This article was first published on AUT's Briefing Papers series. It is here with permission.
By Michael Reddell*
To date, however, the policy responses display little awareness of how previous policy choices have made New Zealand housing increasingly unaffordable over the last couple of decades.
Blaming investors or the tax system are largely distractions.
And while non-resident Chinese purchasers may be bidding up house prices in Auckland (and Sydney, Vancouver and other cities) right now, these pressures are recent, while housing affordability problems are not. Increased demand for houses, whatever the source, doesn’t create problems if it is easy to bring new houses to market.
In 2013 Anthony King and Ivor Crewe published The Blunders of our Governments, which traced Britain’s experiences with various policy disasters over the previous thirty years.
Unaffordable New Zealand house prices, especially in Auckland, are the predictable outcome of a similar blunder: the collision of two sets of perhaps well-intentioned policy choices.
In New Zealand, urban areas cover only around 0.7 per cent of our land. And land used for agriculture is just not that expensive. Prime dairy land at the peak of the boom in 2008/09 was selling for around $50,000 a hectare. Residential sections in Auckland, of less than a tenth of a hectare, are selling for ten times that much.
The comparison isn’t precise – subdivisions need streets and footpaths etc, so one hectare of farmland doesn’t generate one hectare of residential land. But in research published in 2007, Arthur Grimes and Andrew Aitken found that land just inside the Auckland Metropolitan Urban Limit was selling for 10 times the price of land just outside the limit. Even if we had a construction industry that was as efficient and productive as any in the world, our house (house plus land) prices would still be very high just because central and local government together have created artificial scarcity.
Auckland’s geography is certainly difficult, but that is all the more reason for having as few restrictions as possible on the ability of owners to use and develop land for housing.
Land use restrictions appear to have become a much more serious constraint in the last 25 years. By contrast, in the 1950s and 60s, with a much stronger policy emphasis on home-ownership and house-building, planning restrictions (and especially land use restrictions) had a much less serious impact.
Of course, there are land use restrictions in place in local authority areas all over the country. Councils – staff and councillors – seem to feel a need to plan and central government legislation allows them to do so.
But house prices in Auckland are four times those in Invercargill. That difference is really down to population growth differences.
In places where there is no population growth, land use restrictions still impose costs, but they don’t have much impact on house and urban land prices. And where land use restrictions aren’t very important, rapid population growth also won’t do much to boost house and urban land prices. An example is the big US city of Houston, where there are few land use restrictions. Over the last 35 years, Houston’s population has more than doubled while real house prices have actually fallen a little.
New Zealand’s land use restrictions are similar, in effect, to those in a range of other Anglo countries. House and land prices are extraordinarily high in places as diverse as Auckland, Sydney, Melbourne, London, Vancouver, and San Francisco. In each of these places, the inability to easily bring new land to market and use it intensively for housing runs into the pressures of rising demand from a growing population.
When those two pressures collide, house prices rise.
High house prices in these cities are not the result of aggressive and unwise lending by banks. They aren’t the result of speculation. They are just what happens when land use restrictions run head-on into population pressures. And housing demand is, in the jargon, quite inelastic. Existing residents of high-priced cities mostly don’t move somewhere else, partly because the big cities are where the jobs are. Sometimes the resulting high house prices are discussed as some sort of market failure, when it is a sustained failure of governments to allow markets to operate.
Where does the population pressure arise from? In the post-war decades most advanced countries experienced a high birth rate. Demand for housing rose strongly on account of this natural increase in population. Government policy choices didn’t have much to do with that source of demand, and governments in free societies generally don’t attempt to influence the rate of natural increase.
But natural population increase is now quite small in most advanced countries. Even in New Zealand, which has a relatively high birth rate by advanced country standards, the birth rate is only around replacement level. And for the last 40 years or so, New Zealand has had a large net outflow of New Zealanders, pursuing a better life abroad for themselves and their families. This outflow swings around a lot from year to year, but in total around 870,000 New Zealanders (net) have left in the last 40 years.
With little or no natural increase, and a substantial average annual outflow of New Zealanders, New Zealand’s population would now be falling slightly even with the modest rate of inward migration of non-New Zealanders we had in the 1980s. There would be no population pressure on the housing stock in the country as a whole, and probably only modest pressures even in Auckland.
