warrant. I’ve dealt with many/most of those points here over the years, often at length, but might take the opportunity next week to do a further post, with commentary on each paragraph elaborating (or where necessary qualifying) various points and arguments.
In a way, my bottom line is in the second to last paragraph. With structurally record low real and nominal interest rates, houses and housing (two different things) really should be cheaper than ever in real terms. That they aren’t is the choice – active and passive – of successive waves of central and local government politicians. The current wave is currently responsible, and sadly they – especially the Prime Minister, who has the most say (and an absolute majority) – show no serious interest in the sort of better, much cheaper, outcomes – sustained over the longer-term – that are quite possible.
Free up the land
Real house prices have more than trebled in the last 30 years. The most recent surge is just the latest in a series that result directly from the choices of successive central and local governments. And what choices mattered most? Land use restrictions, in a country with so much land that our urban areas cover only 1 per cent of it. When people talk about real house prices having skyrocketed, mostly what they really mean is that the price of the land under the house has gone crazy.
Unfortunately, all indications are that the sorts of the things the government and the Reserve Bank are considering will just paper over a few more of the cracks and not address the real issues. Banks aren’t the problem, and the tax system isn’t the problem either. Nor are those popular scapegoats, “landlords” and “speculators”.
One way of seeing this is to look at the United States, where the regions all have much the same banking and tax systems, but often quite different land-use regulatory regimes. Some big growing cities there are among the most expensive places on earth – like Auckland and Wellington – while others have price to income ratios that are low and haven’t changed much over several decades. They also tend to be the places with the highest rates of owner-occupied housing.
So, what urgent steps should the government be taking?
First, legislate now to establish a presumptive right for any landowner to build as many single or two storey dwellings on any land they own, anywhere. Aggressive competition among landowners on the fringes of our cities and towns, scared that they will miss out and that development will happen elsewhere, is what would underpin much lower urban land (and house) prices.
Second, empower groups of existing landowners in built-up areas (perhaps at a block or individual part of a suburb level) to determine – by super-majority vote (perhaps 75 per cent) – how much, if any, additional density they want to permit on their land. Vote for greater density and they can capture any gains from land made more valuable as a result (which might not be large outside central city areas if new land can easily be brought into development). If not, respect those groups of landowners’ preferences.
Third, the Prime Minister needs make it a personal priority – featuring prominently in all her communications – that house and urban land prices should fall very substantially and stay down. Serious reforms happen, and are followed through on, when Prime Ministers believe in them and commit their skills and political capital to making them happen. We can’t have any more of senior political figures (both sides of politics) feeding a narrative that house prices should always trend up. They shouldn’t.
Asset markets trade on expectations, and no smart purchaser one is going to be keen to pay ever higher prices today when there is a serious chance, by actual reform now and evident political commitment, that the asset will be much cheaper a year from now.
Fourth, as too many ordinary families – just wanting a place to call their own – have been caught in this government-facilitated mess, establish a partial compensation scheme for owner-occupiers (only) who have bought in the last decade and who sell in the next decade. It won’t be cheap, but neither are the economic and social costs of the mess governments have got us into, that among other things has young people convinced that what should be a normal aspiration – buying a first house in your 20s – is now some unattainable aspiration, reserved for the offspring of the rich. Stabilising prices now and hoping low inflation does the job over decades is no adequate substitute for proper reform. Our young people deserve much better.
Real interest rates having been falling for decades, and are now at lows not seen persistently in a very long time, if ever. If we had functioning markets in land and housing, that should mean houses and housing that are cheaper, in real terms, than ever. It takes time (and a lot of money) to develop subdivisions, it takes time to build houses, and the interest costs of doing so are lower than ever. Rents are the cost of using a long-lived asset for a period of time, and the alternative investments (bonds, term deposits) now yield less than ever. And yet because governments make land artificially scarce, house/land prices continue to push ever higher, and rents themselves are unconscionably – utterly unnecessarily – high.
Reform should be about getting housing/land markets functional again, partly compensating some of the losers, and making housing once again something that young people don’t need to worry much about, all without messing up access to finance. It is about fixing injustice now, and rooting out the systematic disadvantage, working against the young and the poor, that governments themselves created.
croaking cassandra 
Its an awesome piece Michael and I hope it will raise awareness of meaningful solutions Don’t worry that its brief , the constraint to 800 will improve your uptake on this important issue.
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Thanks Peter
I agree there is merit in brevity sometimes, but it is also important (other times, other places) to engage alternative perspectives specifically.
