Tuesday, July 3, 2012

Accommodation incidence

Poor people in New Zealand are eligible for a subsidy towards accommodation expenses: the Accommodation Supplement.

The Greens' Metiria Turei calls the supplement a "landlord subsidy" and points to it as part of the general problem of housing affordability: it pushes up the price of housing.

In the current state of the world, she's mostly right. Given a near-vertical supply curve for housing, because land use policy in New Zealand is a complete mess, anything that subsidizes demand mostly gets capitalized into land prices. So it is a subsidy to landlords, mostly via capital gains. 

If developers were allowed to build new housing in response to demand, either by increasing density or by building out, the incidence of the subsidy would be entirely different. 
In the graphs above, we map out supply and demand for rental accommodation among low-income cohorts. 

D represents their demand curve. It slopes down for the usual reasons: when housing is expensive, people demand less of it. Think less of the grosser forms of substitution, like homelessness, but rather of the intensity of rental use: families doubling up in accommodation units and many kids sharing bedrooms. When housing is expensive, people double up; when it's cheap, we have more space per renter. D+A gives demand when low-income renters have access to the accommodation supplement: the vertical distance between D and D+A is the level of the subsidy.

S is the supply curve: the price at which developers bring new low-income units onto the market. It slopes up as well. But, the slope differs between the graph at left and the one at right. On the left, supply is relatively inelastic. And that's the current state of the world in New Zealand. It is illegal to provide low income housing, or any kind of housing, cheaply. Councils restrict the supply of land such that its price is bid up. And, they make it illegal to put self-contained flats into existing homes: one of the quickest and least expensive ways of expanding the supply of more affordable units. And in that state of the world, the accommodation supplement does little to expand access to accommodation; rather, it mostly confers rents upon existing landlords. The quantity of housing shifts outwards from Q to Q', but most of the supplement is taken by landlords. It's then capitalised into land prices, helping to further push up the price of land that's made scarce by regulation.

In the happier state of the world, that pictured in the graph on the right, developers are able to bring new supply onto the market when demand for it exceeds the cost of providing it. The regulatory barriers are eased and the supply curve is consequently more elastic. In that state of the world, the accommodation supplement results in a greater supply of housing for lower-income tenants, with less of it turned into a transfer to landlords. The government is spending more in total on the accommodation supplement, but is also getting a lot more housing for its spending; it could achieve better accommodation outcomes under this regime even with moderate reductions in the supplement paid. That's because the spending mostly turns into new housing instead of into transfers to rentiers.

To keep the graphs simpler, I only rotated the supply curve. More realistically, the supply curve would have been pushed out, resulting in lower ex ante prices and higher ex ante quantities; there's less need for an accommodation supplement where regulatory inflation of land costs effectively bans developers from building low cost housing.

Stephen Franks illustrates the current political equilibrium:
For most of New Zealand's wonderful years of egalitarianism you could buy land for your house for around one year's average earnings, and build your house for about two and a half year's earnings. After taxes and living expenses you could expect to get rid of most of your mortgage over the next 10 to 15 years.
Then the baby boomers inherited political power. Already set for housing they don't need to be grateful to developers. They can despise subdividers. They'll rally to block densification, and 'sprawl' and highrises and infill units and anything that might offend their 1970s aesthetic sensitivities or glorious views. They feel the virtue in sending others to commute in trains from apartments on 'hubs' irrespective of the surveys that show fewer than 5% want to live like that.
The more scarce is housing the better off the boomers are. If you are already on the property escalator of course you will demand 'protection' of 'heritage' building and suburbs. It guarantees your overinvestment in housing. Artificial scarcity will not be exposed for the selfishness it is. Bankers of course agree. Otherwise they might find they've lent more than houses are worth, as they have in the rest of the world.
Zone more land to allow higher density use, allow more subdivision on the edges of town, and implement congestion charging so negative sprawl externalities are handled adequately. Current sets of land use restrictions build massive fragility into our systems so that private owners simply cannot respond to sudden changes in housing supply.

5 comments:

  1. Of course you will find that the Green's solution to this problem is more not less regulation, which will see landlords and developers seek to game the system. NZ land development policies are a complete mess and the artificial restrictions on land use fly straight in the face of what people actually want.


    I live in Auckland. The old quarry in Mt Wellington is being redeveloped apace into a new suburbs, Stonefields - not much imagination, but it works. Anyhoo the developers were planning to build a high density apartment building, but guess what? No one wants to live in it, so instead the land is going to be used to build single level detached housing, which the market does want.


