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Repost: Why I’m optimistic New Zealand can solve its housing troubles

This is a repost of an article I wrote last December explaining why I’m optimistic about housing affordability in Auckland – and New Zealand’s ability to solve problems in general. I think my optimism has held up reasonably well. Since then, New Zealand’s conversation on housing affordability and urban planning has matured in some important ways – crystallising in the response to the Independent Hearings Panel’s recommendations on the Auckland Unitary Plan.

As Toby Manhire observed, “the most remarkable thing is the response… on the whole it’s been incredibly positive”. Reasonable people could have reservations about aspects of the IHP’s recommendations, but most of the views I’ve seen recognise that the finished plan is a good step forward to solving the housing challenges the city faces.

Meanwhile, the UK has voted to Brexit the EU and a large share of Americans – possibly even a majority if we’re unlucky – are planning on voting for Trump. So New Zealand seems to be ahead of the curve on pragmatic problem-solving. Yay!

What’s the problem?

Housing is expensive in New Zealand, especially in Auckland, where median house prices have increased fivefold since the early 1990s (in nominal terms). Roughly half of this increase has occurred in the last four years, which is causing quite a bit of concern:

Interest.co.nz Aucklan stratified house price index 1992-2015

Housing markets are complex – prices are influenced by both demand-side and supply-side variables. As a result, it can be difficult to tell a single, simple story about why prices have gone up or down in any given year. Take the recent rise in Auckland house prices. Some people argue that it’s a financial bubble (a demand-side explanation); others blame high migration (demand) or distortionary tax policies (demand); and others cite inflexible planning rules (a supply-side explanation) or low construction productivity (supply).

Although short-term dynamics can be mysterious, elasticity of housing supply is the main long-term driver of housing market outcomes in a growing city. The easier it is to build new dwellings in the right places in response to increased demand, the less upward pressure there will be on prices.

The empirical evidence suggests that housing supply in Auckland is slightly inelastic – somewhere in the range of 0.7 to 0.9. This isn’t horrible, but nor is it sufficient to get housing supply in balance with demand.

Severe geographic constraints – Auckland’s harbours and steep hillsides – appear to be an underlying driver of the city’s inelastic housing supply. In this context, settling for average urban planning policies means getting a limited supply of housing and high prices. Consequently, we have to make it much easier to use scarce land efficiently. That means reforming our approach to planning regulations. In the past, we adopted land-hungry policies like minimum parking requirements or severe building height limits without thinking through their ill effects. That has costs, and we need to do better.

Auckland is not the only city coping with high housing prices and a lack of supply – you see similar problems in places like London, New York, San Francisco, and Sydney. However, I would bet that New Zealand will do a better job sorting out its housing affordability issues than other places. In fact, I am betting on it! I’m renting in Auckland, which means that I bear all of the downside and none of the upside of spiraling housing prices.

There are three reasons for my optimism:

1. Our proven track record of policy reform

Let’s start with a pat on the back. Having lived in New Zealand, the United States, and Nigeria, I’d say that Kiwis are, by and large, pretty reasonable when it comes to public policy. We’re not very corrupt, which removes one major source of inefficiency. We generally recognise that as a small, distant trade-exposed country we can’t afford to do things inefficiently. And, due to New Zealand’s small size, there’s usually no need to over-complicate things.

Policymaking anywhere will always be subject to cognitive and professional biases – people screw things up, and sometimes it takes a while to sort it out – but New Zealanders don’t seem want totally irrational or insane policies. Unlike the US, say:

Possibly as a consequence, New Zealand has a record of reforming policies that aren’t working, either incrementally or in one go. The classic example of this is in trade policy. From the 1930s to the 1980s, the New Zealand government oversaw an extensive set of import controls. Te Ara describes this policy:

Faced with declining export returns and a foreign exchange crisis, a Labour-led government introduced foreign exchange controls and import licensing regulations in 1938. The regulations prohibited the import of any goods except under licence or where exempted.

Importers had to apply to government for both an import licence and the foreign exchange needed for purchases. The quota – the amount that could be imported with a licence – was set on the basis of imports the previous year.

