LVR limits revisited

The Reserve Bank was out the other day with some research on the impact on house prices of the successive waves of loan to value limit restrictions put in place from 2013 to 2016.     It was a rare Reserve Bank discussion paper –  pieces typically designed to end up in a journal publication –  to get some media attention.   That was, no doubt, because of the rather bold claims made in the non-technical summary to the paper

Overall, we estimate that the LVR policies reduced house price pressures by almost 50 percent. ,,,,, When it becomes binding, LVR policy can be very effective in curbing housing prices.

Since nationwide average house prices (QV index measure) increased by about 40 per cent over the four years from September 2013 (just prior to the first LVR restrictions coming into effect) to September 2017), you might reasonably suppose that the researchers were suggesting that, all else equal, LVR restrictions had lowered house prices by almost 40 per cent (in other words, without them house prices would have increased by around 80 per cent).  Of course, that isn’t what they are claiming at all.

The paper was written by several researchers in the Bank’s Economics Department (two of whom appear to have since moved on to other things), and carries the usual disclaimer of not necessarily representing the views of the Bank itself.  Nonetheless, on an issue as contentious as LVRs, it seems safe to assume that senior policy and communications people will have been all over the communications of the results.  Even if the Governor himself didn’t see it, or devote any time to it, it seems likely this paper carries the effective imprimatur of the Assistant Governor  (Head of Economics),  the Deputy Governor (Head of Financial Stability) and (at least in the bottom line messages) the Head of Communications too.

In the paper, the authors attempt to identify the impact of the various waves of LVR controls using (a) highly-disaggregated data on property sales, and (b) the fact that shortly after the first LVR restrictions were put in place, the Bank buckled to political and industry pressure and exempted lending for new builds from the controls (even though, generally, such lending is riskier than that on existing properties).  By looking at the relationship between prices of new and existing properties before and after the various adjustments to LVR limits, they hope to provide an estimate of the effect on existing house prices of the LVR controls.

Trying to identify the statistical effects of things like LVR controls is hard, but I’m a bit sceptical of this proposed new approach.  After all, if new and existing houses were fully substitutable a new regulatory intervention of this sort could be expected to affect prices of both more or less equally.  People who were more credit-constrained (by the restrictions) would switch to buying new houses, and those who less affected by the contros (eg cash buyers) would switch more to existing houses.

In practice, of course, the two aren’t fully substitutable, for various reasons (including that most new builds are occurring in different locations –  even in the same TLA – than most existing houses), but in the Reserve Bank research paper I didn’t see any discussion of the issue at all.  If there is no substitutability at all then the research approach looks as though it should be reasonable, but that seems unlikely too.

But I’m more interested in whether the reported results are anywhere near as impressive as the authors claim.

As a reminder, here is their chart of house price inflation developments, with the various LVR interventions marked.

LVR1

And here is their summary table of those successive interventions.

LVR2.png

And here is their summary table of the impact of these LVR adjustments on house prices, as estimated from their model.

LVR3

My focus is on the last two lines of the table: the estimated percentage effect on the various different intervention on existing house prices in Auckland and the rest of New Zealand  (the three asterisks suggest that the results are highly statistically significant).

Take the initial LVR controls first (which had the added effect of being something out of the blue, shock effects of a tool never previously used in New Zealand).  Recall too that, at the time, the big concern was about Auckland house prices and associated financial stability risks.    On this particular set of model estimates, the effect on house prices outside Auckland –  where there wasn’t a particular problem –  was larger than the effect inside Auckland.  In both cases, the effect (2 to 3 per cent) isn’t much different to previous estimates, or (indeed) to the sorts of numbers that were being tossed around internally before the controls were imposed.  It was generally expected that the controls would have a temporarily disruptive effect, lowering house prices for a while, but the effects would wear off over the following few years. (There are some model estimates on page 9 of this paper the Bank published in 2013.)

And what about the second wave of controls (which tightened financing restrictions on investors in Auckland, and eased them for everyone outside Auckland)?  On these latest estimates, those restrictions had no discernible impact on prices in the Auckland market at all, even though they were avowedly put in place because of explicit gubernatorial concerns about investor property lending in Auckland.  On, on the other hand, the moderate easing in the rules outside Auckland was so potent that it full unwound the price effects of the first wave of controls.

And, finally, the third wave of controls.  These represented a substantial tightening in investor-finance restrictions (especially outside Auckland), and a reversal in the easing (in wave 2) of the owner-occupier financing restrictions outside Auckland.   And yet, even though the rule changes were materially larger for borrowers outside Auckland, there is no estimated effect on house prices outside Auckland at all (even though, in wave 2 the easing in owner-occupier restrictions, now reversed, was supposed to have had a large effect).  And although the Auckland rule changes are smaller those outside there is no estimated effect on Auckland prices at all.  These results aren’t very plausible and suggest that – even if the results are statistically significant –  the strategy they used to identify the effect on prices isn’t that good.

One could also note that if one added up the effects across the three columns (which isn’t kosher, but still…….) the total effect outside Auckland is basically zero (actually slightly positive).  Even in Auckland, the total is about 5 per cent.

One of the reasons why simply adding up the estimated effects isn’t kosher is because everyone has always recognised that LVR restrictions are unlikely to have long-term effects on house prices.  They disrupt established established financing patterns, and thus can dampen house prices a bit in the short-term, but the effects dissipate with time.

