What is it about housing policy that leads to people forgetting basic economic principles? Following on from the extraordinary Labour Party policy that Matt and I jumped on at the start of the week, we had this blog post from Susan Guthrie, and this press release from Labour. Matt has commented expertly on these here and here, and I don't want to beat a dead horse. But in all the discussion about housing in the blogsphere, a few basic principles keep being ignored, so I thought I would finish what has turned out to be housing week in the blogsphere by listing those prinicples in one place:
- The price of housing depends on the supply of available houses and the number of people wanting to live in houses coupled with their willingness to pay for housing. The price of houses depends on the price of housing today and the expected price in the future. Policies that affect who owns houses and the incentive to purchase existing houses as an investment are sideshows unless they change the underlying stock or the underlying demand for housing.
- Speculation works by buying assets when their price is expected to rise and selling when the price is expected to fall, thus reducing price volatility. Speculative investment that increases volatility in house prices is investment that loses money. If such speculation were coming from overseas, it would be a source of income to New Zealand.
- Speculation that leads to an increase in house prices and makes money, is only profitable because underlying factors are operating to push prices up even further in the future. Any policy that claims to be able to reduce house-price inflation by restricting speculative investment, is a policy that is an open admission of having no solution to the long-term problem.
- Policy can reduce the demand for housing or for houses by imposing taxes, but that can only lead to a reduction in the before-tax price not to the after-tax price and hence is not a route to making housing more affordable.
- More specifically, there is a tax advantages to owner-occupied housing over renting. But to the extent that has any effect, it leads to too much investment in creating houses and hence to lower house prices than would otherwise be the case. There may be arguments for eliminating the tax preference, but affordability is not one of them.