Free up housing by shaking up politics

No one much thinks that either National or Labour-led governments are going to do anything serious about freeing up land use and markedly lowering house prices (and price to income ratios).  A few individual figures in the two parties occasionally talk a good game, but their governments don’t do what is necessary to make a difference.  All indications are that the parties don’t really care that much –  sure, they seem to need to be seen to show a bit of concern from time to time, but affordable housing across the board seems to be rapidly becoming one of those things our political leaders would prefer people just forgot about.  Get used to living in expensive dog-boxes on tiny sections or in apartments – all this in a country with abundant land.

Graeme Farr isn’t willing to give up.  He’s launched House Club, a club and political party in one, designed to make affordable housing an option again.  As the website puts it, the gist is

House Club does not want to change any of the crazy number of rules and regulations that affect housing – it just wants it’s own areas where none of them apply! 

House Club creates its own “Club Zone” which is outside the RMA, the Building Act and council zoning rules and can have from 5 to 5,000+ houses.

Here is the fuller text on what a “Club Zone” is

A Club Zone is land where building does not have to comply to the RMA, the Building Act or local council zoning. This is nothing new – until the 1980’s the Government and its departments like the Post Office, Railways and Ministry of Works did not need to get building or resource consents for anything they built on Government owned land. In some US states such as Texas there are no town planning rules. This was the same in NZ until 1953 and the Town and Country Planning Act – yet houses build before this act are equally sought after and valued than later ones – often more so!

House Club decides solely on where a Club Zone is created. The land can be bought outright by House Club or it can award a group or private landowner a Club Zone – or a combination of both. Each Club Zone site can determine it’s own rules or convenants to suit its purpose, but these will need to be approved by House Club if it is not a partner or owner.

He is planning to have House Club become a registered political party –  for which he needs at least 500 members ($3 for three years’ membership) –  contesting the party vote in this year’s election, aiming for 5 per cent of the vote and the balance of power, with a single issue they’d be looking for action on.  In concrete terms,

House Club will provide houses for UNDER $300K for a 100m2 three bedroom home on a proper section within 30 minutes drive of the centre of Auckland, Wellington or Christchurch and even closer in other cities and towns. 

“Proper section”?  Well, according to a Westpac survey last year, 90 per cent of New Zealanders wanted a backyard.

More generally on the House Club model

House Club will contain many Sub-Clubs who want to do their own thing – House Club55 for low cost seniors housing, Tiny House Club for tiny house villages, Eco House Club and Co-House Club for eco and co-housing schemes and Private House Club for selected private developers who want to provide low cost housing to Club members.

When Graeme first told me about this idea a few months ago it was in the context of retirement villages

1. I am thinking large scale ones – say 200 to 2000+ houses like they build in the US. They are super cheap there and most are freehold titles. I can send examples – you would not believe the prices they can achieve using economies of scale.

2. Dairy factories and timber mills are usually permitted activities in rural zones – so a retirement village will most likely have less affects

3. Retirement villages are better than standard fringe housing as they do not need things like jobs, schools, public transport, wastewater pipes, roads etc. Residents don’t travel at peak hours – they have their own buses. The councils do not need to provide infrastructure like a standard subdivision.

As I noted then, I couldn’t imagine wanting to live in such as village, but it is clear that lots of people do.   And as the website indicates, the model generalises.

The vision is for developments of the fringes of existing cities/towns

Developing in the fringes is not only cheaper but faster too. If the density is kept low then the rural road network and infrastructure that exists around most cities will be sufficient for the intial Club Zones. Modern self contained wastewater plants can service the zones if trunk connections are not nearby. Freshwater and stormwater can be collected and disposed of on site if need be and most rural roads have a power network.  

What about building standards?

Do Club Zone houses need to comply to standards likeNZS3604?

A:   No they don’t as long as they are only one or two storeys.  There would be well over a million houses in NZ which come nowhere near to complying to standards like NZS3604 and you can legally buy these – often at very high prices.  Builders will probably choose to use some standards as a selling feature but making them not compulsory means you can import a house kit or building materials from overseas without restriction. This undermines the local materials supply cartels which contribute to the very high building prices here.

Members buying in the Club Zones will accept they are paying much less for having a house which may contain building products which are not made in New Zealand or made to a ‘special’ NZ standard. Most imported mass production materials are made to adequate or better standards than we have here anyway. At present aluminium windows made for Australia do not comply to the NZ standard NZS4211:2008 – yet they have hurricanes in Australia. The current review of the Building Act will tighten importing rules – supported of course by the NZ Building Industry Federation who represent the local suppliers and manufacturers.

In other words, seeking to address both the land and construction cost elements of our current house prices.

And in a telling, if more lighthearted, response to a suggestion that there might be 2500 rules governing building a house

It is hard to add up all the rules and regulations the Government and councils have made for building a house but it is true pleasure craft in New Zealand need to comply to no construction rules at all, irrespective of size. You can build a 100 metre boat and unless you are using it for commercial use or charters there are no regulations at all – you can build it out of blotting paper if you like. This applies to around one million boats in New Zealand and could of course equally apply to basic housing.

There is even a, perhaps tongue in cheek, plastic bag policy.