In fact, the Reserve Bank researchers illustrate exactly that point in this chart which (if I’m reading them correctly) relates to the first wave of LVR controls.

LVR4

As the authors themselves observe

Figure 5 plots the point estimates with 95 percent confidence intervals. Overall, the effect of the first LVR policy on house prices occurs within the first three months and is relatively stable over a six-month period. Thereafter, the moderating effect declines somewhat (to around 1.5 percent after 12 months), perhaps owing in part to individuals having saved up the required deposit under the policy and a price differential having opened up between existing and newly built houses.

Any substantial effects on house prices don’t seem to last long.

To be fair to the Bank, and the former Governor, they never claimed house price effects would last for long.  The argument was that LVR restrictions reduced financial system risks by altering the composition of bank balance sheets.  That is another contentious claim, but it isn’t touched on in the current paper and so I won’t deal with it further here either.

So what led them to write (and their bosses to approve) the extravagant claim that LVR policies reduced house price pressures by almost 50 per cent?    It seems to be this

The moderating effect of LVR 3 was clearly seen in Auckland with a 2.7 percent reduction in house prices. This LVR 3 effect is both statistically and economically significant, as during the same period the average house price increased by 5.8 percent.

Overall, we estimate that the LVR policies reduced house price pressures by almost 50 percent.

But

  • as the table above shows, there was no estimated effect on all (from LVR3) outside Auckland,
  • even inside Auckland, and granting their estimates, 2.7 per cent is under a third of pre-LVR price increases during that specific period (the 5.8 per cent that happened anyway, plus the 2.7 per cent they claim to have reduced prices by).
  • as the chart aboves shows, on their own estimates, the dampening effects of LVR controls seem to dissipate relatively quickly (in that case half of the effect had unwound within 12 months).
  • the estimate seems to take no account of the ongoing house price inflation outside the arbitrarily chosen period they measure.

Contrary to their claims, LVR policy is not very effective in curbing house prices.  Indeed, its staunchest advocates never really claimed otherwise (for them it was mostly about financial stability), which does leave one wondering why today’s Reserve Bank management are publishing such overblown (and undersupported) claims to be made.  As I noted earlier, over a period when nationwide house prices rose by about 40 per cent, this latest model suggests no sustained impact at all on house prices outside Auckland –  despite significant interruptions to established financial structures and effective property rights –  and probably quite limited effects in Auckland too.

Overblown claims about what LVR controls can do for house prices (especially with no discussion at all of efficiency/distributional costs etc) risk distracting attention from the real regulatory failures that explains the dysfunctional housing market.  And they also detracting from the credibility of the Reserve Bank, whose legitimacy depends in part of being authoritative when it speaks.

 

 

Taxes, housing, and economic underperformance

Two local articles on possible tax system/housing connections caught my eye this morning.  One I had quite a lot of sympathy with (and I’ll come back to it), but the other not so much.

On Newsroom, Bernard Hickey has a piece lamenting what he describes in his headline as “Our economically cancerous addiction”.    The phrase isn’t used in the body of the article, but there is this reference: “our national obsession with property investment”.   Bernard argues that the tax treatment of housing “explains much of our [economic]underperformance as a country over the past quarter century”, linking the tax treatment of housing to such indicators (favourites of mine) as low rates of business investment and lagging productivity growth.

Centrepiece of his argument is this chart from the Tax Working Group’s (TWG) discussion document released last week.

TWG chart

Note that, although the label does not say so, this is an attempt to represent the tax rate on real (inflation-adjusted) returns.

It is a variant of one of Treasury’s favourite charts, that they’ve been reproducing in various places for at least a decade.   The TWG themselves don’t seem to make a great deal of it –  partly because, as they note, their terms of reference preclude them from looking at the tax-treatment of owner-occupied housing.  They correctly note –  although don’t use the words –  the gross injustice of taxing the full value of interest income when a large chunk of interest earnings these days is just compensation for inflation, not a gain in purchasing power at all.   And, importantly, the owner-occupied numbers relate only to the equity in houses, but most people get into the housing market by taking on a very large amount of debt.  Since interest on debt to purchase an owner-occupied house isn’t tax-deductible –  matching the fact that the implicit rental income from living in the house isn’t taxed –  any ‘distortion’ at point of entering the market is much less than implied here.

Bear in mind too that very few countries tax owner-occupied housing as many economists would prefer. In some (notably the US) there is even provision to deduct interest on the mortgage for your owner-occupied house.   You –  or Bernard, or the TOP Party –  might dislike that treatment, but it is pretty widespread (and thus likely to reflect some embedded wisdom).  And, as a reminder, owner-occupation rates have been dropping quite substantially over the last few decades –  quite likely a bit further when the latest census results come out.  Perhaps a different tax system would lead more old people –  with lots of equity in a larger house – to downsize and relocate, but it isn’t really clear why that would be a socially desirable outcome, when maintaining ties to, and involvement in, a local community is often something people value,  and which is good for their physical and mental health.

So, let’s set the owner-occupied bit of the chart aside.  It is simply implausible that the tax treatment of owner-occupied houses –  being broadly similar to that elsewhere –  explains anything much about our economic underperformance.  And, as Bernard notes, it isn’t even as if, in any identifiable sense, we’ve devoted too many real resources to housebuilding (given the population growth).