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Freeing up land is an important, but not the only, part of the solution. Places like Auckland have a legacy of underfunded infrastructure costs for both existing and new/developing accommodation that existing ratepayers are increasingly being asked to pay to remedy. Infrastructure costs are higher in low density housing areas and new developments that don’t provide for the future cash flows needed to service them are adding to the problem.
Our local Councillor Greg Sayers published a useful little booklet a couple of years ago “How to fix Auckland’s Housing crisis: 4 bold proven solutions”. Solutions 1 and 2 are what you propose.
Solution 1: Abolish the Rural Urban Boundary;
Solution 2: Deregulate so developers can develop;
Solution 3: User pays infrastructure funding;
Solution 4: Revolutionise building insurance.
its worth a read..
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Looks interesting https://www.scoop.co.nz/stories/AK1901/S00272/how-to-fix-aucklands-housing-crisis.htm I’ve certainly favoured user-pays infrastructure funding, altho I gather that much of the marginal infrastructure costs for new developments are already covered by development contributions. One could convert those into specific additional annual rates, which would lower the headline price of the new house but would not change the underlying issue (the all up cost over a lifetime is still much the same).
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Solution 2 sounds nice however as we have seen with the leaky home saga, it has cost Councils billions in compensation to victims of leaky homes when the courts make Council fully liable to regulate. In court not having i dotted and t crossed equates to billions in payments. Developers use $100 limited liability companies to build so it is not much use making developers pay up. The last man with the deepest pocket pays up which inevitably leads back to Council. In most other countries, this risk is insured. Not entirely sure why in NZ insurers will not cover this risk.
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Solution 3 has been proven to lead to higher house prices. This is how the current system already works for at least a decade now so Greg Sayer is somewhat outdated. All the public drainage requirements are currently paid by the developer and then gifted to Council.
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It seems to me that land has already been opened up massively under the Unitary Plan. In my suburb on the North Shore in Auckland sites that formerly had a single dwelling on them now have three, four or five townhouses built there. But prices are still climbing rapidly.
The problem appears to be in some part due to the city having to absorb 40,000 newcomers a year. I can’t see how opening up land can keep up with the influx, given there are capacity constraints on how many houses can be built in any year.
Years ago you advocated slashing immigration to cut house prices but you don’t seem to mention that anymore. Have you changed your view?
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I strongly favour permanent reductions in the annual inflow of non-citizen migrants, but mostly for productivity and longer-term economic performance reasons. At present of course there is hardly any net immigration (in fact, small outflows net each month). But more generally it should be possible to produce a functioning affordable housing market with fairly rapid population growth (as one sees in big growing US cities like Atlanta). The problem with relying on cutting immigration as a key response to the housing problem is that it would then encourage councils and govts to reduce any focus on freeing up the land market and making it more responsive to fluctuations in population growth (and fluctuations are inevitable given the number of NZers living abroad, and the relatively easy access NZers still have to Australia).
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Michael, with the border closed, and building consents robust, our construction sector must be at least now keeping up with demand growth.
Of course expectations are the border will be flung open and we’ll again have a surge in immigration. Do you think a commitment by the government to bring down permanently the quota on migrants would also help ease demand pressure?
Say not more than 10k net arrivals per annum?
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Your first point is among the reasons I think the recent surge in prices is likely to begin to peter out quite soon (without solving the longer-term problem, just having moved to a new plateau).
As you know, I favour a permanently lower non-citizen migration target (the bit the govt can control, which it can’t do with net migration). An announced cut to say 10-15K pa new residence approvals might influence expectations for a while, but my worry is that it would also mean councils/govt sat back and did nothing more about freeing up land use etc, so there might not be much sustained gain.
From a housing perspective (as distinct from my productivity arguments, at best it would be a second-best response).
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Thanks Michael, useful to know.
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A good article; as you say there is merit in brevity.
This is the key “” no one is going to be keen to pay ever higher prices today when there is a serious chance, by actual reform now and evident political commitment, that the asset will be much cheaper “”
We have had Prime Ministers commit to leaving the age of entitlement for superannuation at 65. Now we need a Prime Minister committing to reducing average house prices or resign. That would drastically change prices over night.
Your proposed compensation scheme may not be as expensive as you fear. It would have to be bureaucratic – I can think of many issues and good lawyers and accountants will think of more – but with careful drafting it would work. Much depends on inflation. If house prices drop then rents will drop and that will save the government a fortune in their absurd accommodation benefit.
I believe our politicians are currently being asked how many houses they own; the next questions should be “how many children do you have?” and “will they ever be able to buy a house?”.
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On your last para, it seems that in too many cases the MPs have quite a few properties, and thus will readily be able to help their offspring (though one of the parts of growing up really should be moving as soon as possible away from financial reliance on parents).