It isn’t a first-best policy option by any means, but no significant party shows any sign of championing first-best reforms, and local governments are mostly the enemy of anything that would seriously liberalise market (the mayor of Wellington – sworn enemy of the backyard – is quoted on the front page of this morning’s paper talking of “if you can squeeze twice as many houses on the same land why wouldn’t you?” –  this about privately owned land, for privately-owned houses).

But as a second-best option I think it has a lot going for it and, at very least, deserves some serious scrutiny and debate.  I don’t need a house myself, but I’ve just signed up (to support a good cause rather than deciding, at this stage, to vote for them).  I don’t suppose it is likely House Club will get to 5 per cent –  it is hard – but it would be much better, for members and for wider New Zealand, if they did manage to do so, or even if they just managed to put some more pressure on National and Labour to take seriously the plight of our younger generation – including my kids 10 years or less hence –  for whom the elite message seems to be that home ownership is for the especially fortunate, the abnormally determined etc, not a normal and everyday part of life for people across the economic spectrum.

Here, again, is the link to the website.

Housing unaffordability

The annual Demographia report on housing affordability across a range of English-speaking advanced countries was released earlier this week.

If you are a New Zealander who cares at all about efficiency, fairness (especially to the rising generation), functioning markets it makes pretty bleak reading.   The focus of the analysis is on the ratio of median house prices to median household income.   Here is ratio for the median urban market in each of the countries they look at

demographia 2020 2

(They also look at the two city states Singapore  (which is in the middle of the pack) and Hong Kong (which is off the charts, see below).

And here is a chart focused just on fairly large cities (>1 million people).  I’ve shown the ten cities with the lowest price to income ratios, the ten with the highest ratios, and a selection (every ten or so rank places) of those in-between.

demographia 2020 1

and here are the New Zealand cities in the wider sample

demographia 2020 3

You’ll see people sometimes talk about Christchurch house prices being affordable again but it is worth keeping that claim in perspective –  and, in fact, rubbishing it lest anyone think that the Christchurch outcomes are in some sense good or acceptable.

The Demographia reports looks at just over 300 urban housing markets.  In 46 of them, mostly in the US but not exclusively, the estimated price to income ratio is three or less (what the Demographia authors regards as a normal longer-term level), and 103 have ratios of 3.5 or less.   There are large cities and small cities. Fast-growing places and stagnating ones.  A house price to income ratio of 5.4 (Christchurch at present) mightn’t be the worst in the world, but by no stretch of the imagination is it good.   We –  and people in Christchurch –  shouldn’t be settling for it.  Only 60 cities in the entire sample are worse, on this count, than Christchurch.  And Christchurch is a fairly small city with abundant land, and yet its house price to income ratio is the same as those for Miami and New York.

This particular isn’t perfect by any means. No indicator is.    Among other things, median household income is likely to be partly endogenous to house prices: more people working (particularly both parents of young children) and for longer hours to attempt to afford a house.    And if house sizes are probably fairly similar across New Zealand, Australia, Canada, and the US as a whole, the typical house in the UK is considerably smaller than in those other markets, and no attempt is made to adjust for this difference –  whether across countries or across major cities.   Auckland might be in the top 10 most unaffordable ‘major markets’ but on average you will be getting more house and land for your money in Auckland than in London (let alone Hong Kong). But while it is fair to recognise this latter point, to make very much of it is simply a cop-out.  You won’t be getting more house for your money –  and quite possibly less – in Auckland, Wellington or Tauranga than in Lincoln, Nebraska (ratio 3.3) or Louisville, Kentucky (3.2) or the dozens of other affordable cities across the United States.

One of my slight frustrations with the Demographia report is that it does only focus on English-speaking countries.  While they are often the ones we like to compare ourselves to, it would be more reassuring if there was data on a range of continental European countries and Japan/South Korea. Russia wasn’t one of the countries I had in mind  but in this year’s report, they have a snapshot on Russian cities.   Across Russia, population growth certainly isn’t a factor in driving house prices, although some individual cities (including Moscow and St Petersburg) are growing. Most of the 17 cities have price to income ratios of three or less (and while Russian houses/apartments are probably fairly small, Russian incomes are fairly low even by New Zealand standards).  But both Moscow and St Petersburg have price to income ratios of 4.2.  That’s above the Demographia threshold, but well below Christchurch, Wellington, Auckland (or Tauranga).

There was a little media coverage of the Demographia report.  But just a few months out from another election, where is the sense of scandal, of outrage, of a commitment to produce very different outcomes in the future?  No significant political party is willing to talk in terms of dramatically lowering house prices, or of making the structural changes (mostly to land use policies) that would bring it about, or about supporting in the transition people caught out by the rigged market our central and local government politicians have delivered in the last 30 years.  The scandal –  the sheer unaffordability –  that is so recent now seems to be taken for granted as something normal, inevitable etc.  It is highly abnormal. It is a disgrace.  The burden falls most heavily on the youngest and most marginal parts of the population.  It is indefensible.  And yet neither National nor Labour (nor NZ First nor the Greens) are interested in serious change making a serious and sustained difference.  Oh, they’ll tweak things at the margin, but none of them will talk about aiming for price to income ratios of three, or of rendering incredible the notion that small houses on tiny sections in Berhampore would sell for $1million.

