'Build houses to reduce landlord subsidy'

Property

Accommodation Supplement: Landlord subsidy punching a big hole in govt books due to unaffordable housing, or an essential benefit?

7th Dec 11, 4:12pm by Alex Tarrant

The government is being urged to boost the supply of affordable housing to help wean people off a state rent subsidy which could cost NZ$2.2 billion a year - almost twice as much as official predictions - by 2016.

But any fix could require a large up-front investment in state house building, and/or require action from the private and community sectors to help increase housing supply, and therefore affordability, at the lower end of the price spectrum.

The Green Party has called on the government to see whether spending on the Accommodation Supplement could be more effectively spent elsewhere, with the party touting construction of more state houses as one solution to problems of housing and rent affordability. Co-leader Meteria Turei has attacked the Accommodation Supplement in Parliament as a subsidy for landlords. Turei told interest.co.nz high house prices, with constrained supply, meant higher rents and therefore costs to the government through the rent subsidy.

Meanwhile, the government's Productivity Commission, which is currently investigating issues of housing affordability in New Zealand, has had the issue of the Accommodation Supplement, and the possible hit to the government's books, raised with it by the Salvation Army. If housing shortage problems, particularly in Auckland, were not dealt with, rents would inevitably rise, the Salvation Army said. That may lead to more widespread claims for assistance, and increase the average Accommodation Supplement payments being made by the Ministry of Social Development.

The government is at the moment focusing on an upgrade of the current stock of state housing. Minister for Housing Phil Heatley told interest.co.nz the government was broadly comfortable with the Accommodation Supplement as a subsidy.

NZ$1.2 bln spent on subsidising rents

The Accommodation Supplement is a government payment to people deemed unable to fully afford board, rent or mortgage costs, hitting the government's books to the tune of NZ$1.197 billion in the year to June 30, 2011. A total 320,000 people received the supplement last year, giving an average payment of about NZ$72 a week per person.

That cost is expected to rise to ~~NZ$1.99 billion~~ NZ$1.199 billion in the current year to June 2012, with numbers receiving it falling slightly to 312,000. By 2016, The government projects 308,000 people will be receiving the Accommodation Supplement at a cost to the taxpayer of NZ$1.276 billion (see the numbers here in the PREFU, tables 6.2 and 6.3). A spokesman for the Treasury said the Ministry of Social Development provided the projections for the government's books.

However, the Housing Shareholders Advisory Group (HSA), which was appointed by the government to look into social housing costs in New Zealand, reported last year that the costs of the Accommodation Supplement to the government could rise to as much as NZ$2.2 billion in 2016 - well above the official projections.

In its report, the HSA said government spending on social housing was unsustainable, as expenditure had increased steadily over the past decade. If current trends were to continue, total government expenditure on social housing would hit NZ$3.6 billion by 2016, with the accommodation supplement contributing to the majority of that cost, the HSA said.

"The drivers of spending on the AS are the number of recipients and the cost of their housing. The number of recipients remained essentially flat from 2000/01 to 2008/09, actually declining slightly by 6,000 people. Yet spending in the same period rose by 4.7% per annum, (from NZ$720 million to NZ$989 million), reflecting an increase in housing costs, primarily rental housing," the HSA said in its report.

"More recently, a different driver of spending has emerged: spending on the AS leapt by 18% to NZ$1.2 billion in 2009 as the recession hit and the number of AS recipients rose by almost 20%," it said.

Conservative projections showed an additional NZ$700 million to NZ$1.2 billion may be needed to fund the AS in 2016, with total payments likely to more than double from the 2009 level of NZ$989 million, it said.

In its submission to the Productivity Commission, the Salvation Army said it did not think the government's forecast growth of Accommodation Supplement spending was reliable.

"Overall The Salvation Army believes that New Zealand's housing assistance programmes and policies need a radical overhaul," the Salvation Army said in its submission.

"The existing programmes have become more and more expensive and at the same time have not directly addressed issues of adequacy of supply. The existing subsidies have created a dependency both by tenants and landlords which has been locked into the housing market in terms of house prices but which offers little if any hope that future needs will be met," it said.

"Ideally Government needs to become more deliberate in its housing policy and begin to plan for the provision of affordable housing directly through public agencies such as Housing New Zealand and urban development corporations, and indirectly through community housing providers and home ownership support for modest income households."

What is it?

The Accommodation Supplement is paid both to tenants who have lower levels of need than those in state housing and to some with similarly high, or higher, levels of need. In its 2010 report, the HSA noted the high need group receiving the subsidy may be unwilling to apply for a state house, be on the waiting list for one, or live in areas without state housing. The rate of AS paid to an individual is set at 70% of his or her weekly housing costs minus an entry threshold.

"The supplement is capped, and its maximum rate depends on the area in which a recipient lives and the size of his or her household. For the purposes of the supplement, New Zealand is broken into four ‘areas’, reflecting different tiers of market rent. For non-beneficiaries, the amount paid is reduced by 25 cents for every dollar earned over a set income threshold," the HSA said. See the WINZ website for more information on the four areas, and the maximum caps for different groups.

'We can use the money better'

Green Party co-leader Metiria Turei attacked the Accommodation Supplement in Parliament last year, saying it was merely a subsidy for landlords. The Green Party was not calling on the subsidy to be scrapped all together, but believed money should be spent up-front now on building affordable housing to try and reduce dependency on the AS.

"When wages and incomes are kept low and rents continue to increase, people need support to pay their rent. But it is a cost that is getting out of control," Turei told interest.co.nz in an interview on December 6 (see video above).

There needed to be a whole-of government approach to the issue, with a capital gains tax a necessity and more investment in state housing. The Green Party is calling for 3,000 state houses to be built over the next three years, while the private and community sectors needed to come to the party as well. Incomes - benefits and the minimum wage - also needed to be raised.