Just as restrictions on the efficient use of land produce windfall gains for landowners while foisting large costs on renters and new home-buyers, import licensing created fortunes for some manufacturers while making most consumers worse off. As a consequence, after experimenting with some liberalisation of trade policy in the 1970s and 1980s, the remaining import controls were swept away in the late 1980s.

Recent changes in transport policy also demonstrate our ability to reform bad policies. Over the last decade, there have been some important, although undoubtedly incremental, moves to reform our inefficient monomodal urban transport system.

For example, last year I reviewed a 2010 research research report on deficiencies in NZ’s public transport planning and operations – and was surprised to find that almost all of its recommendations are being implemented in Auckland, Christchurch, and other places. Since 2010, Auckland has:

  • Established a public agency (AT) that can plan and deliver a PT network and supporting infrastructure
  • Developed and begun implementing a frequent, connected network that satisfies best practice network design principles
  • Reformed bus contract models
  • Implemented integrated ticketing (and soon, integrated fares)
  • Started to build bus interchanges and bus lanes.

New Network Model

This is a big deal, but it’s hardly the only story in town. How about the fact that central and local governments are now coming to the party on urban cycleways? For the first time ever, significant investments are going towards one of New Zealand’s “missing modes”.

We now have an opportunity to take the same approach to urban planning – reform what isn’t working and get better outcomes.

2. The structure of our governments

The current structure of New Zealand’s governments makes it easier to implement reforms and make them stick. We have two key advantages in this area that offer a smoother path to policy reform.

First, New Zealand’s government has a unitary structure rather than a federal one. This means that most powers are concentrated in central government rather than distributed among multiple layers of government. Political centralisation certainly isn’t all good – in the past it’s often led to a perverse situation in which urban transport policy is being designed by rural politicians.

But in this case, it makes policy changes much easier. If central government were to, say, issue a National Policy Statement on urban development or rewrite sections of the Resource Management Act (which governs the development and implementation of urban planning rules), it would lead to changes in the way that local governments regulate. That option isn’t usually available in federal systems.

Because any proposal to liberalise planning rules inevitably creates controversy at local body election time, central government involvement can potentially assist in getting important changes over the line.

Second, the creation of the unified Auckland Council ensures that all growth tradeoffs – and the negative consequences of preventing growth – are internalised within a single council. Gone are the days when councils could simply refuse to zone for growth and assume that it would become someone else’s problem instead. Now a single council is responsible for sorting the region’s problems out.

You can see the results in the Unitary Plan – a document that’s not perfect (no plan is!) but which takes some important steps forward. For example, it removes MPRs from the centre zones, which are intended to accommodate a mix of business and residential uses, cuts back minimum lot sizes throughout much of the city, and creates some midrise residential zones.

Amalgamation does come at a potential cost to Tiebout competition, in which adjacent councils compete for growth. But I suspect that the benefits outweigh the drawbacks. As the San Francisco Bay Area shows, local government fragmentation doesn’t necessarily result in more housing supply – the Bay Area has 93 local governments but building permits have still been falling since the 1970s.

New Zealand’s unitary government structure and the creation of a consolidated Auckland Council create the potential for “virtuous cycles” in which local and central government egg each other on to improve urban planning regulations and processes. To date, this has led to things like the Special Housing Areas, which aims to ease consenting in selected areas, and the Unitary Plan hearings process, which is intended to review the plan and allow it to be implemented faster.

The hearings process, in particular, has encouraged Auckland Council to think carefully about its proposed zoning rules. For example, following instructions from the hearings panel, the council is considering rezoning some areas to enable more housing. This is an important step towards recovering from the ill effects of past down-zoning.

FrameWORK_Housing_ZoningCapacity

Down-zoning in Los Angeles (Source: Re:Code LA)

3. The political agenda

Lastly, housing affordability has hit the political radar at a national level. There is an increasing consensus that reforms to urban planning rules are a key part of the solution. The latest Productivity Commission report on using land for housing outlined some key policy changes, and politicians from several major parties have subsequently endorsed a number of these recommendations. For example:

In other words, there is likely to be cross-party support for sensible reforms to urban planning that build on the good work that’s already been done by central and local government.

