Densification: not much happening in the US

The government’s housing plans –  and, I presume, the Labour Party’s –  seem to make great play of squashing more people, and more dwellings, into much the same space.    And it is certainly true that many of the older state houses seemed to sit on ridiculously large sections, (especially incongruous when the sections themselves are in otherwise very valuable locations).

Increased density appeals to planners, and perhaps even to people in certain demographics.  I wouldn’t want to stand in the way of people who prefer to live more densely. But that is rarely enough for the enthusiasts.  Instead, much rhetoric is aimed at so-called NIMBYs, people who might be reluctant to see a change in the character of their neighbourhood pushed through by bureaucratic fiat.  There was an article in today’s Herald along exactly those lines.

As I’ve noted here previously, over history, as cities have been richer they have tended to become less dense, not more so.     Space seems to be a normal good.

And so I was interested to stumble this afternoon on an article in the New York Times, with a couple of interesting graphics on changes in density in 51 metropolitan areas (population in excess of one million) in the United States over the last few years.  2010 to 2016 is quite a short period, but –  given history –  the results shouldn’t really be surprising.  I can’t cut and paste the graphics (click through to have a look), but what they highlight is two things:

  • only a fairly small number (10) of US cities saw increased density during that period, and the increases in density were typically small (although Seattle stands out with by far the largest increases)
  • the remaining 41 cities (metropolitan areas) saw a shift towards less density over that period, and many of those falls were quite substantial.

In  the chart, there is also some suggestion that areas with faster population growth were more likely to have become less dense over this period (Dallas, Raleigh, Houston, Nashville, San Antonio and Austin stand out).

It looks a lot like a case where cities spread –  people want more space –  when land use restrictions don’t stop them doing so.   It isn’t obvious why New Zealanders’ preferences would be that much different from those of Americans.   And it is hardly as if New Zealand is short of land either.

Land use restrictions may actually stop cities’ populations growing much –  at least in the US where there are many big cities to chose from (some with tight restrictions, others without).  That would seem to be the message in the latest Hsieh and Moretti paper , which highlights how little population growth there has been in the US cities with some of the tightest land use restrictions (San Francisco, San Jose, and New York) relative to other cities.   By doing so, those restrictions may have imposed substantial real economic costs (lost opportunities to take advantage of high productivity opportunities in those cities).   The case that such restrictions might have had a large real cost here is less strong –  numbers in Auckland has grown very fast even with the restrictions.  Perhaps here the cost is “simply” the shockingly high cost of purchasing house+land, a systematic redistribution against the young, the poor and the credit constrained.

UPDATE: For anyone interested, John Cochrane has a nice post explaining clearly, and in more detail, what is going on the the Hsieh and Moretti paper, and commenting on a couple of other papers in a similar vein.

One of the more idiotic headlines I’ve ever seen

Of course, there is plenty of competition.  But this isn’t the latest on Kim Kardashian or Prince Harry, or whatever.  It is about house prices.   And this time one can even, sort of, excuse the media outlet concerned

According to the Herald,  New Zealand housing market 40% chance of going bust, says Goldman Sachs.  

Sounds bad.  Or perhaps promising if you care about the prospects of your kids being able to buy a house.

But quite what does “bust” mean here?  Well, not quite what you or I might think of us as a bust.

Goldman, Bloomberg said, defines bust as house prices falling five percent or more after adjustment for inflation.

A five per cent fall in real house prices is a “bust”???  In what sort of alternative universe?   If the Reserve Bank does its job and keep annual CPI inflation around 2 per cent, unchanged nominal house prices for 2.5 years is a real fall of around 5 per cent.

As recently as 2008/09 –  no one’s definition of a house price “bust” in New Zealand –  nominal house prices fell by 9.1 per cent in year to March 2009.  The total nominal fall was a bit larger than that, and the real fall was a bit larger again.   In serious ‘busts” abroad, real house prices have fallen by 50 per cent (most of that nominal). In the late 1970s in New Zealand, real house prices fell by 40 per cent.

But, of course, the worst of it isn’t Goldman Sachs fishing for headlines with ill-chosen labels for modest corrections, but politicians who fall over themselves to suggest that, no matter how awful and unaffordable current house prices are, we can’t possible have house prices falling.

Last month it was Andrew Little

But asked if he welcomed signs Auckland house prices were falling, Little said no.

Today, Phil Twyford seems to be running the same line

Labour housing spokesman Phil Twyford said a housing bust could be just as bad as skyrocketing prices.

(In fairness, even though this quote appears in the “bust” article, it is possible Twyford has something more in mind than a 5 per cent real fall when he talks of a “bust”).

Flat nominal house prices might be an improvement on what we’ve had, but as I illustrated in a post last month

Depending on how optimistic you are, [with flat nominal house prices] it could take 40 to 50 years to get house price to income ratios back to around three – the sort of level sustained over long periods in well-functioning US cities (and in many other places before land use regulation became the fashion). Perhaps you are sceptical New Zealand could get back to three. It would take 20 years or more just to get back to five.

Of course, it isn’t as if other political parties are really any better.

If Amy Adams had been asked, at today’s launch of the plan for the government to build lots of houses, if she was hoping to see house prices fall, I wonder what she would have said?

The Green Party co-leader,  Metiria Turei, did once call for a slashing in Auckland house prices.  But that was a year ago, and nothing more has been heard of that call.

Last year, Arthur Grimes called for a 40 per cent fall in house prices.  That was greeted by the then Prime Minister with the label of “crazy”.  As I noted at the time

It betrayed a fundamental lack of seriousness on the part of the Prime Minister and the government about making housing affordable, and in fixing the dysfunctional market that they –  and their Labour predecessors –  have presided over.

Arthur noted that no politician has been willing to give a a straight answer on how much they wish house prices to fall and suggested

I suggest that this simple question should be asked every time a politician (of any stripe) talks on the subject. One can then see if they are really serious about making house prices in Auckland affordable for ordinary people.

Indeed.

Big changes in relative prices can be disruptive.  They already have been, on the way up.  But as I noted last year

if some people will suffer in house prices fall, that is only the quid pro quo for relieving the pressures (“suffering”) on whole classes of people who find it desperately difficult to afford a house at all, especially in Auckland –  the younger, the less well-established, the newer arrivals, those without wealthy parents to fall back on.

It amused me last year when someone passed on a report of a talkback caller who had insisted that I couldn’t be a real economist because I favoured a fall in house prices.   I think what caller had had in mind was the sort of fall in house prices that results from massive overbuilding, and reckless lending.   Severe recessions are often associated with those sorts of gross mis-allocations of resources.