But around 25 years ago, New Zealand immigration policy was reformed to encourage a much larger annual net inflow of non-citizens. The current annual target, reconfirmed by Cabinet only last year, is around 45,000 to 50,000 permanent residence approvals each and every year. That is one of the largest rates of non-citizen immigration (as a share of population) of any advanced economy.
As one would expect, a disproportionate share of the migrants settle in our largest and most diverse city.
No one envisaged the impact on house prices when the land use restrictions became progressively more binding, or when the more expansive immigration policy was adopted.
With hindsight the contribution of these two directly contradictory sets of policies is pretty clear.
Land use restrictions might do little harm in a country with low or no population growth (the situation in many OECD countries today). And rapid rates of non-citizen immigration would have no adverse impact on housing affordability if land could be as freely used for housing as in Houston. As it is, the young and the poor, disproportionately of Māori and Pacific origins, find it almost impossible to purchase a house in our largest city simply because of the choices – blunders – of our governments.
It is time for our government to confront that responsibility and to bring about change. If sufficient reform of land use restrictions is not possible – and the overseas precedents are not encouraging – the case for a significant reduction in the target rate of non-citizen immigration is pretty clear.
--------------------
Michael Reddell is a Wellington-based independent economist and commentator on economic and financial affairs, blogging at www.croakingcassandra.com. He recently left the Reserve Bank where he had held various economics and management positions over many years, including Head of Financial Markets and manager responsible for economic forecasting. This article was first published on AUT's Briefing Papers series. It is here with permission.
79 Comments
All very interesting and Reddell certainly brings an informed perspective to the issue.
Not sure I can quite reach the same conclusions however.
Ruling out speculation as an (ie, even possibly just one) driver of price inflation seems beyond the realm of reason. Not sure how he justifies the statement.
Again ....
1 - ban non-residents from buying in NZ
2 - require 50% deposit on non-primary residence property
3 - 30% deposit for ANY property (i know it is initially unfair)
4 - tax heavily investment properties (+increase rates on those as well)
5 - act actively on non-occupied propertied (pay high tax if not occupied or enforce to sell)
Then we will see where the prices will go....
Jerry_NZ ......why on earth would anyone implement such hideous policies?
If you want the rate of home ownership to increase and housing to be affordable then NOT ONE of your solutions would do that....NOT ONE of them!!
I couldn't help but think that you must hate people immensely that you want them to suffer.!!!
You have to be joking ZP.......I actually can't type what I would like to say on this issue because freedom of speech online was delivered a nasty blow with new legislation......but if this is what people actually believe then NZ is truly screwed and I sure hope this is minority thinking because it is mathematically illiterate!!
so , what would you propose?
How many times have you bid at the auctions by asian buyers?
How many times you have bin outbid by the investor (a week after property was sold was 'for rent')?
How many times have you been outbid by a builder (buy > quick du-up > sell for more)?
my ideas although not perfect - most likely would help people hardly working in NZ and paying taxes here.
Lets be clear here Jerry......I agree house prices are stupid and unaffordable. But it is regulation that has caused the problem so I am very much in favour of completely deregulating.......Anyone who went through the 1980's knows the benefits of deregulation!!! People have to have freedom to be able to make their own choices and mistakes......the status quo of regulating the heck out everything does not work, will never work, has never worked......
If you looked at what happened when LVR's were first implemented as I said at the time it will increase house prices and that is exactly what it did!!!! Where are all those people now from on this site who stated that LVR's were the right tool to be implementing???
When GST went up what happens it increased house prices. And again people were told this would happen.....but still some people wanted further taxes places on houses.....as I have said before you cannot increase the costs of anything via the tax system and expect prices to move lower!!
The more restrictions you place like LVR's and taxation then the higher the prices go!!
Right now your obviously peeved at being out done at auctions.......we all get p^*@ed off when we don't get our way......but if I were to genuinely desire that all people in NZ can afford their own home then it would be very wrong of me to endorse your policies which will do enormous harm.
