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House in an Auckland SuburbGareth Morgan

Housing Affordability: The Problem is Not Lack of Supply

Contrary to the findings of the Productivity Commission the fundamental issue with housing affordability is not lack of available land. That Commission has done the debate a major disservice by pointing the figure at land supply, the councils do not agree with them and that is a damming indictment of that piece of work. There are cities in the world with five times Auckland’s population, living in an area no larger than Auckland’s, and with housing prices lower as a percentage of income than in New Zealand.

The problem with the Productivity Commission’s analyses is that its authors are locked in a time warp, thinking that the quarter acre pavlova paradise is the appropriate model for housing still. Of course if your thinking is confined by that paradigm then it is very easy to argue there isn’t enough land. But any user pays analyses would rapidly indicate that this type of urban expansion would make housing even less affordable. Only if other ratepayers are willing to stump up with the cost of infrastructure would such a dated type of housing be affordable. No cities in the first world have kept unfettered urban sprawl their model for the future.

We all know what the problem with housing in New Zealand is. It’s the flipside of the problem the new Governor of the Reserve Bank has identified with the economy at large. He noted that the economy will not pick up until the country gets its huge external debt levels down. But look at what that money has been raised for – it has been raised overseas by our banks overseas and on-lent into the property market in New Zealand. The flipside of the high debt is simply a housing base that is valued at these record levels.

And how have we managed to drive the price of the housing stock to these dizzying levels? There are two drivers – the directive from the Reserve Bank to the banks to treat mortgage lending as the safest form of lending and therefore to expand that far more than loans to businesses that create jobs and incomes; and the tax break that tells us all that if investing in property is a tax-free path to prosperity. That toxic duo has led to us all falling into property big time, buying a few houses each as a way to get rich. Resultingly, we have driven the price of housing from twice the average household income to six times. And surprise, surprise – property is now out of the reach of a greater proportion of would-be homeowners.

As well as the above factors, the cost of building has risen enormously as well. Now that is due to both a stricter building code, and to issues around lack of competition in building supplies. But by far and away the biggest contribution to the rise in property prices has been due to the excess demand generated by the financial and taxation policies of successive governments.

So if government were really serious about making housing more affordable for those currently locked out, then it needs to

(a)    Have the Reserve Bank remove its direction to banks to lend on mortgages in preference to all other forms of lending – that has seriously tilted the playing field towards property investment over all other forms.

(b)   Introduce a capital tax (not a capital gains tax – See an explanation of the difference here) to augment the income tax regime so that all forms of income are captured

Do those two things and housing affordability will improve rapidly as those of us with multiple properties realise they are no longer a path to prosperity.

  • Rich d’Rich

    ‘There are cities in the world with five times Auckland’s population, living in an area no larger than Auckland’s, and with housing prices lower as a percentage of income than in New Zealand” – word.

    I’d just point out another factor – housing is the only highly leveraged investment available to an ordinary person. If I asked a bank to borrow 80% of the value of a share portfolio or a private business, I’d be laughed at. A house, no problem at all.

    • Matt Blaikie

      for obvious reason though, businesses go broke, shares can be worth 1 cent, or less. house is still there, still worth ‘something

    • Ferand Peek

      Actually anyone can go online and trade FOREX at up to 200:1 leveraging, all they need is a credit card.
      Risky as all hell, and might not be classed as an ‘investment’ – but then the carry trade is one of the reasons our currency gets so high, so many people do do it. (i.e borrowing in Yen to buy NZD and banking the interest differential between the two currencies).

      But yes I agree with the thrust of your comment, and with the article in general.

      I think the sooner we move away from the 1/4 acre section (or the 4 bedroom mansion filling the entire property) and start building some high quality apartments that people actually want to live in the better! (as opposed to the shoe boxes with low ceilings and walls that are too thin that currently get built)

  • Ray McIntyre

    My wife and I are in our late 40s & early 50s. We rent because we cannot afford to buy and indeed we never will be able to as our income level is too LOW for even the government first loan scheme.

  • Jenny Mauger

    Kia ora Gareth. Wondering if you do could a precis / piece on the crises throughout the NZ re evictions, then destruction of solid timber homes resulting in homelessness / trauma etc. Be interested in your overview / analysis and what this means for NZ overall?