"The [HSA] said there are 70,000 too few homes in this country, and as long as demand far exceeds supply, the costs will continue to grow for families."

The fix was a long-term solution which would require an upfront investment.

"If we're going to be spending two-and-a-half billion dollars in 2016 on the Accommodation Supplement, why don't we spend some of that now on building homes. That is one way of doing it," Turei said.

"It is a subsidy for landlords - they can continue to increase rents, and the government will continue to supply them with that extra cash, because they won't allow for the increase in wages - they won't increase the minimum wage, for example," she said.

"But people are desperately in need. Some 320,00 people are getting an accommodation supplement. Without it they have no way of paying their rent, so you simply cannot just take it away. It's been so embedded in our economic system that it has become a real issue - you can't leave people, families and children, without a home."

'A supply response is needed'

Alan Johnson, who is a policy analyst for the Salvation Army, has been following developments with the Accommodation Supplement since the early 1990s.

He said rent rises closely matched rises in household incomes.

“In my view, if you supplement household incomes through some form of transfer, that’s going to translate into higher rents,” Johnson said.

“The AS is pitched quite cleverly in that it only subsidies 70% of any rent increase, so there’s a handbrake on excessive rent increases which could ratchet up. If a household income rises 5% over an extended period, rents would probably rise 5%. But rents only make up 30-40% of a household’s income, so feasibly the household’s better off by that supplementation because it’s got other income,” he said.

The government needed to look hard at the supply side of the housing equation in order to check the costs of the Accommodation Supplement.

“The subsidy rate that we’ve got is designed to encourage people to economise on their housing costs. But it does mean that any rent increase ahead of household income increase still leaves the household with less disposable income, which can cause real hardship," Johnson said.

“They haven’t really addressed that issue, and the way they are addressing it is through supplementary benefits – Working for Families – which doesn’t help. What it does is turn working households into beneficiary households," he said.

"Really the only way is a supply response. Build houses, or make certain affordable houses are built."

(Corrects transposed figure in the 7th paragraph)

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73 Comments

by Wolly | 7th Dec 11, 4:27pm 1323228475

Yes the subsidy to the landlords should go...but not into the state building new houses for those who are on low incomes...with the subsidy removed the market will find a new level where many landlords will opt to sell out...thus driving down the cost of the properties...and leaving the door open for low income people to buy their own home.

But this pathway does not reward the pinky green party at all...and so it is not suggested...much better to have voting support living in state provided housing..dependent on the state...The Greens are learning from Labour....

Saving 2.2billion per year would take pressure off the fiscal hole...unless idiocy prevailed with more govt splurging, taxes could be cut back..gst to 10%...thus boosting activity in the new building sector and the DIY sector...creating new jobs...Too much for the greens to swallow.

by Matt in Auck | 7th Dec 11, 5:29pm 1323232176

GST on new construction should be pulled back to 7.5%, possibly 5%. That would help housing construction more than anything, including RMA reform

by korual | 7th Dec 11, 5:37pm 1323232635

As the MP suggested, you can't just abolish the AS and wait for market forces to solve the matter. Thousands of families are now dependant on the AS. It is too big to fail. A government has to actually do something about the distortions of the "free" market.

Your free market approach wouldn't suit pinky green National party either. Housing the population is generally considered an important part of governing a country. It's important like education, defense, health.

Free market economics has become like Marxism, the preserve of die-hard ideologues. Best thing about the election was ACT being effectively wiped out.

by benwave | 8th Dec 11, 12:26am 1323257207

Maybe I'm missing something here, but I don't quite understand the argument that lowering house prices will lead to lower rent prices

If house prices fall, some current renters will buy homes leading to less demand - with you so far - but now that's one less house that can be a rental property. So doesn't that drop the supply in the same way, for a net change to rent prices of zilch?

Sure there will be less people renting, but I can't understand how rents will go down as a result. The only way to change that through supply and demand would be to decrease the number of people here or to increase the stock of housing... the rental/owning thing seems like a red herring to me. Can someone explain it to me?

by PhilBest | 8th Dec 11, 10:57am 1323295021

You have a point, in that rents have not increased anywhere near as fast as house prices; this is one evidence of a "bubble", same as when the P/E ratio on the share market is out of whack, indicating a bubble there.

This is because investors are counting on capital gains, not rental or dividend income.

But ultimately, the longer the underlying problem is a racket in the quantity of urban land enabled by town planners, rents also inflate. Britain is the case study in all this, having been "containing urban sprawl" since 1947. They have had volatile price bubbles in which rents were left behind house prices, but the underlying TREND in both house prices and rents, is steadily upwards as a proportion of incomes. That is, the "troughs" in house prices get higher as well as a peaks, and the rental price trend follows a similar track to the house price trend.

NZ is just copying the British lunacy, in spite of having about 40 times as much spare land per person.

Inflated land prices are actually an economic disadvantage. Underpopulated countries like NZ need to exploit this natural advantage, abundant land, to keep prices down. NZ running an urban land racket is like playing a sport where the opposing team is far more numerous, but they are all cripples - and we say, hang on, even though there is far fewer than us, we will cut our tendons so we are cripples too. Then we wonder why our economy tanks, when we have put it under the same disadvantage as a nation that actually HAS run out of land (like Japan or the Netherlands or Hong Kong or Singapore) but that has the compensating advantage of economies of scale.

by stp | 9th Dec 11, 11:19am 1323382776

Yes Wolly, If you are poor will it (market force) happen before you die or after.....

by alex | 7th Dec 11, 4:41pm 1323229291

Far too sensible for it to happen Wally.

by Wolly | 7th Dec 11, 6:05pm 1323234351

Yes you're right Alex...really dumb of me to waste my time to post it...

by bob | 7th Dec 11, 4:51pm 1323229907

All very well to want affordable housing, but the RMA through Council/District Plans won't allow it.