But we’ve had no sign of overbuilding (if only…) and not much sign of reckless lending either (if banks had been inclined to, successive waves of LVR controls have made it that much harder).  Instead, we could fix up the housing market by freeing up land supply (because the biggest underlying issues –  for all the talk of building houses –  are land, not the house on the land).   And we could help by taking off some of the population pressure, even if only temporarily.    People who had bought in the last few years, might well find themselves in a difficult position.  People who haven’t been able to buy or build would be much much better off.  And for most of us, it wouldn’t make a lot of direct difference at all –  the mortgage you were planning to pay off over 30 years, would still be being paid off over 30 years.   There wouldn’t be an economic recession in consequence, rather than would be a new wave of optimism and opportunity as land –  not exactly naturally scarce in New Zealand –  was once more affordable.

 

Labour on housing

There was nothing positive to be said about the previous Labour-led government’s approach to housing and house prices.  There is nothing positive to be said about the current National-led government’s approach.  The rhetoric while they were in Opposition had been encouraging.  The substance of reform has been almost non-existent, all the while cloaked in fairly brazen, even offensive, rhetoric from both Prime Ministers (Key and English) suggesting that it was all a mark of success, a quality problem, and so on, along with suggestions that the government’s approach was working.    By that standard, I hope I don’t live to see a failed housing policy.

There have been some hopes, in some circles, that the Labour Party, if they were to lead a new government after this year’s election, might be different.  Their housing spokesman seems pretty impressive, and seems to understand the issues.  In a no doubt mutually beneficial move, he and Oliver Hartwich, head of the business-funded New Zealand Initiative, even did a joint op-ed on freeing-up the market in urban land.   Places where landowners can use their land pretty freely tend not to have the sorts of grossly dysfunctional housing markets New Zealand (and Australia, and the UK, and much of the US east and west coasts) have, even if those places are big and fast-growing.

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.

I first wrote about this last October, when Phil Twyford had put out a substantial piece on Labour’s housing programme.   There was a five point plan.  Reform of the planning system appeared on the list, but briefly and well down the list.    As I noted then

It has the feel of a ritual incantation –  feeling the need to acknowledge the point –  rather than being any sort of centrepiece of a housing reform programme.

Yesterday, my doubts only intensified.  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 (although he didn’t mention the tasteful lavender out the front of his current house, which I walk past each day).  Media reports say the speech went down well with the faithful.

This time there was a four point plan.  It was a lot like Twyford’s plan from late last year, with one omission.   The continuing features were:

  • the state building more “affordable” houses,
  • restrictions on “overseas speculators” buying existing houses,
  • making “speculators who flip houses with five years pay tax on their profits,
  • “ring-fencing” losses on investment properties.

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.     Planning reform isn’t going to be easy.  Few big reforms are under MMP.  It probably isn’t something the Greens are keen on.  And if the putative Prime Minister isn’t on-board, hasn’t yet internalised (or even been willing to simply state it openly) that this is where the biggest problems lie, it is hard to believe that a new government would really be willing to spend much political capital in reforming and freeing up the system, no matter how capable, hardworking and insightful a portfolio minister might be.

Probably reforms of this sort don’t play well in focus groups (although surely there is some responsibility on political leaders to help shape the debate, and change what people respond positively to?)   On the other hand, presumably the data suggest that people react well to attacks on “speculators”, “loopholes”, “subsidies”, which appeared numerous time in Little’s speech.

The headlines around the speech were around the leader’s official confirmation that Labour will prohibit people from offsetting tax losses from investment properties against other non-property income.   This is, apparently, to “close a loophole” to stop “speculators” receiving “subsidies”.     In fact, it is nothing of the sort.

For better or worse, New Zealand has a comprehensive income tax system in which different types of factor income are treated much the same, and taxed at much the same rate.  There are various exceptions, and lots of devil in the detail (thus, for example, the establishment of the PIE regime a decade or so gave an advantage to funds in widely-held entities over individually-held assets).  It has long been pretty fundamental to that system that one tots up all the gains and losses over the course of the year, and then pays tax only on the overall net income.  It would be absurd, for example, to take a business with five operating divisions and tax them on the basis only of the lines of business that made profits, even though several of the other divisions may have made large losses.    Since time is money, it wouldn’t be much consolation to say “oh, don’t worry, you can offset those losses against future profits in those particular operating divisions”.

But that is just what Labour proposes to do.    There is no “subsidy”, there is no “loophole”.   There is simply a conventional comprehensive income tax system at work.  If you lose money on one activity, you can offset it against gains on other activities.

And, if you are concerned about favourable tax treatments then, within the comprehensive income tax model, the clear and unambiguous feature of the tax system that favours one group of potential house purchasers over another is the non-taxation of imputed rents on owner-occupied houses.    Relative to other potential purchasers, this feature provides a big advantage to unleveraged owner-occupiers (ie mostly those in late middle age and the elderly).   This isn’t some idle Reddellian claim.  You can see the calculations worked out carefully in a Reserve Bank discussion paper, The tax system and housing demand in New Zealand, from a few years ago, showing how the features of the New Zealand tax system affect what different types of potential purchasers will be willing to pay.

Within a comprehensive income tax system, I’m at a loss to understand the economic logic behind Labour’s proposed policy.  Presumably it will be fine to buy a farm (or shares in a farm) and offset losses on that investment against labour income?  Presumably it will still be okay to set up a small sideline business which makes losses for several years in the establishment phase, and to offset those losses against labour income?   But not for residential investment properties (or, one assumes, for shares in companies mainly devoted to holding such properties?)   Even though setting oneself up as the owner of an investment property, renting a house to tenants, is a small business.  In fact, it is a way that many people get into business, taking risks to get ahead.

Much of the discussion in the time since Little gave his speech has been on what sort of people will be affected –  whether it is the evil “speculators”, as opposed to “Mum and Dad”.  I’m not sure if there is much data available on that in New Zealand, but they are having a very similar debate in Australia, and I was interested to see a list from Australian Tax Office data published on the ABC website as to who had claimed rental losses in Australia, by occupational group.  People can make of it what they will.  The occupational groups most likely to claim rental losses in 2013/14 were anaesthetists (28.7 per cent of them).  But 22 per cent of Police did as well.

I’m opposed to ring-fencing, if we are going to have a comprehensive income tax system.  And, I’m doubly opposed to singling out housing for ring-fencing.   If there is an economic logic to ring-fencing, apply it more generally or leave it alone.  As it happens, we tried something similar before.  From 1982 to 1991, there were restrictions put on loss-offsetting against labour income for “specified activities” (at the time, the bugbear was people investing in things like kiwifruit orchards).  Even then, loss-offsetting was limited to $10000 per annum (rather than zero).

Are there problems with the current tax treatment?  Arguably so.  Some would claim that the absence of a full capital gains tax is such a distortion, allowing people to run operating losses in the expectation of future capital gains.     As it happens, Labour proposes to address that by, in effect, imposing a capital gains tax on any sales of investment properties within five years (presumably these are typically the “speculators”).  But even if they weren’t, the argument still fails.  In even a moderately efficient market, there are no rationally-expected real future capital gains on offer across the market as a whole.  If there were, people would bid up the prices further now to take advantage of (and thus eliminate) those gains.     There are windfalls –  gains and losses –  from large actual changes in capital values of assets, but it isn’t a systematic distortion in the system.     (In principle, I don’t have too much problem with a capital gains tax that (a) applies only to real (inflation-adjusted) gains, (b) applies on a valuation basis rather than a realisations basis, and (c) treats gains and losses symmetrically.  In practice, no such systems exist).

