Renting and buying

In his Sunday Star-Times column this week, economist Shamubeel Eaqub announced that “I’ve bought a house at last” .   He and his wife had had quite a lot of coverage for their choice to stay renting, even though they could readily have purchased a house in Auckland.    As they noted in their book Generation Rent, their decision to rent had been both a lifestyle and a financial one.

Economists have form in this area.  Most people want to own their own house sooner or later, and in the longer-term those who don’t are usually those who can’t.   When economists don’t buy it is usually a choice.

The most prominent New Zealand economist who once chose not to buy was the then new Governor of the Reserve Bank, Don Brash.    Taking up his role as Governor in 1988 involved shifting from Auckland to Wellington.  At the time, after the break-up of his first marriage, Brash was on his own.  But he was also struck by just how high interest rates in New Zealand were.   To buy a house would involve paying mortgage interest rates that implicitly assumed inflation would not come down further, even though the mission Brash had been given was to keep on reducing inflation.   Renting looked a lot cheaper than buying, at least if inflation was going to be successfully reduced.   Brash pointed this out in the media and, even if there was a certain logic to his point, cartoonists had fun.  This was Tom Scott’s contribution.

Brash cartoon housingNot that long afterwards, Don remarried and they then had a child.   Like the Eaqubs, whatever the cold financial analysis might have shown, he bought a house.

I went through a similar phase.  In those far-flung days, Reserve Bank staff could get mortgages at 4.5 per cent.  I got a secondment to Papua New Guinea in 1985, and my father urged me to buy a house before I went.  I did the numbers and calmly talked him through the analysis demonstrating that if the inflation rate was going to be cut as the government and the Reserve Bank were suggesting then it wouldn’t be worthwhile to buy, even at 4.5 per cent (according to the RB website, private borrowers at the time were paying 17.5 per cent for a new first mortgage).  More fool me.  In the following few years one of New Zealand’s biggest credit booms ever happened, and with it a whole new last wave of high inflation.

There is nothing wrong with renting.  For anyone living in a city or town only temporarily, or newly arrived and not sure where they want to be long-term, it is usually the more sensible option.  Transactions costs, and the uncertainty, associated with buying and selling houses are quite a deterrent to doing it very often at all.  And there is the added advantage that maintenance etc is someone else’s problem.   For most people just starting out in the workforce, there aren’t serious alternatives even in well-functioning markets (ie without land use restrictions, or LVR controls).

But for most people in most places renting is a phase they want to get past.  Often, just as quickly as possible.    This chart shows home ownership rates for a bunch of OECD and EU countries.

home ownership rates

The median for these countries is 72.8 per cent. New Zealand was under 65 per cent at the last census, and probably falling further.

I’m not sure that home ownership is one of those things we want governments actively encouraging –  that way lies, for example, the sorts of credit misallocations that, in the US, contributed to the financial crisis of 2008/09.    But, equally, we don’t want governments standing in the way of people fulfilling a natural human aspiration for a place of their own (as governments do now, through some toxic mix of land use restrictions, together with policy-driven rapid population growth and credit controls).     Economists sometimes fret about people having “all their eggs in one basket” –  their biggest asset in the same location as their job etc –  but revealed preference internationally suggests that economists have it wrong.  People typically weigh the advantages of home ownership as outweighing any of the risks/costs that economists sometimes focus on.

It is sometimes claimed that the tax system materially favours owner-occupation, but it doesn’t really.   The tax system (arguably) favours those with a large amount of equity in their homes, but it bears down on most people buying a first home.  To be sure, they aren’t taxed on the imputed rental value of living in their own house.  But, unlike rental property owners, these (typically highly-indebted) owner-occupiers can’t deduct interest or other home ownership expenses.   Few/no first home buyers would be paying any more tax –  many would be paying less – even if the tax treatment of housing was put on what most economists would regard as a more neutral footing.

To my mind, the main policy priority should be fixing up the land supply issues (probably supported by reduced immigration and eased credit controls).  Do that –  all quite readily technically feasible, whatever the political failures of nerve –  and for most people renting will become a short-term proposition again.   Sure, there will always be a handful of people unable to buy, or to cope with having their own house, and in many cases state housing (or state-financed housing) is likely to be the solution.  But there shouldn’t be any reason why ordinary working people couldn’t buy their own house in their 20s, as used to happen.  After all, they’ll have another 40 years plus of working life to pay off a mortgage –  and it is quite rational for low income people to spread such a bulky purchase over a long working life.