CBD apartments under $500K were banned in 2006 with PM2. Apartments were basically banned in Newmarket under PM196 (20% of your building has to be $1M units or no consent).

Found a consent for cheap houses in Albany that was recently declined. From a quick read it was declined because only 2.5 carparks per unit wasn't considered enough and the units didn't have enough outdoor space to satisfy commisioners (although it all complied and was more than most houses have - once it's discretionary they don't have to care about their own rules). There were zero off site effects i.e. the only people who would have 'suffered' were the people who CHOSE to live there.

Council officers determine the minimum size etc. they think is appropriate for other people to live in and that sets minimum price - which seems to be from $500K.

You are not allowed to chose to live in a smaller house for a lower cost. Someone else decides how you live and how cheap your house is allowed to be.

by PhilBest | 8th Dec 11, 11:08am 1323295718

The fact, observable everywhere in the world where there are urban growth containment policies, is that the escalation of urban land prices under this racket, is always greater than the ability of people to "trade off" space to keep within what they can afford.

The few remaining undistorted markets in the world, have a LOWER median multiple house price AND a far larger average amount of space per person. A one-eighth of an acre section in NZ or Britain, costs literally several times as much as a 1 acre section in many US cities (regardless of pre-or-post-crash conditions. The US cities without urban land rackets had no price bubble).

The result of fringe homes being $150,000 houses on $250,000 sections instead of $150,000 houses on $50,000 sections; is that a decent apartment near the CBD is $1,000,000 (almost all of which represents gold-plated land value) instead of under $200,000 as it is in the undistorted market.

The biggest irony in all this, is that FAR LESS people have the "choice" of living near the CBD, under the "inflated land price" model. Economist Jan Brueckner says in a paper entitled "Urban Growth Boundaries: An Effective Second-Best Remedy For Unpriced Traffic Congestion?":

".......failure of the Urban Growth Boundary to appreciably raise densities near employment centers is the main reason for its poor performance, and this failure will persist regardless of whether the city has one or many such centers......"

There are numerous other similar academic findings from economists listed HERE:

http://www.performanceurbanplanning.org/academics.html

by Anarkist | 7th Dec 11, 6:37pm 1323236244

Hugh,

Perhaps the Greens perhaps justly concerned that if the housing affordability issue were left solely to the private sectors, property investors with deep pockets (well connected to financal interests) would use their leverage to buy up huge blocks of land at the urban fringes and over time allow just a trickle of new developments come onto the market, thereby keeping prices high. It is entirely conceivable and would undoubtely prove lucrative to take that strategy.

by Chris-M | 7th Dec 11, 11:09pm 1323252593

It's a bit late for "would use ....."

by PhilBest | 8th Dec 11, 11:22am 1323296527

Anarkist,

There is nowhere in the world that that has happened, when there are "NO LIMITS" to urban development.

Urban growth always takes decades for a city limit to move 1 whole kilometer along its entire edge. Therefore, your land banker classes have to carry their land holdings for literally centuries if they want to lock out developers who would otherwise build affordable housing. Otherwise, any Bill Leavitt type can simply buy a farm at farmland prices another 1 km beyond where the land bankers have "cornered", and put affordable houses on $30,000 sections. The cost of driving the extra distance to get there, will always be FAR less than the cost of inflated price housing closer in.

The fact that this is POSSIBLE, means that "land bankers" actually do not bother. This is the reality in the cities in the USA where there has never been a price bubble. This is what stops a price bubble.

Greenies everywhere locally now have the chutzpah to turn citizens into KGB informers on each other because trees are now so scarce in urban areas that they must be declared sacred and not touched. This happens to be the consequence of the elimination of decent backyards and gardens because "raw land" is hundreds of thousands of dollars an acre instead of $4000 per acre. There is no lack of trees in "sprawling", "auto dependent" suburbs in US cities.

The Greenies have the chutzpah to insist that the cost of urban growth containment must land entirely on humans. Having banned large-lot suburbs where humans DO co-exist with nature, they demand that humans STILL co-exist with nature by setting aside some share of their $800,000 per acre urban areas for trees and enclaves for "endangered species" of worms. Even though the land is now $800,000 per acre instead of under $10,000.

by Crooked Thumb | 18th Jan 12, 10:19pm 1326878389

Other bloggers have explained why this would not happen, but I have read of another solution which would also be likely to reduce the entry cost of acquiring land. It is called a LAND TAX, and if applied correctly would obviate the need for a complex, unwieldly capital gains tax that the Greens seem to advocate with mantra-like regularity.What has it got going for it?

1. Good pedigree - all the way from Adam Smith, Quesnay, Turgot, Ricardo, J.S.Mill, Henry George. (Note no socialists in this list)

2. Impossible to avoid and easy to collect and administer.

3.Forces land (our most scarce resource - we aren't going to find any more) to be used productively. Perhaps this is anathema to the Greens; some seem to value the land ahead of human wellbeing.

4.Is a progressive tax - hurts the rich landowners , not the poor landless.

5. Land bankers have to find another occupation.

6. Is a very good proxy for a capital gains tax, without the complexity.

7. To be applied to the (unimproved) Land Value - reasonably straightrforward to arrive at these values. Our local council does it every three years.

8. Has been applied successfully in other countries, e.g Singapore.

9. Goes some way to recognising that land basically belongs to us all, and that "private ownership" of land is little more than a right of occupation, it is not absolute. It never could be, given the way that private ownership of land originated.

P.S. I own both residential and business land. I advocate this not out of narrow self-interest but out of desire to see a fairer and better functioning society.

by mark.s | 18th Jan 12, 11:13pm 1326881636

Could you please give some evidence for Adam Smith thinking a progressive land tax was a good idea?