So what about the tax treatment of rental properties?   Across the whole country, and across time, any distortion arises largely from the failure to inflation-index the tax system.  Even in a well-functioning land market, the median property is likely to maintain its real value over time (ie rising at around CPI inflation).  In principle, that gain shouldn’t be taxed –  but it is certainly unjust, and inefficient, to tax the equivalent component of the interest return on a term deposit.     Interest is deductible on rental property mortgages, but (because of inflation) too much is deductible –  ideally only the real interest rate component should be.  On the other hand, in one of the previous government’s ad hoc policy changes, depreciation is not deductible any longer, even though buildings (though not the land) do depreciate.

But, here’s the thing.  In a tolerably well-functioning market, tax changes that benefit one sort of asset over others get capitalised into the price of assets pretty quickly.  We saw that last year, for example, in the US stock market as corporate tax cuts loomed.

And the broad outline of the current tax treatment of rental properties isn’t exactly new.  We’ve never had a full capital gains tax.  We’ve never inflation-adjusted the amount of interest expense that can be deducted.  And if anything the policy changes in the last couple of decades have probaby reduced the extent to which rental properties might have been tax-favoured:

  • we’ve markedly reduced New Zealand’s average inflation rate,
  • we tightened depreciation rules and then eliminated depreciation deductions altogether,
  • the PIE regime – introduced a decade or so ago –  had the effect of favouring institutional investments over individual investor held assets (as many rental properties are),
  • the two year “brightline test” was introduced, a version of a capital gains tax (with no ability to offset losses),
  • and that test is now being extend to five years.

If anything, tax policy changes have reduced the relative attractiveness of investment properties (and one could add the new discriminatory LVR controls as well, for debt-financed holders).  All else equal, the price potential investors will have been willing to pay will have been reduced, relative to other bidders.

And yet, according to Bernard Hickey

It largely explains why we are such poor savers and have run current account deficits that built up our net foreign debt to over 55 percent of GDP. That constant drive to suck in funds from overseas to pump them into property values has helped make our currency structurally higher than it needed to be.

I don’t buy it (even if there are bits of the argument that might sound a bit similar to reasoning I use).

A capital gains tax is the thing aspired to in many circles, including the Labour Party.   Bernard appears to support that push, noting in his article that we have (economically) fallen behind

other countries such as Australia, Britain and the United States (which all have capital gains taxes).

There might be a “fairness” argument for a capital gains tax, but there isn’t much of an efficiency one (changes in real asset prices will mostly reflect “news” –  stuff that isn’t readily (if at all) forecastable).   And there isn’t any obvious sign that the housing markets of Australia and Britain –  or the coasts of the US –  are working any better than New Zealand’s, despite the presence of a capital gains tax in each of those countries.   If the housing market outcomes are very similar, despite differences in tax policies, and yet the housing channel is how this huge adverse effect on productivity etc is supposed to have arisen, it is almost logically impossible for our tax treatment of houses to explain to any material extent the differences in longer-term economic performance.

And, as a reminder, borrowing to buy a house –  even at ridiculous levels of prices –  does not add to the net indebtedness of the country (the NIIP figures).  Each buyer (and borrower) is matched by a seller.  The buyer might take on a new large mortgage, but the seller has to do something with the proceeds.  They might pay down a mortgage, or they might have the proceeds put in a term deposit.    House price inflation –  and the things that give rise to it –  only result in a larger negative NIIP position if there is an associated increase in domestic spending.  The classic argument –  which the Reserve Bank used to make much of –  was about “wealth effects”: people feel wealthier as a result of higher house prices and spend more.

But here is a chart I’ve shown previously

net savings to nni jan 18

National savings rates have been flat (and quite low by international standards) for decades.  They’ve shown no consistent sign of decreasing as house/land prices rose and –  for what its worth –  have been a bit higher in the last few years, as house prices were moving towards record levels.

What I found really surprising about the Hickey article was the absence of any mention of land use regulation.  If policymakers didn’t make land artificially scarce, it would be considerably cheaper (even if there are still some tax effects at the margin).   And while there was a great deal of focus on tax policy, there was also nothing about immigration policy, which collides directly with the artificially scarce supply of land.

I’ve also shown this chart before

res I % of GDP

These are averages for each OECD country (one country per dot).  New Zealand is the red-dot –  very close to the line.  In other words, over that 20 year period we built (or renovated/extended) about as much housing as a typical OECD country given our population growth.    But, as I noted in the earlier post on this chart

The slope has the direction you’d expect – faster population growth has meant a larger share of current GDP devoted to housebuilding – and New Zealand’s experience, given our population growth, is about average. But note how relatively flat the slope is. On average, a country with zero population growth devoted about 4.2 per cent of GDP to housebuilding over this period, and one averaging 1.5 per cent population growth per annum would have devoted about 6 per cent GDP to housebuilding. But building a typical house costs a lot more than a year’s average GDP (for the 2.7 people in an average dwelling). In well-functioning house and urban land markets you’d expect a more steeply upward-sloping line – and less upward pressure on house/land prices.

And, since Hickey is –  rightly – focused on weak average rates of business investment here is another chart from the same earlier post.

Bus I % of GDP

Again, New Zealand is the red dot, close to the line.   Over the last 20 years, rapid population growth –  such as New Zealand has had –  has been associated with lower business investment as a share of GDP.  You’d hope, at bare minimum, for the opposite relationship, just to keep business capital per worker up with the increase in the number of workers.

