Media release: Restoring New Zealand’s housing affordability
Wellington (18 November 2013): The government needs to urgently restructure financial incentives for local councils, shift the burden of water infrastructure costs, and create competition in planning if it wants to deliver affordable homes, according to The New Zealand Initiative’s third housing report.
The report, Free to Build: Restoring New Zealand’s Housing Affordability, is the third in a series which explores how the housing market has lost its affordability since the 1970s, and how other countries have maintained stable house prices over the same period.
This report builds on the previous two by identifying the policies that have been successful in Germany, Switzerland and Texas, and adapting them for New Zealand.
“There is a common misconception out there that the housing affordability crisis is a result of market failure,” said Dr Oliver Hartwich, Executive Director of the Initiative. “In actual fact, it is poor policy which has fostered an anti-development sentiment among local councils.”
“For too long, local government has been left to carry the infrastructure costs that come with new housing developments, without a means of sharing in the economic benefits new residents bring. Under this framework it is entirely rational for councils to discourage new home construction, but it has serious consequences for the supply of affordable homes.”
This is reflected in the median multiple (the number of annual incomes it would take to pay off the median house price) which stands at 5.1 for the country, well above the 3.0 multiple considered the international benchmark of affordable housing.
The New Zealand Initiative recommends government restructure incentives to encourage a pro-housing development attitude among local councils by implementing three policy measures:
- Housing Encouragement Grants: Councils should be entitled to a one-off Housing Encouragement Grant for every new house built in their area, provided the house meets minimum delivery deadlines from application to completion. Grants would be benchmarked on the GST levied on the house, recognising the impact of sales tax on house prices.
- Reform Water Infrastructure: The costly provision and maintenance of the potable and waste water infrastructure is a challenge for many local councils, and one of the primary reasons why they are reluctant to open land to development. Water provision should be stripped from local government, as it has been in Auckland, and in its stead five regional water companies established. These water companies can use network pricing to create quality water infrastructure and make long-term investment decisions free of political or electoral considerations.
- Community Development Districts: To counteract the high costs charged by monopoly suppliers for infrastructure within new development areas, we recommend a new kind of infrastructure funding option be created. Loosely based on Municipal Utility Districts in Texas, these structures will be able to privately raise debt finance to build new infrastructure and charge residents an ad-valorem tax to repay the debt. This would serve to pay off the infrastructure costs over the life of a house and not capture it in the upfront price of a new home.
In summary, these policies seek to free up the supply of new homes, which has been demonstrated to be a key element in the provision of affordable houses internationally. They are not concerned with demand-side responses such as banning foreigners from the market, restricting access to finance and introducing a capital gains tax.
“Implemented on their own, each of our recommendations would help make housing more affordable,” said Dr Hartwich. “But implemented as a package of reforms, they will deliver the big bang that’s needed to unclog the supply of new houses.”
Free to Build: Restoring New Zealand’s Housing Affordability is written by former cabinet minister and historian Dr Michael Bassett, and Initiative Research Fellows Luke Malpass (adjunct) and Jason Krupp.
Media are invited to a press conference ahead of the launch of the report (details below), where Dr Hartwich and Jason Krupp will be available for questions. Publication is strictly embargoed until 6pm, 18 November.
ENDS