First time ive heard that one.

by Andrew Atkin | 18th Jan 12, 8:44pm 1326872670

Yes Hugh, exactly. It doesn't need to be a government solution (if they could just get out of the way). Get rid of the articifical price inflations and the private sector can fund itself out of this damn mess!!!!!!

And our John Key needs to be tested for psychopathy. (Apparently the money trader world is completely infested with them).

BTW, Hugh...You should do a power-point speech, so we can get it online. Something for our politicians and officials to look at maybe?

by muzza | 7th Dec 11, 6:21pm 1323235263

Why not cut back on the really big handout, the national super ?

by prosperopink | 7th Dec 11, 7:14pm 1323238445

Its all OK folks! Tony Alexander has just been on TV One news cheering us all up.

House prices will be going up. He said "if the GFC didn't cause a housing crash it isn't going to happen now. Huh? I thought we were about to start GFC Mark 11

by Kate | 7th Dec 11, 10:55pm 1323251711

What twaddle - effectively he said "houses are 25% over-valued, but you better buy now because tomorrow they'll be 30% over-valued".

I assume they're lending up to 95% on these 25% over-valued houses - but why not, we don't have non-recourse loans here!

Surely the kind of advice he has just given on national telly should have breached some kind of FMA regulation?

by Zaphod The Flatulant | 8th Dec 11, 7:26am 1323282379

"houses are 25% over-valued, but you better buy now because tomorrow they'll be 30% over-valued".

Kate, that made me chuckle as well.

by Wolly | 8th Dec 11, 7:49am 1323283750

But but govt policy promises to pork values with the uncapped landlords subsidy rort in full swing....supported by the banks...which will lend the 95% to landlords...who know they can drive by winz to collect their $200 per property per week...and go borrow more to score another property...and fill it with those who cannot save enough to afford the deposit on a property even with a 50% lvr mortgage from the bank....the same bank that lends 95% of the already inflated value to the landlord who collects the benefit....

And the bank donates to which political party.....as does the landlord.!

by PhilBest | 8th Dec 11, 11:31am 1323297068

I want the media to show some consistency for once, and if they regard a few TranzRail shares as "vested interests" if an MP owns some, then that applies very much more so for investment properties.

I want to know whether the ownership of investment properties by MP's is the sticking point for getting any reform that WOULD get housing affordable again, in contrast to hot air and going through the motions to look like "doing something", KNOWING all the time that it is NOT going to work and one's investment is still quite safe thanks.

by scarfie | 7th Dec 11, 8:42pm 1323243721

Yes lots more state houses please, then we can breed lots more John Keys.

by PhilBest | 8th Dec 11, 11:34am 1323297255

I WISH State Housing bred "John Keys", and criminal parents bred "John Banks", and, and, and........I can't think of any more exception-to-the-rule examples. Bummer.

by Living in Clover | 7th Dec 11, 9:22pm 1323246142

"A total 320,000 people received the supplement last year, giving an average payment of about... "

Good God this must be half of all New Zealand families receiving this benefit, what a croc !

What a rort for the landlords!

What is NZ coming to !

by skudiv | 8th Dec 11, 11:58am 1323298685

If each person represents a family of 4, this is more like 28% of the population supporting landlords.

by Ayris | 7th Dec 11, 10:48pm 1323251307

Alot of residential property investors vote for the Green's

Their policies help drive up house prices and rents, although National just did quite a good job of it recently by dropping the depreciation alowance on rental houses. This cuts the supply / the will to build new houses.

Bring on a capital gains tax.

This will really spook the market, and stop it dead for a few years.Less houses being built = big rent increases.About time really, rents need to climb to bring them back into line.

by amalgam | 8th Dec 11, 12:06am 1323255964

"About time really, rents need to climb to bring them back into line."

Rents need to climb?

If or when rents increase to the point that they become as unaffordable as mortgage payments for NZ's 99% (and they won't have to increase much for that to be the case), those that can't move back home with mum and dad will head offshore in search of a decent income.

Considering the claims of a property shortage have been demonstrated to be utterly spurious, where will this turn of events leave those dependent upon rental incomes?

by PhilBest | 8th Dec 11, 11:40am 1323297654

Property investors support the Greens BECAUSE they create rackets in urban land by restricting the conversion of farmland to urban via growth boundaries etc. This is a classic "Baptists and Bootleggers" situation, with the Greenie religionists as the "Baptists" and the property investors as the bootleggers.

This is even true for huge international commercial property investors like George Soros.

No-one rakes in the capital gains like CBD property owners, because prices there are a MULTIPLE of what fringe land prices get driven up to.

Rent seekers of all kinds HATE Texas, because there is no pickings there for them. Texas' fiscal and regulatory policy is optimised for PRODUCERS, NOT RENT SEEKERS.

Economic secret weapon numero uno, I suggest.

by DC | 8th Dec 11, 12:27am 1323257237

This is so bad! Tax payers money going into the hands of landlords via low income tenants. This does nothing for the main problem which is the amount of housing supply available pushing low income families out of home ownership due to the high cost of the cheapest houses.

What about this government?

Take off GST on building supplies for new builds.

Immigrants can only buy new houses.

Developers get taxed for sitting on land.

Developers get subsidised planning permission to develop land.

Open up new land to be developed around train lines.

Sell current state housing and use the funds gained to build new state housing.

Provide apprenticeships in trades with a cash incentive when passed.

Why wouldn't the government do this instead of putting the country in debt with no return of increased supply?

by PhilBest | 8th Dec 11, 11:54am 1323298497

The biggest problem is NOT "developers sitting on land". The developers are just the meat in the sandwich. Alan W Evans discusses the Portland experience in his book "Economics and Land Use Planning". Portland drew an Urban Growth Boundary with "20 years supply" of land for urban growth within it. 4 years later, prices began to inflate.

Evans says this is because:

- at any one time, approximately half of farmers will not want to sell their land, period.

- developments typically take about 4 years.