Given China's rules on taking $50k yuan out something is very wrong and I would be addressing that issue under urgency if I were a politician!! As a potential purchaser at auctions have you bothered asking the RE Agent if the opposition (Asian)money is clean??? The fact is a buyer at auction has to pay the deposit into the Real Estate companies trust account and if that deposit is over $50K Yuan then that money is hardly clean is it!!! The RE Agents have to be brought to account for any actions they are taking!! And they are accepting that deposit!!!
The controlling of land use by the authorities adds enormously to the price of housing......then you have the Councils exorbitant charges for building inspections and other building related issues.....once people could build their own home and that right has been removed.......now everything is strictly controlled so as to extract the largest amount of money out of the home owning process as possible!!
Every time new rules come in all house prices rise regardless of the state of those houses!!
I am of the opinion after undertaking a huge amount of research that taxes are only legally able to be collected if they are spent in certain directions......so abusing the tax system is NOT an option and all politicians and bureaucrats who do this should be like the RE Agents and brought to task!!
I don't rule out a role for "speculation" but call it a distraction? Why? Because so-called speculative opportunities, in markets where prices have got ever-higher over 25 years, arise only from more fundamental causes. I suggest focusing on the more fundamental policy-driven causes and concerns about "speculators" or "investors" will largely take care of themselves.
When AUT commissioned this piece they didn't want footnotes, and I had only 1200 words. A fuller version of my story is in a speech at this link http://croakingcassandra.com/2015/05/19/high-house-prices-a-blunder-of-…
Yes. This person was evicted due to a rates dispute.
An Auckland woman has lost her house over an $11,000 unpaid rates bill.
Charlotte Marsh's three-bedroom Manurewa home was sold at a High Court-ordered auction on Wednesday after she refused to pay rates to Auckland Council for five years.
It's the first property to be sold out of eight rates arrears cases the council has pursued.
Her 1950s fibre cement-clad home in Rogers Road is on a 827sqm section and has a CV of $400,000. it sold for $597,000 Read more
.... yes i do. I live in a house so its value is largely irrelevant to me. Just as the value of my heart on the body part market is irrlevant as well. I would like them low, so our people can invest their time and energy into productive and satisfying matters...not sweating their lives away to fund the blood suckers who are running rampant.....
As long as all properties dropped in Auckland, it would be a good thing. Only investors and greedy speculators would be hurt. That would be a good thing also.
My rates and insurance would be less and if I sold my house for less, the next house I buy would be cheaper also.
John Key said it is a good thing house prices are going up at the present rate as it makes people richer. ( he said this on the Leighton Smith show)
If this is the Government's reasoning for sitting on its hands, then we are run by baffoons!
Only traders and speculators want the value of their assets to keep raising. Owners who live in their houses could not care less. In fact, they would be happy for a reduction in rates and associated costs of maintaining their homes. Beyond a level, inflation in house prices, driven by speculators and traders is harmful to the economy. Fundamental.
High house prices in these cities are not the result of aggressive and unwise lending by banks. They aren’t the result of speculation.
I beg to differ.
While money is essential to facilitating purchases and sales of real resources outside the banking system, it is not itself a physical resource, and can be created at near zero cost. Read more
Yes, I'm familiar with that literature. Choices by banks can be the cause of housing problems - and in the US govt pressures on banks (and the agencies) meant it was a big issue there - but here and now, in NZ, we seen no real sign of a significant deterioration in credit standards. Arguably they are still tighter than in 2007. The interaction of two real forces - land restrictions and immigration policy - push prices upwards, and in this case credit policies of banks largely just accommodate that real price adjustment. The RB's stress test results tend to confirm that view.
...but here and now, in NZ, we seen no real sign of a significant deterioration in credit standards.
Just out of interest who or what constitutes "we"?
The Aussie regulator certainly seems concerned that residential mortgage risk weighting levels are too low for our local parent banks.
Part of that is an increase in average mortgage risk weights - meaning a rise in the amount of reserves the big four banks and Macquarie have to set aside to cover potential home loan defaults - to 25 per cent, up from the mid-teens now. Read more
Historically, I understood an 80% LVR residential mortgage bank asset attracted a 35% risk weighting set by the RBNZ. Did that materially change, just before you moved on, under Basel 3 self risk determination procedures to the reported Australian mid-teens level?