Where there is a systematic distortion in the system is around the treatment of inflation.  In an ideal system, there would be no systematically expected inflation.  In practice, we have an inflation target centred on 2 per cent annual inflation.  As a result, roughly speaking, nominal interest rates are around 2 percentage points higher than real interest rates, and real assets should be expected to increase in value by around 2 per cent per annum, even if there is no change in their real value.      The two percentage point component of interest rates that is just inflation compensation isn’t real income (no one is better off as a result of receiving it; no one’s purchasing power is improved).  And yet it is taxed as real income.  And for those borrowers who can deduct expenses, interest is fully deductible, even though the inflation compensation component doesn’t reduce the borrower’s real income.   That is a systematic advantage to such borrowers, and one for which there is not a shred of economic logic.

In my preferred approach, the inflation compensation component of interest income would not be taxed.  And the inflation compensation component of interest expenses would not be tax deductible for anyone.    As the Reserve Bank discussion paper I linked to earlier showed, this change alone would make quite a substantial difference to how much highly-geared investment borrowers would be willing to pay.  And it would be a genuine improvement in the comprehensive income tax system as well, without singling out on class of purchasers of one class of asset.

But it is worth bearing in mind, that none of these issues can explain anything about house price inflation behaviour in the last 10 or 15 years.  Over that period:

  • the loss-offsetting rules have been much the same,
  • the introduction of the PIE system disadvantaged individual holders of investment properties relative to, say, holders of financial assets in PIE vehicles,
  • in 2005, the tax depreciation rules were tightened,
  • from 2010, depreciation on properties was no longer tax deductible,
  • the inflation target was raised in 2002, but for the last eight or nine years, inflation expectations have been trending down again,
  • maximum personal income tax rates were also cut in 2010 (reducing the value of deductibility and loss-offsetting).

Any of these “distortions” should be capitalised into the price pretty quickly once they are announced and understood,  The only new measures in the last decade or so have reduced the relative attractiveness of property investment  (and that is before even mentioning LVR controls).  It typically takes shocks to displace markets.  In principle, the advent of non-resident foreign purchasers could have been an example (in the presence of supply constraints), but we don’t have good data.  So could unexpected population growth.

We should probably also be sceptical as to how much difference ring-fencing, as Labour propose, might make.  When I was at the Reserve Bank we came and went in our views on tax issues around housing.  But the one consistent observation over the years was to point out that many different countries had quite different regimes for the tax treatment of housing.  Some allowed loss-offsetting, some didn’t.  Some had capital gains taxes, some didn’t (and all those who did had various different rules).  Some had differential income tax rates for capital and labour income. Some even made a stab at taxing imputed rentals.  But it wasn’t obvious that the differences in tax treatments explained much about the levels of house prices, or about cycles in them.    And in a well-functioning land market, land –  the asset value that is, in principle, affected by tax system changes –  is only a fairly small component of a typical house+land price.

What tax rules do is affect who owns which assets.  Thus, for decades our tax system has tended to treat all owners of investment properties pretty equally.   Loss-offsetting was part of that.   But so was the fact that we didn’t give favourable tax treatment (generally) to insurance companies and superannuation funds.  In many countries, assets held in those sorts of vehicles are more lightly taxed.  Not surprisingly, managers of those vehicles can afford to pay more for the assets, and a larger share of the assets end up in such vehicles.

Ring-fencing rules can be expected to have similar effects.     If “Mum and Dad” with one investment property can’t offset a bad year’s losses against other income, but have to carry it forward and wait for a good income year from property, while a superannuation fund with lots of investment properties can (either because it is less leveraged or because losses on some properties can be offset against profits on others) more properties will be held in such vehicles.  It isn’t clear what the public policy interest is in such an outcome?  More generally, the change will disadvantage people starting out in the rental services businesses relative to those who are better-established and have larger equity.

In the end, so-called “speculative” opportunities, on any sort of widespread scale, arise mostly because governments got themselves into the land market, and by regulatory interventions, disabled the market from working smoothly to increase supply in response to increases in demand, or changes in tastes.   Wouldn’t it be better, more in the interests of middle New Zealand (and economic efficiency) to address the problem at source –  fix the regulatory failures –  rather than falling back on rhetoric about speculators and subsidies, which at best in tackling symptoms, not grappling with causes?

Fix up the planning system and all this will be yesterday’s issue.  Fix up the inflation distortion and you’ll also have a better tax system.  But if the planning system isn’t fixed then, whatever other short-term stuff Labour does (including immigration changes) will only provide temporary relief, and in a few years time we’ll be back with the same old housing affordability problems.  What a lost opportunity that would have been.

PS.  I see that Labour is invoking the Reserve Bank in support of ring-fencing.  Perhaps the current Governor does favour such a change –  although we’ve not seen any economic analysis in support of it from them –  but if so, it is an example of a proposal which the Bank was against before it was for.    In 2005, at the request of the then Minister of Finance, a group of senior Reserve Bank and Treasury staff was asked to review policy options for dealing with house prices.  I was part of that group (as was Adrian Orr, and incoming acting Governor Grant Spencer, and the current Chief Economist at The Treasury).  There is a nice treatment of the ring-fencing issues on pages 19 to 22 of our report.

 

 

Slashing immigration really is quite easy

There is a story on the excellent new Newsroom site this morning on immigration.  When I printed it out at about 8am, it was running under the headline “Slashing net migration not easy”, although forty minutes later that had been revised to “Few answers to slashing net migration” [UPDATE: by 4:15pm the story is now running as “Slashing migration offers no easy answers”.]    Perhaps reflecting the preferences and presuppositions of the author, the URL for the story reads “immigration to rear its ugly head”, as if somehow there is something wrong with a serious discussion, in election year, about the number, and type, of people we allow to settle (or work) here.    But whether we should or not, if we (New Zealanders collectively) decided to cut back migrant numbers it is really quite easy to do so.  I’ll come back to that.

We are still waiting to see where Labour is going to land on immigration.   The other day housing spokesperson and campaign chair Phil Twyford was talking about what Labour might do on immigration.

Labour’s election chairperson Phil Twyford said Auckland was creaking under the weight of too many people and not enough investment in infrastructure.

and

Mr Twyford said details were still being worked out, but Labour policy would be to find a better balance.

“There is room to ease back particularly in the area of temporary work visas, and the blowout that has occurred in the so-called skilled migrant category.

“We think there’s flexibility there to ease back on the overall levels of immigration and that will take some of the pressure off Auckland.”

And yesterday Andrew Little was also commenting

Little said National had failed to manage immigration, especially by bringing in labourers when there were unemployed labourers here, and by the number of work visas issued.