So calls for various reforms of tenancy laws to facilitate longer-term renting seem mostly like a concession of failure –  a refusal by successive governments to sort out the housing supply market itself.    Shamubeel Eaqub and others sometimes talk up Germany and, to a lesser extent, Switzerland.    I see nothing appealing about the Swiss housing market –  hugely highly-priced (and accompanied by very high levels of –  probably tax-induced –  household debt), and with outcomes badly out-of-step with most other advanced countries.  Sure, one could make rental tenure more secure, but is there any evidence that most ordinary citizens would prefer that over owning a place of their own?

I’m not that familiar with the details of tenancy law, but it isn’t clear to me that there is any legal obstacle to long-term fixed tenancies, mutually agreed between owner and renter.  Perhaps if there is an issue it relates to the ownership patterns of the New Zealand rental stock.

One good feature of the New Zealand tax system is that it has treated individuals owning rental properties very similarly to institutional investors owning rental properties (although that has been changing over the last decade or so).  That isn’t the case in lots of other countries where, for example, rental properties owned by a tax-preferred retirement savings entity will be much more favourably treated than properties owned by an individual holder.  Perhaps partly as a result, most private rental properties in New Zealand have been owned by people with quite modest portfolios of properties.   That probably works fine for renters much of the time when most renters have quite short-term horizons.  If they have a longer horizon, it can become more problematic if the owner wants to rebalance or liquidate their modest portfolio of properties.  Those problems are much less likely for an institutional owner who, in principle, might have 1000 properties, and sees themselves in the rental business for the long-term.

Even so, I have wondered why we don’t see more institutional owners of rental properties.  At times, I’ve wondered whether it had to do with the nature of our housing stock –  mostly detached houses.  Perhaps institutional ownership was easier and more natural with, say, whole apartment blocks, or some of those squares in London all owned (but rented with long leases) by a single estate.   A big portfolio of detached houses might be harder to manage, maintain etc.

And so I was interested to see a lengthy article in the Wall St Journal the other day on private companies doing exactly that in the US on a large scale.

Those four companies and others like them have become big landlords in other Nashville suburbs, and in neighborhoods outside Atlanta, Phoenix and a couple dozen other metropolitan areas. All told, big investors have spent some $40 billion buying about 200,000 houses, renovating them and building rental-management businesses, estimates real-estate research firm Green Street Advisors LLC.

It is a fascinating article (google, “Meet your new landlord: Wall Street”).  It isn’t clear whether it will prove to be a viable model in the long-term, or whether it is largely a post-crisis phenomenon that might fade away again in a few years.     But if people are serious about a better-functioning long-term rental market in New Zealand –  if people are giving up, as they shouldn’t, on fixing the housing supply market, enabling a recovery in the home ownership rate –  it is the sort of business model they should be hoping to see develop in New Zealand.

In closing, I wanted to pick up just one specific point from Shamubeel Eaqub’s article.   Talking about the rent vs own choice he notes

we don’t hate home ownership at all. We just didn’t think it was the best use of our hard-earned money to spend it meeting ownership costs (such as house maintenance) that are much higher than rents, nor to deprive us of the opportunity to invest in businesses that will hopefully give us good financial returns and create jobs and prosperity for other New Zealanders.

Sadly, now that our money is tied up in one huge asset, it gives us shelter and security, but it no longer has the opportunity to be directly invested in New Zealand businesses to get them started, or to help them grow.

At an individual level, no doubt the logic seems fine.  The Eaqubs did have shares in businesses (or units in unit trusts which had shares in businesses) and now they own a house.     But their purchase of a house last week didn’t change, even slightly, the total number of houses in New Zealand, the number of people living in houses, or the number of companies with shares on issue.  All that happened was that ownership changed: the Eaqubs purchased a house and someone else sold one. The Eaqubs sold shares and others purchased them.    Renting rather than owning doesn’t change, by one iota, the volume of real resources in the economy devoted to housing.