- developers like to have secured their next development site before they have completed their current development

- longer permission processes cause developers to act earlier to secure their next site

- farmers being approached all of a sudden by multiple interested buyers, "get wise".

That is not rocket science, yet planning advocates are in denial and most economists cannot see reality for all the fancy formulas they bury themselves in.

Developers, furthermore (Evans discusses this too) find they are now in a "high risk" profession, at the mercy of speculators and incumbent land owners with monopoly powers. The cost of RAW land that they must finance while doing the development, is now literally hundreds of times what it used to be. Property cycles are much more volatile and timing becomes much more important. The window of opportunity for money making is narrowed not just by the length of "boom" cycles, but by the length of permission processes.

Many developers end up going out of business, and the trade tends to concentrate more and more in fewer and fewer hands. The small "spec builder" is squeezed out altogether. The "supply" response during each "boom" of the property cycle, gets less and less and the PRICE response gets more and more volatile. This is literally the fact in Britain (where Evans comes from, and the main subject of his books). Actual shortage of housing gets greater and greater, and pressure on social housing and accomodation supplements increases.

The disincentive "marginal tax" for leaving social housing and ceasing to qualify for accomodation supplements (by getting a job or increasing one's income) entrenches increasing amounts of welfarism. This is a vital ingredient in Britain's now-terminal economic decline.

by rp | 8th Dec 11, 12:44pm 1323301441

dunno about that mist42. Why are truffles so expensive? Or diamonds? Limited supply. Demand, what people are prepared to pay does affect price. But supply is the other half of the equation. Limit supply, with demand staying equal, and prices will go up.

by PhilBest | 9th Dec 11, 4:46pm 1323402362

Mist42nz,

That is simply a back to front way of looking at the urban land market. Where did you learn it? "Supply doesn't matter, only demand".

I realise that there ARE some people out there with letters after their name arguing this, but they are dead wrong and deeply culpable for the mess we are in, because of the confusion they have cause and the smokescreen they have provided for the economic illiteracy of the "growth planning" advocates.

When the NZ Govt introduced an auction system for car import quotas in the early 1980's; the result was: the price of imported cars went up, car dealers bidded higher and higher each year to try and stay in business against each other, and then when a certain point was reached, the cars were finally too expensive for buyers, and the "successful" dealers (in terms of winning the quota auction) went broke.

By your standard, regulatory interference in supply had nothing to do with this, the price of imported cars would have gone up anyway, because "that was what the NZ public were willing to pay anyway".

By your standard, the price of urban fringe sections would be "that high anyway because that is what the public would be willing to pay for them".

So "the price the public is willing to pay" for a necessity, always excuses the outcomes of anyone interfering in supply of anything? We should try it with milk and bread.

by Wolly | 8th Dec 11, 7:20am 1323282047

I'll have another bash....friends said they have given up saving to buy and said they were able to have their rent debt cleared by winz with the landlord's rent being topped up by the taxpayer...what hacked them off was learning that the three houses for sale in the town had all been bought by the same landlord, a member of the National Party, married to the local bank manager, the same bank that gave her a 95% mortgage to snap up the three houses...and that winz had set up shop nearby to deal with the expanding accommodation supplement work in the town...and they were renting offices from guess whom...and the landlord's cousin was the real estate agent what sold the three houses...but my friends had to accept this because they realised that their job with the construction company that had the govt contract to reseal the highway,...was all part of the deal...the jobs existed because the govt subsidised the work that would fatten the companies bottom line, the company donated to the National Party which was determined to see the govt continue the rent supplement and the "investment in infrastructure"...the supplement that ensured there was a secure labour supply for the construction company...the "investment" that ensured there was a never ending road resealing taxpayer funded contract.

Everybody was happy....it's called Keynesian make work make profit policies...and the banks love it.

But the most happy of all was the boss of the bank...the bank that had most of the mortgages in the town...on properties that had increased in 'value' by 100% in just three years...His bank also donated to the......National Party.....I forget why!

by Les Rudd | 8th Dec 11, 7:49am 1323283753

Ha, nice one Wolly! So, in terms of a comparison to public credit funding same, not much difference then, referring back to the make work and 'bridges to nowhere' objections. It's just that in your example the credit (money) supplier issues money as debt with interest attached, that generates CI based inflation/debasement. Nice work if you can get it, eh.

How to solve?

Cheers, Les.

by Wolly | 8th Dec 11, 7:55am 1323284149

I shall grade you level 5 on your NCEA BS study Les....well done....yes there is stuff all difference between the current grand scam involving a govt splurge on "infrastructure and landlord benefits" ...and the social public credit "print and be dammed because it's free money" utter idiocy founded on freak thinking.

Now you understand why the NZ economy is owned and controlled by the banks with fatheads in the Beehive managing it for them...fully supported by the RBNZ "protect the bubbles at all cost" policies.

by Les Rudd | 8th Dec 11, 8:08am 1323284884

In either case Wolly the answer is appropriate regulation and I know you believe that is the answer to the present system, so why not same for a debt-fre or mixed (public/private) system?

From yesterdays Top10@10:

7. Printing Greenbacks - Washington College History Professor Richard Striner looks back through history via The American Scholar to find a time when America printed money to buy stuff, as opposed to just bailing out banks.

If the Federal Reserve can create new money, couldn’t Congress do the very same thing? The answer is yes, and here’s the precedent: the Legal Tender Act of 1862, in which the Republican-controlled Congress authorized creation of “United States Notes,” known as greenbacks, that were printed up and spent into use.

The U.S. Constitution has no provision for this practice, but it does authorize the minting of coins.