This issue, on my telling, isn’t the price of houses –  dreadful as that is –  but the pressure the rapid policy-fuelled growth of the population has put on available real resources (not including bank credit).  Resources used building or renovating houses can’t be used for other stuff.

And one last chart on this theme.

productive cap stock

The blue line shows the annual per capita growth rate in the real capital stock, excluding residential dwellings (it is annual data, so the last observation is for the year to March 2017), but as my post the other day illustrated even in the most recent national accounts data, business investment has been quite weak.   I’ve added the orange line to account for land and other natural resources that aren’t included in the official SNZ capital stock numbers.  We aren’t getting any more natural resources –  land, sea, oil and gas or whatever –  (although of course sometimes things are discovered that we didn’t know had been there).  The orange line is just a proxy for real natural resources per capita –  as the population grows there is less per capita every year, even if everything is renewable, as many of New Zealand’s natural resources are (and thus the line is simply the inverted population growth rate).

In New Zealand’s case at least, rapid population growth (largely policy driven over time) seems to have been –  and still to be – undermining business investment and growth in (per capita) productive capacity.   Land use regulation largely explains house and urban land price trends.  And it seems unlikely that any differential features of New Zealand’s tax system explain much about either outcome.

The other new article that caught my eye this morning was one by Otago University (and Productivity Commission) economist, Andrew Coleman.    He highlights, as he has in previous working papers, how unusual New Zealand’s tax treatment of retirement savings is, by OECD country standards.  Contributions to pension funds are paid from after-tax income, earnings of the funds are taxed, and then withdrawals are tax-free.   In many other countries, such assets are more often accumulated from pre-tax income, fund earnings are largely exempt from tax, and tax is levied at the point of withdrawal.   The difference is huge, and bears very heavily on holding savings in a pension fund.

As Coleman notes, our system was once much more mainstream, until the reforms in the late 80s (the change at the time was motivated partly by a flawed broad-base low rate argument, and partly –  as some involved will now acknowledge –  by the attractions of an upfront revenue grab.

The case for our current practice is weak.  There is a good economics argument for taxing primarily at the point of spending, and not for –  in effect –  double-taxing saved income (at point of earning, and again the interest earned by deferring spending).  And I would favour a change to our tax treatment of savings (I’m less convinced of the case for singling out pension fund vehicles). I hope the TWG will pick up the issue.

That said, I’m not really persuaded that the change in the tax treatment of savings 30 years ago is a significant part of the overall house price story.  The effect works in the right direction –  and thus sensible first-best tax policy changes might have not-undesirable effects on house prices.  But the bulk of the growth in real house (and land) prices –  here and in other similar countries –  still looks to be due to increasingly binding land use restrictions (exacerbated in many places by rapid population growth) rather than by the idiosyncracies of the tax system.

House prices: Cleveland and Wellington

A few months I signed up to get the e-mail newsletters of US analyst Aaron Renn.

Aaron M. Renn is a senior fellow at the Manhattan Institute, a contributing editor of City Journal, and an economic development columnist for Governing magazine. He focuses on ways to help America’s cities thrive in an ever more complex, competitive, globalized, and diverse twenty-first century.

There is an interesting mix of material on urban issues.   But this morning, one newsletter in particular caught my eye.  The title was a warning: “Sprawl in its Purest Form, Cleveland edition”.    The article began this way.

…..the image below contrast[s] the amount of urbanized land in Cleveland’s Cuyahoga County in 1948 vs. 2002. The county population was identical in both years: 1.39 million.

 

And the piece goes on to lament how costly the spread of suburbia is, concluding that

As a rough heuristic, development of new suburban footprint should largely be limited to the growth rate in households to avoid saddling a region with excess fixed cost.

It might be music to the ears of some of our own planners, and the politicians who continue to enforce their policies.

Renn laments the fact that, at least in this case, when cities can spread and new houses can easily be built, while the population doesn’t change much, existing houses lose value

If you keep building new homes but you aren’t adding households, then older homes at the bottom of the scale will be abandoned. And all up the stack homes are devalued.

In the same way, when we had restrictions on importing cars in New Zealand for decades, secondhand cars didn’t depreciate much.  Most of us prefer access to newer cars.

I had a look at some Cleveland data.  And sure enough not only has that county’s population been largely unchanged, but greater Cleveland (MSA) with just over 2 million people also hasn’t had much change in population for 50 or 60 years (if anything falling slightly more recently).

I also had a look at house prices.   Demographia reports that Cleveland median house prices are 2.7 times median incomes in Cleveland, averaging US$146000 last year.  Average per capita GDP in the Cleveland metro area was around US$56000 in 2016.

On the other hand, a friend had mentioned the other day a house, perhaps 150 metres from where I’m typing, that had sold the other day for  $831000.    It is a small house (100 square metres) on a pretty tiny section (324 square metres) –  with a major construction project almost on the doorstep for the next 18 months or so – and as far as I can see nothing out of the ordinary.  That is the point –  it isn’t egregiously expensive for Wellington (let alone Auckland) in this day and age.    It is about what one might expect, given our laws and regulatory practices.     Average GDP per capita in Wellington in the year to March 2016 was around $NZ67900 –  a fair bit less than in Cleveland.

