Australia’s MIA politicians

Don Brash, leader of the New Zealand ACT Party and former governor of the Reserve Bank of New Zealand (1988 to 2002), has delivered some stirring speeches recently lamenting the declining level of housing affordability in New Zealand. 

On 25 August, Dr Brash gave a speech in which he noted the role played by regulatory constraints on land/housing supply in making New Zealand’s housing unaffordable – an issue with direct relevance also for Australia given our state governments operate similar urban containment policies:

It is impossible to avoid the conclusion that the interaction of the RMA, the Local Government Act and local government staff all over the country has produced a major obstacle to improved living standards.

One of the ways this has happened is through the way in which this interaction has pushed the price of housing well beyond the reach of far too many New Zealanders – or more accurately, has pushed the price of residential land well beyond the reach of far too many New Zealanders.

We know, from the annual surveys undertaken by the Demographia organisation, that housing in our major cities is now among the most expensive in the world, relative to household incomes. And why? In large part because too many local governments have quite deliberately limited the supply of residential land.

Arthur Grimes, now chairman of the Reserve Bank, found that the effect of the Metropolitan Urban Limit [urban growth boundary] imposed by the Auckland Regional Council had increased the price of land just inside that Limit by some 10 times compared with the price of land just outside the Limit.

This is absolutely nuts, in a situation where New Zealand is one of the most under-populated countries in the world, and where Auckland is one of the most densely populated cities in the world – in terms of people per square kilometre, Auckland is more densely populated than Vancouver, Melbourne, Portland, Adelaide, Perth or Brisbane.

I’m delighted that one of the first projects of the newly-established Productivity Commission is to look into the affordability of housing.

On Saturday, Dr Brash followed-up with a fantastic speech, entitled This land is your land, in which he laments the eroding of New Zealand’s property rights and the corresponding decline in New Zealand’s living standards. The speech covers a wide range of areas and is worth reading in its entirety. Below are the sections relating to housing affordability.:

Property rights are the basis of any modern society. Ownership of a piece of land puts upon the owner both the freedom to use it for new and better purposes, and the responsibility to bear the losses of using it badly.

This balanced freedom and responsibility gives rise to experimentation. You may wish to open a factory, someone else may wish to build a house. I happen to have a piece of land on which I choose to grow kiwifruit. The beauty of private property is that we can all pursue our different goals on land we own…

It’s been said that those who like public policy and sausages should not watch the making of either. The Resource Management Act is a case in point.

This legislation was intended to streamline land use development, improve outcomes based on rational principles and improve productivity in New Zealand. In its effect, it’s done the exact opposite – hampered our productivity and eroded the whole purpose of property rights. The RMA legislation contains the word “restriction” 61 times and the words “property right” once, and then only in reference to another piece of legislation.

The ownership of property now confers the freedom to use it as the owner sees fit only within narrow constraints set out by people who don’t bear the cost of those constraints…

I believe that the single biggest hurdle facing New Zealand’s economic future is this creeping erosion of property rights.

For the rest of this speech, I’d like to focus on one particular area where regulatory overkill and a flagrant disregard for property rights are kneecapping our society.

New Zealand is a sparsely populated country with once-high rates of home ownership. Only an estimated 0.7 percent of our total land area is urbanised. One might be forgiven for thinking that plentiful land for building would be one of our advantages.

But one would be wrong about that! Today we have some of the most unaffordable housing in the English-speaking world. Comparing New Zealand with other English-speaking countries – Australia, Canada, Ireland, the United Kingdom, and the United States – only Australia has worse housing affordability than we do, when house prices are compared to incomes.

Once upon a time, people came here from Britain with the promise of being land owners. Today, New Zealanders would find housing more affordable if they left here for there.

Relative to incomes, the price of housing has doubled since the late 1980s, or, as a keen observer might notice, since the introduction of the Resource Management Act in 1991.