But he said Labour would manage immigration, not cap it.

Bad as they are, stresses on Auckland –  housing or infrastructure –  aren’t the most compelling economic argument for cutting migrant numbers.  But if Labour is serious about making a difference there, it can’t just involve tweaks at the margin, or things that will affect numbers for just a year or two (since land markets, for example, will trade on expectations of future demand and supply pressures).  I guess we’ll see some details eventually.

What makes me sceptical that Labour’s talk in this area will amount to much is another comment from Andrew Little in the same article.

But asked if he welcomed signs Auckland house prices were falling, Little said no.

I’m sure there all sorts of political considerations about not scaring the (relatively small minority) of people who have taken on very large mortgages in the last few years, but really…….    When house prices in Auckland are ten times income a key marker of whether things are coming right will be a fall in house prices.   If all Little is saying is that prices will ebb and flow a bit, and that nothing structural has yet happened to reverse the inexorable trend rise in price to income ratios, then I agree with him.  But when houses are less affordable than they’ve ever been, we need politicians with the guts to say that they want to see house prices, especially in Auckland, a lot lower.

[UPDATE: In another report of the same interview Little confirms his reluctance to see prices fall    “Having the right number of houses, or closer to it, stabilises prices, it doesn’t collapse prices.”    That stance would be fine, if prices hadn’t got so out of whack over the last few decades. ]

It isn’t as if time will quickly take care of the problem if nominal house prices simply hold at current levels.  We have an inflation target centred on 2 per cent, so over time we can assume incomes will rise by around 2 per cent plus whatever growth in labour productivity the economy can manage.  For the last five years, that has been zero.     Here is what happens to price to income ratios, starting from 10 (around the current Auckland level) on three different productivity scenarios.

price to income scenarios

Depending on how optimistic you are, it could take 40 to 50 years to get house price to income ratios back to around three – the sort of level sustained over long periods in well-functioning US cities (and in many other places before land use regulation became the fashion). Perhaps you are sceptical New Zealand could get back to three. It would take 20 years or more just to get back to five.  That sort of adjustment makes the government’s NZS eligibility reform proposals look positively fast-paced.

But to revert to immigration –  which has the potential to play an important role in accelerating any adjustment that looser land use regulation, and perhaps even new government house building, might set in place –  Newsroom’s Shane Cowlishaw reckons there are few easy ways to cut immigration.    It is mostly quite a good article, made more difficult for the author by the refusal of either the Minister of Immigration or Winston Peters to be interviewed, and the fact that neither Labour nor New Zealand First have published any details of their policy in this area.

But, frankly, I think Cowlishaw’s conclusion is simply wrong.  It isn’t that hard at all, and actually the current government showed that with the baby steps they took last year (cutting the residence approvals target, and –  within that – suspending parent visas, and reducing the family category numbers).

I outlined what I’d do in a post a few weeks ago.   Here it is again, all focused on the bits of the net flow that are about immigration policy, the number of non-citizens we let in to live and work in New Zealand.

  1.  Reducing the residence approvals target from around the current 45000 per annum to, say, 10000 to 15000 per annum.  In per capita terms, that would be about the rate of legal immigration the US has, and would be similar to the rate we had in the 1980s.  Not exactly closing the door, but certainly pulling it over to some extent.
  2. Within that reduced target I would look to focus much more strongly on demonstrably highly skilled people (who offer the best chance of fiscal and productivity gains) and thus would
    • revisit, reduce and potentially eliminate the current Pacific access categories,
    • permanently eliminate parent visas, except (and even then capped) where there is an enforceable, insured, commitment to full financial support from the parent, or their New Zealand citizen child.
    • leave the refugee quota as it is
    • eliminate the additional points provided for job offers in regional areas (a measure that is tending to lower the average quality of the accepted migrants)
    • eliminate additional points for New Zealand specific qualifications,
    • eliminate additional points for jobs in areas of “future growth” or “absolute skill shortage”
    • more strongly differentiate points in favour of higher level qualifications,
    • perhaps establish a category akin to the US visa for those with extraordinary ability
  3. Eliminate the provision allowing foreign students studying here to work 20 hours a week.  If New Zealand tertiary institutions really have a product worth buying –  and some probably do –  they should stand on their own feet, as other exporters are required to.
  4. Reshape the work visa system with a view to (a) reduce the scope for lobbying and influence peddling, (b) reducing the total number of people here on work visas at any one time, and (c) provide much greater flexibility for employers to utilise work visa people for short specific periods in highly-skilled and well-remunerated roles.    Since there would be many fewer residence approvals places open (see above) this path would in any case be much less popular with prospective migrants.   Specific features might include:
    • no one could have a work visa for more than two three year stints
    • use an age-based matrix in which in normal circumstances no work visas might be issued to anyone under 30 for a role paying less than, say, (an inflation-indexed) $75000 per annum, increasing by (say) $25000 in each five year age window up to a cap so that for a person over 50 to get a work visas they would need to be in a role paying $200000 per annum or more.
    • no doubt there would need to be some exceptions to this, and it would not apply to say approvals for roles of less than perhaps three months, but the point is to get the focus not on official judgements of “skill shortages” but on attracting people, if we do, who are capable of commanding high salaries (loose proxy for skill) on market.

I’d also be rethinking (although this isn’t specific) the emphasis in the current points scheme on people who already have New Zealand work experience.  It was a well-intentioned reform –  a reaction against the experience in the 1990s of people coming in who for various reasons simply couldn’t get established in the New Zealand labour market using the sorts of skills/qualifications that got them entry in the first place.    But it has the effect of giving priority to relatively lowly-skilled people who managed to get in on temporary work or student visas, over people with much higher skills and much more potential to add value to New Zealanders over the long haul.

Little or none of these sorts of changes requires complex legislation. For better or worse, the details are mostly at the whim of the Minister or Cabinet.  They would make a substantial difference, and offer the prospect of a sustained reduction in the net inflow of non-citizens (although still lots of year to year variability in the PLT numbers, that include New Zealanders).   They would, among other things:

  • take immediate pressure off the housing market (current and expected future pressures),
  • lead to material downward revision in expected interest rates (possibly actual cuts, but at least pricing out any increases for a long time to come),
  • lead to a material fall in the nominal real and exchange rates, boosting the competitiveness of our struggling tradables sector,
  • force our export education industry to rely on the excellence of its product (or at least some mix of excellence and moderate cost) rather than what I’ve described as “export subsidies” from the immigration system.  Subsidies typically don’t build strong robust, sustainably internationally competitive, industries.  Rarely if ever have, rarely if ever will.
  • we’d strengthen regional economies relative to Auckland (an economy whose productivity growth has been underperforming even relative to that of the whole country),
  • get the government out of the business of picking winners in the labour market, or sectors/skills that somehow need a government hand on the scales to help them out, and,
  • over time, it would be likely to ease pressures holding down the wages of New Zealanders towards the lower end of the skill distribution.

