By Jason Krupp*
Replace the word London for Auckland and you could be forgiven for thinking that The Economist was writing a lament about housing affordability in New Zealand’s biggest city.
In an article titled “Little London”, the magazine notes that soaring property prices are dragging on the city’s economy. That is because while the city’s population has grown by about 100,000 people a year, while only 27,000 new houses are consented annually to accommodate these new arrivals.
This disparity between demand and supply means that prices must rise. The article notes that the median price of a house in London has tripled over the last 20 years. That has spilled over into the labour market, where firms struggle to attract and retain young talent. Indeed, London-based firms also pay twice as much for equivalent commercial space as their counterparts in New York.
The parallels between the affordability problem in London and Auckland are striking. So too with the root cause: land use regulation. In London, draconian rules are stymieing the supply of housing in the city, and urban growth boundaries in the form of greenbelts are stopping it from spreading outward. In Auckland, existing property owners have successfully lobbied politicians to back away from attempts to lift height limits in the inner city suburbs. Furthermore, planning and balance sheet constraints also prevent fast growing cities like Auckland from expanding outwards.
The long-standing view of the Initiative is that cities need to cut through the regulations that prevent them from growing up or out, a policy cure shared by The Economist.** Both cities desperately need strong political leadership with a firm grasp on the economics of housing affordability if either is to have a hope of cooling their white-hot property markets.
For Londoners, who went to the polls on May 5 while this article was being drafted to choose a mayoral replacement for Boris Johnson, the prospects do not look good. Labour-backed candidate Sadiq Khan has proposed tightening existing rent controls. On the right, Zac Goldsmith is no better, proposing that firms lend money to workers for rental deposits.
Both of these policies are deeply flawed. The economic literature on rent controls shows that they tend to exacerbate housing affordability problems, not cure them. And that is not the worst of it. Allowing people to borrow more money to get into the rental market will not resolve the housing shortage in London, to say nothing of the risk it shifts to employers. It does not look good for London.
Fortunately for Aucklanders, there is still some time before the local government elections (October). The three right-of- centre candidates and one-left- of-centre candidate are for the most part still working on the specifics of their respective policies. Hopefully, measures to address the housing crisis will rank among their top priorities.
For those voters concerned about housing affordability, it is important that they assess the candidates (and their policies) on two criteria. The first is whether they credibly plan to lift the supply of land and housing stock in Auckland – the only practicable means of improving housing affordability.
Of course Auckland Council is only responsible for a limited (but important) range of factors which influence the property market. Central government regulation, building industry capability, Nimbyism, ideology, and a generational wealth divide are all factors that make housing affordability one of the most complicated political issues of our time.
That brings us to the second criterion: do the plans recognise this complexity, and the roles that respective parties play when it comes to residential housing?
As a non-partisan think tank, the Initiative does not have a preferred mayoral candidate. But as the contenders for the Auckland mayoralty unveil their plans to make housing more affordable, it is through the lens of these two criteria that we will be assessing their policies. We, as a nation, need to separate the wheat from the chaff when it comes to housing solutions, as the costs of weak leadership will be too high to bear.
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*Jason Krupp is a Research Fellow at The New Zealand Initiative and a former business reporter at the Dominion Post. He interviewed Mario Polese in Montreal last year as part of a local government research trip. The NZ Initiative provides a fortnightly column for interest.co.nz.
**These are the same policy recommendation made by Dr Oliver Hartwich, the current Executive Director of The New Zealand Initiative, when he worked in London a decade ago as the Chief Economist of Policy Exchange.
35 Comments
Good article Jason. The next Mayor of Auckland will play an important role in restoring Auckland's housing affordability or not. Ratepayers should carefully assess the candidates with respect to their housing policies.
An important factor will be a willingness/ability to work with central government and whether central government is a genuine partner with commitment/policies to restoring housing affordability to NZ's cities.
Yip, all of that plus the fact that people who vote in local body elections are actually property owners. We've seen the power of this voting bloc with the 180 degree turn on the unitary plan. This does disgust me. The only alternative is building whole new suburbs further out which will only result in one thing - more motorway congestion. This is the single biggest issue I think Auckland faces. The ability to cycle across/under the harbour bridge would please me no end.
Camel's back - actually the real problems are 'both' at local govt and national level.
Most economists like Jason make it seem as if planning rules are 70-80% of the problem - which I think is a bit of an over-emphasis.
Whilst they are a big part of the problem, my own view is they might be 50% of the problem, then the other 50% of the problem is the issues you refer to on the demand side - overly generous immigration and foreign investment settings, tax settings etc..
Not so sure Fritz, If you had given me 80% i would have agreed!.. I drive all over AK delivering my products and we are building flat out, little towns popping up all over the place.