As a result, our culture of home ownership is eroding in New Zealand. In 1936, half of us owned our homes. In 1986, we achieved an admirable home ownership rate of 75 percent, or three quarters. The percentage of people owning their own homes has fallen at every consecutive census since. By 2006 that rate was down to two thirds. It seems very likely that rising prices have led to the decline in home ownership.

The evidence from the Centre for Housing Research is that it is those most sensitive to rising prices that are being squeezed out first. It is young New Zealanders, low income New Zealanders, and single parent households who are being squeezed out of home ownership first.

The apologists for the status quo have come up with a plethora of half-baked excuses for this sorry state of affairs.

Some say it’s the absence of a capital gains tax in New Zealand which has caused the huge increase in our house prices. But Australia has a capital gains tax, and house prices there have risen even more sharply, relative to incomes, than they have in New Zealand. The United States has a capital gains tax and, within the US, submarkets such as California have had much more inflated housing bubbles than ours.

Others say that younger New Zealanders simply don’t wish to own houses. This can’t be true either. Those who do manage to buy houses are paying more than ever.

Others would have it that cheap credit is fueling a speculative bubble. Once again, this is incorrect. New Zealand has generally had some of the highest interest rates in the developed world.

More importantly, if there is a speculative bubble, it can only be based on scarcity. You don’t get speculative bubbles in items where supply can readily be increased.

Still others argue that house price increases have been driven by increases in building costs. They are partially correct. Building costs rose by 60 percent between 1999 and 2010.

But the price of sections rose by 140 percent over the same period!

And it’s this huge increase in section prices which deserves an explanation.

As a result of over-inflated house prices, we are creating a society of haves and have-nots. The haves own their own homes and find themselves with healthy nest eggs; the have-nots face a seemingly insurmountable barrier between themselves and inclusion in a property-owning society.

Equity is the big loser, both within generations and between them. It is younger generations who are hit hardest, unless of course they have wealthy relatives who can help fund them into the property market.

We borrow money offshore to bid against each other for overpriced houses, paying interest on those loans, then attempt to compete against those who have lent us the money. As another former Reserve Bank economist, Rodney Dickens, has put it: “How can a small, export oriented country facing huge disadvantages because it is half a world away from some of its major markets be competitive when housing costs 30-43% more than in the U.S.?”

Affordable housing, or the lack of it, has also been linked to migration. Because it is one area where Australia too has a serious problem, affordable housing could be a game changer for our challenge of getting our citizens back.

All of this leaves us with quite a puzzle. We don’t have any obvious shortage of land – as I’ve mentioned, the urbanised part of New Zealand covers only about 0.7 percent of our land area – but increases in section prices have driven houses out of reach of more and more New Zealanders.

The answer lies in the proposition I laid out earlier. There’s absolutely no shortage of land, but the myriad of constraints placed on its use has strangled the supply of land available for people to build their lives and homes.

Take the example of Auckland’s Metropolitan Urban Limit [urban growth boundary]. According to research by respected economist Arthur Grimes – now the chairman of the Reserve Bank – this limit has made land immediately inside the MUL between eight and 13 times more expensive than land immediately outside. In their wisdom, the planners in Auckland have said to outside property owners, “this land is not your land, what you can do on it depends entirely upon the purpose we deem for it.” The result is that land inside the MUL upon which people can build homes is limited, and homebuyers pay the premium.

Even within this area, there are multiple constraints on what can be built. Over much of the city there is a three storey height limit.

The new planning theory in Auckland is ‘densification.’ Providing for subdivisions suitable for families is actively discouraged with the expectation that more and more people will live like students in tower-blocks.

But prescriptive policies of any sort are doomed to be a costly failure in a complex society. The international evidence is now crystal clear that prescriptive, long-term land-use planning that supplants the basic right of land owners to use their property as they see fit always and everywhere pushes up the price of housing.