Of course, the immediate response from much of the business sector is “but how will I get workers”.    It is a real and genuine issue for individual firms under current policy settings.   But individual firms simply don’t see the economy as a whole, or the adjustments that would take place across the whole economy if a policy package like the one I’ve outlined above was adopted.

Thus, individual firms treat migrant labour as increased labour supply.  And, for each of them, of course it is.  But migrants add demand as well as supply –  reasonable estimates (and the consistent historical view of New Zealand macroeconomists are that in the short-term the demand effects are stronger than the supply effects.  After all, immigrants have to live somewhere, shop somewhere, work in some building, and few bring their household appliances (etc) with them.  So an individual migrant might indeed ease an individual employer’s labour availability issues –  and if there are lots of migrants in a specific sector, they might even ease those constraints for the sector –  but for the economy as a whole:

  • in the short-term high inward migration exacerbates overall labour shortages in the economy, and
  • in the longer-term, high migration makes little or no difference to overall labour shortages (or, eg, to the unemployment rate).

That is true even if all the typical economist pro-immigration arguments, including those about potential productivity spillovers, hold  (which, of course, I don’t think they have in modern New Zealand).

So what would happen if a government were to announce a package like the one I’ve outlined above?  I’ve already sketched it out at a high level above.  But here is a bit more colour and flavour.

Whole sectors of the New Zealand economy employ many more people than otherwise because our population is growing so rapidly.   Activity in those sector would shrink, perhaps quite materially.   With a population growth rate around zero –  similar to those of many prosperous European countries –  not many people would be required to build new houses and road, and fewer people (for example) would be selling the stuff the stocks new houses (carpets, appliances etc).  Those people would need jobs elsewhere.  The prospect of lower interest rates would make more private investment attractive, but on its own that channel would take a while to work –  after all, overall domestic demand growth would weaken.  But the lower exchange rate –  actual and prospective –  would make a big difference to the competitiveness, and willingness to invest, of the tradables sector.   That investment will usually require workers –  to build it, and to staff it. So resources will shift within the economy.   Dairy farmers who couldn’t get Filipino workers could afford to bid up wages to some extent to attract potential New Zealand workers  (it doesn’t happen overnight, but markets work –  it will happen).  It would certainly be tough for (consumers of ) some domestically-oriented industries that have been heavily reliant on migrant labour (one could think of rest homes) but the whole point of an economic strategy that successfully reorients the economy towards a much more strongly-performing tradables sector is that tradables firms have it better relative to non-tradables firms.  (And non-tradables sector firms typically have pricing power that tradables sector firms don’t.)  It has been the other way round for too long, and we’ve seen the results (in eg, the charts I showed the other day).

Are there losers, even among New Zealanders, from such an approach?  Well, yes, of course.   It is almost impossible to re-orient the economy without there being losers.  Some of the people who will be worse off will be those holding urban land in or around our major cities (especially those who might otherwise have been thinking of selling).  Non-tradables firms often won’t find it attractive –  a business model geared to rapid population growth isn’t going to look so good under a model that no longer seeks to drive up population.  And there would inevitably be some workers in some firms/sectors who might find the adjustment difficult –  as is the case with any structural change, and as was the case as we moved (unconsciously no doubt) to skew the economy away from tradables firms towards non-tradables.

It is easy for economists to wave their hands and suggest big changes in economic structures and policies. It isn’t usually the economists themselves who are affected.  But our current strategy – the grand Think Big population experiment –  just isn’t working.  It wouldn’t be hard to change it, and in my assessment if we were to do so –  along the lines outlined above –  we put the New Zealand economy on a much better footing for sustained growth in productivity and real incomes/material living standards.  We’d also greatly ease those intense near-term stresses –  particularly housing and infrastructure in Auckland –  that rightly grab the headlines.

 

 

 

Housing, governments, and public opinion

There have been a couple of interesting polls that caught my eye lately on the government’s handling of specific issues.

The first was from Newshub on housing

newshub housing.jpg

Taking the wording literally, the last thing I’d want is the government “controlling” the housing market.  They (this government and its predecessor) have done quite enough to mess it up as it is.    It looks as though real house prices nationwide will have risen by around 50 per cent in both the previous Labour-led government’s nine years in office, and in the current National-led government’s nine years in office –  a bit more in the earlier government’s term (which included a 10 per cent fall in nominal house prices in 2008) and a bit less in the current government’s term.

We simply didn’t have today’s problems before governments (central and local) took powers to “plan” –  something that seems to have worked about as well as Eastern European planning more generally did during the Communist decades.  But I don’t suppose the respondents were interpreting the question quite that literally.  It looks like an overwhelming expression of a sentiment that something (probably quite a lot) needs to be done.

At the time of John Key’s early resignation from Parliament last month, there was some UMR polling reported on how well Key had handled various issues.   On most of the issues, we can probably treat it as a proxy for how the government had handled those issues.    This was the main graphic.

UMR john key

I found it a bit easier to read if I converted it into a chart of net balances –  the difference between of those saying “good” or “very good” and those saying “poor” or “very poor”.

Key UMR poll resultsIn some areas, Key rated very well, as one might expect (he did after all lead his party to three election victories).   Relationships with foreign leaders scored as highly as you might expect from someone who seemed generally to be regarded as “the sort of person you want to have a beer with”.       And if the government didn’t do anything much in the wake of the “global financial crisis”, arguably it didn’t have to –  after all it was mostly a North Atlantic crisis, and when the crisis ended there, so did the worst of the backwash in the rest of the world.   But if you are in office, you tend to get the credit.

Of the other answers, the only one that really surprised me was the quite negative Pike River score.  Perhaps more people than I appreciated really did think the mine should have been re-entered to try to retrieve the bodies?

But of course the two results that really caught my eye are the ones I’ve highlighted in red.  Respondents clearly didn’t think, on balance, that John Key had done well in “getting the level of immigration into New Zealand right”,   and were really really negative on how well the “housing crisis” in Auckland had been handled.  Perhaps the phrasing was a bit emotive, but when 61 per cent of people thought Key had done a bad job, and only 14 per cent thought he’d done a good job, the overall message is pretty clear.   The public just don’t buy the profoundly dishonest line that Key and his successor have run, that somehow unaffordable house prices (and some of the worst house price to income ratios anywhere in advanced world) are “quality problems“.  They are, quite simply, a scandal, and a sign of near-total failure (economic and moral) of policy in this area.  And this from a party that once prioritised home-ownership, and notions of a property-owning democracy.

Instead, we now have a governing party (notionally from the centre-right) that can’t or won’t do anything much about freeing up urban land supply, and can but won’t do anything much about cutting back the flow of non-citizen immigration that aggravates and amplifies the housing affordability problems.   It looks a lot like a deliberate attempt to skew wealth towards those who already have it, away from those who don’t.  I don’t suppose it is quite so deliberate, but the effect is the same.