 

The void where hope might have been

If, as I do, you’ve lived for almost 25 years 100 yards or so from the old Erskine College you have a fairly good sense of what National was on about in this snippet from their new “Building NZ, RMA Reform and Housing” policy discussion document released yesterday.

Objections to proposals for residential reuse of the old Erskine School site in Wellington held it up for more than 20 years. It involved claims that the decaying buildings had heritage value, as well as the routine RMA neighbour objections. Long after the school closed the buildings were red-stickered by Wellington City Council as being unsafe for occupancy. After two decades of costly objections and delays, development eventually started on the site providing 94 dwellings for families.

The school closed in 1985.  Some of the land was developed decades ago, but the main site is only now getting the first few occupants in the new (eye-wateringly expensive, at least on the advert I followed up) townhouses.

But if there seem to be some hints of some modest good things in the document, it is hard to be that positive  Every so often Opposition parties talk a good game about fixing (or rather, freeing) the housing market –  the one that results in such appallingly high price-to-income ratios, systematically skewing opportunity away from the young.   And then nothing very much that matters happens.  It has been that way for 30 years now, even as the problem has got worse and the imbalances more entrenched.

National talked a good game leading up to 2008.  And then accomplished almost nothing –  people from David Seymour to David Parker argue they made things worse – including when they had a clear absolute majority with ACT.  Some elements of Labour –  well, mostly just Phil Twyford – talked a good game prior to 2017.  Twyford can still give a pretty good speech on the subject, but are real house/land prices higher or lower than they were when Labour took office two years ago?  Higher of course.  And these are asset markets, that trade not just on how things are right now –  policymaking and legislating takes time – but on best credible expectations about the future.

And now we have National in Opposition again, trying to shape the best policies for New Zealand –  oops, the best policies they think they might win on –  heading towards next year’s election.  They seem to have given up already.

Oh, I know the headlines don’t say that.   They’ll report National talking of splitting the Resource Management Act in two, to have separate regimes for urban development and for wider environmental resource utilisation issues.  But then the current government is already looking at that option in one of their numerous working groups and consultative processes.    Have land prices on the edges of our cities been falling towards the value in the best alternative (agricultural?) use?  Not that I’ve noticed.  In principle, the idea of  splitting the Act sounds appealing, although with the caution that various experts have posed that there is a risk of creating huge uncertainty for a decade or two as courts define the implications and limits of a whole new regime.

But what is striking is how little specific there is about how differently things might actually operate under new National legislation.  National grappled with these issues in government for nine years, with ready access to experts inside and outside government.  They’ve now had two years in Opposition, with key former ministers (eg Amy Adams and Nick Smith) still on board, and yet nine months out from an election we have page after page of ideas from other people (notably the Environmental Defence Society) and discussions of how things are done in Scotland, South Australia, and Queensland, but little or nothing specific, and nothing that articulates any sort of National vision of a radically more functional future system.     And nothing that, for example, notes that Scotland has little population growth and the big cities in Queensland and South Australia have house price to income ratios well in excess of six –  classified in the annual Demographia rankings as “severely unaffordable” –  when both Brisbane and Adelaide not that many decades ago had price to income ratios of three.

And, sadly here I add an “of course”, there is not a single reference anywhere in the document to that myriad of thriving growing US cities where house price to income ratios today  –  10 years into an economic growth phase, with interest rates almost as low as those here now –  are anywhere from 2.5 to 4.    Or how we might be able to deliver those sorts of outcomes for New Zealanders.

I got to the end of the document last night and was rather struck by the lack of apparent ambition and by what appeared to be an avoidance of directly addressing the main issues.  So I checked the entire document and neither ‘land prices’ nor ‘house prices’ appear at all.   And yet every serious analyst knows that one of the key presenting issues is how large a share of the cost of an urban house+land is the price of the land under the house.  We aren’t short of land in New Zealand –  far from it.   Fly in and out of even Wellington or Auckland –  let alone most provincial cities –  and it is striking just how much land is close by the existing urban areas.  And yet our governments –  central and local –  have managed to create an artificial scarcity that often means that well over half the cost of a house+land in our cities is the price of the land.  It is crazy –  and we aren’t just talking close-in places like Mount Victoria or Parnell, with distinct locational advantages.   But it is worse than crazy, it is a chosen evil that governments do to our younger generations.    National can do all it likes –  and there looks to be good stuff that could and should be done –  but unless they end the artificial (government created and maintained) scarcity of (potentially) urban land, they will never make any serious inroads in fixing housing affordability.    There wasn’t even any sign in the document of National pushing back against the current proposal to worsen the situation around so-called “highly productive land”.    No hint of, for example, a flagship stake in the ground, promising (say) to enact a presumptive right to build two-storey housing on (almost) any land.