Globally speaking, it’s somewhat unique – and fortuitous – to have so much attention placed on urban planning issues at both a local and central government level. For example, in the US, a few economists in the Obama administration are starting to talk about the drawbacks of overly restrictive planning regulations. But President Obama has very little ability to influence zoning in San Francisco or New York.

New Zealand is different. We are generally willing to reform policies that aren’t working for us, we’ve got government structures that can facilitate that reform, and our elected representatives are paying attention to the problems and potential solutions. Those seem like good reasons for optimism!

22 comments to Repost: Why I’m optimistic New Zealand can solve its housing troubles

  • Ricardo

    Vancouver and Sydney have the same drivers we have – unlimited Chinese money coming in, buying everything, letting it stagnate, and they haven’t managed to solve similar problems. I humbly suggest they have as smart or smarter people looking at it too. We have to manage immigration.

    • Peter Nunns

      This post presented *specific* institutional and social reasons why New Zealand’s relatively well placed to address housing supply issues. If we get a better outcome than Sydney or Vancouver, which I hope we will (but can’t be certain of, yet), it will be because we have made some choices that they did not.

      Please engage with the substance of the post or don’t comment at all.

      • Bruce

        Peter, we will only do better than those places from those benefits you mentioned if we can stop the wholesale selling of our housing stock to foreign investors and turn the tap down on immigration. Without those measures we will forever be like the dog chasing it’s own tail and never catching up and in the mean time become ever more indebted as a country.

        • Stu Donovan

          your argument is flawed.

          Key reason: Immigrants don’t explain why we are building so few houses at a time when house prices are sky high. Auckland’s housing market is broken, and the primary cause is our inability to build houses to meet the demand for dwellings.

          These issues are largely independent from migration. Yes the latter can exacerbate underlying supply issues, but it does not cause these issues to exist in the first place. On that score we have only ourselves, and our elected representatives, to blame.

  • Peter that’s a really good summary, and a welcome reminder of both how much is changing, has recently changed, and can still change further. That governance flexibility, especially since amalgamation, is an important reason I am confident that AKL can become one of the world’s truly great small cities this century.

    Reasons to be cheerful.

  • Dave B (Wellington)

    [Cynical observation]: We have a government that prefers to build poor-business-case motorways rather than much-needed houses.

    – “Minister, the peasants have no homes!”
    – “Then let them sleep in cars”.

    [/Cynicism]

  • Harsha

    Very optimistic post Peter! Its funny how people are worried that immigration will cause New Zealand to run out of land when New Zealand is among the least dense countries in the world. And also how immigration will make the country more “indebted”, when the reality is that skills-based immigration (like NZ has) allows (for the most part) only people with the required skills to immigrate into the country. These are the kind of people who provide net value to the country, not the type who burden the welfare system.

    • Nick R

      Yes funny, especially the hand wringing over “Chinese” buying million dollar homes. That means a direct injection of a million dollars of foreign funds into the New Zealand economy. How many tonnes of milk powder do we need to sell to make a million dollars?

      • I find that a surprising way to look at it. You can look the same way at someone in NZ borrowing a million from an overseas bank. In both cases it’s like incurring a debt and someone is going to pay off that debt (rent or interest respectively).

        Unlike milk, where the Chinese would actually drink that milk.

        • Observer

          While it’s true that a foreign buyer putting their capital into the country eventually expects to get it back one way or another, doesn’t their money go to a (often local) seller who then has money to spend in the domestic economy? It’s not terribly useful when it’s just used to puff up property prices somewhere else but then again, there are sellers who gain there too. If only there were more incentives to put that money to more productive use, like getting cashed-up sellers investing in emerging industries where NZ is competitive.

          Furthermore, while the buyer might expect to get their capital back, it’s not like someone here has obligated themselves to paying it back, as with an overseas loan. No guarantees with property as an investment, speaking as someone who survived (barely!) the US housing crash.

