In its response to the Productivity Commission, the Government agreed with the Commission’s analysis that supply side factors explain the deterioration in New Zealand’s housing affordability. The Government’s response to the Commission’s report concentrated on land supply, infrastructure provision, costs and delays due to regulatory processes, and improving construction sector productivity.The first step is admitting we have a problem. And I expect that English has a rather good idea of the things that need to be done. But many of them are outside his portfolio, and more of them wouldn't make Councils happy.
Housing affordability is complex in the detail – governments intervene in many ways – but is conceptually simple. It costs too much and takes too long to build a house in New Zealand. Land has been made artificially scarce by regulation that locks up land for development. This regulation has made land supply unresponsive to demand. When demand shocks occur, as they did in the mid-2000s in New Zealand and around the world, much of that shock translates to higher prices rather than more houses. It simply takes too long to make new land available for development.
We may be seeing the beginning of a repeat of the mid-2000s demand shock. As interest rates stay below historic norms, expectations are shifting that these rates are here to stay. As a result, demand for real assets has increased, observed in booming equities markets in 2012. Demand for real estate is also increasing, with the median house price in Auckland recently exceeding the highs of 2007.
Costs of other housing inputs contribute to New Zealand’s affordability problem. Building materials cost more in New Zealand than neighbouring Australia. The structure of infrastructure financing, and the timing levies are to be paid, raises the market price for housing. Appeals under the Resource Management Act, New Zealand’s land use regulation, can hold up developments and city planning for a decade or more in some cases. Time is money because development is risky.
From the Government’s perspective, worsening housing affordability creates a number of problems. Fiscal pressures increase because financial assistance for housing is tied to its market price. Home ownership provides financial security and a form of savings and lowers dependence on public assistance later in life. Worsening affordability increases demands for direct intervention through rent controls and public housing. We are aware of the results of these sorts of interventions overseas and must avoid them.
New Zealand is not alone in its housing affordability problem and there seems to be increasing awareness around the world that the planning pendulum may have swung too far. Land use regulations and intrusive development rules have consequences.
It is especially heartening to see English providing this statement as foreward to Hugh Pavletich's survey. Hugh has been the country's most tireless campaigner for fixing the regulatory mess that keeps housing prices up; he's also been a strong and public critic of Christchurch Council rules that have stultified post-earthquake development. This year's report puts Christchurch as worse than Los Angeles, San Diego, and Adelaide but better than Abbotsford, BC or the London ex-urbs.
File this under "Good Omens".