Complaining about a housing crisis in New Zealand has become a national sport, spawning all sorts of wrong policy remedies.
New Zealand’s housing issue is a supply problem: The country’s rules and institutions are not conducive to a thriving building industry.
In this environment, councils do not have the correct incentives to provide – or simply cannot pay for – the infrastructure to accommodate economic growth. Neither does the planning system under the Resource Management Act (RMA) invite cities to grow up and out.
That is why current and past attempts to fix our housing crisis have not worked. They have tried to tame demand while completely ignoring supply problems such as restrictive planning laws and an inadequate infrastructure financing toolset.
Yet a new tide of bipartisan political reckonings is now rightly looking at supply constraints as the real drivers of housing unaffordability in the country.
With enough support, it might hopefully soon lead to a “flood of housing developments” across the nation.
Wellington, we have a problem
But first, how big is the housing problem?
A plethora of evidence shows that buying a first house is becoming a distant dream for many New Zealanders.
According to the Real Estate Institute of New Zealand, just in the past decade, national house prices on average rose more than 60% in total – with prices roughly doubling in Auckland throughout the same period.
Currently, New Zealand’s ratio of median house price to median household income (that is, the median multiple), a proxy for house affordability, reached a peak of 6.5 – up from 5.9 in 2004, and less than 3.0 in early 1990s.
Auckland, with a 9.0 median multiple, is now the seventh least affordable among the 91 major housing markets covered by the Demographia International Housing Affordability Survey.
Home ownership rates have consistently decreased over the past 30 years from an all-time high of 74% in 1991 – the same year the restrictive RMA was approved – down to current record lows hovering near 65%.
If these numbers do not characterise a housing affordability crisis, nothing will.
Public outcry against unaffordable housing markets led politicians scrambling for quick fixes and election-appealing talking points: “Private market failures” and “rampant speculative foreign demand” were speedily pointed out as convenient scapegoats.
And for every policy misdiagnosis, politicians kept prescribing an equally wrong medicine.
Snake oil on the rise
First, the 2018 Overseas Investment Amendment Act bluntly banned foreign home buyers, classifying all residential land (even in local communities where house affordability was not an issue) as “sensitive.”
As a collateral effect, the new legislation created additional hurdles for international infrastructure companies operating in New Zealand and unjustly punished legitimate foreign workers living here. Apart from that, not much else was accomplished.
Second, government hubris led to the now-discredited KiwiBuild programme: the idea that government would be able to build better, faster and cheaper than the private sector.
Third, as housing prices kept increasing, the government decided to grab a piece of the pie, flirting with the idea of a new capital gains tax on all property investments.
Doing the right thing
Fortunately, leadership from both sides of politics have recently shown a welcoming change of focus on housing policy toward fixing supply constraints.
At a speaking event on March 15, National leader Simon Bridges suggested granting GST earnings on new housing to local councils.
This idea was first espoused by The New Zealand Initiative in 2013: “These [GST on new housing] grants would foster a pro-development attitude within councils, and provide a predictable cash flow to local governments by increasing their revenue from more development. It would also incentivise councils to speed up the planning approvals process.”
Boding well for a bipartisan resolve on the housing problem, the Housing Minister Phil Twyford too gave a one-of-a-kind speech at the New Zealand Initiative’s annual retreat dinner on March 22.
In the speech, Mr Twyford promised a revitalised housing market by addressing three big policy challenges:
- A broken system for financing infrastructure;
- A planning system based on urban containment; and
- The failure of governments until now, both local and central, to actively work with the private sector to enable urban growth and expansion.
“Our aim is to bring down urban land prices by flooding the market with development opportunities,” the minister said at the event.
The remedy, Mr Twyford suggested, would in part come through a user-charges model focused on independent financing entities without penalising ratepayers or local council’s balance sheets.
This financing concept has proven successful in Austin, Texas, making it one of the fastest-growing and affordable cities in the United States.
As highlighted in our Free to Build report, such independent financing entities would be quite suitable for New Zealand’s circumstances, allowing for the ability “to privately raise debt finance to build new infrastructure – fresh and waste water, electricity connections, etc – and charge residents an ad valorem tax to repay the debt. This would serve to pay off the infrastructure costs over the life of the bond and not capture the cost in the upfront price of a new home.”
The (t)ides of March
As both major parties acknowledged the housing supply constraints last month, the tides seem to finally favour a rising bipartisan solution. This is most welcome.
As the Elizabethan bard so well put it, “There is a tide in the affairs of men, which taken at the flood, leads on to fortune.”
So be it: Let there be flood!