My feeling is, if you stemmed the flood of people and stopped people and companies from buying exsiting houses that they will not reside in, you would solve the problem.
Yep building is happening but the stats show Auckland is way way behind the eight ball and trying desperately to play catch up. That can only be helped once the Unitary Plan is finalised and we free up building more.
Need to be careful with capital gains tax. I support it, but more as a way to take just a little of the incentive out of property speculation. As shown in many countries, it won't do too much to stop runway house prices. But it's equitable, and more govt revenue (and then they could cut taxes elsewhere)
A CGT would only have meaningful impacts on house price inflation if it was really high (40-50%). But then it could have all sorts of nasty unintended consequences.
As I said elsewhere, I think immigration needs to be pulled back, and that can help a little - but we still need some immigration, and also we can't control when and how many kiwis may suddenly return. Also, we have natural growth, and internal immigration.
I would love to see us adopt the Aussie policy of restricting foreign property investment to new housing.
House problem in Auckland is cumulative policy failure. The Govt does not want to take an initiative , sad to know last week that National thinks Auckland prices as success and low rate on interest increasing affordability. It is mess , with no political will to solve as politicians are the ones earning most. The higher prices are extracting money from economy which is affecting demand in other sectors causing inflation to remain low as people do not have spare money, Guess how will economy perform if interest goes up.
The property investors have created a parallel economy from tax incentives and negative gearing. First home buyers have access to neither of these. Where is level playing field. This article stages Auckland population growing with 100000 and housing stock by 27000. Mathematically 27000 are cable of feeding 100000 as every home accommodates a family which is normally unit of 3 or 4. Rental is not strong , there is clear evidence that housing supply in not only the factor creating this huge ripple in market, it is investors assisted by Government with ability to influence policies. The Govt has constitutional duty to work for welfare of community which includes every citizen , by not listening people for controlling this property ripple , how is this Govt complying with its constitutional obligation. Why are NGO's or social groups or unions not pressuring the Govt to establish a taskforce for finding a balanced solution. How will service class with minimum wage survive in this city, where as the tax collected from these is feeding the rentals as tax incentive. ...............
"...every home accommodates a family which is normally unit of 3 or 4."
No. Couple with children household is only 41.3% of NZ households and decreasing. Couple without children is 40.9% and increasing. Statistics NZ
"Households with one or two usual residents made up over half of New Zealand households, at 57.0 percent. Households with three or four usual residents were not as common, at 16.4 percent and 15.2 percent, respectively. Households with six or more usual residents made up just 4.5 percent of households. There was little change since 2001."
Im waiting for this.... http://www.stuff.co.nz/auckland/69928915/Auckland-Harbour-Bridge-SkyPat…
Can someone please help.
Many people say a Capital Gains Tax is political suicide.
But, is there anything stopping the Govt introducing a CGT that only applies on properties purchased after the CGT was introduced?
Surely, that wouldn't be suicide, as it wouldn't affect people who have existing properties.
There already is a CGT.
Anyone who trades in any form of asset and makes a profit from it must pay tax on the profit. The problem with residential property as an asset class is that there are plenty of ways of presenting the profits as windfall or accidental and, therefore, exempt. A property trader who lives in the house is exempt from capital gain taxes. Someone who buys houses for the purpose of renting them out pays tax on the rental income (minus legitimate expenses of course :-) ) but may be exempt from paying capital gains taxes when they "re-organise their portfolio".
The recent law change implementing the "bright line test" was supposed to make that distinction clearer and applied to houses only bought after the law came in.
So I guess your wish has already been granted.
Who knows? Do you think the IRD is on top of it? I'm guessing they are. Now we have ascertained landlords/investors do in fact pay tax on capital gains - at a rate higher than any peer nation I might add and the fact landlords pay tax are you happy now? Or are you going to call for some other envious tax on people trying to save for retirement?
Only a fool tries to outsmart the NZ IRD. They are very good unfortunately. Of the 4 tax depts I've dealt with they let the least slip.
No idea but they needn't pay much tax anyway. Anyone who bought an AKL property in the last 3 or so years to rent out would never have had much hope of doing better than just putting their money in the bank except for capital gains.
By the time they deducted mortgage interest, rates, insurance, property management expenses etc from their rental income there wouldn't be much tax to pay anyway. But, if renting out the place means that their principal business is not buying and selling houses, then they get to keep any profits on the sale of the property tax-free. Currently 15%-20% p.a. tax-free would be achievable.
And we wonder why no-one invests in productive businesses.
It (suicide) appears to be so. I'd suggest there are a significant amount of ppl who have one or two rentals as part of their retirement plan ie long term ownership. These are the swing voter and probably also the middle incomers who actually pay the rump of PAYE etc ie are heavy tax payers already. So while I agree with a CGT and a land tax it isnt going to pass the voting booth I think.