I happened to have the 1975 National Party manifesto on my desk.  They had some really flaky stuff to say about housing –  a bit of that below –  but at least there was some realism on this specific point.

“The first way we will do this is by admitting honestly that we cannot create a better environment when people are pouring into the country faster than anybody can provide houses –  any kind of houses.  Thus immigration will be cut from the current rate of 30000 per year to around 5000.  This will give us the breathing space we so desperately need.”

National was in opposition then.  But it would be a good line for Opposition parties this year –  or for the government –  even if they all think they are really serious, this time, about sorting out the dysfunctional, over-regulated, urban land supply market.

As I said, that 1975 National manifesto had some astonishing stuff on housing.  I suspect it wasn’t unique to them.  The Values Party –  sometimes regarded as the world’s first environmental party –  did rather well in the 1975 election, getting 5 per cent of the vote in an FPP election.   And I doubt the Labour Party’s stance then would have been that much different.  But here is what the National Party –  just about to score a huge landslide victory –  was promising:

National has developed a complete plan for “the cities”.  And in doing so has become the first political party in New Zealand to include a serious urban development programme in its election policy.

…..

First, we will make moves to limit urban sprawl.  Second, we will set out to save the beauty that already exists.  And third, we will ensure that all new buildings contribute to an improved environment, at all times remembering that cities are people and that the social factors are all-important.

When a city sprawls, it destroys productive farmland and inevitably this also leads to decay in the inner city.  But sprawl can be stopped.  It has been done overseas and we will do it here.  We will change the Town and Country Planning Act to provide legal powers to literally “fence off” the cities.

….

….the government will encourage and finance new and better forms of high density housing.  This will not mean high rise apartments. We will build not just houses, but whole new communities. Ones in which people will want to live.

And so we have metropolitan urban limits, rural/urban boundaries, and all the associated restrictions that have given a land-abundant country some of the more expensive suburban and urban-periphery land around.  It was bad policy then, as it is now, but for the 15 years or so after those words were written New Zealanders were protected from the worst of it because population growth was very sluggish –  between the exodus of New Zealanders to Australia, and the reduced inflow of non-citizen immigrants.

What worries me now is that both main parties seem to believe, in principle at least, in freeing up urban land supply.  But it remains a great deal easier to pledge allegiance to that principle, than to do something serious about it.  Eight and half years into this government and very little has been done, even though the rhetoric has been roughly right since before they came to office.  Perhaps a Labour-Greens government really will be different, but if one is to take that prospect seriously perhaps it would be a good to see some agreed “Housing affordabilty and land use rules”, to match the recent welcome budget responsibility rules.      Not much has been heard from the Greens on this since their co-leader last year courageously advocated a substantial fall in house prices.     And the Greens historically have had a lot of sympathy with lines like those in that National Party 1975 manifesto.

I’m all for liberalising the urban land market.  But there needs to be a lot more realism about the prospects of substantial change.  I don’t favour cutting our immigration targets mainly for house price reasons –  in principle at least, that problem could be better dealt with in other ways –  but given the scale of the housing problem, the clear public discontent over housing unaffordability, and the much greater ability for governments to adjust immigration targets than to put in place new planning laws, it simply seems reckless –  and frankly ideological –  not to wind back quite substantially our target rate of non-citizen immigration.    For the Greens, who put a lot of emphasis on the physical environment, and for Labour –  historically the party of the working class New Zealanders –  it should really be a natural policy call.   I’m not sure why it seems not to have been so far.    Perhaps it is just fear of being tarred as somehow like Trump or Le Pen or whoever, even though our rate of legal immigration is typically far higher than those in almost any OECD country (a bit ahead of even Canada).    But even if your own natural biases are somehow pro-immigration, surely it is now past time to take a hard look at the New Zealand experience:  New Zealanders’ incomes haven’t been boosted by large-scale immigration, and housing for their children is rendered ever-more unaffordable by the toxic mix of planning restrictions and rapid population growth.  It is well past time to be cutting the immigration targets quite severely.

Of course, not everyone agrees.  I notice that the New Zealand Initiative has a new report out, Manifesto 2017 , outlining in very upbeat style their recommendations for what the next government should do.  It is 80 pages long, and I might offer some thoughts when I’ve read it, but I did do a quick search of the document for references to immigration policy, especially in light of the very recent Initiative report on that topic (which I reviewed in a series of posts).  There wasn’t much, but I did find this

Our report The New New Zealanders argues few countries have as successful
migration and integration policies as New Zealand.  It is yet another aspect of New Zealand to be proud of and celebrate.

If only it weren’t for those pesky unaffordable house prices, and levels of productivity that languish far behind those of other advanced economies.  It would good, just once, to see the evidence of the “success” –  for New Zealanders –  of our immigration policy.

In passing, this weekend has brought up the second anniversary of my move to become a stay-at-home parent, and thus the effective second anniversary of this blog.      I’ve been thankful for all the readers and the various comments/challenges various of you pose at times.  A while ago my 13 year old son asked me how long I’d keep going with the blog.  I responded that it might be two years or it might be 30 years, depending on whether I still had things to say, still had readers, and whether doing the blog came at an opportunity cost, to other things I might want to do, that outweighed the fun and stimulus I’ve had from continuing to do it.    There are rare days when I wonder if I still have much to say, that hasn’t been said 10 times already.  Then again, the other day I found a list on my desk dating back to 2015 of various topics I could usefully cover.  Many of them I still haven’t got to, and indeed I noticed this morning a book in a pile by my bed that I’ve been meaning to write about since I began.  So, for the time being at least, I’ll keep on as I have been.

Labour on financing new housing infrastructure

The parliamentary Labour Party has been showing signs of being serious about proposing steps that would, as they see it, unwind the structural impediments that keep urban land prices high and slow down the construction of new housing. Their housing spokesman (and campaign chairman) Phil Twyford has indicated that Labour wants to get rid of the artificial urban limits around cities, especially Auckland, and even managed a joint op-ed with the New Zealand Initiative on that.

Welcome –  and no doubt genuine –  as it all is, I’m still somewhat sceptical about what it will mean in practice.  Any Labour government is near-certain to require the support of the Greens, not known for their support for such flexibility.   And Labour or Labour-associated mayors lead our three largest cities, but there has been little sign of those Councils or mayors leading the way in freeing up urban land supply.  There is a great deal councils could do if they wanted to.  And even if they ran into legal challenges under current legislation, they could still be laying down markers as to the likely direction of reform when Labour returns to national office.

Last week Phil Twyford was out with another interesting idea in the same broad area –  very long-term infrastructure bonds paid back by targeted rates – which again garnered public support from the New Zealand Initiative.  Twyford sketched out his idea in an op-ed in the Herald, and also gave a substantive interview on it to interest.co.nz, who covered it in an article here.  A reader with ties to the Labour Party suggested that I might like to write about it.  My interest in the details of local authority finance is, sadly, quite limited, but I’ve been mulling over what to make of the proposal for the last few days.  Is it really a proposal that, if adopted, might make a useful difference?