    • Nogi Head

      … i too would like to know …

  • Jacob Lister

    That’s a bit rich isn’t it Gareth? In one breath your saying that property is overvalued, and the next that building any more of the same kind is too expensive. You really can’t have it both ways. Someone of your wealth can afford to live in whatever kind of property they choose to, but here you are telling ordinary folk they need to lower their expectations, probably below the standard of living of their parents generation. Expectations do change – and there’s certainly a place for higher density housing in our urban centers, but our cities need to grow out as well as up.

    • Ross Carter-Brown

      And continue building outwards indefinitely until the whole country is suburban sprawl? Besides most of today’s middle class families have both parents working full-time and don’t have the time (or want) to maintain a section that size.

      • James

        “until the whole country is suburban sprawl”. What rubbish. Only 3% of NZ is built up, there is plenty of room to build houses at a lower land cost. Who wants to live in an apartment if you have kids?

        • Jacob Lister

          less than that:

          “0.8 per cent artificial surfaces such as urban and built up areas, landfills and transport infrastructure.”

        • jh

          only about 8% (?) of Britain is built up and yet they are around the same size and have nothing like the mountains. So why do people want to emigrate to NZ?
          Divide the growth rate into 70 to find the doubling time of a given relative growth rate… How long until Auckland is twice as big and achieves the lifestyle of a Haiti?

    • Mat

      I find this comment somewhat odious. Possession of wealth, or lack of wealth for that matter, shouldn’t deminish anyone’s right to express their views. Stick to the issue, don’t get personal. This is NZ where we are equals. That’s how I was raised anyway. Have some pride.

  • Clive

    the Housing problem is an Auckland one and not that generally pertaining to the rest of the country. If “average earners in auckland” can’t afford to live in the city, perhaps the Govt should implement policies which could encourage them to move to other less expensive areas in the country of which there are many. This Govt sponsered nonsense that everything is now centred in Auckland is ridiculous and detrimental to the growth of the rest of the country.

    • Curtis Antony Nixon

      It’s a big problem in Wellington too. Adding to the problem here is the ‘earthquake prone’ syndrome, mostly older, low-end properties being taken out of the market, ratcheting the whole price scale up.

  • Matt Blaikie

    Definately agree with the availability of ‘easy money’, which was the root cause of not just the property boom here but the Global Financial Crisis. Coupled with that the offsetting of losses against personal income, if these losses were ring-fenced in some form and folks had been left to pay the difference in the boom times between their 4-5% net yielding property and their 7-9% interest rates Id suggest that the bulk would have shyed away, which in turn would have held back prices from spiralling as high as they did. The fact that losses can still be offset against personal income means it is unlikely that there will be any serious correction in prices anytime soon, particularly with significantly lower interest rates i.e. no need to sell.

    Also I would suggest the lack of financial literacy generally and that a significant portion of investors in the property sector are ‘boomers’, most of whom would have experienced in some form the negative fallout from the ’87 crash or at least know of someone or passed on the memories to their families and so are somewhat shy of shares or other forms of investments. The finance company collapse would have no doubt reinforced in many minds that the ‘only way to make money is through property’.

  • Nogi Head

    … it is such a shame this is happening in NZ, such a shame! … mind boggling & … more disgusting! …

  • James

    Gareth, presumably the Reserve Bank considers housing loans to be safer than business loans… because they are. Should the RB be instructed to consider lending to startups to be on the same level as property loans? Despite the need to get money to startups the risk isn’t the same is it? The implication of what you are saying is that mortgage interest rates would go up quite significantly, and that wont help affordability will it?
    I don’t know how you can say that supply isn’t a key issue. With demand for housing and land is increasing with population, of course supply has to be an issue.
    The article linked to below highlights how silly it is to restrict Auckland’s expansion, there is plenty of land and Auckland is not a big city by international standards.
    Why the hell should Kiwi’s have to live in little chicken coops in “compact citites” when only about 3% of NZ is built up? There is tonnes of space in NZ, stop putting restricitions on using more land and get cracking. The Govt is right on this one and all the UN Agenda 21 compact city people need to go stick their head in a dunny and flush repeatedly until that stupid nonsense has been washed out of their heads.