    • Waspman

      Skilled based, working at Pizza Hut, driving a taxi, really? Excellent way to supress wages though!

      • Bruce

        [This comment has been deleted as it violates user guideline 8i, no obsessive arguing in a thread or threads. You have been warned multiple times about this user guideline.

        Further comments from you about immigration will be deleted, and if you are unable to abide by that restriction, you will be banned.]

  • mfwic

    I am interested that you suggest the benefits of Tiebout sorting might not justify the costs. When you look at the Auckland house price index the big climb in prices seems to have restarted at the beginning of 2011 just after the amalgamation. My view is there really was competition between the Councils for growth, but that has been replaced by the deadweight that is AT.

    • Peter Nunns

      I’m skeptical of Tiebout competition because in the US, where there are 11,000 local governments or so, inefficient local government planning policies have imposed an economic cost equivalent to around 10% of GDP (Hsieh and Moretti, 2015). Furthermore, new evidence from California shows that local government tend to respond to neighbours’ introduction of planning restrictions by tightening their *own* planning rules, rather than trying to capture the growth that their neighbours are foregoing (Jackson, 2016).

      Basically, Tiebout competition is a nice theory, but the empirical evidence shows that it doesn’t really work in reality.

  • Waspman

    There has to be some silver lining in every cloud. House prices have climbed at $10,000 per month allegedly since this was first published, great for some. However from what I read Aussie is ahead of us in this area, for example, http://www.news.com.au/finance/real-estate/buying/boom-to-bust-how-many-is-too-many-apartments-for-our-big-cities/news-story/8c15498749e077b97bb3aeee16e67e6d

    And while I agree long term this is positive, this is now and now is not good.

    I am personally aware of whole families with working people living in appalling conditions that are a leaf straight out of Victorian England.

    We should have the kind of responsive progressive government you speak of that foresaw many of the abundantly obvious warning signs and reacted accordingly but it hasn’t and we don’t have that progressive government, we have this government who for many years has been in denial and even now says Aucklands property situation is a “challenge”. And that challenge doesn’t seem to include those toward the bottom end of the spectrum.

    Maybe in 10 or 15 years we might get over the hump I believe is driven largely by greed but will that be too late for the likes of those families living in desperate conditions? And I surely hope, given our abysmal record on poor quality houses, that we dont in the process mimic that other Victorian lowlight, slums!

  • Nice piece and so good to remind ourselves it’s not all doom and gloom and plenty has been achieved in the last 10 years. Some interesting ideas here from Switzerland if others are interested : https://www.codha.ch/fr/accueil

    • Peter Nunns

      Thanks GJ – and that looks like an interesting link, but unfortunately it’s not in English. Got a translation?

      • If you are using Google Chrome. it should offer to translate the pages for you. The translation is not great but good enough. I also caught a TV programme on Choice which I will look up to see if it will be shown again. Codha is representative of many such programmes around the world where more decision making is in the hands of the homeowners. Codha is particularly impressive in the way they combine sustainable building, community interaction and best of all, how they partner with local government which appears fully supportive. Homeowners get the assurance of a good home, with no threat of a landlord upping the rent or not fixing the poor insulated walls or hiking the body corporate fee.

  • James

    Most succinct summary I have read so far on this complex challenge. To borrow from a bit of office BS speak there are pros and cons to everything so it depends whether you are glass half full or half empty type.

  • Property markets can be like ocean liners; hard to turn, but when on a new course hard to stop that too. Much behaviour is based on expectation, so once the market loses confidence in the ‘ever-rising’ idea, the opposite can suddenly become the only story. Presumably this is what the gov fears; they want that on someone else’s watch?

    The shift has to be credible, and does require a real shift in fundamentals to achieve that. The question is how many of any of the forces that have combined to cause the current pattern need to change and how far, for a shift to occur? Low interest rates, high net migration, restricted density, infrastructure deficit, skills shortage, stagnant incomes for key demographics, ageing population….?

    Some are being addressed…

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