Unlocking the solution
Broadly speaking, addressing the problem of housing unaffordability has three interrelated parts.
Part 1: Free up buildable land
A fundamental part of the solution to unaffordable housing must be to make land supply more responsive to changing housing demand.
However, this needs to be done in a way that minimises the environmental impacts as far as possible.
Currently, insufficient land is available for construction, reflecting stringent land use restrictions (urban boundaries, size and height requirements, long and difficult consultation processes, and red tape) and few penalties for land banking, where investors or developers lock up large swathes of housing-zoned land and release it only at a trickle to hold prices up and maximise profits.
Many developers release houses in developments only slowly to create the appearance of limited availability when in reality the pipeline is ongoing.
Because buildable land is so scarce and expected to remain so, this has been capitalised into very high land prices. An enormous portion of the cost of a house is the cost of the land it is on – up to 56% in Auckland.
While appropriate land use planning is very important for liveable, sustainable metropolitan areas (and climate change makes long-term planning even more essential), unnecessary land use restrictions need to be relaxed urgently, and penalties need to be introduced for passively holding housing-zoned land for long periods without developing it.
Making land available, in practical terms, takes time, since infrastructure for greenfield development is also required (see Part 2), but it is fundamental to any housing solution – and signalling could make a difference now.
Expectations of tight supply are baked in, so a strong, and binding, commitment that more land will come available in future could help to put a lid on further price rises as expectations adjust.
As part of this, some degree of expansion of urban boundaries is needed to reflect growth in the population.
At the same time, increasing our buildable land means making more efficient use of the land we already have available, meaning more intensification.
Building smarter and more densely around public transport hubs is also crucial to ensure that new-build houses aren’t an ever-longer car drive from where people need to be. It has to be a combination approach.
Not all kiwis want to live in inner city apartments or townhouses, but some do, especially as a first step on the property ladder. Restrictions that inhibit scope for more intensive building are not helpful.
Smaller and less bespoke housing options should be available for those in the market who want them. And let’s be frank, for those who are homeless, a small, homogenous house is much better than none.
Changes to the Resource Management Act (RMA) are a step in the right direction.
The right changes could help to ensure that planning, infrastructure provision, consenting and building become easier and faster, such that supply constraints are relaxed.
But we can’t just tinker at the edges. As a wise person once noted, property owners tend to be raging libertarians as regards their own property rights, and complete socialists when it comes to their neighbours’ – without even recognising the contradiction.
To achieve real change, existing home owners need to be willing – or forced – to embrace some combination of urban expansion and intensification.
That means pushing back against “not in my backyard” thinking, and reducing the power of vested interests.
Work to directly encourage councils and developers to increase buildable land supply would be helpful, perhaps including financial incentives. It’s really hard for local governments to push through changes that are unpopular with current homeowners.
They’re the people who vote. There’s a good argument for central government to play a bigger role - though homeowners vote at much higher rates in general elections as well!
Part 2: Build more houses and infrastructure
Increasing housing supply and making it more responsive isn’t just about freeing up land, although that is key.
It is also about ensuring that conditions are conducive to sufficient infrastructure provision, fast consenting and plentiful and efficient home building in the right places.
To increase home supply meaningfully, incentives need to be aligned to fund infrastructure and encourage property development, including easing financial constraints, potentially using central government funding.
A long-term planning process is also needed to ensure that the civil construction industry doesn’t face a stop-start pipeline that makes it difficult to maintain capacity.
At the same time, work is needed to increase construction industry capacity and reduce costs. Recent initiatives to encourage people to work in trades are definitely helpful.
The industry tends to be dominated by small players, which hampers productivity. Encouraging innovation, scale, better co-ordination of sub-contractors, and building of more homogenous (potentially prefabricated) homes could help.
On construction costs, materials regulation needs to be carefully calibrated.
Building standards absolutely need to be assured through effective regulation, but a common complaint about the current system is that it is an unfortunate mix of highly prescriptive and slow to change, affording a near-monopoly to certain products for which perfectly good alternatives are available.
More competition in building supplies would also help.
Social housing is an important part of the housing solution too, and this may require direct Government intervention.
A radical expansion in available buildable land for new homes and relaxation in red tape to house our homeless population should be high priority.
A central Government-organised build using cheap, mass-produced options to make it happen could be part of the answer. Some good progress has been made in the area of social housing in recent years but much more remains to be done.
Part 3: Align demand and supply settings
Broadly, one of the fundamental issues that has driven worsening housing affordability in New Zealand has been the fact that demand and supply settings have not been well aligned.
We have seen large swings in immigration flows, while housing supply has been constrained.
We need to bring people into the country to meet essential skill shortages, but growing the population in wild surges without a plan to house everyone simply doesn’t work.
In Selwyn, improved housing affordability has been achieved through radical expansion on the supply side.
West Christchurch was blessed with a large supply of flat, accessible, suitable land on their doorstep, which not every city is – indeed the topography of, say, Auckland and Tauranga is extremely challenging.
You could add Queenstown to that list. But it’s not always rivers or estuaries or mountainous peaks that are standing in the way. Often it’s legislation.
And for the country as a whole, supply-side changes are absolutely necessary to combat our existing shortage of buildable land and homes and make supply more responsive.
But the other side of the equation – demand – may need to be considered too if we are to mitigate the extent of future house price rises while supply catches up, not to mention addressing the many issues that climate change is going to unleash – we’re going to have to replace a significant number of houses as time goes on, making growing the housing stock even harder.
Curbing immigration cycles would reduce pressure on the housing stock. It’s still important to meet skill shortages, but with the border currently closed, it’s a good opportunity to take a good hard look at migration settings and what is really best for New Zealand now and into the future.
The composition of demand is relevant too. Initiatives to get first home buyers into the market through the likes of subsidies are well meaning, but have counter-productive effects as higher ability to pay just pushes up house prices further.
Keeping a lid on risky, speculative lending thorough macro-prudential policy is helpful, but changing the RBNZ’s monetary policy mandate is not, since attempting to rein in housing demand with higher interest rates can lead to worse societal outcomes.
We concur with the RBNZ’s assessment that including house prices in their financial policy, rather than monetary policy, remit makes sense.
Adding debt-to-income caps into the RBNZ’s toolkit would also be a good idea to stem financial risks associated with buyers being overstretched.
It could also be worth reconsidering the calibration of bank capital risk weights that tilt the playing field firmly in favour of mortgage lending.
Incentives to reduce the attractiveness of property investment would perhaps be desirable to impact the composition of the market, even if not a game changer for affordability.
The most effective way to reduce the attractiveness of property investment is to reduce the scope for capital gains by increasing supply. But other policy tweaks, such as tax changes, could help at the margin, at least in a one-off fashion.
Changes to tax settings, such as introducing a capital gains tax, are worth considering for broader reasons, like intergenerational equality.
But would only affect housing affordability very slightly, similar to the ban on foreign buyers, which curbed demand in a portion of the market but did not affect overall house prices meaningfully.
And tax changes could have some negative consequences, like discouraging saving and investment.
That said, they could be used as a stopgap to help bring about a pause in the market while other meaningful changes are made.
But the political will for such a broadening of the tax base obviously isn’t there at the moment.
We must act now
Fundamentally, focus needs to be on those changes that will make the biggest difference and lead to significant, sustained impacts. First and foremost, that means tackling the issue of supply constraints.
Sure, it’s complicated and some aspects of the response may take time, but doing nothing simply isn’t an option. The need for action is urgent. There’s potential for meaningful change, but we must act now.