Why shouldn’t the American people have additional funds to be used for such impeccable purposes as national security, infrastructure maintenance, public safety, environmental protection, and research to counteract global climate change—funds created by the government without more taxes or debt? Does the principle seem too good to be true—a mere mirage, something for nothing? Think it over, for the system that we have right now is an exercise of mind over matter. The system I propose would give the people and their leaders an equal share in money creation with the bankers who are seeking private profit. It’s a profitable game, the creation of money, and we need more players at the table.

by Wolly | 8th Dec 11, 8:40am 1323286846

Tisk tisk...you was such a promising student Les...."appropriate regulation"..indeed......written by whom?.....the very pollies who manipulate the system to the advantage of themselves( as instructed by the banks).....

So you see Les old bean.....the system exists to benefit those in control....you knew this didn't you!.....it means the NZ govt will always act in this manner...the socialists will grease the pockets of the Union bosses et al and bake benefit pie to buy votes.....the capitalists will grease the pockets of the companies to get the donations to swing the media and scoop the votes from foolish punters.......oh and the banks play both sides against each other...they can't lose which ever way govt goes...

We have landlord subsidies because both sides of the political madness have failed to realise they are puppets being jerked around by the banks...the very banks that benefit from the subsidy.....they win we lose Les...

by Les Rudd | 8th Dec 11, 8:51am 1323287499

Methinks Anarkist and you would have a fair amount to agree on:

http://www.interest.co.nz/opinion/57042/tuesdays-top-10-nz-mint-grim-reaper-overdue-debt-german-taxpayers-bail-out-private-bon#comment-659149

Keep at it Wolly.

Cheers, Les.

by PhilBest | 8th Dec 11, 11:56am 1323298617

Wolly, Wolly, Wolly;

Why don't you see political unwillingness to tackle the fringe land racket, as the major problem? Your observations above are extremely acute otherwise.

by Alex Tarrant | 8th Dec 11, 10:24am 1323293090

Is that a true story Wolly? Serious question.

Cheers

by Wolly | 8th Dec 11, 11:26am 1323296784

Alex...my tale was as truthful and honest as the statements we have had to endure about the economy from our govts for thirty plus years.

by Alex Tarrant | 8th Dec 11, 11:34am 1323297292

So you made it up :) Was just checking. Would've been a cracka

by Wolly | 8th Dec 11, 11:37am 1323297455

It is a cracka...lodged in somebodies earhole on the 9th floor of the madhouse...light the fuse quick...

by Wolly | 8th Dec 11, 1:15pm 1323303351

You reduced me to a ...'Parable'....you rotter.....those fools in the Beehive won't take any notice of a parable stuck in their earhole Hugh...it has to be a cracka with a lit fuse...a Hugh cracka....

by Wolly | 8th Dec 11, 2:01pm 1323306092

I'm sorry Hugh...it's the polly in me....we all have our bad bits of DNA in us...

by Lucky Basket | 8th Dec 11, 10:47am 1323294424

Mate please tell me that was just a bloody good story but not a true one!! If it is true the serious fraud office johnnies should be investigating it immediately!!

by Wolly | 8th Dec 11, 1:21pm 1323303662

Right you are misty...I'll give John an earful when I see him next....

by David George | 8th Dec 11, 9:01am 1323288094

Seems to me we have a fundamental problem being papered over with expensive and often counterprodctive Saviour State largess.The people can no longer afford their basic needs.

The median wage is about $29,000, not enough to raise a familly and cover housing, clothing, medical & dental, food, transport, education, insurance,taxes and retirement saving etc. So the state subsidises or directly pays for these through WFF, Accomadation Supplement, National Super, State Housing, free medical, etc. etc. These programs are now deeply entrenched in the peoples expectations.

Turei "But people are desperately in need. Some 320,00 people are getting an accommodation supplement. Without it they have no way of paying their rent, so you simply cannot just take it away. It's been so embedded in our economic system that it has become a real issue - you can't leave people, families and children, without a home."

Unfortunately, now the Mighty Saviour State can't afford it either. The whole something for nothing fantasy is falling apart. Now what?

by Wolly | 8th Dec 11, 9:21am 1323289303

You think...!

Only course of action for a govt of action is.....employ more spin doctors and get them working on a new 'fantasy' image.....works every time...

by Magnum PI | 8th Dec 11, 9:43am 1323290597

How about the 'mighty saviour' billionaire employers? Can THEY afford it? How much would it kill them to pay their staff a bit more than third world wages and salaries?

by skudiv | 8th Dec 11, 11:49am 1323298193

New Zealand income levels, which used to be above much of Western Europe prior to the deep crisis of the 1970s, have never recovered in relative terms. The New Zealand GDP per capita is for instance less than that of Spain and about 60% that of the United States. Income inequality has increased greatly, implying that significant portions of the population have quite modest incomes. Further, New Zealand has a very large current account deficit of 8–9% of GDP.

http://en.wikipedia.org/wiki/Economy_of_new_zealand

by PhilBest | 9th Dec 11, 4:57pm 1323403066

This is really ALL ABOUT the rationing of urban LAND.

The price has been forced up by the rationing, not the other way around.

It is not the price of STRUCTURES that changes, it is the price of the LAND.

