Who Is Responsible for Housing Affordability?
The solution to Auckland’s twin housing problems of homelessness and unaffordability seems as far away as ever, despite the much-trumpeted Housing Accord signed by the Auckland Council and the government.
I say “seems” since it appears that no one has the information that allows us to make an accurate judgment. Under the Accord, which was approved in September 2013, ten per cent of the new homes built in Special Housing Areas have to be affordable housing – that is, houses that could be purchased by a first-home buyer on a modest income.
It is now clear that, such is the lack of seriousness with which these issues are being tackled, neither of the signatories has bothered to keep a reliable (or any) record of how many affordable homes have actually been produced and what proportion they represent of the new houses that have been built.
In the meantime, the median house price in Auckland has risen to over $860,000 – hardly most people’s definition of “affordable” – and the average price is higher still. The Housing Minister, Nick Smith, tried to deflect criticism when questioned by asserting that it is not the government’s responsibility to see that the promised affordable houses are produced – even though it is his signature that commits the government to achieving the targets identified by the Accord.
He concedes that the government has failed to check that private developers meet their obligation to declare formally that 10% of the new houses built are affordable; he argues instead that the much delayed pick-up in new housing consents will eventually help, as and when the houses are built, to restrain the rise in house prices, even as they continue to rise, albeit a little more slowly. He thereby by implication consigns the 10% affordable houses target to the scrap heap.
This is, of course, entirely predictable and in line with the government’s conviction that the private market can be trusted to solve the affordability problem. Why should we even bother, the government says, to make sure that the government’s friends in the development industry keep their word on affordability when increased supply alone will do the trick?
So wedded are the government to this view that we can now, it seems, treat the Housing Accord, and the commitments required of developers, as just so much waste paper – a perception reinforced by this week’s news that more than half of the Special Housing Areas have been scrapped. Nick Smith’s signature seems to mean nothing.
What this debacle reveals is a complete failure to identify the true causes of the problem. Ministers and others cannot seem to get their heads around a very simple proposition. If you have an asset (like land and, by extension, housing) that is in limited supply, but you have a virtually unlimited supply of purchasing power chasing that asset, the inevitable consequence is that the price of that asset will rise and will go on rising inexorably.
Even if (with or without a meaningful Housing Accord) you manage to increase the supply a little at the margin, but do nothing to restrain the volume of demand for the asset (or the purchasing power available to purchase it), the only outcome will be – as mortgage lending increases to match the increased supply – higher prices (and profits) across the greater volume of the asset. And that is even more likely if you take no steps to enforce any commitment agreed with those controlling the asset whereby they undertake to provide certain classes of the asset on favourable terms.
The proposition that increased supply will resolve the unaffordability problem is, even assuming that Nick Smith actually believes it, nothing more than a con trick – a trick designed to benefit private developers, but destined to betray those who have been priced out of the housing market. And so, prices go on rising, even if marginally more slowly.
Ministers have no excuse for adhering to such evidently mistaken nostrums. They need only look to the analysis developed by the Reserve Bank. The central bank has demonstrated, through its introduction of loan-to-value ratios and debt-to-income ratios, its understanding that only the restriction of the otherwise unlimited power of the banks to create money by making loans on mortgage will succeed in restraining the rise in housing prices – and such fall as there has been in the rate of increase is clearly attributable to the introduction of these measures.
But rather than concede and act further on this simple point, Nick Smith prefers to inflate the developers’ profits, disappoint those who cannot afford to buy their own home, and disclaim all responsibility for his own signature.
And if he really believes that it is exclusively supply, rather than demand, that is the problem, why does he not, rather than sub-contract it to developers, take that problem on himself – by tasking the government to build the affordable houses that are needed?
Bryan Gould
6 July 2017
Why Are Houses So Expensive?
As a young solicitor in Auckland in the early 1960s, I handled the conveyancing for young couples who were buying their first home. It was one of the more satisfying parts of my work.
At that time, a deposit of just L50 ($100) would purchase, for a total price of L850 ($1700), what was called a deferred licence on a quarter-acre section. It was then possible to borrow the total cost of building a new house through a 100% mortgage either with the State Advances Corporation at 3% interest or with a non profit-making building society with which the young couple had been saving and of which they were members and co-owners.
These arrangements promoted what was then virtually the highest rate of home ownership in the developed world. Many young families were enabled to bring up their children in the secure environment provided by ownership of their own homes. It is hard to know why that was possible 50 years ago but is said to be beyond our reach today.
The damage done by the shortage of affordable housing today does not need emphasis. Young families with children are growing up in conditions that threaten their health, handicap their education prospects and destroy their life chances. The benefits to those who already own their homes of the rapid, unearned and untaxed growth in the value of their housing equity, by contrast, represent a huge transfer of wealth from the poor to the well-off. We cannot be surprised that New Zealand today is disfigured by growing inequality.
The contrast between 1960 and today in terms of housing affordability is the result of a fundamental shift in policy. In 1960, decent housing for all was seen as a social responsibility to be discharged by the community through its government or through cooperative arrangements. Today, confidence is reposed in the market to achieve this same outcome.
The evidence as to which is the better approach is surely conclusive; the market has – in this respect at least – failed. But, says the government, that is not the fault of the “free market” (which ideology asserts is infallible), but rather the consequence of “rigidities” which stop the market from operating as it should.
The argument is the same as that used to explain why the market has produced an historically high rate of unemployment. The reason for this, we are told, is that “labour market rigidities” preclude a low enough price of labour to clear the market.
In the case of unemployment, in other words, the fault is said to lie with the trade unions, notwithstanding their “small influence” – described by the Prime Minister as a principal reason (together with a tax gift of $67 million) for Warner Bros deigning to come here to make The Hobbits.