I’m not sure there is anything particularly virtuous in preferring a smaller simpler house over a larger better-appointed house, but it would only be if people were consistently choosing smaller simpler accommodation  –  rather than just changing who owns those houses –  and were saving rather than spending the leftover money, that additional real resources might be available to the business sector.   Since the typical concern is that we have too few houses for the number of people in New Zealand,  and some often highlight that many of our houses aren’t of great quality (cold, drafty etc), it seems curious for someone who is on record as generally favouring our immigration programme to suggest that fewer resources in New Zealand should be devoted to housing.

Market rents

In the aftermath of the London fire, in some ways my heart isn’t in writing much about housing.  Disasters don’t often get to me, but this one has.

Nonetheless, the Dominion-Post led with housing this morning, and when I saw that the first word in the entire article was “greedy”  (followed by that other emotive term “landlords”) it wasn’t promising.    Just because people scoff when Fox News talks of being “fair and balanced” doesn’t mean the rest of media should abandon the aspiration.

Faced with rising demand for rental accommodation –  in a city where central and local government have again combined to make housing supply not very responsive to changes in demands –  owners (or their agents) of residential rental services businesses have faced excess demand for the limited stock available.  The typical response you might expect would be for rents to rise.

There are different sorts of pricing structures used for different goods and services.  Typical dry goods in a supermarket will have a fixed price, and occasionally the supermarket runs out of stock –  which can be mildly annoying to you or me, but is presumably easier to manage for them.  The value of New Zealand dollar (the exchange rate) is constantly changing, typically by quite small amounts, as pressures from potential buyers and sellers ebb and flow.   Even at a retail level, petrol prices now change very frequently.   There are whole literatures on the reasons why different structures are adopted in different markets (and I’m certainly not expert in that field).

Housing is typically nearer the variable pricing end of the spectrum.  In the market for actual house purchases, fixed price adverts, “buyer enquiry over”, tenders, and auctions all co-exist.   In the last two, the seller can reconcile supply (one house) to demand, simply by using the amounts bid.  In a fixed price advert, if there is more than one interested party, the seller might have to use some other decision criterion (although I imagine that typically even then one bidder will offer more).

It is, as I understand it –  not owning rental property, and not having rented one in this country for many decades –  customary to advertise rental properties with a fixed rental price.  Holiday home websites operate that way too –  and, in effect, they just operate on a “first come, first served” basis.    In a normal market, it probably often works quite well –  if there are plenty of people offering rentals, and plenty of potential tenants, even if one misses out on one property, there is another not far away.  If the property owners sets his or her price too high, they find there is little or no interest in renting their property, and eventually have to re-evaluate and revise the fixed asking price.

But the current situation seems to be one where lots of people are enquiring eagerly about almost any rental property on offer.  Fixed asking prices are, in that sense, too low to clear the market.   Over time you’d expect that those fixed asking prices would rise –  and thus take care of that particular element of the problem –  but that doesn’t deal with the property owner’s issue on the day: when 20 people want one rental.

Wellington Central MP Grant Robertson knew of two cases of renting tenders in Wellington – both from around the start of the year when students were returning to the capital.
“I think it is barely legal,” he said.
At one, would-be renters turned up to view a flat with an advertised price. “When they got to the property they were asked, ‘how much are you prepared to pay?'”

At the other there was no advertised price and would-be renters were simply asked how much they were prepared to pay.
“I think it is abhorrent. It is exploiting the fact we have a real shortage of rental homes in Wellington at the moment – exploiting people in vulnerable positions.”

So how is the property owner or agent supposed to respond?  Just ignore the excess demand and draw straws to determine who should get the flat at the –  evidently –  too low advertised price?  It is a market, and the property owners aren’t running charities for the homeless, but private businesses.

As is noted in the Dom-Post article, auctions aren’t always an ideal mechanism –  as an owner you are likely to care about the quality of the tenant as well.   But simply drawing straws doesn’t seem to have any particular merit –  moral or practical  – in this climate.

Don’t get me wrong.  The housing market in New Zealand is, in many, respects a scandal, and the problems flow largely from the choices of successive waves of central and local governments.  Since we are talking about right now, in this case it means the National-led central government, and the Labour-dominanted Wellington City Council.   But attacking a symptom –  rising rents, and alternative techniques to reconcile supply and demand –  isn’t a particularly meaningful response.   Owners of rental properties are, in many respects, the last people who should be being blamed here.