Homes.co.nz records that the same Island Bay house sold in 1985 for $76500.   Apply the Reserve Bank’s inflation calculator and in today’s dollars that would be the equivalent of $207000.  The actual recent sale price –  the real increase in price –  was four times that.

How have Cleveland house prices done over time?  Here is a chart, back to 1985, from the FRED database.

cleveland prices

Nominal prices have increased quite a lot.  But in real terms, applying a US inflation calculator, Cleveland house prices have barely moved –  up a bit in the boom years, down in the recession, but over 33 years virtually no change at all.  Houses were highly affordable then, houses are highly affordable now.    And lest you assume Cleveland is some economic wasteland, the FRED database also suggests that the unemployment rate there has been averaging about 5 per cent in the last year or two, very similar to that in New Zealand.

I usually focus on cities with fast-growing populations in discussing US examples of low and affordable house prices – eg Atlanta or Nashville.   And I’ve never been to Cleveland, and have no particular idea how attractive or otherwise parts or all of it are (in Wellington, Porirua and Wainuiomata  –  for example –  also have their downsides).   But the ability of the citizenry to readily expand the physical footprint of the city seems like a success story, producing housing market outcomes that seem much more appealing –  particularly to younger people trying to enter the market –  and affordable than what we now seem to manage in our larger New Zealand cities.

We should steer well clear of “rough heuristics” or tighter rules that try to limit the expansion of the physical footprint of cities, or allow officials and politicians to determine which land can and can’t be built on, in what order.   A competitive market for urban land –  peripheral and central –  remains the best prospect for once again delivering what should be a basic expectation: affordable housing.

Sadly, I noted in ACT’s newsletter earlier in the week, a link to a parliamentary question from a few weeks ago in which the Minister for the Environment indicated that “Cabinet is yet to make any decision about whether to review the Resource Management Act”.  I’ve long been sceptical as to whether, even if some Labour parts of a left-wing government was willing to think about serious reform, such reform would be possible given the reliance on the Greens to pass government legislation.  Sadly, for now it increasingly looks as if those fears are being realised.

House –  and land prices –  need to fall.  This government, like its predecessor, seems at  scared of such an outcome, and unwilling to take steps that offer the prospect of sustained much lower prices.

 

Land use regulations matter

Most local councils don’t employ economists –  or at least not ones we hear of.  The Auckland Council does have an economics unit, and the previous incumbent did some interesting and stimulating work.

But yesterday on interest.co.nz there appeared an article by two of the Auckland Council’s economists which argued, so the headline proclaimed, that “evidence from across NZ supports conclusion that land use regulation is unlikely to be the main culprit for house price rises”.   They even had an estimated empirical model in an attempt to back their claim.

But, frankly, it looks like an attempt to play distraction, and shift responsibility from their employer (and other local governments around the country).   And it is as if this is the very first time they had come to the subject and were, thus, unaware of the large number of thriving growing cities in the US with house price to income ratios not much more than a third of those in Auckland or Tauranga.

This is the centrepiece of the article

martin-norman-jan-18-2

Which might look superficially fine, at least until one stops to think about what is going on here.

Firstly, it appears to be an odd model, in that they appear to be explaining changes in nominal house prices, but without any explanatory variables like general prices or wages.  Over the best part of a decade, one might expect nominal house prices to rise by around 20 per cent as general costs and prices rose.   Perhaps they’ve estimated the model in real terms, but there is no suggestion in the article that they have done so.

Secondly, all else equal, lower real interest rates might indeed tend to raise the value of an asset in fixed supply.  But, on the one hand, this proposition doesn’t engage at all with the reasons why real interest rates might have fallen.  If, for example, expected future income growth has fallen at the same time – a part of the story in most explanations of the last decade –  any such asset price effect will be greatly weakened.   And, on the other hand, in a well-functioning housing and land market, the only fixed factor here is unimproved land.   And absent land-use restrictions, unimproved land in most places –  even most parts of a city –  simply isn’t worth much.  Perhaps you might think of $50000 per hectare for good rural land.    You could see long-term real interest rates fall 300 basis points (more than we’ve actually experienced), with no changes in future income expectations, and it still wouldn’t make that much difference to the free-market price of unimproved land (and the component of that used in a typical suburban dwelling).

Third, what about population increases?   Auckland (and Hamilton and Tauranga) have had a lot of population growth –  indeed, over decades Auckland has had one of the fastest population growth rates of any largest city in an OECD country.  And when regulatory obstacles –  land, consenting/construction or whatever –  get in the way then shocks to population will boost house prices.  There are regular population estimates published, which are easy to drop into a model.  And, no doubt, had Auckland’s population growth rate been half the actual rate, house and land prices would be somewhat lower.   But all this simply ignores the point –  the insight we really get from that swathe of US cities, (as well, actually, as from basic theory) – that population growth alone makes little or no sustained difference to house prices when the land and construction markets are free to work effectively.  So ascribing responsibility for house price increases to population growth is largely just cover for the regulatory failures of central and local government.

As a reminder, in fairly substantial US cities –  with growing populations –  we find median house (including land) prices of around NZ$250000 to $300000   (from the Demographia report: Des Moines US$198000, Louisville US$176000, Omaha $179000).

Noting that across local authority regions places with larger population growth rates have tended to have higher house price inflation, the Auckland City economists attempt to cover themselves this way

To point the finger at land use regulation would imply that all the areas with the largest population increases have the worst land use regulations and those with the smallest gains have the best regulations.

