Time to slash housing's Gordian knot

Jason Krupp
Insights Newsletter
17 March, 2017

This week business journalist Bernard Hickey took his pen to the subject of housing, listing the factors that have unintentionally conspired to create New Zealand’s housing affordability crisis.

It is a piece worth reading because it offers a glimpse into the complex and intertwined regulations and constraints that prevent the housing market from functioning like every other market.

Hickey calls it a Gordian knot.

At the core of this entanglement lies an infrastructure problem. As he describes it: “[Auckland] Council has few incentives to invest heavily for growth when the Government in Wellington gets most of the benefits and does not have to pay for local roads, some of the railways and none of the pipes.”

This is a point the Initiative has been making since 2013.

Fast growing councils have been quite open about limiting the amount of land they release for development because it means less expensive infrastructure investment. These investments may pay off decades later, but the costs have to be worn by ratepayers now.

Our solution then was bold and simple: Central government should incentivise councils to embrace development by providing them with a grant equivalent to the GST for a set period.

We are doubling down on this recommendation today by making it our first policy recommendation for the 2017 election.

If this policy were enacted for one parliamentary term fast-growing councils would push housing-related infrastructure projects to the front of the line because there was a financial reward for doing so. And a strong incentive it is too: the value of residential building in the January year was $12.5 billion, and 15% of that is $1.9 billion.

The policy will have other positive spill-over effects too. Local officials are likely to take a very dim view of any red tape or bureaucratic processes that threatens their new revenue stream.

In short, this policy would make the home building boom that New Zealand so desperately needs to tackle the affordability problem a real possibility.

As Hickey’s article makes clear, there are other tangles to the housing knot. But our research in Europe shows that complexity is a small barrier where the incentives are clear and strong enough.

With surpluses in hand, it is well within the government’s power to adopt this policy. Whether it does so depends on if there is a will to cut through the Gordian knot, or if we policymakers are content to fiddle while Auckland’s housing market burns.

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