But I also learned something new from the article.    The journalists approached, and got some comment from one of their officials

Ministry of Business, Innovation and Employment national manager tenancy compliance and investigation Steve Watson said the practice was allowable under the Residential Tenancies Act.

“Any party who feels that they are being asked to pay rent that exceeds ‘market rent’ has the ability to apply to the Tenancy Tribunal who can review and determine the appropriate amount of rent for a residential property,” Watson said.

Really?   I know there has been centuries of philsophical and theological debate around concepts of “just prices”, but have we (or rather our Parliament) really legislated to provide for cases where some arbitrarily determined “market price” differs from a price being paid in….well…the market.  It seems that our politicians had done just that.

Here are the relevant bits of section 25 of the Residential Tenancies Act

25 Market rent

(1)  On an application made to it at any time by the tenant, the Tribunal may, in accordance with the succeeding provisions of this section, on being satisfied that the rent payable or to become payable for the tenancy exceeds the market rent by a substantial amount, make an order reducing the rent to an amount, to be specified in the order, that is in line with the market rent.

(2) Notwithstanding anything in subsection (1), no application may be made under that subsection in respect of the rent payable under a fixed-term tenancy later than 3 months after—

(a)  the date of the commencement of the tenancy or (in the case of a tenancy that was subsisting immediately before commencement of this Act) the date of the commencement of this Act; or

(b)  the date of the last review of rent,—

whichever is the later.

(2A) …..

 (3)  For the purposes of this Act, the market rent for any tenancy shall be the rent that, without regard to the personal circumstances of the landlord or the tenant, a willing landlord might reasonably expect to receive and a willing tenant might reasonably expect to pay for the tenancy, taking into consideration the general level of rents (other than income-related rents within the meaning of section 2(1) of the Housing Restructuring and Tenancy Matters Act 1992) for comparable tenancies of comparable premises in the locality or in similar localities and such other matters as the Tribunal considers relevant.

Initially I wondered if this might be some historical provision to deal with, say, a situation in the Great Depression where there was a long-term fixed rent, and the general price (and wage) level fell sharply.  But that can’t be –  at least for fixed term tenancies these provisions can only be used within three momths of the tenant taking up the tenancy, or of the most recent rent review.

It just looks like an extraordinary piece of “feel good” law.     The standard (in 25(3)) is the rent that “without regard to the personal circumstances of the landlord or tenant, a willing landlord might reasonably expect to receive and a willing tenant might reasonably expect to pay, for the tenancy, having regard to the general level of rents”.

It isn’t clear at all why the “personal circumstances” should be irrelevant.  If someone desperately wants to live on a particular street, because they want to be close to aged parents (say) why shouldn’t that be something that can reflected in the price they pay for a rental tenancy?    One bag of flour might be much the same as the next one.  But except perhaps in high-rise blocks, almost every rental property is different from the others, even if only by location –  and location preferences are often quite idiosyncratic and personal.

I have no idea how often this provision is used –  perhaps more often now  having been highlighted on the front page of a major daily paper.  Various readers have a lot of exposure to running rental businesses, and I’d be interested in any perspectives they can offer.     But you also have to wonder why the MBIE official felt it appropriate to add in this information when he commented.  After all, the one common element, agreed (it would seem) by all parties in the story, is that the rental market in Wellington is very tight.  The general level of rents is presumably rising.        (And if, perchance, someone does agree to pay a level of rent “above the market rent”, it was a contract voluntarily –  even if grudgingly –  entered into: not great perhaps, but better –  for the renter –  in their own assessment, than the alternative.)

I was interested to see Grant Robertson stating that Labour will soon be announcing a package to “strengthen renters’ right”.  There may well be merit in some of that.   But the best way to protect the position of renters, and all others coming into the accommodation market (whether as renters or buyer) is surely to fix up the land use and housing supply markets.  Abundant responsive supply in the face of  changes in demand is the best assurance of genuinely affordable and secure accommodation.

(On which note, a reader sent me a link the other day to a stimulating piece on housing and land markets from a UK academic. I don’t agree with everything in it, but for those interested in the debate –  and in recognising the similar issues in other countries –  it is worth reading.)



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.


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.


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.