But that simply doesn’t follow.  Of course, it is often the interaction between population pressures and land-use restrictions that matters in determining what happens to prices.  And it is quite plausible that places with the fastest population growth might even have some of the less worse land-use restrictions, but those restrictions are simply placed under more pressure.  Land-use restriction is, to some extent, endogenous.

As the end of their article approaches, they argue that

Council, the Reserve Bank and the Ministry of Business, Innovation and Employment have all estimated Auckland’s housing shortfall at between 43,000 and 55,000 and growing. The Auckland Unitary Plan allows for up to one million potential new dwellings. Yet the plan was implemented a year ago, and there is no evidence of decreasing land prices.

Put another way: If having already zoned to develop 20 times the current housing shortfall is not bringing land prices down at all, can land use regulation in Auckland be the major cause of high house prices?

As I’ve noted here previously, those estimates of a “housing shortfall” are almost meaningless.   In the Auckland market as it stands, given the regulatory and other features, effective supply and effective demand appear to be in more–or-less balance.  What makes me say that?  The fact that prices haven’t moved much for a year or more.     No doubt there would be demand for many more houses if the price of land were lower, but at current land prices –  regulated and thus artificially scarce –  effective demand seems to be largely sated.

And what of the argument that “we’ve done the Unitary Plan and prices aren’t coming down, so the problem can’t be land regulation”?   Well, yes, of course it can.  If anything, given the manifestly obscene prices people face for land in  or around Auckland, Auckland Council officials (and their political masters) should be looking at the failure of land prices to fall back and concluding that their latest planners’ vision had failed.   It is all very well to talk of the potential for a million more houses, but these are the sorts of lines local authorities have run for a long time –  I recall councils running these lines when the 2025 Taskforce was looking at these issues.   I haven’t looked into the “million house claim” in any depth, but as I understand it, much of this potential is about the possibility of increased density on properties that the existing owners are simply never going to sell (they like living in their existing house/location).   There was probably a lot of theoretical capacity before the Unitary Plan, and of course there has been a lot more population pressure in recent years.

And the bigger issue is that when Council planners and politicians deem that certain places can be built on and others can’t etc etc, there isn’t much of the market at work.  A well-functioning land market would be one in which developers and land owners on the fringes of growing cities were in active competition with each other as to which could supply new sections and new homes more effectively, and where those options in turn competed with realistic options for increased density (according to the tastes/incomes of potential purchasers, not the whims and preferences of officials and politicians).     In a competitive market, holding costs are quite substantial –  not so where regulation rewards “land-banking” –  rewarding bringing land to market early.

The Auckland Council economists’ final line is cute in a way

In the case of Auckland at least, the answer is simple: You can’t live in a resource consent. It is because not enough houses are being built fast enough (for a range of reasons), rather than just the technical availability of developable land, that is keeping prices up. Land may be resource consented for development, but until houses are actually built on it, a premium will be placed on houses that are available.

And, of course, one can’t live in a consent, and we know from other work that the net addition to the housing stock in Auckland has been well less than the number of consents issued for various reasons (including that densification often loses existing houses).  But the point isn’t really relevant to the claim the economists are trying to rebut.

I did a brief post last year on one small example of undeveloped land on the fringes of Auckland –  property at Dairy Flat, still some years from actual development –  where various plots were selling at an average of $1.266 million per hectare.   When that sort of land –  with no prospect of a house on it for the next few years –   is still that expensive –  land which for rural purposes might be worth $30000 per hectare –  we know there is still something very wrong with land use regulation as it is being applied in Auckland.  If one looked, I can only assume we’d find similar examples around Tauranga.

None of this is deny that there might be problems around consenting processes, construction costs (and the construction products supply chain), and/or infrastructure, but please Auckland City stop trying to pretend that black is white and that land use regulation is not a major part of why house price to income ratios are so high in New Zealand –  not just in Auckland, or even Tauranga, but in places with few natural obstacles and modest population growth like Napier-Hastings, Christchurch, or even Palmerston North.

demographia 2 2018

Palmerston North or Des Moines?

I’m still enfeebled by the last of a bad cold –  three days of Wellington Anniversary Weekend and I didn’t even get out the front door –  so there won’t be much here today. But I noticed that Demographia yesterday released their annual report on median prices relative to median incomes in Anglo countries cities (and a few other places).

As three academics from the London School of Economics put it in their introduction

Before we can have useful debates or even give a balanced assessment of the issues we need good measures. Here Demographia has done wonders over the past decade to focus public debate on the inequity of rising house prices relative to incomes. As Oliver Hartwich in his Introduction to the 13th edition last year said “Demographia’s‘ median multiple’ approach…firmly established a benchmark for housing affordability by linking median house prices to median household incomes. It… is not a perfect measure because it does not account for house sizes or build quality. But it is the only index that allows a quick comparison of different housing markets, and it is the best approximation of housing affordability measures we have to date.”   We agree.

(The house size point matters when comparing, say, New Zealand or Australian price to income ratios with those in, say, the UK  –  where the typical house is notoriously small –  but much less so for comparisons across, say, the US, Canada, Australia and New Zealand markets.)