One difficulty in reaching a strong view is that the idea is no more than sketched out at the moment, and many of the details could matter quite a lot.

Some have argued that New Zealand should introduce, or allow, the sort of model used in many parts of Texas –  Municipal Utility Districts –  where developers of new residential areas outside existing city limits can form an incorporation, with its own governance structure, which in turn borrows to finance infrastructure developments and the provision of utilities such as water, sewerage and even parks.  The bonds are then serviced by user charges and property taxes on the properties within the specific district.    The New Zealand Initiative has written favourably about them (reported here), and I found an interesting recent Texan newspaper article that captured some of the colour/flavour of these sorts of vehicles.    Whatever the merits of these schemes –  and there seem to be some downsides too –  they aren’t what Twyford and the Labour Party are proposing.

There are some real issues they are trying to address.  As Twyford notes

The council is up against its debt ceiling and last week put the brakes on large-scale housing projects in Kumeu, Huapai and Riverhead until more progress is made on roads, stormwater and the like.

When the population of a city is growing as rapidly as Auckland’s, the existing debt ceilings are almost certainly flawed.  There is a huge difference in the amount of debt, relative to (say) current revenue, that should prudently be taken on in a local authority region  with no population growth than in a region that is seeing 2 or 3 per cent population growth per annum.  We saw this at a national level when New Zealand and Australia were rapidly developing prior to World War One.  Overall government spending as a share of GDP was much lower than it is today, but debt levels (again as a share of GDP) were much higher –  in excess of 100 per cent.  It wasn’t a problem, and markets didn’t see it as a problem.

Some of the current problem then seems to arise from a reluctance to use targeted rates, to ensure that purchasers of the new properties bear the cost of the infrastructure involved in developing those properties.  Development contribution levies presumably go only part of the way.  If owners – present or future –  of the newly-developed sections bore the full cost of the infrastructure it isn’t clear what (economic) reason the Council could have for standing in the way of future residential developments. Planners’, bureaucrats’, and politicians’ visions as to what the city “should” look like are quite another problem –  and not one that Twyford’s proposal seems to address at all.

Twyford describes the problem this way

Developers under current rules have to finance infrastructure within a subdivision and are levied by the council for a share of the cost of connecting to the wider roading and water systems as well as parks.

Many developers struggle with the sums of money involved and it adds cost and delay to projects.

But it isn’t clear that the issue here is really infrastructure finance.  Developers need to finance all the costs of bringing properties to market, including covering both the delays that are perhaps inevitable in complex projects, and those brought on by the regulatory approvals processes.  The largest chunk of those costs typically wouldn’t be the infrastructure (I’d have thought) but the unimproved value of the land  (recall that urban and peripheral urban land prices are really what are sky-high).  And property development is risky –  even though the Reserve Bank’s LVR restrictions weirdly exclude new construction, new developments are where far and away the greatest risks lie.  Lend on an existing house in Mt Eden and the risks are far lower than lending on a new development in Huapai.  Sections might sit unsold, or undeveloped for years.  New houses might do so too –  there was plenty of that in Dublin after the boom ended.

There has been talk recently of banks becoming more cautious about lending for new construction –  perhaps partly from their own reassessments of risks, and partly at the prompting of parents, in response to APRA’s nudges.  Broadly speaking, that seems to me quite welcome.  Banks make their own credit judgements and sometimes they will be less willing to lend than the authorities might like.  It is, of course, the money of their shareholders they are putting at risk.

But Labour talks of central government becoming a fairly large scale provider of finance.

Labour’s plan is for infrastructure within a development, as well as the connections to the wider networks, to be financed by 50-year bonds.

Instead of the developer picking up these costs and loading them on to the price tag of a new home, the bonds could be issued by a government agency – perhaps a specialist infrastructure unit within the Treasury.

Bonds issued in this way would be the cheapest finance available, taking advantage of the Government’s ability to borrow more cheaply than anyone else.

The plan seems to be for the government to issue long-term bonds, with the government standing behind the bonds, and then to on-lend the proceeds to developers, tied to specific projects.  The bonds, in turn, would be serviced by targeted rates levied by local councils on properties within that development.

It all sounds fine when everything goes well (most things do), but here are a few of my problems/concerns:

  • should we be comfortable with Treasury officials making loans to individual developers, with all the risks of political cronyism in the allocation of credit over time?  At very least, lending would need to be done at much more of an arms-length from elected politicians (as, say, when the government provided loans through the Housing Corporation or the Rural Bank),
  • on what basis would we think that Treasury officials –  or even those of a more independent agency –  are better placed to evaluate and monitor residential property development projects than banks and other private providers of development finance?  Who has the stronger incentive to get it right?
  • isn’t there a high risk that the weakest projects will tend to gravitate towards the government provider of finance (strong projects, strong developers, will typically be able to get on-market finance?).  Isn’t that incentive greatest towards the peak of housing booms, when more conservative private lenders might start to pull back from the funding market?
  • how is cost-control ensured?  If developers can simply shift any cost blow-outs into mandatory targeted rates over the next 50 years, doesn’t that materially weaken incentives to bring projects in on time on budget?
  • what is the proposed legal structure?  Only Councils can levy and collect rates, targeted or otherwise.   Are they, or the developer, legally liable for the borrowing from the government?  Developers can and do go out of business quite quickly.  Councils don’t –  but then don’t the debt ceiling concerns cut in again? And can councils credibly (or legally) commit to maintaining a whole series of specific targeted rate for the next 50 years?    (And what are the protections for the property owners against arbitrary changes in these localised targeted rates?)
  • and what happens if the project fails?  If, for example, population growth slows up and a half-completed development lies idle for the next couple of decades.  Will the owners of the land have to pay the targeted rate anyway and, if so, how resilient is this likely to prove politically?

It seems to me that the proposal is meant to have two main attractions:

  • part of the development cost –  infrastructure costs –  are financed at a lower (government) interest rate, and
  • the headline cost of a new house would probably be reduced.

But in substantive terms, neither is really that much of a gain.   The cheaper government financing cost is only available –  in Twyford’s own words –  because the government’s credit risk is protected by the use of targeted rates.  But money that the government has first claim on isn’t available to service other obligations. The infrastructure bonds might well be rock solid, but the rest of any borrowing people had taken out to finance a new property would be just that much riskier.  Incomes don’t rise, and servicing the infrastructure bonds would have first call on what income there was.  Banks would presumably take that into account (including in deciding how much, and at what margin, they will be willing to lend).

And if the headline cost of a new house is reduced, so what?  If I have a choice between paying $700000 for a new house, or paying $600000 for the house and then having to service $100000 of infrastructure bonds issued by the government to cover the development costs of the house, it doesn’t make much difference to me.  If the infrastructure bonds really were 50 year ones, the annual servicing burden might be a little lower than otherwise.  Then again, New Zealand already has the highest real interest rates in the advanced world, so the notion of paying those high rates for that long might not be overly attractive.