    • Curtis Antony Nixon

      “go stick their head in a dunny…” -not exactly riveting argumentation! National troll?

      • James

        I could have chosen my words more carefully, however restricting land supply in a country with one of the lowest people/sq km ratios and the negative consequences it causes in terms of the cost of housing and the impact of that cost on people and families is just so frustrating. So unnecessary. Imagine how much better the economy, job creation and the quality of life would be in NZ if a median house cost 4 times median income and not 6 or 8 times. A totally self inflicted own goal.

        • jh

          Isn’t the ratio of houses to landmass also a matter of people to some sort of economic activity or is yours a build houses and the economy will follow argument? Would it help a farmers production if he added an extra farmhouse (not that that’s your problem if you’re a shill for the development industry)?

  • John O’Neill

    Right then. Where shall we build next? How about west over the Waitakeres? South into the fertile Waikato or north along the remaining coastline?? As usual the cart is put before the horse. The eternal problem is the increasing and more demanding population.

  • John

    RIght on. And so why do the pollies keep on ignoring the obvious? Because acting wisely in the national interest to reduce the value of all our houses will be a political disaster for whoever is in charge when it happens. A total lack of courage to take the hard decisions by politicians paid large salaries for their responsibility to the nation. Where is a leader with the guts to act ?? Not in our parliament.

  • Dr Angela Sharples

    Totally agree with the comments about being stuck in a time warp. Not only is our attitude towards large single dwellings on individual plots of land a financial burden to the country but it is also a major environmental problem too. The government announced today they want the the Auckland council to open up more land for subdivision. This simply removes productive land from our agriculture and horticulture industries and eats up more of the ‘green belt’ and reserve land. Thi sis a very poor environmental decision as well as a poor economic decision.

  • Dave

    if they started making people pay capital gains tax on a second investment, then you would watch the price of houses drop. i cant understand why when you invest money in a bank, you pay tax, when you invest it in property, any gain is tax free. Also the extra costs that councils whack people when they subdivide is a rip off. They should also make people have a deposit of at least 10% before you can borrow money from the banks.

  • Peter King

    The RBNZ treats mortgage lending as the safest according to international convention and standard. There is nothing unusual about this. The lack of a capital gains tax is an issue. But as you know Motu’s Arthur Grimes has shown the Auckland municipal boundary does create house price inflation. It is a purely arbitrary line. In Germany they don’t get this sort of house price inflation because there are great transport links and towns and cities are kept small. They start new developments with suitable infrastructure as needed. In NZ we play the game of selling the same house to the next new chum off the boat at twice the price we bought it for. No extra value is created. We are addicted to house price inflation and so our productivity is pitiful and our net international investment position is up there with Ireland, Greece and Portugal. But a cold turkey solution will kill us. What we really need is a sensible approach to funding local government because rates and consents are a mugs game. Only when local government is incentivised for productive investment will we start seeing the country lift its productivity.

  • Steven

    Those factors you point out are part of the cause. they were also the cause for the housing boom in other places, but, places like the USA had massive increases in supply as a response to policies that encouraged this type of investment. The result was actually a lower bubble, empty houses and then the bubble burst. In NZ we haven’t had that luxury, we had a massive bubble, that never burst because of supply restrictions. This is the cause of housing unaffordability.

    Density has much more to do with the time at which the city developed. The dense european cities and NY developed when transport was expensive. By warping the market and restricting supply artificially we don’t get density but we get a premium for sites within the MULs. This is the cause of unaffordability as pointed out by the Productivity Commission. By the way there ARE cities with unrestricted growth. I think Dallas and Pheonix are the best examples and their massive growth over the last 10 years has made them much more globally connected cities and been a catalyst for growth in those states. Growth in the US is largely coming from these mid-sized cities that don’t restrict building growth.

    I thought you were a better economist than this Gareth. But I do agree with your policy proposals; in a addition to removing the MULs – Also infrastructure is not paid by tax or rate payers. It should be paid by development contributions.