On cost, yes there are offsets re Accom Supplement, but sadly the cost is rising by the day as ever more people take on debt to get into a house even at these high prices. Even if prices plateau, natural turnover will just increase the stock of debt assumed at the distorted prices.
More generally, one of the advantages of a low public debt is that we have the flexibility, if we choose, to partially compensate some losers, to ease the political obstacles to much-needed reform.
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You reminded me that Accom Supplement is available to home owners paying a mortgage. But most will be paid to renters earning below average income. Today my daughter, husband and child are moving out of the family home and into a rented apartment. I do not know their finances but i suspect they each earn about $40k pa and their child will be costing them ~$300pw for pre-school. My guess is they will not qualify for accommodation supplement.
You should be able to roughly estimate the cost of your proposed compensation scheme at different ranges of house price drop. I would apply it only to NZ citizens who remain in NZ after selling their property. It should not apply when the owner dies or leaves NZ. There cannot be that many Kiwi families selling their home in any given year.
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The big wild card is how many people would sell during the period concerned. My scheme – developed in an earlier post – offered something like 50 or 75% compensation for realised losses only, beyond an initial threshold (say $50000), and then capped. But even with material negative equity most people won’t sell – they like their house and there are high transactions costs to selling and moving. Also generalised wage and price inflation over the period would cover over some of the losses and discomfort. One could, of course, play around with some scenarios and look at sensitivities.
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I have asked David Parker this, amongst other things, and received no reply.
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Reblogged this on Utopia, you are standing in it!.
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+1
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A big problem with more urban sprawl in the major cities would be the impact on our already overloaded transport system. Perhaps the infrastructure costs would be higher than intensification too.
Intensification along public transport corridors seems like the best and cheapest solution to me at the moment, but that would conflict directly with your second solution. Phil Twyford was keen on dictating zoning through central government due to the strong opposition to intensification that has occurred at the local level, but the idea has not been carried on. Unfortunately, I think it will need to be done, or there will be large extra economic and social costs.
I’ve read somewhere that the Auckland Unitary Plan actually does allow enough space to keep up with future development, but I’m not sure how true that is. What I am fairly sure of is that it was captured by vested interests that had the funds and connections to engage with the extremely complex process of creating it.
The best solution I can think of at the moment is to massively fund (through borrowing) foreign construction teams to build low-rise (and perhaps a few high-rise) buildings and the extra infrastructure to support them. Spread them out along transport corridors, and have a mix of low-cost social and private apartments. More housing is the bottom line as I see it.
Hopefully, we can train more residents in the trades as well, but that will take time, and I would be wary of having them become redundant when we caught up.
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I guess I would just emphasise choice. If lots of people really do prefer to live intensely near transport hubs – rather than in more distant suburbs with backyards – that will be reflected in the potential value of the land near those transport hubs, which would incentivise existing owners to vote to allow the greater intensity.
I don’t have any objection to intensification, to the extent that is the option preferred by some/many individuals, provided the choice is not so skewed by policy (holding up peripheral land prices) that people feel/find they have little or no effective choice. My prediction is that most NZers will still prefer the backyard option for most of their lives – partly based on revealed preference (we don’t see a rush to more-intense downtown living in our smaller/cheaper provincial towns cities) but for policy purposes my predictions are neither here nor there
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Excellent article Michael. However, the consistent lack of action by our political leaders over 30 years to introduce reforms that would create a functioning land market (which would seriously reduce land prices) most likely reflects the political incentives they face rather than their lack of political bravery or policy nous. We might sometimes get an an unusually brave and intelligent leader but they’re very rare, and so in my view the trick is to build into your policy prescription approaches that will likely yield positive outcomes for low political risk, and which create a positive political dynamic for ongoing reform.
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Thanks Carl. I think the obstacle has been a mix of the factors you cite, together with some “ideological” ones in some circles. Serious acts to reform always involve some losers (so does passive failure to act, but it is harder to pin immediate blame). But, yes, finding a way through the political mire is a challenge – there is a particularly type of person who becomes a great reforming politician (something about courage, about articulating compelling narratives, about ability to spot moments when people will pat prices, and a bit of luck too).
But we didn’t get the reforms in the 1980s – or the 1890s – because radical change was suddenly rewarding for the politicians.
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Thanks Michael.
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Reblogged this on The Inquiring Mind and commented:
Some very interesting comments on housing issues
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[…] Reform should be about getting housing/land markets functional again, partly compensating some of the losers, and making housing once again something that young people don’t need to worry much about, all without messing up access to finance. It is about fixing injustice now, and rooting out the systematic disadvantage, working against the young and the poor, that governments themselves created. – Michael Reddell […]
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