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