The reasons are not difficult to grasp. Planners speak of the kind of city they wish to create, yet planners don’t create cities. Families, businesses, and developers create cities. The only tool that planners have is the ability to define where certain types of development will not be allowed. Their only hope is that the cities they dream of will emerge in the spaces remaining.

The problem is that if they wish to shape a city using restrictions on development, then their restrictions will only have effect if they restrict exactly the types of development that people would otherwise wish to undertake!

The net result of the kind of comprehensive land-use planning that we are seeing in Auckland, for example, can therefore only come to pass if the range of development opportunities is restricted. Small wonder that house prices, and land prices in particular, have shot through the roof in the era of the RMA and comprehensive land-use planning.

All of this identifying the problem is well and good, but what exactly would ACT do about it?

ACT wants affordable housing to again become a reality for all New Zealanders. We want to ensure that cities grow according to the wants of people rather than dreams of planners.

We would reverse the notion that people can use their property only in accordance with local government plans. Instead, we believe that central and local governments should respect the wishes of property owners. ACT wants the law to provide that, provided baseline environmental conditions are met, any activity would be permitted…

Dr Brash is to be commended for fighting the good fight on housing and providing a voice to younger and disadvantaged New Zealanders denied the opportunity of affordable housing – an opportunity earlier generations took for granted.

However, one has to wonder why, given the striking similarities between the Australian and New Zealand housing markets, Australians aren’t hearing similar statements from their politicians and policy makers arguing for more affordable housing?

Of course, we all know the answer to that question (hint: politico-housing complex).

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Comments

  1. All parties to our, the NZ, up-coming national election are trying to out-do each other on the property-market-changes front. It’s amusing, really! Because at the same time as talking about urban planning limits ( Don Brash, above); Labors proposed implimentation of a Capital Gains tax ( that we don’t have, along with no stamp duty – now there’s an opening for some bright political party or another!); National wanting to ‘give kiwis an alternative to property investment by selling off our utilities on the stck market’….they are all trying to do ‘it’, and yet ‘not panic the horses’ at the same time! So we get property changing rhetoric and the old ‘house prices will not fall’ talk…all at the same time.

  2. Brash, when Governor of the NZ Reserve Bank, 1988 – 2002, already had a good grip of this issue. It was one reason why he went into politics, to try and save the country from its lunacy.

    It is a tragedy that he did not succeed.

    The Reserve Bank, since Brash departed, has only just got its act together again on this issue. I suspect that the Clark Government’s appointees were nowhere near as capable as Brash.

    But they are still ahead of most “central bankers” in the world. Have you ever heard Greenspan or Bernancke say anything about this issue?

    It would be wonderful for NZ if the ACT Party gained a decent share of the vote, and was in a position to dictate a few crucial policies as the price of a coalition government deal.

  3. No, this doesn’t smell right to me. I agree with some of his explanations for the causes of the overpriced land/houses, but this is clearly an example of promoting his conclusion (less regulation) and working backwards.

    I have no doubt that a restriction on land supply for property has put upward pressure on prices as the bubble inflated (which he seems to deny the existence of?), but removing regulations opens another can of worms. Quite clearly there is another option: ensure adequate land is released for property to meet demand through the existing structure. I think the NSW ALP tried this through centralising the approach and frankly it seems more about centralising the political donations than anything else (hence my skepticism).

    Maybe I am naive in thinking the various Government organisations managing land usage can have their focus changed to releasing land to maximise public usage rather than tax/levy/donation revenue. But I doubt less regulation is in itself the answer. Several US States have been mentioned in previous MB articles as being successful in avoiding property bubbles through land release – maybe they should serve as models in this case?

  4. He sure got one thing right.

    “It’s been said that those who like public policy and sausages should not watch the making of either.”

    I went to a sausage factory once, where they used sheep intestines for the sausage casings.

    Couldn’t front another snag for years after that 🙂

  5. How could anyone read over this Brash charge: “Others would have it that cheap credit is fueling a speculative bubble. Once again, this is incorrect. New Zealand has generally had some of the highest interest rates in the developed world.”