@ Fritz; No Capital Gains Tax for investment property is not political suicide, most successful countries around the world have it. But sadly even if it was fully enforced, I don't think it will do much to slow down NZ and particularly Auckland's property prices.
Just going back to the article; it doesn't take much to realise what's really driving the property markets, a lot of which is overseas investment which is happening in virtually all the major cities. I suspect that London and Auckland have had their property markets massive inflated due to some shady investment from overseas.
For London (And the rest of the UK), On May 12 Prime Minister David Cameron is hosting an Anti-Corruption Summit for governments that genuinely want to tackle corruption make the change happen. I really wish that Mr Key would take a similar stand.
There's a really wonderful information graphic that helps to highlight the shear scale of the problem relating to London's property prices: http://www.ukunmaskthecorrupt.org/
http://www.ukunmaskthecorrupt.org/interactive-london-property-map.php
Just make you wonder how much of that is happening here and whether anyone is going to step in to prevent it?
Of course it won't be "enforced". The UK has a capital gains tax that's LESS than the income tax you pay on PROFIT when you sell a house. In the UK you pay 28%. In NZ you pay 33%!
So when house prices go up its because of money laundering/ponzi schemes/corruption? Not people getting 0 return from the bank so they look at an asset class that does give one?
Yet another NZ Initiative comment that totally ignores the supply v demand equation by ignoring any comment on demand.
Please mention demand but you can then excuse the candidates because they cannot exert any influence on immigration and foreign ownership both being solely by Government irresponsibility.
If you cannot understand what is the total debate content, then avoid making any comment.
ECON101-ism is not your friend here.
There are plenty of places in the world with higher demand for housing than in AKL where there is no property speculation. And they don't have CGT's, LVR's, "bright line tests" or any of the other Heath Robinson patch-ups littering the scene here.
The problem is elasticity of supply. In New Zealand developers can't turn on the tap when there is a lift in demand. And our problem is that demand can fluctuate wildly. It seems hard to believe but only five years ago we were losing population - NZers were shifting to Aus faster than we were gaining inwards migrants. And we have had those wild swings for as long as anyone can remember.
It's over-simplifying a little but Auckland Council have guaranteed in writing that they will enable 13,000 dwellings to be built each year for the next 30 years (and basically no more) regardless of demand. It's a no-brainer for speculators to arbitrage the gap between fluctuating demand and capped supply.
Basically the rules of the game are wrong and a new Auckland Council could easily re-rewrite those rules.
Some good points there. Especially in a smaller country volatile immigration will have a bigger effect.
I'd like to know how immigration is monitored. how regularly? And what are NZ's 'target numbers'?
Surely if fewer kiwis are leaving and more are coming back the non-kiwi tap can, if not be turned off, then slowed to a trickle??
But I'd be interested if anyone knows how responsive the immigration quotas can be to changing circumstances. Is there a 3 month lag? Or 12 months?
@Fritz. The statistics that are reported on this site and in other media come from Statistics NZ and are based on the arrival and departure cards passengers fill out when they fly in or out. They are updated monthly. I have never looked for them but I assume that Immigration NZ separately produce their own reports on the long-term visas they issue (which paradoxically include short-term work and student visas). Bear in mind that any targets relate purely to long-term visas granted. We have no control over the flow of NZ and Aus citizens and permanent residents.
Given that MFAT issue visas, DIA issue citizenship and Australians arrive here with special visas already granted, the arrival/departure cards are probably the only one-stop shop for the big picture.
I don't know anything about immigration policy but there may be documents on Immigration NZ's website. You might also enjoy Michael Reddell's writings at Croaking Cassandra. Click on the "immigration" topic button and see what pops up. I don't agree with everything Michael says but he sure does like to crunch the numbers.
Is it time for Nick Smith to be strung up by an angry mob yet? Because he's pretty much told FHBs to go feck themselves.
http://www.stuff.co.nz/business/79560171/hamiltons-the-city-of-rental-s…
No shortage just too many investors in the market local and foreign pushing up prices. 80% of properties in some auckland areas bought by investors. Stamp duty 10% force thəm out of buying existing homes. Zero stamp duty on new builds. Encourage supply.
Sooner they realise that the better. Australia and the UK have brought in stamp duty for landlord buyers time nz followed suit. See one property sold for 2m in New Lynn. Crazy
#24
That won't work. There aren't enough builders as it is. National [ removed unnecessary expletive. Ed ] by disencouraging apprenticeships and never recovered. All we have is a bunch of liberal arts students that don't vote.
Stamp duty won't curb house prices at all, that's one thing i agree with National on.
Restricting demand will fix the housing market. Too many immigrants are moving in, too much investment in property. That's where it should start. The kiwi dream will be shattered though, who will buy BMWs from Jerry Clayton?
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