And so one comes away from the document with a sense that National really doesn’t care that much about severely unaffordable housing and rigged land markets, or they are scared and don’t trust themselves to actually be able to sell the case for change and what it might take to bring that change about.   Probably only they know the answer to which influence is more important, and perhaps not even they do (since the human capacity for barely conscious self-deception is pretty well-developed).    And so the government-created disaster, and all the attendant injustices, will go on.  It doesn’t make National any worse than the Labour-New Zealand First-Greens government, but what consolation is that to anyone (other than those sitting on existing artificially high-priced assets)?   On these issues –  as on so many –  they are really two sides of the same coin, largely protecting the status quo and wasting the offices of government which could be occupied by an –  as yet non-existent party –  that might be really willing to address the core issues to promise to get house and land prices a long way down, and perhaps even offer some sort of limited compensation scheme for those who –  largely through no fault of their own –  have taken on very large debts in recent years to get into any sort of home of their own.

Instead, all we get is small-target stuff, with nothing to scare the horses, no bold messages to sell, and little or no prospect of overdue real change and improvement.  Much like –  again from both parties –  the failure to even begin to get to grips with the decades-long productivity failure.  I’m guessing National – like Labour –  would be quite happy if several decades hence houses were once again affordable (perhaps three times income) more or less by accident.  But they won’t promise to get house and land prices down, they won’t do what it would take to fix this massive failure of our government.  And, so it seems, they’d mostly also be happy with just a bit of marginal product differentiation and just little enough action to keep the public angst (my children should be in the house market 10 years from now) more or less in check.

 

The unimaginable dystopias we live in

I’m not sure if it was planned but there was a distinctly dystopian tinge to the magazine section of the Sunday Star-Times yesterday.

The Editor’s Note dealt with the pervasiveness of dystopian themes in the modern books being read by children and “young adults”.    There have been plenty of these in and through our household –  the Wellington libraries seem abundantly stocked with them.  I’ve even read a couple –  the kids seem to like the idea (nay, strongly urge) that Dad occasionally reads one of their books.  I haven’t yet succeeded in getting my youngest to read 1984,  Brave New World, or Children of Men, although she and I both recently read The Handmaid’s Tale and The Testaments –  and I couldn’t really disagree with her, not wholly favourable, assessment of the latter as “like a young adult dystopian book”.  I guess there are all sorts of reasons for liking these dystopian books, some of which are probably less than entirely healthy, but it is interesting to ponder the alternative societies, rules, norms (and lack of them) depicted by the authors.

A bit later in the same magazine section there was just such a portrait, “Dark Days in Dystopia”, but this time about a real place, the state of California.  The column first ran in The Times (UK) and is by Gerard Baker the (British) former editor-in-chief of the Wall St Journal.   It is online only behind the paywall of The Times but the gist is in the lead blurb

“California used to represent a fantasy of Hollywood glamour and wholesome hippie-ness combined.  But now, with blackouts, crippling taxation and unaffordable housing, the Golden State is a feudal society of super-rich and serfs”

Not being that into eiher Hollywood or hippies, I guess my impression of California decades gone by was a bit different, with an emphasis on mild weather, sunny optimism, and widely-spread prosperity.  In childhood TV terms, The Brady Bunch.  In US political terms, it isn’t that long since California was a Republican state – middle (suburban) America.

Baker’s article touches on various aspects of how California has gone bad.  But the revealed preferences of individuals are often as telling as anything and –  as he notes – Americans (net) have been leaving California for years (in the ten years to 2016, a net 1 million left).

Baker makes quite a bit of the breathtakingly high tax rates in California, but his main focus is on housing, “almost unimaginably unaffordable for most Californians” which is, of course “an entirely human-made debacle”.  He quotes a (Democrat-sympathising) academic, Joel Kotkin, who “describes California as a reimagining of medieval feudalism” in which underneath the “wealthy elites” who promote and champion the panoply of problematic policies

are the modern serfs, who can barely afford the land they must rent from their masters. They have no assets, no stake in their economy and, thanks to prohibitive housing costs, have limited mobility.

The column ends

California has always been eyed as a signpost to the future.  The dystopia there might be a warning to voters everywhere.

The column might seem a touch over-written to you (it probably does to me as well) but it was some of the concrete details in the midst of the rhetoric that I latched onto.

The median home price in California is $614000 (NZ$959000), almost three times the national average. The California Association of Realtors’ housing affordability index estimates the percentage of households that can afford to purchase the median-priced home.  For California, that number was 31 per cent….for the US as a whole it was 56 per cent.

But what about New Zealand?

The median house price here is now $607500 (in October, according to REINZ).  That is a lot cheaper than California, of course.  But we, on average, are a lot poorer than Californians.

Average GDP per capita in California is about US$66000.  Here, it about NZ$62000.

In other words, the ratio of house prices to income (this time proxied by GDP per capita) is much the same here –  just a bit worse –  than in California.   I’m a bit wary of median household income figures –  just because I know the data less well – which are more often used for house price comparisons, but it doesn’t look as if the comparisons would be much different in one used that data.   We have our own human-made housing dystopia, without even the consolation of those hugely successful tech companies that also still characterise California.  We have an ongoing productivity failure.   And with few/no offsetting compensations –  between volcanoes and earthquakes, probably much the same sort of natural disaster risk, and –  for those in Auckland in particular –  congestion that seems to rank high (badly) by advanced world standards.   Who’d have imagined just a few decades ago the local dystopia we’ve let our “leaders” create?