The big strength of the report is the collation of the data.   But the authors have policy prescriptions in mind too.  This is the more “analytical” of the charts in the report –  a variant of one they seem to show most years.

demographia chart 2018

No New Zealand city is large enough to feature, but the general point isn’t reliant on a single observation: by and large, cities with high price to income ratios have restrictive land use laws.   And no city –  in their sample –  with liberal land use laws has particularly high price to income ratios.

As so often, the US offers a high degree of in-country variability.  There isn’t just a single large city, or a single large fast-growing city. And there are very substantial differences in the land-use restrictions regime.  All within a country that has the same currency (and interest rates), the same banking regulations, and much the same tax system.

So here are the median house price to income ratios for the New Zealand cities in the Demographia sample and a selection of US cities.

demographia 2 2018

Did I cherry-pick the US cities?   Well, yes, in some ways I did.  If I’d simply wanted to show what can be done in the US, there are 10 cities with populations over 2 million with price to income ratios of 3 and under.  But some of them are cities that haven’t done very well economically, and really depressed places with falling populations can have house prices below replacement costs.

Instead, I picked out a selection of cities –  of different size, although all larger than the typical New Zealand city – in a different parts of the country.  I don’t know a lot about some of them, but many are regarded as pretty nice places to live –  at least if one gets over New Zealand priors in favour of cities by the sea (which, of course, Hamilton and Palmerston North aren’t).

As for population growth, I found some scattered snippets:

  • the Charlotte area is estimated to experienced a 15 per cent increase in population from the 2010 census to 2016,
  • the Nashville MSA is estimated to have doubled its population in the last 30 years, and had a rate of population increase similar to Charlotte’s in the most recent decade,
  • the Boise (Idaho) area has doubled its population since 1990,
  • according to the US Census Bureau, Des Moines has recently been the fast-growing city in the mid-west (at around 2 per cent per annum).

As regular readers know, I’m not a fan of government-fuelled population growth.  But in the US as a whole, immigration policy isn’t a large contributor to population growth, and so rapid population growth rates in individual cities are mostly about people and firms locating where the opportunities are.       And, perhaps, where the housing is affordable.

There seem to be plenty of examples in the United States in particular showing what can be achieved –  functioning affordable housing markets – even in areas with fast-growing populations.     Perhaps there is something amiss in our construction (and construction products) markets, but there has to be something seriously amiss with our land use laws and regulations when price to income ratios in what is –  for now –  by some margin our least unaffordable market are materially higher than those in flourishing US cities, such as some of those shown in the chart.

It would be good to see the urgent report the Minister for Housing commissioned before Christmas on the problems around housing in New Zealand highlight some of these simple, but telling, contrasts.

The Reserve Bank and housing collapses

In early December, the Reserve Bank published a Bulletin article, “House price collapses: policy responses and lessons learned”.  The article wasn’t by a Reserve Bank staffer –  it was written by a contractor (ex Treasury and IMF) –  but Bulletin articles speak for the Bank itself, they aren’t disclaimed as just the views of the author.   Given the subject matter, I’m sure this one would have had a lot of internal scrutiny.  Or perhaps I’ll rephrase, it certainly should have had a lot of scrutiny, but the substance of the article raises considerable doubt as to whether anyone senior thought hard about what they were publishing in the Reserve Bank’s name.

I’ve only just got round to reading the article and was frankly a bit stunned at how weak it was.    Perhaps that helps explain why it appears to have had no material media coverage at all.

The article begins with the claim that

This article considers several episodes of house price collapses around the globe over the past 30 years

In fact, it looks at none of these in any depth, and readers would have to know quite a bit about what was going on in each of these countries to be able to evaluate much of the story-telling and policy lessons the author presents.

Too much of the Reserve Bank’s writing about house prices tends to present substantial house price falls as exogenous, almost random, events: a country just happened to get unlucky.  But house prices booms –  or busts –  don’t take place in a vacuum.  They are the result of a set of circumstances, choices and policies.

And none of the Reserve Bank’s writings on housing markets ever takes any account of the information on the experiences of countries which didn’t experience nasty housing busts.  Partly as a result they tend to treat (or suggest that we should treat) all house price booms as the same.  And yet, for example,  New Zealand, Australia, the UK and Norway all had big credit and housing booms in the years leading up to 2008 but –  unlike the US or Ireland –  didn’t see a housing bust.  What do we learn from that difference?   The Reserve Bank seems totally uninterested.   Their approach seems to be, if the bust hasn’t already happened it is only a matter of time, but 2018 is a decade on from 2008.

One particular policy difference they often seek to ignore is the choice between fixed and floating exchange rates.  When you fix your exchange rate to that of another country, your interest rates are largely set by conditions in the other country.  If economic conditions in your country and the other country are consistently similar that might work out just fine.  If not, then you can have a tiger by the tail.  Ireland, for example, in the 00s probably needed something nearer New Zealand interest rates, but chose a currency regime that gave it interest rates appropriate to France/Germany.    Perhaps not surprisingly, things went badly wrong.

In the Bulletin article, the Bank presents a chart showing “house price falls in [10 OECD] selected crisis episodes” (surprisingly, not including Ireland).  But of those, eight were examples of fixed exchange rate countries (in several cases, the associated crisis led the country concerned to move to a floating exchange rate).   The same goes for all the Asian countries the author mentions in the context of the 1990s Asian financial crisis.     There can be advantages to fixing the exchange rate, but the ability to cope with idiosyncratic national shocks in not one of them.     And yet in the ten lessons the author draws in the article, there is no hint of the advantages of a floating exchange rate, in limiting the probability of a build-up of risk, and then in managing any busts that do arise.    It is a huge omission.  As a reminder, New Zealand, Australia, Norway, the UK, and Canada –  the latter a country that has never had a systemic financial crisis –  were all floating exchange rate countries during the 2000s boom and the subsequent recession/recovery period.