"we" - the Reserve Bank has produced no evidence suggesting such a deterioration. If they had it, it would have strongly been in their interests to use it in defence of the proposed investor finance restrictions.
Risk weights on housing mortgages in Aus have long been lower than those in NZ, and I think still will be even after APRA's latest initiative. The big banks here (and in Aus) use internal models (subject to some regulatory overlays) to determine risk weights. I don't remember the average numbers, but the IMF has produced work showing NZ's were higher than those in other advanced countries, and only last year the RB increased the risk weights for high LVR loans (for the other - standardised - banks)
Isn't the issue more about the RBNZ enabling bad policy? Because the household debt was allowed to run so high in the last bubble the RBNZ is forced to modulate interest rates to a level that means that mortgagees can still afford the mortgage. In this way they take pressure off government to actually, well, you know, act.
How about reframing the whole way of thinking about the impact of bank lending and speculation: Artificial scarcity is a driver of the "opportunity for speculation" and "bank lending based with limited risks." Not wanting to detract from the good descriptive profile of the situation, but Reddell has spent much of his working life within the institutional mechanism which typically downplays the impact of the "undesirable" elements of behavior that lead to where we are right now. While I think his analysis is likely to be spot on, it's almost like saying that prices and wealth can be micromanaged by manipulating supply and demand. Of course, this is true, but whether or now it is wise considering houses are citizens' greatest target of expenditure in their lives should be addressed.
Michael Reddell
Have you ever tried talking to some Auckland house builders?
There are builders who
(a) do custom builds to customer specifications on customer owned land
(b) are spec builders who buy sections, build a house and then sell
(c) do renovations, do-ups, extensions to existing homes
For some years I was a middle-man spec developer (in Auckland) searching for suitable sections at a suitable price, working out the numbers, talking to builders, doing the design, preparing plans, talking to builders again, getting quotes, working out the numbers again, organise funding, obtain approvals, building, then selling
With that background in mind, and looking at the developed sections available, as far afield as Pokeno, Te-Kauwhata etc, (there's plenty available) and working out the numbers, I wouldn't risk taking anything on. Where the available land is, the risk is too great.
So the question is - who is going to do the build? Houses don't just magic themselves into existence
Don't know about inner-suburban high-rise or high-density multi-unit construction developers
What the hell is going on with the REINZ figures due to be released today????!!!!
They keep changing the time of release and now they've changed it completely until tomorrow.
Are they trying to figure out new ways to cook the books and make the data look better than what it truly is... something weird is up.
http://www.interest.co.nz/economic-calendar
Quite right! They are applying their own Internal Risk Weighting Analysis to the figures; doing a bit of Smoothing and Seasonal Adjustment to them.
As someone wrote a few days ago elsewhere, put the Australian cricket figures though that process and all out for 60 can turn into 6/541 at tea!
LOL the message has to be just right - it's got to somehow say "holy batman prices are going nuts" and "the market is cooling, no action required, nothing to see here" all at the same time. Amazing that QV used the phrase 'speculative buyers' in its report this month.
In our economic calendar where there is no definitive date for release of data we estimate the time of arrival as best we can. Where times are estimated there is an "E" in the time column following the time expected.
As REINZ do not inform us when the data will drop (it comes when it is ready) we have to adjust our expectations on a regular basis and hence why you are seeing this particular entry move.
There is no manipulation of any data going on.
The REINZ over the last few years have gotten very precious and offside with pretty much everyone. They now fancy themselves as a business in themself. The strata data and other information series were in fact put together by the RBNZ who continue to assist with it - the fact is that we have taxpayer money which they are now selling. It's not on.
The data was initially free, and then they were prepared to sell it - so I paid.
A couple of months after taking my annual subscription they unilaterally stopped providing the stratified data (the useful information - REINZ median prices are highly distorted by a disproportionate but variable share of sales in the upper deciles).
So what do you suggest - allow developers to chuck up subdivisions wherever they feel like it and expect the council to splash out billions of dollars connecting them with motorways, water, sewerage, etc? How can that possibly work?
