OPINION: House prices are on the rise again, and this time rents are rising as well.
And right on cue, the property interventionists are limbering up to demand capital gains taxes, rent freezes and sundry other measures to tackle the issue.
Before we embark on another “housing crisis” complete with politically partisan policy ideas that turn out to be mirages (come on down Kiwibuild), let’s have a look at all the housing policy changes that have occurred over the last decade and assess what practical lessons they provide about the New Zealand housing market.
The first is that land supply is hugely important if you want to build more houses.
Auckland has undoubtedly built too few houses over the last twenty or thirty years. The decade from 2000 to 2010 saw a particularly marked decline in the number of new detached houses being built in the city, so that by 2010 the number coming onto the market was possibly the lowest ever.
The primary reason for that decline was lack of land ready to build on. The old Auckland Regional Council drew a hard boundary around the city and refused to let local councils build beyond It because they didn’t like urban sprawl.
The other Auckland councils in turn weren’t fond of intensified housing on existing land. They all sued each other to a standstill. When the Key Government activated the Royal Commission’s recommendations to merge the councils into one, Rodney Hide saved tens of millions of dollars by cancelling all the unresolved legal fights over urban planning.
The new more permissive Auckland Unitary Plan was adopted in record time but it still took a few years and many plans had to wait until the new rules were decided. It’s now largely doing its job, with Auckland building record numbers of new dwellings. More land will be needed soon.
The premier case study on land availability is post-earthquake Christchurch. Pre-earthquake the local councils developed a “smart growth” plan where they agreed what land around the city would be released for housing progressively over the next thirty years. Then, alongside the lives tragically lost in the earthquakes, massive numbers of houses were made uninhabitable virtually overnight.
After the quakes, amid dire predictions of skyrocketing house prices, Gerry Brownlee took the radical decision to release the whole thirty years of land at once. There was much sucking of teeth at local and central government, but it was the right call.
As the result of competition amongst developers tens of thousands of Christchurch families were able to use their insurance payouts and reasonably priced new home and land packages to successfully re-establish themselves. Christchurch house prices have since been some of the most reasonable in New Zealand.
The second lesson is about the availability of finance. The Global Financial Crisis dried up bank finance and laid waste to non-bank lenders. The lack of finance for new builds crippled the building market and it took years to recover. That’s a cautionary tale for the Reserve Bank, whose heroic new bank capital ratios will reduce available bank finance, albeit more gradually than previously proposed.
The third, and arguably biggest lesson from the last decade is the now obvious role low interest rates play in driving high house prices, and indeed all asset prices. Every time interest rates have got ridiculously low, house prices have shot through the roof as people bid up prices to the limits of the mortgage they can now afford. This price inflation seems fine if you already own a house, but it perpetuates the wealth gap between those that own houses and those that don’t.
Ultra-low interest rates are driven by governments worldwide contracting out wider economic management to central banks, which then have to compensate for poor microeconomic policies flattening growth. You might not think an oil and gas exploration ban, poor quality government spending, and backward-looking employment policies lead to ever higher house prices, but indirectly they do.
There are lessons out of the rental housing and social housing markets. It is crazy to persist with a single monopoly state housing provider when it has never in its history managed to successfully meet the demand for social housing. It’s also not sensible to let one person have the same state house for life irrespective of changes in their family and personal circumstances. The rapidly growing social housing waiting lists compared to two years ago provide the evidence there.
And if you make it harder to rent out private houses, less rewarding to own investment housing, and demand more and more upgrades to rentals, you will reduce the supply of rental houses and the rents will go up. That’s not to say never change anything about residential tenancies, but perhaps don’t whack landlords with a dozen negative changes over, say, three years.
To make housing more affordable, the last decade’s experiences tell us to greatly increase land supply, ensure a ready supply of build finance, put less pressure on the Reserve Bank to lower interest rates to keep the economy going, enlist community and NGO help in supplying social housing, and stop treating the vast bulk of residential landlords like they are pariahs. Oh, and forget a more punitive capital gains tax – countries with one of those have the same skyrocketing house prices as we’ve had.
* Steven Joyce was minister of finance in the last National government.