And thus I suspect Twyford is wrong about a possible third benefit.  He argues

Reduce the infrastructure component of the price of a new home, and you’ll reduce not only new house prices but eventually prices across the whole market.

That’s unlikely.  If I’m looking at a $700000 house (with no targeted rates), and comparing it to that new house in the previous  paragraph, changing the financing pattern for the new house isn’t likely to change much about what I’d be willing to pay for the existing house.   Of course, if the policy really did increase the flow of new supply of houses and developed land, there would be benefit in lowering the prices of existing properties.  But simply lowering the headline cost of a new house (while loading an equivalent amount into infrastructure bonds) won’t change that.

In many respects, I’m sorry to reach a negative conclusion.  It is great that the Labour Party is looking for ways to make a difference to the housing market, not just for a few months but permanently  (and it is a disgrace that we’ve had 15 years of increasingly unaffordable house prices under both Labour and National-led governments).  And, of course, this isn’t the only (or probably even the main) component of their housing plan

Fixing the housing crisis and managing Auckland’s growth needs sustained reform on many fronts. Labour will build 100,000 affordable homes, tax speculators, and set minimum standards to make rentals warm and dry. We will free up the planning rules by relaxing height and density rules around town centres and on transport routes, as well as replacing the urban growth boundary with more intensive spatial planning.

But I’m sceptical that the infrastructure bond proposal is a suitable response to a serious constraint or that, even if the governance and monitoring concerns could be overcome, that it would make much difference to house and urban land prices.

If they wanted to consider a bold initiative, how about promising that any private land within 100 kms of Queen St could be built on to, say, two storeys without further resource consents?  With a similar policy –  perhaps 50 kms circles  –  for Hamilton and Tauranga, it would seem much more likely to make a real difference in lowering land prices –  the biggest financing issues not just for developers, but for ultimate purchasers.    There are other pieces of the jigsaw, but changing the rules that underpin expectations of future potential land values is probably the biggest component of the problem.

Throw in a sharp cut in the immigration residence approvals target –  not mostly to solve the housing problem, but because there is no evidence New Zealanders are gaining from the large scale non-citizen immigration  – and properties in or near Auckland would be much more affordable really rather quickly.

 

 

 

 

 

 

 

 

 

House prices and population

I wrote the other day about the role that population growth, including that accounted for by immigration policy, plays in influencing house prices, at least in places where regulatory restrictions on land use or construction impair the responsiveness of housing supply.  More demand, in the face of lagging supply, seems fairly ineluctably to put upward pressure on prices.

The latest QV house price data, for January 2017, also came out the other day. They produce data at an individual TLA level, which in conjunction with SNZ TLA population estimates, enables us to have a look at whether there has been a relationship (albeit crude and bivariate) between population growth and house price inflation.

In the chart below, I’ve focused on the period since 2007.  2007 was the peak of the last house price boom, and a period for which QV has supplied house price data for each TLA.  The population growth data is the percentage increase in population from June 2007 to June 2016 –  the most recent SNZ estimates.      It is worth remembering that in periods since the last census, population estimates are approximate at best, but these estimates are the best SNZ can do and they presumably use a consistent methodology across the country.

house-prices-and-popn-growth-by-tla-since-2007

Given that we have pretty pervasive land-use restrictions, it isn’t very surprising to find that areas with the greatest (lowest) population growth also tend to be the areas with the largest (smallest) real house price increases over this period.    It isn’t a mechanical, or one-for-one, relationship of course.  One factor is likely to be differences from TLA to TLA in how practically constraining the land-use rules are.  All else equal, a TLA where land use restrictions are less constraining will see less real house price inflation for any given population increase than a TLA with more-binding restrictions.  (I’m not aware of any good land-use restrictions indexes for individual New Zealand TLAs).

The observation on the far right of the chart might be an illustration of this point.  That dot represents Selwyn district, on the outskirts of Christchurch.  It has experienced a huge population increase –  in excess of 50 per cent in nine years –  especially since the earthquakes.    Some observers argue that the local authority has been relatively liberal in facilitating new housing and business development.  Perhaps (I was a little sceptical here), but one other factor is that, at the margin, people considering buying in Selwyn are likely to be considering developments in the rest of greater Christchurch too –  and over this period real prices in Christchurch city and Waimakariri only rose 10 and 14 per cent respectively.

The other obvious outlier is the observation at the top of the chart –  that for Auckland.  Real house prices in Auckland have risen 61 per cent since the 2007 peak.  Auckland has had considerable population growth over that period (16.1 per cent)

But the population growth in these TLAs wasn’t that different from Auckland’s experience

Kaipara
Waikato
Hamilton
Waipa
Tauranga
Hurunui
Ashburton
McKenzie

and they all experienced much less real house price inflation (these are the dots more or less directly below Auckland’s on the chart)

There could have been a variety of factors at work explaining how much Auckland prices have risen (even given population growth):

  • perhaps Auckland’s land use restrictions are just that much tighter than those in other places,
  • perhaps Auckland prices are being influenced by expectations of continuing strong population growth (which isn’t likely in all of those other TLAs),
  • perhaps Auckland prices were being influenced by the non-resident purchasers (of whom we have heard so much, but don’t really have good data on).

On the other hand, factors that aren’t likely to explain the difference include:

  • interest rates, which are the same across the whole country,
  • tax policy, which is the same across the entire country.
  • (and, for that matter, immigration policy which is much the same for the entire country)

Sometimes people will try to ascribe strongly rising house prices in particular localities to the state of the specific region’s economy.   But since 2007, Auckland’s average GDP per capita has grown no faster than that in the country as a whole.

akld rel to nz gdp pc

and the unemployment rate in Auckland has mostly been a touch higher than that in the country as a whole.

u-rate-akld-and-national

The other thing that struck me from the scatter plot above was just how many parts of New Zealand still have real house prices lower than those at the peak of the previous boom.   Some have had falling populations, but one or two have actually had faster population growth than Auckland  (eg Carterton, for some reason unknown to me).   These are the places where real house prices are still more than 10 per cent lower in real terms than in 2007.

Clutha
Taupo
Southland
South Taranaki
Westland
Masterton
Central Hawkes Bay
Tararua
Whanganui
Kaikoura
Gisborne
Rangitikei
Buller
Opotiki
Ruapehu
Grey   (-27.2 per cent)

It is easy for people in Auckland and Wellington to be dismissive of some of these places, but as I’ve already illustrated, it isn’t as if Auckland’s economic performance over the last decade has stood out as noticeably better for the average person than that of the country as a whole.

On which note, real house prices across the whole country are now around 6.4 per cent higher than they were in 2007.  With Auckland accounting for a third of the country, and with real prices up 61 per cent there, average real house prices in the rest of the country are still, fortunately, lower than they were at the peak of that previous boom.