    Brash misses the point: The cost of credit is irrelevant; Access to credit is the crux of the problem. Pretty much like every other country in the liberal democratic sphere, NZ lent to anyone with a tax number (and sometimes without) to get a piece of the property action. The only skill involved was one’s ability to write applications and schmooze with lending officers.

    • “Access to credit is the crux of the problem”

      Then how did half of the cities/states in the USA with easy credit manage to avoid housing bubbles and maintain affordable housing? The difference between their outcomes and those of the bubble states was in the way they regulated land/housing supply.

      Mixing easy credit with restricted land/housing supply is a recipe for disaster. Take away either ingredient and the problem is reduced significantly.

      Whether you agree with Dr Brash’s views on the supply-side or not, it is heartening to see a key political figure speak out about housing affordability – something that is all too rare in Australia.

      • All I pointed out was that the “cost of credit” is different to “easy access to credit.” The “cost of credit” was irrelevant when the housing frenzy was in full swing.

        • That is quite true. As long as expectations of capital gains are higher than interest rates, people will speculate in property. And there is really no such thing as interest rates high enough to deter property speculation, because interest rates that high would “kill” the productive sector in an economy. Kind of like the housing bubble is a cancer and monetary policy is chemotherapy. It can kill the patient before it kills the cancer.

          IF interest rates are high for “market” reasons, not for monetary policy reasons, this is because inflation is high, and property will still be popular as an “inflation proof” investment.

          Furthermore, what is a lending institution supposed to do if supply constraints have caused property prices to start to go up? Are they supposed to quit the industry altogether until sanity is restored? Are banks supposed to collude to deny people credit? What about the “anti trust” regulators?

          All this talk of easy credit and blaming the banks, is diverting attention from the real problem.

          A paper by Malpezzi and Wachter 10 years ago, said that the only way to theoretically model these property price bubbles, was to make “speculative” demand ENDOGENOUS to “supply” inelasticity. That was the only way to explain the markets with easy credit and no bubble – because they had highly elastic “supply”, they had no “speculative demand”.

          A recent paper by Glaeser and Gyourko confirmed and built on this finding.

  6. Pure gold.
    My favourite bit is “The apologists for the status quo have come up with a plethora of half-baked excuses for this sorry state of affairs.”
    Brash is describing the shortage-deniers perfectly. I’ve lost count of the number of ridiculous arguments the shortage-deniers have come up with. As soon as I shoot down one piece of nonsense they come up with another “proof” that there is no shortage.

    My second favourite quote is “Others would have it that cheap credit is fueling a speculative bubble. Once again, this is incorrect … if there is a speculative bubble, it can only be based on scarcity. You don’t get speculative bubbles in items where supply can readily be increased.”

    Shortage-deniers love to over-simplify the housing situation. They imagine all dwellings in one country are interchangeable. They imagine rich freely share with poor, and old freely share with young. They imagine that the housing situation in each country is identical. They imagine that the problem is the same problem throughout the world.

    Instead they should switch their brains to the on position and analyse the price of premium housing separately to the components of price that make up a marginal dwelling (eg a new house on the urban fringe or a new unit on the unit fringe). Premium price is set by the buying power of the richest CEO’s in the country competing for what is always a scarce resource. Fringe housing price is set by government policies that choke supply and create a shortage of housing by a contrived scarcity. This shortage causes the poorest to miss-out on independent housing.

    Ask what is the problem? If you are a poorer elite with savings who cannot afford a mansion then the problem is that richer elites have access to too much money. If you are an ordinary wage earner who cannot obtain decent housing, then the problem is completely different – govt choking supply and poking demand.