Maybe it worked in the old days when a small road was enough and you could pump the sewerage out to sea, but these days the costs for roads with enough capacity for each family to have 2+ cars and the cost of proper sewerage and water etc is a lot higher.
Here is one of Houston's higways required by all the sprawl:
https://www.google.co.nz/search?q=houston+highway&espv=2&biw=1920&bih=9…
Think we can afford one of these?
How do the proponents for urban sprawl propose that we obtain the funds necessary to build the the required infrastructure that sprawl would require? Are ratepayers going to pick up the tab for this or will household pay their own way?
There's a good post on the Auckland Transport blog looking at the future cost of sprawl.
http://transportblog.co.nz/2015/08/07/the-future-cost-of-aucklands-spra…
Breaking that down we have:
1st Decade – $111k to $140k per dwelling
2nd Decade – $179k to $234k per dwelling
3rd decade – $93k to $120k per dwellingThose seem like some crazy high costs, especially if you consider them on a per house basis.
Next imagine what the land prices for these new sections would have to be to cover the costs if the council were able to pass the full costs. Combine that with the costs to the developer of providing the local infrastructure and these areas are not going to be cheap, losing one of the supposed advantages of greenfield developments.
The reality is only some of these costs are likely to be passed on meaning that existing ratepayers will effectively be subsidising this greenfield growth.
The other long-term cost is the transport burden placed upon the people generally living so far from their place of employment. Transport costs are more likely to rise then fall over the coming decades, and unless there is infrastructure in place for mass transport (rail), a lot of people are going to be paying a lot of their incomes to transport costs.
I suggest the geniuses who initiated the escalated immigration programs and the mental giants and masterminds who continued it, all thought the increase in population would disperse itself evenly around the regions and into the other cities
And they also expected the new arrivals would all become taxpayers and contributors to the public purse ... which would pay for the infrastructure ... little did they think
Of course while the City have come up with these figures as Costs, to them they are Revenue. The reality is that if you removed the ability for council to generate this revenue, the land would still happen, but at half the price.
In fact Micheal's article mentions about the the escalation of costs that happen when demand exceeds supply. Many of the costs are what are Known as non-value added costs, in that they exist without adding any amenity value.
Most of the costs quoted by transport.co.nz are these type of costs. While I agree with supply higher density, it should not need to be done by making an alternate artificially more expensive, especially on the fringe as this feeds back into the centre and makes all land more expensive.
I often wonder what would happen if all land was leasehold? They had that debate when NZ was being settled and it was assumed that a "free hold rock in the MacKenzie Country would be looked after better than a leasehold in ___?"
I think you have to look beyond affordability and look at the long term welfare provided by good urban layout and design and these two can't be achieved by "spontaneous organisation" . The benchmark would be Singapore's department of public housing?
It is time for our government to confront that responsibility and to bring about change. If sufficient reform of land use restrictions is not possible – and the overseas precedents are not encouraging – the case for a significant reduction in the target rate of non-citizen immigration is pretty clear.
Well it is good to see the admission that supply-side (re-zoning rural/rural residential land to residential land, and rules changes to allow for greater densification of the centre) initiatives take time in the Auckland geography and planning/political context .. and hence, are not the "silver bullet" promised to us by the Houstonites.
So, yes, finally we turn our mind to demand-side. But in that corner, again, I don't think we can simplify this down to "non-citizen immigration". For starters, the volume (numbers) pressure where non-citizen immigration is concerned are overseas students (and I don't think you are suggesting we slow that export earner at the moment). Too many of the student's parents see the easiest way to secure their children's accommodation while studying is to purchase it. If we forced offshore students into purpose-built student accommodation - that would take huge pressure off the Auckland market for housing (both rental accommodation and permanent homes) for NZ families (be they existing citizens and/or new immigrants).
It would also mean far less foreign direct investment in our residential housing market, and far greater spend (by students and their families) on consumption (student meals and accommodation provided by the institutions themselves). All the catering and hostel management could be done by paid apprentices (other students studying for hospitality and chef qualifications).
I absolutely despair that no one in this government seems to be exploring win-win solutions for Auckland's problem. It really won't be "ours" in future, unless we take a far more interventionist approach to this immigration/FDI residential housing problem.