    When you work through the numbers it is more profitable for developers to build detached or semi detached dwellings because that is where most of the money and demand is. Developing high density stuff in the suburbs is an easy way to a lower profit; the customers don't want it.


    But try telling that to our council overlords...


    They are to blame for the steepness of the supply curve, but they blame the 'market' because people don't want the 'right sort of housing'. Sheesh.

    ReplyDelete
  2. The Greens
    are never happy, Metiria Turei can sophistry say that the
    housing subsidy given to “poor” people is a subsidy to landowners, and I think she would also say that the money you give to a
    grocer makes him a fat glutton.


    But
    disturbingly Eric Crampton who should
    know better draws an S line for subsidy supply on a graph, and he says he agrees with her, and this is
    graphic sophistry, and worser still he pulls in a quote from Stephen Franks to
    blame old people for all this,


    because old people they own houses.





    Well
    now I am happy to tell you I have appointed myself as director of the Truth and
    Recrimination Committee for Land supply
    and Evaluation., which we will refer to affectionately
    to as ‘Land truth think’


    And we
    have decided that the evidence we will hear will prove incontrovertibly that
    the land and housing problem in its entirety stems from the Resource Management Act, and the RMA, and
    Geoffrey Palmer, and Sue Wells; so it
    will be that Geoffrey Palmer is to be banished to Greenland next Thursday and no come back, and Sue wells is to be banished
    to a nunnery there to read the RMA backwards till she is ready for the world again.


    And
    Stephen Franks will appear before Hugh Pavletich at his office at 9am sharp next thursday also to receive a lecture on Society,
    the RMA, and land prices, and as Hugh looks for ways we could possibly reconcile with a lawyer, he [Stephen]
    will repeat many times


    “ I am
    sorry, I am truly sorry I blamed old
    people, for the housing problem, whatever that is,


    and I can now recant, and o do recant and I ask the Truth Committee to forgive me,
    because it is because I am a lawyer that
    I think bad, and I acquiesce to everything the Truth on Land Committee tells me
    as gospel,”





    Next
    Eric Crampton will draw a new series of graphs which will be upside down, and
    he will tell people it proves a story that
    he makes up, and is externalized, and I
    bet nobody will notice, and this will prove that graphs are invalid.
    He will then also appear before ‘Land recrimination Committee but quite frankly I think he has gone too far. He has a lenient attitude to alcohol and cigarettes and there
    is evidence he is a liberal, so I am not so sure he can be reconciled.





    Here is
    the truth, which we will be using in the Recrimination committee.





    Truth :
    There are many accommodations in Christchurch waiting on ‘Trade me’ for a
    buyer.



    : It is difficult to get a return of 5% on rental of
    house


    :: Charging $300 for rental may
    placate some in the Green party but it will lose you money





    Lets say
    we increase will the housing stock by intensification within Christchurch City as
    Eric and others propose,


    and we build a 100 sq meter house and then rent it
    out, applying the following figures stolen from Hugh Pavletich’s
    office.





    Land
    value say 450 metres $120,000. Cost of
    building is $1800 per meter = $180,000, note
    Council and legal costs, not included


    total
    cost $300,000. .


    Yearly operating
    costs are ; Rates $1500, Insurance $1500,
    Maintenance $2000 Wages $2000 other $1000:Total operating costs $8000


    Required
    return on capital is 5%, that is $15,000


    Income
    required is therefore $22,000, and at a
    rental of 47 weeks per year [ 5 weeks down time ] a rental to return 5%


    is $22,000
    / 47 = $470 per week.





    Metiria Turei is in the
    company of others who have their mouths
    open, and their minds closed, and if you give them half a chance they will
    steal all our land to subsidise the select few.

    ReplyDelete
  3. I could not do layout in my reply, sorry, Disqusting will only let me look at one line at a time, so I have no idea of how it will throw words out of shape, or lines, or paragraph

    ReplyDelete
  4. Imagine that the government puts in a subsidy so poor people can afford the Mona Lisa .. an art supplement. There is only one Mona Lisa. The price of the painting just goes up, right? The accommodation supplement is mostly a subsidy to landlords because the Greens and Councils won't let anybody build. You are no better off for it because the higher rental rates were incorporated into the price you paid for the house.

    ReplyDelete
  5. Really? When I use it, the comment box expands as I add more lines.


    And it lets me add line breaks where I like. I hit carriage return twice before adding this line, for example.


    Does the Disqus box not expand as you add lines? What browser are you using?

    ReplyDelete

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