Sections on the urban fringe in MOST cities in the USA have been steady for years at around $30,000 to $40,000 for up to 1 acre (the raw land is only about $4000 per acre so most of the price is "development" - the size of the section hardly affects the price). New houses are typically $140,000 for something quite substantial and as little as $80,000 for a brand new "townhouse". Older houses are typically $60,000 to $80,000 in lower-socio-economic areas, and good upmarket older houses in posh suburbs might be $300,000 (as some immigrants from high land cost countries like NZ are discovering to their surprise when they look around - the same thing in any Australian, NZ, or Californian city being well over a million). The "land" portion of the "house" value remains minimal. Bear in mind these are typical, stable market figures. In the BUBBLE market cities of the USA, the prices have been, like in NZ and Australia now, more like $250,000 for a fringe section, $400,000 for a new fringe house, $300,000 for a scungy older house (most of the price being "land"), $750,000 for a good quality older house in a good area (most of the price being "land"), and well over a million dollars for something substantial (the land alone being over a million). These prices attained in California and the other bubble markets, have crashed by anything up to 70% in parts. (Remaining stubbornly high in others). Commercial land is similarly overpriced (or not). Detroit and other "rust belt" cities with high unemployment all tend to fortunately NOT have enacted urban growth restrictions although some advocates are now misguidedly saying these would "HELP" them recover......! But they had sensible, affordable prices to begin with, and their unemployment-caused property price crash has resulted in old houses in scungy areas being worth nothing (they might sell for $2000), and even good quality houses in good established areas being no more than $150,000. Bear in mind that half acre and 1 acre sections are the norm. The land is worth "nothing", and indeed, a "negative" amount in scungy areas. This, and the dirt cheap cost of commercial land, means that venturesome people with little capital can buy in; or established people who bring their income with them can get themselves huge amounts of space for lifestyle or business expansion, often buying 2 or more adjacent properties. Even international investors from high-land-price countries are buying properties in Detroit just for a cheap punt, scarcely able to believe that property can possibly be that cheap, and certain that it has to go up again one day. Contrast this to Britain, which has strict anti-development laws in every city and town. Regardless of how high unemployment goes, their property prices never fall to levels that truly reflect their economic condition, and the region involved never recovers. My opinion is that NZ has got itself into a similar mess for the same reason, and so has Australia although they have strengths that are still propping their economic performance up in spite of the extremely high urban land prices. By the way, high urban land prices relative to incomes and GDP are a clear economic disadvantage - they represent a cost input to the economy, they are not only "high value collateral". There are some sensible writings on this subject that everyone is ignoring. Southern and heartland USA actually have a significant advantage in this respect, not just over California, Australia, NZ, Britain, Ireland and Spain; but over China, India, and Brazil. While those countries do not have Greenies obstructing urban development, they do have corrupt officials on the take, and the result is the same. Unaffordable urban land. Interestingly, the IMF published a paper recently showing a very high correlation between the stable urban land prices in US cities, and the proportion of "Evangelical" Christians in the population of those cities. By the way, Germany, Austria and Switzerland seem to have kept their urban land prices internationally competitive - while ours have been going up since about 1980, theirs have been trending down. So it is no surprise to me if their economies are in less trouble than other nations in Europe. Ireland and Spain had absurd house price bubbles that have burst. France has a moderate problem. The Netherlands has a problem now. Sweden's prices are inflating ridiculously right now in spite of all the evidence they should have taken account of from other countries experiences. Italy, funny enough, does not have a house price bubble even though it is notorious for corruption. This seems to be because people just flaunt the regulations and pay off officials cheaply; the officials do not run an actual racket in developable land as they do in China.

by Magnum PI | 8th Dec 11, 9:39am 1323290394

The whole argument about 'why doesn't the govt do this or that or some other thing to knock the housing rort on the head' completely ignores the fact that a big percentage of MPs own investment property.

by PhilBest | 8th Dec 11, 12:01pm 1323298871

Excellent; I have been saying this sort of thing for years:

I want the media to show some consistency for once, and if they regard a few TranzRail shares as "vested interests" if an MP owns some, then that applies very much more so for investment properties.

by rp | 8th Dec 11, 9:42am 1323290561

Absolutely superb article Alex. Hey someone there at interest enter this young guy for a journalism award. This kind of policy will dirve NZ into 3rd world status unless it is fixed.

by Les Rudd | 8th Dec 11, 9:49am 1323290943

What will continue to drive NZ more away from 1st world status is the absence of a balanced tax system and effective taxation of ...................

Sshh, don't want to wake the elephant so early in the day.

by rp | 8th Dec 11, 10:09am 1323292196

Agree Les. Other side, which Alex has here, is subsidizing things that will inflate the value of non-productive assets (e.g. houses). Also lowers everyone's standard of living as well diverting investment to wrong areas of the economy. The biggest single cost, on average, for most people is housing. Government not increasing supply (or dampening speculative demand with a tax), but throwing more money in via subsidy, economics 101, will inflate the price....crazy, crazy stuff. Almost unbelieveble in how stupid this is.

by PhilBest | 8th Dec 11, 12:04pm 1323299073

Britain is the case study in all this, having been "containing urban sprawl" since 1947. They have had volatile price bubbles in which rents were left behind house prices, but the underlying TREND in both house prices and rents, is steadily upwards as a proportion of incomes. That is, the "troughs" in house prices get higher as well as a peaks, and the rental price trend follows a similar track to the house price trend.

The McKinsey Institute in their 1998 "Driving Productivity and Growth in the UK Economy", found that the cumbersome planning system and inflated land prices were responsible for Britain's economy being 40% less productive than the USA's, and 20% less productive than Germany, France, and the Netherlands.

NZ is just copying the British lunacy, in spite of having about 40 times as much spare land per person.

by PhilBest | 8th Dec 11, 12:06pm 1323299163

By the way, the Netherlands worked this stuff out decades ago, which is why they use powers of compulsory acquisition of land to keep land prices low even though they have "run out of it".

by rp | 8th Dec 11, 12:30pm 1323300621

....economy 40% less productive because of inflated land prices...wow. Staggering.

I bet we're somewhere near there too Phil.

Let's see what kind of animal this new productivity commission is - a poodle or lion. There's a giant opprotunity for them to sieze and help lift NZ. Will they take it on?

by PhilBest | 9th Dec 11, 5:01pm 1323403284

This of course is the result of decades of annually compounding under-performance.

The ACT Party once put out an interesting chart of what certain policies were each costing NZ in terms of foregone economic growth. I think the urban growth constraints were the single biggest one. There were plenty more, of course, that also added up.

by PhilBest | 9th Dec 11, 5:04pm 1323403457

Thatcher's reforms would have been a raging success had she tackled the land planning issue. As it is, their success was undermined and the reforms she did make, were discredited.