And what of the prospects of the next generation?  One of the downsides of living with me, is that my kids get to hear my fulminations about the disgraceful government failure that is our housing market, which in turns engenders occasional, slightly despairing, comments from them about the unlikelihood of ever being able to afford a house in New Zealand.

I was having one of these conversations with one of my daughters the other day.  She was asking how much I’d paid for my first house, which is just down the street and which we walk past quite frequently.  I told her I’d paid $155000, which brought gasps of astonishment. I did hasten to point out that there was this thing called inflation and in today’s dollars that was something like $290000, but it didn’t really change the point (in our unprepossessing but pleasant suburb the median house price now appears to have passed $900000).

When we have these conversations I periodically point out that real mortgage interest rates in 1989 were a lot higher than they are now, that first home buyers probably shouldn’t be expected to buy a median house, and that there are cheaper parts of cheaper suburbs (without, say, having to fall back on the desperate expedient of relocating to my childhood home of Kawerau, where median prices have recently rocketed back up to…about $290000).  I think the kids are right to be uneasy, but smart hardworking well-educated people who marry sensibly will probably eventually be more or less okay.

But in the course of our conversation I got to think about my parents.  They bought a first house (new) in Christchurch in 1962, just before I was born.  It wasn’t a particularly big house, but it was an 809 square metre section –  bigger than most Island Bay sections. My father was 27.  Dad had gone to work at 16 –  as probably most people did in 1950 – working as a clerk at the BNZ and by this time he had his own small newsagent’s shop in Riccarton, but was just about to move back to a salaried position.  Mum didn’t work after I was born –  as probably most mothers didn’t in those days.   There wasn’t –  at least that I’m aware –  family money behind them.    But at 27, on a single income (not supported by tertiary qualifications or lots of overtime), they had their own (new) house in one of our bigger cities.

I don’t suppose it seemed extraordinary then.  It was what young couples typically did.

I’m not suggesting it is impossible now: there are, from the time to time, those stories of extraordinary young people who through hard work, thrift and a focus on one goal have purchased a house very young. But it is extraordinarily difficult now for those who are poorer, less-skilled, less well-qualified, with children.   Almost inconceivable for young people earning average incomes for their age to even think of doing it on a single income in any of our bigger cities, at least without enormous sacrifices of material living standards.    Perhaps simply impossible in Auckland.  And if the groups most severely affected aren’t exclusively Maori and Pacific, they are disproportionately so.

It is a human-made dystopia.  And the humans who lead our governments (central and local) seem quite uninterested in doing anything serious to fix the problems.

Falling population shares: a highly-productive big city

Writing about Wales the other day I included this chart

wales 1

The comparable chart for Scotland is even more stark (16 per cent of the Great Britain population in 1801 and just over 8 per cent now).

But what really caught my eye when pulling together the numbers was this chart.

london 19.png

I guess part of my brain knew that greater London’s population had fallen for several decades, but that bit never quite connected with the bits thinking about world cities, agglomeration and so on and so forth.  London is one of the great world cities, a key financial centre in an age when capital is more mobile than it was for decades after the war.  There is no other really great city in the UK, the UK’s population hasn’t increased that rapidly by New World standards, and yet the share of the UK population resident in greater London is less now than it was for decades prior to World War Two (true even using the orange dot –  for which there is no time series – the estimate of the population of the (defined by contiguity of population rather than local authority boundaries) of the greater London urban area.

(As it happens, on checking one finds that the New York metropolitan area population is also lower now, as a percentage of the total US population, than it was several decades ago – I could only see data back to 1950.  But the US is different  –  there are multiple very large cities and the spread of air-conditioning greatly affected the liveability of many of those places.)

As you may recall from Saturday’s post, estimated GDP per capita in London is 188 per cent of that of the EU as a whole (and about 180 per cent of the UK as a whole).  The only other (Eurostat-defined) region that comes even close to London is (close to London) “Berkshire, Buckinghamshire, and Oxfordshire” (at 151 per cent of EU as a whole).

These have the feel of places where if more people were able to live there more people would be better off.  The whole of the UK might even be better off on average (a larger proportion of the population able to do more highly-productive jobs), even if the London premium over the rest of the country narrowed somewhat.

And yet, of course, as everyone knows London house prices are really expensive –  price to income ratios similar to those in Auckland (with incomes higher), typically for small houses and small sections.  You can tell similar stories about San Francisco/San Jose or New York (where GDP per capita are well above those of the US as a whole).   Rigged housing and land markets really seem to have visible consequences in pricing people out of working in highly productive cities.

Where the story is much less compelling is in Auckland (or Sydney or Melbourne). I wish it were otherwise –  I’m a strong supporter of land use liberalisation –  but

(a) on the one hand, the populations of those cities (urban areas) have actually increased very substantially as a share of national population (especially Auckland: 8.5 per cent of the population in 1901, and about 33.5 per cent now), and

(b) in none of the Australasian cities do the estimates for GDP per capita show up with any very substantial margin over the rest of the country (see, by contrast, London above).  People who just don’t earn that much (or produce that much) have found a way to live in those cities anyway.

Fixing the New Zealand urban housing markets is, or should be, a matter of dealing to one of the grosser injustices in our economic system, but it is far from obvious that there is a compelling case in issues around productivity and wider economic performance.  If anything, there are probably already more people in Auckland – and perhaps Sydney/Melbourne –  that there really are highly-productive opportunities that are either waiting for them now or would spring up were housing once again as affordable as it should be.