  • Dave Eskildsen

    I completely disagree with your dismissal of the development land constraint as a factor in property prices Gareth. The productivity commission is broadly correct here. Once we get to the point that land on either side of the metropolitan urban limit is equal in market value, then we can dismiss this as a factor. By all means charge a development levy contribution that accurately reflects the infrastructure costs, both on green fields developments, and on intensification proposals. Then we as property buyers can decide where we want to live, according to our taste and budget. New Zealand is not short of land, and the disparaging use of the word “sprawl” is a value judgement. Excessive building costs is a factor, as is the increase in average house size. Both these could be seen as riding on the back of a booming market.

    With regard to direction to banks to lend on houses, this is a red herring in my view. As far as the economy is concerned, it should not really matter who carries the debt. Attention would be better directed at excessive credit growth in general (money supply). This has been marked since the year 2000, and the result was seen in all asset classes, not just property. I do not believe there is a rational explanation why this is desireable or necessary.

    I am back in general agreement with you regarding the need to further reform the tax system. However, zeroing in on housing is not fully justified. (I have read your book on the subject) I point out that finance for private housing is not interest tax deductible, neither are the costs of maintenance. This makes a house similar to a car or a boat. They are (and should be seen as) private goods bought with private funds for private consumption. Applying a significant capital tax and allowing an interest deduction would be a mixed blessing. Farm land and commercial property is a different story.

    Wealth and income distribution and benefits etc. play an implied role in this discussion, (for example if we were to choose and politically sell a different and more rigorous monetary policy,) but my point here is mainly the land supply question and the role of credit growth.

  • sabre100

    A family home is an asset but not an income producing one. So, how does introducing a capital tax to augment the tax regime fit, in a situation like this?

    • Susan Guthrie

      This link explains how the taxing of capital/wealth works and gives an example of how it applies to a home –

      The family home does not produce cash, but it certainly produces income-in-kind in the form of:

      (i) shelter which would cost plenty if you had to rent it and
      (ii) increases in the value of your asset over the long term which you benefit from when you sell it.

      Neither of these benefits are taxable to homeowners so investing in owner occupied housing looks like a better option than investing in other things. For example, say you get an unexpected bonus from the boss of $100k. If you put it the bank, you’ll pay tax on the interest. If you invest in your daughter’s business you’ll pay tax on the share of the profits you get. If instead you use it to buy a holiday home you’ll get the benefits of using it (one type of income in kind) plus an increase the value of your home over time (the other type of income in kind) and you don’t pay tax on either of the payoffs from this investment. So the current tax system distorts people’s investment decisions, putting excessive pressure on house prices and leaving our businesses struggling for capital. It also distorts the type of housing we have – lots of large, underutilised spaces (think the McMansions) and lots of vacant holiday homes far from the city centres. Instead we need housing to be just about delivering healthy shelter and pleasant communities, removing the tax distortions will go a good way to doing that.

  • Phil

    Gareth, have you looked at, the issues are indeed inflated property prices as a result of the introduction of excessive credit

  • Jacob Lister

    The claim that “There are cities in the world with five times Aucklands population, living in an area no larger than Aucklands” is fallacious and I really wish people would stop making it. It’s true that if you took a map of Auckland and overlaid it on the center of London or Paris, you would get 5x the population density in that area, but that ignores the much greater surrounding suburban areas that make up those entire cities. For example:

    City – Population density (source Wikipedia)

    Auckland – 2,700/km2
    Paris – 2,844.8/km2
    London (Greater) – 5,206/km2
    Tokyo – 6,000/km2
    Hong Kong – 6,480/km2
    Singapore – 7,315/km2

    Even against Singapore and Hong Kong – city states filled to the edge of an absolutely finite land area, the ratio is 2.7x at best, and Auckland is not like that.

    Compared with elsewhere in the world, Auckland has a high urban density. The only thing it lacks is an intense central city core

    Sydney – 2058/km2
    Melbourne – 1567/km2
    Los Angles – 1,024.7/km2
    New York – 720/km2

  • Sandy Price

    Being a landlord is no certain path to prosperity, more like a hell of a lot of high risk hard work combined with social work. Emphasise that to burst the bubble! You are spot on about lending – why on earth do companies pay more for productive money than residential houses lending costs

  • jh

    The findings of the Savings Working Group appear to have been ignored but they agree with Gareth:

    The Koch Brothers crowd ignore the cost of infrastructure and generally shrink the human footprint everywhere and increase the size of mother earth.