  7. Disillusioned Aussie

    For an interesting view of how regulation has driven prices up read this by David Van Der Klauw by from 2007:

    http://www.financialsensearchive.com/fsu/editorials/2007/0420.html

    At the time it was targeting the Sydney housing market but I can see this being as relevant as ever to many places in Australia. In my opinion the most important argument in his article is that an increase in house prices has no benefit for the country it is only a transfer of wealth from younger people to older people. And as stated in the argument above when this is done with borrowed money from overseas what we really have done is lower our benefit from our productivity by servicing the debt all to create a wealth divide.

    I work in the Pilbarra and there is an abundance of land and work around regional centres (Port Hedland, Karatha) but the land is released in dribs and drabs. This has driven prices through the roof and rents can easily exceed $1000/wk for a s$#thole (excuse me).

    There are plenty of people who would like to buy or even rent(I am not one) but will not at the prices. This just increases the unlivablity of the area causing more fly in fly employees, which ruins families and the environment by the way.

  8. The number of people with houses and mortgages outnumber those who rent, so no politician will get elected on a promise to bring down prices for housing. The general population wants a ‘magic pudding’ solution where house prices goes up AND becomes more affordable at the same time. This lead to terrible policies like the ‘First Home Buyer Grant’.

    Take NSW as an example. The state Liberal government made a promise to release more land and simplify planning laws when they’re elected. Almost 6 months after the election, the NSW Liberal government announced a ‘planning law review’ which will report their non-binding findings in 18 months. Vested interest have completely taken over the political process of both the major parties now.

    • Also, the current crop of developers in NSW seem to be thinking – why get rid of regulations when you have captured the regulators?
      .
      Regulations serves as a barrier of entry for would-be developers.
      .
      All that noise about regulations is for public consumption.

      • Spot on Mav. In Portland Oregan, a mid-sized developer was once quoted as saying the following in reference to Portland’s urban growth boundary:

        “[Portland’s] urban-growth boundary has really been our friend. It has kept the major builders out of the market”.

        A wide range of developers compete for business in less regulated markets, ranging from small companies that produce only a few homes each year, to medium-sized companies that produce a few hundred homes per year, to giant national companies that build thousands of homes in a variety of markets. Excessive regulation tends to put the small companies out of business and discourages some larger companies as well. The resulting loss of competition helps keep home prices higher than they otherwise would be.

  9. Why don’t we hear anything from our politicians? Because they’re profiting from high house values themselves and they’re not going to do anything to jeopardises those values.

    • The Qld Premier “invested” $2million immediately after winning the last state election. Think she was ever going to do a damn thing to address the obscene cost of housing?

      In fact a state member went to gaol for corruption. His motivation? To help his kids buy a house. The irony.

  10. Ever wonder why there is a 6 year exemption on CGT if you are renting your primary residence. It equates to two terms of federal parliment. Self interest by politicians will win over what is good for the country everytime.

  11. “Peace and prosperity are inversely proportional to the level of taxation.” John Pugsley

    ‘Should government refrain from regulation (taxation), the worthlessness of the money becomes apparent and the fraud can no longer be concealed”.
    John Maynard Keynes

    “Keynesianism is not a theory of economics. It is a confidence game, and the question is not whether they can correctly predict the future. The question is, can they gain your confidence and get you to act in such a manner that they can steal your wealth?” Howard S. Katz

    Australian politicians/public servants are not MIA. They are Gitten while the Gitten is good.

    The only way to look at a politician is down!

  12. THE POLITICAL COSTS OF HOUSING BUBBLES

    Excessive mortgages do cost politicians.

    Research following the 2007 Australian Federal Election found that the mortgage belt deserted the Howard led Liberal Government. Refer to the Welcome Page on my website www,PerformanceUrbanPlanning.org for a hyperlink to an important Sydney Morning Herald article at the time explaing this.

    This is just one of countless examples from around the world.

    Too many politicians are essentially in the employ of vested interests.

    Dr Don Brash in contrast has a mind of his own. He has made enormous contributions to public policy over many decades, in his roles as Reserve Bank Governor, National Party leader and now leader of the ACT Party.