In the case of affordable housing, the villains are supposedly the local authorities. Again, the government – and “free-market” theory – cannot, it seems, be blamed. In both cases, not only does the government deny responsibility but they have conveniently found a scapegoat in those who do not share their political view.
Abandoning the effective planning of land usage, however, so that developers were free to go wherever and do whatever they liked, might stimulate a short burst in property development and building activity, but is unlikely to bring down the cost of housing in the long term. Much more likely would be a surge in the profits made by both property developers and banks – both significant elements in pushing up the cost of housing.
The very term “property development” gives the game away. The development value of land, which is almost entirely produced by the wider community’s success in building new communities and local economies, has been siphoned off into private pockets.
An even more significant factor has been the increasing role of the banks in financing house purchase. With the replacement of mutually owned building societies by profit-making banks, the whole nature of lending for house purchase has changed. The banks make most of their money from lending on mortgage. Its appeal is that it is risk-free lending, with houses providing real and immoveable assets as security. It is in the banks’ interests to go on lending ever more; they thereby apply in effect a huge pair of bellows to the housing market.
The huge increase in the money supply caused by inflated bank lending for non-productive housing, moreover, seriously skews the whole economy. It diverts investment away from productive investment and into housing and creates an asset inflation problem which we choose – unbelievably – to address by raising interest rates so that productive investment becomes even less attractive and housing yet more expensive.
It is encouraging to note the first glimmers of recognition of this issue in the Reserve Bank’s contemplation of “macro-prudential” measures to restrain bank lending; but their emphasis is still on the health of the banks’ balance sheets rather than on the distortion of the macro-economy. And, as on so many issues, the government’s loyalties seem to lie with its big business and corporate backers, rather than with families and children in need.
Bryan Gould
29 January 2013
This article was published in the NZ Herald on 31 January
Why Housing Isn’t Affordable
As a young solicitor in Auckland in the early 1960s, I handled the conveyancing for a number of young couples who were buying their first home. It was one of the more satisfying parts of my work.
At that time, a deposit of just L50 ($100) would purchase, for a total price of L850 ($1700), what was called a deferred licence on a quarter-acre section. It was then possible to borrow the total cost of building a new house on the section through a low-interest 100% mortgage with the State Advances Corporation or the non profit-making building society with which the young couple had been saving and of which they were members and co-owners.
These arrangements promoted what was then virtually the highest rate of home ownership in the developed world. Many young families were enabled to bring up their children in the secure environment provided by ownership of their own homes. But I suppose we must have been doing something wrong, because that system was changed for what was supposedly something better.
We know that the changes have achieved their purpose because of the huge fortunes made out of the housing sector by property developers over recent decades and the even greater profits from lending on mortgage made by our Australian banks and repatriated to Australia. In that respect, the changed policies have been a roaring success.
What a pity, though, that the impact on the availability of affordable housing was not so positive. By the time I returned to New Zealand in 1994, home ownership had passed beyond the reach of many young families; and housing is even less affordable today, with the result that home ownership rates have slumped and we are rapidly approaching a housing crisis.
The government is of course concerned. It would like to do something to help, as witness their response this week to the recommendations of the Productivity Commission on the subject. True to form, however, they look everywhere for solutions rather than where the real responsibility lies.
The government prefers to avert its gaze from what has really happened to create the housing crisis. The fortunes made from property development by some of our most successful business leaders have come from somewhere – and that “somewhere” is an important element in the hugely inflated prices now being asked and paid for houses. The very term “property development” gives the game away. The development value of property, which is almost entirely produced by the wider community’s success in building new communities and local economies, has been siphoned off into private pockets.
An even more significant factor has been the increasing role of the banks in financing house purchase. With the replacement of mutually owned building societies by profit-making banks, the whole nature of lending for house purchase has changed. The banks make most of their money from lending on mortgage. Its appeal is that it is risk-free lending, with houses providing real and immoveable assets as security. It is in the banks’ interests to go on lending ever more, whatever the consequences for individual borrowers or for the housing market or for the economy as a whole.
The banks have in effect applied a huge pair of bellows to the housing market and have accordingly inflated house prices to their current – and, for many, unaffordable – levels. They are about to start all over again, as the Auckland market already demonstrates. The increased prices being paid by house purchasers will in effect disappear westwards across the Tasman as bank profits. If we want an explanation of the huge rise in housing prices, that is where we should look first.
It is hard to exaggerate the price we pay for these excesses. Not only have we generated a quite unnecessary housing crisis, but we have also created a powerful mechanism for creating ever-widening inequality, as the untaxed capital gains as a result of house price inflation mean that wealth is in effect transferred to those who own homes and away from those who cannot afford them.
The huge increase in the money supply caused by inflated bank lending for non-productive housing purposes, moreover, seriously skews the whole economy. It diverts resources from productive investment and creates an inflation problem which we choose – unbelievably – to address by raising interest rates so that productive investment becomes even less attractive and bank profits grow even larger.
The government’s response to all of this? More of the same. Their “remedy” is to remove remaining restrictions on property developers – even to the extent of displacing families from their homes to allow private “redevelopment” to occur – and to bypass elected authorities so that the community interest or environmental concern can no longer inhibit the drive for profit. And they set their face against any change in the monetary policy that conveniently overlooks the damaging role played by excessive bank lending.
As on so many issues, the government’s loyalties seem to lie with its big business and corporate backers. As we assess the government’s plans, let us remember that families without decent homes, and children being brought up in unsafe and unhealthy conditions, need and deserve more than crocodile tears.
Bryan Gould
29 October 2012