But undoing her reforms and still not tackling the land planning problem, will definitely make things worse for the Poms, not better.

by skudiv | 8th Dec 11, 11:40am 1323297631

Has anyone here, actually bought some land on the outskirts of the city and put some houses on it? Or attempted it? How expensive is it? Is is seriously that hard?

by Wolly | 8th Dec 11, 1:30pm 1323304241

Makes you understand why the building sector is dying don't it Hugh....!

by skudiv | 8th Dec 11, 12:04pm 1323299044

Is this supply side economics? Or is this a case of everyone is so poor relative to the cost of things? Houses consume a lot of resources, land, labour, timber, concrete, copper, steel, glass etc. Is it the intrinsic value of these commodities that have been systemicaly inflated beyond the reach of many people. Or is it just a scam with a few fat cats stealing the cream from the working class?

Secondly GTFO of Auckland, last place in the country I'd ever want to live.

by skudiv | 8th Dec 11, 12:18pm 1323299928

I'll answer my own question. We are a bunch of broke peons.

Cost of building a small 143m2 home 240k

Section 100k

Total 340k

Close enough to average price of housing in NZ. We need wages to rise by a signifcant amount in NZ to be able to afford this. Thats the answer right there. Govt policies that make us feel not so poor are as much of a problem as they are a solution (which is typical of govt policies).

The real question is why did our standard of living drop so profoundly from the 70's. Address that issue, and housing will become more affordable.

by PhilBest | 9th Dec 11, 5:17pm 1323404278

You are correct about all these things. I did not mean to say at any time that actual growth boundaries were solely responsible. But Alan W. Evans' books (I recommend them to anyone who wants to regard themselves as a true expert on all this) describes the true relationship between fees and other regulatory costs, and "planning gain".

IF there was no regulatory restrictions on "supply", and hence no "planning gain", a levy would simply add straight on to the costs incurred by the developer, and would be passed on to the end buyers. The incumbent property owners (farmers) would still not be able to capture quasi-monopoly capital gains.

But when there ARE regulatory restrictions on "supply", the "supply curve" and the equilibrium price is shifted. The "supply curve" is shifted by the extent to which land owners can "hold out" for quasi monopoly "rents" in their asking price. A "levy" is a DEDUCTION from the "take" possible by these land owners; or is a "share of planning gain" taken by local government.

These things are literally the subject of explicit negotiations that drag out for years in development processes in Britain today - who gets what share of "planning gain". The "planning gain" and the prices paid for housing by buyers, are determined by the shift in the supply curve, not by the levies and extractions that might be taken from the "planning gain". The incumbent land owner is usually part of the negotiation process, and the extractions made by local government, regional government, national government, lawyers, consultants, and local interest groups; is fully understood by the incumbent property owner to be getting "taken" from the gain that otherwise would be theirs alone.

by steven | 8th Dec 11, 1:46pm 1323305185

raed a piece saying that hedge funds effectivelytake at least 50% of industries profits.....what ppl miss is they thinking its the working man (employee) v the employer....its not....its businesses and their employees that produce a good v the vampire squids...

The vampire squids have won....the losing half is about to die on them....so they are sucking even harder to get the last drop....

One of my hopes is these [wb]ankers future appointments is a lamppost and some rope....

Ive got to the stage that I wont shed a tear......its just immoral (the lynch mob) v the amoral (bankers etc).

regards

by PhilBest | 9th Dec 11, 5:26pm 1323404800

Mist,

I agree with pretty much everything you say, but you remain unenlightened about Hugh's main point, which is in fact the most important point; and that is, "freedom to build" on any land beyond the existing urban fringe without having to be restricted to purchasing land from owners who KNOW they have a de facto monopoly power.

Yes, by all means build "cheaper houses". But it will really, really help if you pay $4000 per acre for the land you build them on, because you bought a farm from a farmer; instead of $800,000 per acre because you bought the "farm" off someone who KNEW it was "inside the urban growth boundary".

I dealt earlier with your reasoning that the land is this expensive "because it is what people ARE prepared to pay". Even if there was no regulatory boundary? People don't usually pay $800,000 when the same thing is going somewhere else for $4000. I guess people MIGHT "be prepared to pay" quite a lot more than they currently do for bread and milk, too, IF a certain class of people could GET AWAY WITH establishing a racket in those things. They probably could, too, if it meant that a LOT of people were going to GAIN and only newly formed households were going to "lose".

by mich | 10th Dec 11, 7:42pm 1323499375

Unbelievable people still fall for it. Subisdising rent, subidising borrowing, subsidising whatever, it does one thing only; subsidising banks. Rents wil, overall, increase exactly the amount of subsidy. It means more money to pay on interest, which means higher prices for housing (than otherwise), which means more slaving for the banks. Same 'o same 'o. Sigh.

by eliteincome | 11th Dec 11, 9:53pm 1323593629

Hello NZ

My kids want to find out about getting onto to this free everything do nothing deal.Dad why should we work,everybody else in the street has a statehouse.They have never worked an drive better cars then we do.Time limits on all this support is only fair,going to work is a joke.

Only build statehouses an nobody works at all,free everything for ever.

My kids are bright an so right.

Auckland is full of these massive growing areas now

No easy fix but NZ has to start somewhere.

by PhilBest | 12th Dec 11, 12:46pm 1323647186

There needs to be more studies done into the real "marginal tax rates" involved in the difference between having a job and paying your own way in life, or being a ward of the State. Possibly the biggest factor now that is sending all the wrong signals, is the sheer cost of owning your own home.

The British Town and Country Planning Act 1947 forced housing prices up and led to ONE THIRD of the population living in State housing by 1977, and vastly increased disincentives to "getting a job" and losing the subsidised home.