The government’s housing toolbox
Published in Insights, The New Zealand Initiative’s newsletter, 12 February 2021
When the only tool you have is a hammer, every problem looks like a nail. That is what it must be like for the government in the housing crisis.
Over the past year, we witnessed the New Zealand property market take off. Not that it was affordable before. But the price increases created by an avalanche of fresh central bank money catapulted real estate into previously uncharted territory.
And so, this week, we got two announcements. The first was from the Reserve Bank increasing the loan-to-value ratios at which banks may lend to home buyers.
Shortly afterwards, the Prime Minister signalled her intent to help first-time buyers cough up the cash for the now substantial deposits on their homes.
Unfortunately, both policies will fail to resolve the housing crisis. That is because they both work on the demand side. And somewhat bizarrely, they counteract each other.
However, the basic problem with New Zealand’s housing market is its long-term supply shortage. For decades, this country has not built enough to keep up with demand. Even the current surge in building is not enough to deal with the backlog, and the industry is at capacity.
Because of this supply constraint, house prices respond strongly to changes in demand. If you add more cash demand into housing, for example through first-time buyer subsidies, you will not see much more building activity but mainly rising house prices.
The way to fix this problem would be to make supply more flexible. We would like to see extra demand lead to extra supply – not least because that would keep house prices stable.
The problem is, supply-side reform for the housing market is hard. The just announced replacement Resource Management Act will take at least two years to materialise. Fixing council incentives would be a distant dream. And we have not even mentioned building materials.
To know how hard supply-side reform is, ask Phil Twyford. He is one of the few politicians who understands the matter but struggled to have the cut-through.
So, given the difficulties of supply-side reform, the remaining lever is demand. Which makes demand management the hammer in the government’s housing toolbox.
The Reserve Bank’s new lending rules reduce demand, which cools the housing market. The Government will appreciate it. And the Government’s help for first-time buyers will then refuel demand, which partially counteracts the Reserve Bank’s policies.
Crucially, both demand side interventions fiddle with symptoms. None deals with the actual problem: supply.
We can only hope that the replacement of the RMA will give the government new tools for its housing toolbox.