 

Rents should have been falling

Statistics New Zealand this morning released its monthly residential rentals series. I don’t usually pay any attention to these data but since I’d been thinking about the very low level of real interest rates, I decided to take a quick look for once.

The series goes back to November 2006.   They have both stock and flow-based measures, the latter being available on a regional basis.   Nominal rents have risen by about 50 per cent since 2006, and these are the changes in real (CPI-adjusted) rentals on each of these measures over that period.

rents

Something like a 15-20 per cent increase (depending whether you prefer the stock or flow measure) over 13 years might not seem too bad.  That’s a rate of increase of about 1 per cent per annum.

But that really is the wrong way to look at the issue.  After all, renting a house/flat involves paying for the use of a long-lived asset.    And the key influence that should influence any change in the supply price of such assets is changes in the cost of finance, returns to alternative uses of money etc.

In November 2006 the real 10 year government bond rates was about 3.25 per cent (roughly so whether one uses the one indexed bond then on issue or takes a nominal bond yield and subtracts surveyed medium-term inflation expectations).  The real 10 year bond rate is now about 0.15 per cent.   What about the risk premium?  The Treasury guidance to government agencies suggests using an equity risk premium of 7 per cent.  One could play around with different estimates, and with assumptions about how much diversification housing might add to a portfolio.  But it doesn’t seem unreasonable to work with a rough estimate that the required rate of return should have fallen by perhaps a third since 2006.    All else equal, in a well-functioning market, we might reasonably have expected to have seen a significant fall in real rentals over that period.

Of course the standard counter is “oh but falling interest rates raise the price of fixed assets”.  Often enough that isn’t even true for assets in genuinely fixed supply –  since long-term real interest rates rise and fall for reasons that often have something to do with the expected future returns in the wider economy –  but even to the extent it is true, in a well-functioning housing market the only component of a “house plus land” bundle that is in genuinely fixed supply is unimproved land itself.    The supply of anything else can be augmented, and in a well-functioning market almost without effective limit.

In a free market, in a country with as much land and as few people as New Zealand, most unimproved land isn’t very valuable at all.  Just suppose it was worth $50000 a hectare (and actual New Zealand farmland traded at a median of just under $25000 a hectare most recently) and that you could get 7 houses to a hectare (a decent sized section and the associated roads and footpaths), the value of the unimproved land under a standalone house would be worth less than $10000.   As something like a perpetuity, the lower interest rates might have raised that value by a third, an amount that –  relative to New Zealand median residential prices –  is really almost lost in the rounding.

The substantial reduction in real interest rates shouldn’t dramatically affect the supply price of new building.   Raw materials prices –  timber, cement, fittings etc –  should not be affected.  Nor, really, should the price of labour: perhaps interest rates are low partly because productivity growth is low but, broadly speaking, any such weakness will be matched over time by lower growth in real wages.    If anything, there is an in-principle argument that much lower interest rates may have lowered the supply price of new developments, because there is often quite a lag between acquiring land for development and being able to put the finished product on the market (inevitable market delays and regulatory delays),  Lower interest rates mean lower costs of financing those lags.

In a well-functioning market it might not have been unreasonable to have expected, say, no change in nominal rents nationwide over the 13 years, not a 50 per cent increase.

But, of course, we don’t have a well-functioning market at all.  We have one consistently and systematically rigged against competition and development by local councils and their central government enablers.   There is no scarcity of unimproved land in New Zealand. But councils –  councillors and staff planners – combine to create an artificial scarcity of developable land, such that in the face of one of the largest falls in real interest rates in history, to unprecedentedly low levels, rental housing is not abundant and cheap (as readily reproducible longlived assets should be in this climate) but scarce and expensive.  Utter government failure if ever I saw one.

Bits of both arms of government occasionally talk a good game about freeing up land supply, but it is central government that is currently consulting on making less peripheral land available.  It is a senior member of the Labour Party council –  a Wellington city councillor –  who when she rang me on a canvassing call a few weeks ago offered the unprompted observation (when I asked about fixing housing) that she didn’t want any more of that “sprawl” –  this in a city with abundant, if often undulating, land.    In many cases, their vision is to have us packed in like sardines –  more “efficient” like that, supposedly –  and they feed that personal preference, or sense of inevitability, by making land so expensive that many people feel they no longer have that historic New World option of space –  in cities that, by global standards, remain pretty small.

When people complain about rents, and particularly the plight of people at the bottom with few choices but to rent, they need to sheet home responsibility to our governors –  central and local.  Perhaps a future National government would be different, but they too talked a good talk when they were last in Opposition and did nothing then.  There isn’t yet much reason to think they’d be different next time.

Whatever the other risks, downsides, and complications of exceptionally low interest rates, the market has delivered a climate in which the real cost of decent housing should never have been cheaper.  It takes governments –  central and local, left and right ( in this area a distinction without a difference as they all enable planners) –  to have produced rising real rents in a decade like this.