The author also hardly seems to recognise that even if house prices fall, house prices may not be the main event.   Even the Reserve Bank has previously, perhaps somewhat reluctantly, acknowledged the Norges Bank observation that housing loan losses have only rarely played a major role in systemic financial crises.   But there is no hint of that in this article.     Thus, in the severe post-liberalisation crises in the Nordics in the late 1980s and early 1990s, house prices certainly went up a lot and fell back a lot too, but most accounts suggest that those developments were pretty marginal relative to the boom and bust in commercial property, in particular development lending.  The same story seems to have been true for Ireland in the crisis there a decade ago.  Housing also wasn’t the main event in Iceland –  a floating exchange rate country not mentioned here that did have a crisis.  Even of the two floating exchange rate countries the article mentions –  Japan and the United States –  only in the United States could housing lending, and the housing market, be considered anything like the main event (and the US experience may not generalise given the very heavy role the state has historically played in the US housing finance market).

(And as I’ve noted here before,  even the US experience needs rather more critical reflection than it often receives: the path of the US economy in the decade since 2007 wasn’t much different to that of, say, New Zealand and New Zealand experienced no housing bust at all.)

Some of the other omissions from the article are also notable.  The author seems quite uneasy, perhaps even disapproving, about low global interest rates (without ever mentioning that inflation has remained persistently low), but there is no hint in the entire article that neutral interest rates may have been falling, or that global trend productivity growth may have been weak (weakening before the 2008/09 crisis showed up).   Thus, where economic activity is now –  10 years on –  may have little or nothing to do with the specifics of housing market adjustments a decade ago.   And although he highlights the limits of conventional monetary policy in many countries (interest rates around or just below zero), again he doesn’t draw any lessons about the possible need for policymakers to give themselves more room to cope with future downturns (by, for example, easing or removing the technological/legislative constraints that give rise to the near-zero lower bound in the first place.)

It is also remarkable that in an article on housing market collapses, there is only one mention of the possible role of land use restrictions in giving rise to sharp increases in house prices in the first place.   And then it is a rather misguided bureaucrats’ response: because supply may eventually catch up with demand the public need wise officials to encourage them to think long-term.  Perhaps the officials and politicians might be better off concentrating their energies on doing less harm in the first place –  whether fixing exchange rates in ways that give rise to large scale misallocation of resources, or avoiding land use restrictions that mean demand pressures substantially translate in higher land and house prices.

But in all the lessons the Bank (and the author) draw in the article, not one seems to be about the limitations of policy and of regulators.   There are typical references to short-termism in markets – although your typical Lehmans employee had more personal financial incentive (deferred remuneration tied up in shares that couldn’t be sold) to see the firm survive for the following five years –  than a typical central bank regulator does, but none about incentives as they face regulators and politicians (including that in extreme booms, an “insanity” can take hold almost everywhere, and even if there were a very cautious regulatory body, the head of such a body would struggle to be reappointed).

And nor is there any sense, anywhere in the article, as to when cautionary advice might, and might not, look sensible.  Alan Greenspan worried aloud about irrational exuberance years before the NASDAQ/tech bust –  someone heading his concerns then and staying out of the market subsequently would probably have ended up worse off than otherwise.   Much the same surely goes for housing.  In New Zealand, central bankers have been anguishing about house prices for decades.  Even if at some point in the next decade, New Zealand house prices fall 50 per cent and stay down –  the combination being exceedingly unlikely, based on historical experience of floating exchange rate countries, unless there is full scale land use deregulation –  that might not be much encouragement to someone who responded to Reserve Bank concerns 20 years ago.  (Oh, and repeated Reserve Bank stress tests suggest that even in a severe adverse economic shock of the sort that might trigger such a fall, our banks would come through in pretty good shape.)

The article concludes “housing market crashes are costly”.    Perhaps, but even that seems far too much of a reduced-form conclusion.  The misallocations of real resources that are associated with housing and credit booms are likely to be costly: misallocations generally are, and often it is the initial misallocation (rather than the inevitable sorting out process) that is the problem.  To me, it looks like an argument for avoiding policy choices that give rise to major misallocations (and all the associated spending) in the first place: be it fixed exchange rates (Nordics or Ireland), land use restrictions (New Zealand and other countries), or state-guided preferential lending (as in the United States).   Of the three classes, perhaps land use restrictions are most distortionary longer-term, and yet least prone to financial crises and corrections, since there are no market forces which eventually compel an adjustment.

It was a disappointing article on an important topic, sadly all too much in the spirit of a lot (but not all) of the Reserve Bank’s pronouncements on housing in recent years.

On housing, in late November, the Minister of Housing Phil Twyford commissioned an independent report on the New Zealand housing situation.   According to the Minister

“This report will provide an authoritative picture of the state of housing in New Zealand today, drawing on the best data available.

The report was to be done before Christmas and it is now 15 January.  Surely it is about time for it to be released?

Housing policy and prospects

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?

As for me

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
  • Kiwibuild.

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).

construction coeff of var

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.