    The Savings working group also said:

    January 2011

    “The big adverse gap in productivity between New Zealand and other
    countries opened up from the 1970s to the early 1990s. The policy
    choice that increased immigration – given the number of employers
    increasingly unable to pay First-World wages to the existing
    population and all the capital requirements that increasing
    populations involve – looks
    likely to have worked almost directly against the adjustment New
    Zealand needed to make and it might have been better off with a lower
    rate of net immigration. This
    adjustment would have involved a lower real interest rate (and cost
    of capital) and a lower real exchange rate, meaning a more favourable
    environment for raising the low level of productive capital per
    worker and labour productivity. The low level of capital per worker
    is a striking symptom of New Zealand’s economic

    The Australian productivity Commission concluded that there was little or no benefit to Australians from immigration, it had all been captured by the migrants. They also said importing workers for an ageing population is just a sugar hit as the workers themselves age.

    our own Productivity Commision had it’s terms set such that :

    “agree that Commission’s second tranche of inquiries be selected on
    the degree that

    • are relatively uncontroversial given the desire to establish broad political support for the Commission


    So don’t embarrass Labour National or the Greens or the Koch Bros Inc NZ.

  • jh

    We have grown up enough to limit family size, we wouldn’t call people who have two children rather than 15 “child haters” yet that wisdom doesn’t extend to an analysis of population stress on house prices, infrastructure or the environment. I believe this is a social phenomena driven by the fact that one sections fortunes increase with population growth and because it marks liberals as being in with the right mob, distancing them from the lower classes in their own society. Since no moderate stance is allowed to enter the lexicon the only way these things can be expressed is by something like Golden Dawn. People say “oh well, bugger it, so we’re nazis..” because although they can’t find expression they believe in an essential truth..

  • John Threlfall

    After WWII Britain built “houses for heroes”. In NZ eariy Labour Govt built good houses- it can be done.Rangiora could be the new Christchurch.In Hastings you can buy a good 2br unit for $120K.People can be happy with smaller houses and more leisure time.Like the river pollution problem the housing problem has multiple facets and multiple solutions and will take time but it is worth doing.

    • jh

      The question is why do New Zealanders have to opt for a choice between sprawl or density?

      The answer is that population growth is government policy and it is supported by Labour and the Greens (judged by the lack of any response). Elites have managed to deny any debate by presenting population growth as good for everybody:

      JESSICA – Let’s talk a little bit about that population spread. Why are so many people moving to Auckland?

      Professor Paul Spoonley
      PAUL – Well, Auckland – there’s an agglomeration effect, so the bigger Auckland becomes, there more attractive it becomes. It becomes more attractive economically, but it also becomes more attractive as a place to live.

  • Dave

    I think the problem is the wages are too low in NZ and people can’t afford to buy homes – Dave

    • jh

      New Zealand now boasts one of the highest rates of home unaffordability in the world as a result of prices rising far faster than incomes, and the government’s Savings Working Group blames that squarely on the policies of successive governments.

      Although ‘‘the favourable tax treatment of property investment’’ accounted for about 50% of house price increases between 2001 and 2007, the working group said, there was also strong evidence that rapid swings in immigration brought about price-rise ‘‘shocks’’.

      There was a sharp spike in immigration in 2001, 2002 and 2003 and, said working group committee member Dr Andrew Coleman, it appeared that property prices did not fall anywhere near as greatly when immigration fell again.

      The report added that there was little evidence that immigration boosted local incomes. In fact, the need to build roads and schools meant that net migration contributed to the national deficit.”…/Government-policies-blamed-for-house-prices

  • shaz

    i agree introduce capital gain tax, then house prices would drop which would then enable those that cannot afford to buy to buy, its got nothing to do with there not being enough housing it is entirely cost.

  • jh

    Is the Productivity Commission straight?