 

Reforming housing/land, and compensating some losers

There seem to have been more than a few people on the left pretty deeply disillusioned with the Prime Minister after she walked away from the possibility of a capital gains tax, not just now (when the parliamentary votes for it probably couldn’t be found) but at any future time while she is Labour leader.    Some parallels are drawn with John Key ruling out doing anything about raising the age for New Zealand Superannuation while he was leader –  an important difference perhaps being that Key had never evinced any enthusiasm for such a policy, only to recant, let alone been the leader who put the issue back on the table.     Perhaps something closer was Key’s refusal to use whatever “political capital” he had to do anything much useful around economic reform.  But, again, despite occasional encouraging rhetoric while in Opposition, no one ever really thought Key was someone who would rock the boat, or was that bothered about doing useful longer-term stuff, as opposed to holding office and managing events as they arose).  Some, perhaps, thought Ardern was different.

But in the wake of the Prime Minister’s abandonment of the possibility of a CGT –  and whatever (quite diverse apparently) hopes people pinned to that quite slender reed – there is the growing question of what, if anything, the government might actually do. It is, after all, in their phraseology, supposed to be the year of delivery.

In his Political Roundup column yesterday, Bryce Edwards posed the question as “What will Labour do about inequality now?”.   There is a lot of talk about different possible tax reforms –  I might even come back and look at a couple in later post – and some reference to the forthcoming “wellbeing budget” (which can surely only disappoint, given the self-imposed fiscal constraints).   But there was nothing about the option most directly under government control which would probably make the biggest tangible difference to the most people, with clear efficiency gains not losses, and with the possibility of a considerable degree of across-Parliament support: fixing the housing and urban land market at source.

As a reminder of the symptoms of the problem, I ran this chart in my post earlier in the week. It is Australian data, but the picture seems unlikely to be much different in New Zealand.

aus 1

The young and the poor (especially the young poor, and probably especially the Maori and Pacific young poor) are increasingly squeezed out of the possibility of home ownership, for decades or at all.   There is no good economic or social case for tolerating this systematic penalisation of the more marginal groups in our society.

But there are obstacles to reform, including the economic interests of those who could suffer quite seriously –  through no real fault of their own –  if the situation was fixed.

Some elements of the government –  well, really only one, the Minister of Housing –  talks a good talk.  In a recent speech he talked up the prospect of reforms that the “flood the market” with development opportunities and thus lower, presumably quite considerably (when you use a strong word like “flood”), urban land prices.   It warmed the hearts of many (mostly rather geeky) readers, including me.   And yet I’m very sceptical that it will come to much. As I noted in a post shortly after the speech

And yet, I remain sceptical.  Perhaps Phil Twyford’s heart is really in this.

But is the Prime Minister’s?  Even though housing was a significant campaign issue, even though she has been in office for 18 months now, we’ve never heard her putting her authority behind fixing the housing disaster at source, let alone substantially lowering house prices.

And is the Green Party on board?  Quintessentially the party of well-paid inner-city urban liberals, are they really on board with bigger (physical footprint) cities, or with encouraging intense competition among landowners for their land to be developed next.  Some of them seem to believe that it would somehow be morally virtuous –  and “solve” the affordability issues –  if people lived instead in today’s equivalent of shoeboxes.

The approach of the Wellington City Council –  led by one of Labour’s rising figures –  just reinforced my doubts.

There are various practical issues to be worked through in any serious reform effort.  But one consideration that always seems to play on the minds of politicians (understandably enough I guess) is that lower house prices means lower house prices: in other words, people who currently own a house will find their asset worth a lot less than it was.     For those of us without a mortgage on our primary residence or with only a modest remaining mortgage, such a fall wouldn’t matter at all.   Our natural position is to own one house, and we intend to own one house (perhaps a different one) well into our dotage.  The label (the estimated value) attached to that property doesn’t really matter.  And for our kids hoping to enter the market in the next decade or two it is pure gain.

But it, understandably, feels quite different if you are one of the growing number of people who have taken out a very large mortgage (perhaps 80 per cent or more LVR) to get into a house.   If someone talks of halving house prices, that can sound pretty threatening.  As a result, very few politicians ever do (I recall Metiria Turei doing it, but only once, and……).    Banks have the legal right to call in their loan if the value of the collateral (the house) drops below the outstanding value of the loan, and although they probably wouldn’t do so in normal times –  when the labour market was okay –  it leaves people feeling quite vulnerable, and also quite trapped (hard to move cities if selling would immediately crystallise a large loss).

When house prices first shoot up there aren’t many people affected that way.  The longer they stay high –  five or six years now of the latest surge up –  the more people have taken out mortgages based on the high house and land prices.  Most of the owner-occupiers among them aren’t business operators or “speculators”, just people at a stage of life where they want to settle and to be secure in a place of their own.   And they –  and their parents – vote.

Of course, there is a whole other class of people who would lose from house and land prices coming down.  But mostly they are a less sympathetic group.   There are the “landbankers” –  people who responded to government-created incentives –  to sit on potentially developable and let the artificial scarcity push up the price of their asset.   That’s a business operation, and in business you win some and you lose some.   Risk is at the heart of business, and that means the possibility of real and substantial losses.  And there are those in the residential rental business, many of them (especially recent entrants) quite highly leveraged.  Halve the price of city properties –  and that is what re-establishing sensible price/income multiples would imply –  and many of those owners would be either wiped out, or see their real wealth (real purchasing power for things other than houses) very dramatically reduced.  But, again, it is a business, and business implies the possibility of gains and losses (one reason I was always at best ambivalent about a CGT was that no real world CGT really treated gains and losses symmetrically).