No, my experience of overseas students is really positive - they are dedicated to their studies. Thing is, though, even parents of kiwi students know how tough it is for students to get rentals. We bought in TGA for just that reason when one of our sons studied there.
What about the unreasonably high cost of building materials as a result of the monopolistic and cartel like behaviour of the suppliers? NZ costs can be up to 2-3 times that of the USA and Australia. Research by Tony Sewell the CEO Ngai Tahu Property Development Ltd confirms this.
Yes it might be cheap to build in Texas, but look at build costs in Canada!
We need to build on suspect ground and in damp conditions = extra cost.
Regulation also adds huge costs here particularly council fees, development contributions and health and safety costs.
To make additional savings, we could just import everything from China, or we could use slightly more expensive but better quality NZ made products. Product costs are only a small part of the total cost, we can't lower the labour cost or regulatory costs. How much would relying on cheap imports really save?
I understood Michael Reddell to be saying that while we have the land supply population nexus a third factor (a brake) was the provision of infrastructure and crucial to that was the wage levels in the economy. So if migrants are coming to an economy that is booming on something other than people servicing (eg Sir Paul Callaghan type endeavours) and we have high wages and lots of savings, it isn't an issue?
Is MMP to blame? Seriously, regulations grow wildly when times are good, then comes the bust and then, normally, the pendulum swings the other way, also to extremes. It was certainly my expectation that planning rules and the RMA would be drastically weakened (probably far too much) when Labour got the big boot. I mean a few hundred decent tower blocks would quickly solve Auckland's issues.
Reading the original MR document leads me to conclude that a total change of direction on IMMIGRATION would cure the Auckland problem over time.
Firstly the conclusion is that total immigration has been as high in the past BUT the immigrants then were English speakers and culturally similar means they dispersed easily to other places and were encouraged to so do.
Secondly all governments were trying to make up the numbers of the departure of our own diaspora.
The two clashes of immigration and land availability are from two sources, the Government and the Auckland Council and they will talk past each other forever and try to pass the blame.
So the real issue is IMMIGRATION supposedly controlled in numbers and targeted nationally but out of control in Auckland. It is hard not to conclude that ultimately there will be racial tensions building further if our Government of whatever hue do not exercise a radical change in numbers and rules sooner rather than later.
Michael Reddell's article is almost spot on.
The only point missed is the impact of such policies to also lower wages - which further upsets the affordability issue.
As I am officially forbidden from mentioning the "i" word, I can't comment further.
Although I will add that it is a discussion that needs to be had and not shut down and shrugged off by the powers that be (who of course stand to earn short term rewards from such policies).
It is interesting that new residents (that was close but not the verboten "i" word!) tend to support encumbants (as they have known nothing else, and perhaps try to reward them for letting them in??), therefore if there are 150,000 new migrants during an election term and only 1,000,000 votes are needed to win an election, then it perhaps is a good way to rig an election??
Thats because they can't be bothered to make the effort to get their lethargic ass down to the polling station. In this age group non voting clocked in at 37% at the last election. It wasn't that great for the general populace at 23%.http://www.elections.org.nz/events/2014-general-election/election-resul….
Of this lazy 23% how many were made up of unionists, low paid workers, students, unemployed, minorities etc that are natural labour voters?
Easy to see why JK does not want compulsory voting a la Australia. Democracy - only if you vote.
I would rather have seen constant 4-7% house price inflation then this crazy 18%+ moves. Houses used as investment also increase chance of more extreme pullbacks then we have traditionally seen.
That said term deposits sitting at 4.5% are making rental yields attractive. Don't see term deposit rates going higher with the diary debacle unfolding.
Quoting BE on NZHerald today:
"This is a market that has been messed up by poor planning and we will continue to do what we have to do, deepening our relationship with the people at Auckland Council, to ensure supply can respond to changes in demand.
We are getting somewhere but we have quite some way to go yet," English said.
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=114…
Why entice immigrants to the regions? Ask people in the regions, do they want them? I would say probably not. Or if they do want them , then perhaps high quality immigrants. Perhaps people already live in the regions for reason, one of which may be it's not bloody Queen St in Auckland.
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