Published in Insights, The New Zealand Initiative’s newsletter, 2 November 2012
When political announcements consist of motherhood statements that nobody could possibly disagree with, they often make little sense. Or at least they don’t tell us anything new.
Monday’s government response to the Productivity Commission’s housing recommendations was a bit like this: housing should become more affordable; planning processes simpler; and procedures under the Resource Management Act (RMA) less costly.
That’s all very well – except no one calls for less affordable housing, more complex planning processes, or more costly RMA procedures.
The best, then, one can say about the government’s announcements is that they are a step in the right direction. However, much more thinking needs to be done on the central question of how New Zealand can effectively make housing more affordable.
Once again, shortcut answers like ‘increasing supply’ do not get us any closer to solving the house price problem. Of course, ceteris paribus, increasing the supply of housing reduces house prices. That’s not just elementary economics but a truism.
The real challenge for anyone seriously contemplating ways to help New Zealanders afford homes is to ask how to ensure housing supply responds to increases in demand (and price).
This is where it gets difficult, but also more interesting than motherhood policy announcements. What we really need is a system where increases in housing demand automatically lead to a corresponding increase in housing supply, which would counteract price pressures.
This happens all the time in other markets. For example, despite China and India adding millions of consumers to the global middle class over the past two decades, car prices (adjusted for inflation) have not skyrocketed – thanks to a price elastic supply of cars.
New Zealand housing is obviously a different story. Twenty years ago, an average house cost less than three times the average household income. Today it is more than five times the average household income. At the same time housing completions have gone down, not up. A functioning housing market would look different.
In considering housing and planning reforms, we need to understand why New Zealand’s housing market is failing to adjust to increases in demand. This is the core question. Once we have found the answer, we will be able to design policies that will restore housing affordability.
The New Zealand Initiative has just started a major research project dealing with precisely this issue. Watch this space.