Of course, these business owners vote too, and will lobby intensively.  But (a) there are fewer of them than mortgaged owner-occupiers,(let alone unmortgaged renters, hoping to be mortgaged owner occupiers) and (b) they just don’t command the same public sympathy (and rightly so) –  we might sympathise with any business owner whose operation falls in hard times, but we know that is the nature of business.

Back when Jacinda Ardern first became leader of the Labour Party I did a post on what a radical reform package, that might really make a difference to our economic woes (housing and productivity), might look like.   Buried in that post was a suggestion for a partial compensation scheme for mortgaged owner-occupiers that might help smooth the way towards overdue structural reform.  I noted then the desirability of getting house prices down a long way.

No one will much care about rental property owners who might lose in this transition –  they bought a business, took a risk, and it didn’t pay off.  That is what happens when regulated industries are reformed and freed up.    It isn’t credible –  and arguably isn’t fair –  that existing owner-occupiers (especially those who just happened to buy in the last five years) should bear all the losses.   Compensation isn’t ideal but even the libertarians at the New Zealand Initiative recognise that sometimes it can be the path to enabling vital reforms to occur.  So promise a scheme in which, say, owner-occupiers selling within 10 years of purchase at less than, say, 75 per cent of what they paid for a house, could claim half of any additional losses back from the government (up to a maximum of say $100000).  It would be expensive but (a) the costs would spread over multiple years, and (b) who wants to pretend that the current disastrous housing market isn’t costly in all sorts of fiscal (accommodation supplements) and non-fiscal ways.

If I recall rightly, I came up with the rough suggested parameters as I was typing, but a couple of years on it still looks like the sort of thing that might be worth considering, perhaps with a larger cap on the maximum payout and a restriction to a first (owner-occupied) home.   The expected cost will have escalated since 2017, because we have had another couple of years of people taking our large mortgages on properties with values inflated by government-controlled regulation in the face of trend increases in demand), but so has the number of people unable to do what they would otherwise “naturally” do; purchase a first house in their mid to late 20s.

This is a sketch outline of a scheme, and like all such government schemes would need lots of detail to limit abuses.  But what are some of the features of the scheme:

  • you only get to lodge a claim if you sell your house (someone who is going to stay in the same house for 50 years doesn’t need any explicit compensation, even if they are left with a heavier servicing burden than might otherwise have been possible if they’d waited to buy).  Of course, some people will choose to sell and buy somewhere different just to crystallise the right to make a claim, but selling a house – a genuine arms-length transaction –  and moving isn’t cheap.
  • the nominal price has to have fallen more than 25 per cent to be able to make a claim at all.  For the last few years LVR restrictions have meant that most owner-occupiers have been borrowing only 80 per cent of less at purchase, and there will have been some principal repayments since then.      Relatively few people would be in a negative equity position if their house price fell by 25 per cent, and even fewer would be facing immediate pressure from their lender.  Owning an asset has to mean some exposure to reasonable swings in price.
  • beyond a 25 per cent fall, you could claim back up to half of subsequent losses from the government.  Thus, if you had bought an $800000 first house and the price halved, you would be eligible to claim $100000 back from the government (half of the difference between $800000 and $400000.   On reflection, and with such a large deductible (the owner takes the first 25 per cent loss) it might be more appropriate for a compensation scheme to cover 75 per cent of subsequent losses (in this example $150000).
  • any such scheme should have a maximum payout capped.  There is no obvious justice in paying out large amounts to a couple who happened to buy a $4 million house which then halved in price (there was a similar issue when the government bailed out AMI).

I don’t have a good sense of how large the cost might be (but it would be in the billions, spread over at least a decade).  Unfortunately, I’m not one of those who believes that fixing the housing market would produce significant productivity gains for New Zealand –  so it isn’t by any means a free economic lunch –  but the sheer injustice of what successive central and local governments have done to our young and poor cries out for action, and sometimes it is worth offering compensation to help pave the way for the sort of thoroughgoing reform that is desperately needed.

Fixing the housing/land market at source would be a huge step to improving the economic and social wellbeing of so many.  Compensating some of the more sympathetic of the losers from such a reform –  most of whom won’t be in an overly strong financial position themselves –  shouldn’t offend too many canons of justice. In an ideal world, one might seek to finance such a scheme from those who benefited greatly from the previous (well, current) rigged market – but that would be hard to do.  In the real world, we are fortunate that the government has fiscal surpluses and very low net debt (especially including the politically managed money pools in NZSF).

I’m not optimistic the government (Prime Minister) really has much interest in addressing the housing/land problems at source.  But if she is ever is tempted to take seriously Phil Twyford’s rhetoric, a compensation scheme of some sort might be an option to consider, to help dull the inevitable opposition in some quarters (some purely from business interests who would have misjudged, but some from people who through little fault of their own became trapped by these longrunning government policy distortions, that generated the scandal of the New Zealand housing market).