Building pressure

Dr Eric Crampton
24 November, 2020

Air compressor tanks come with a maximum pressure rating. The things are built to handle pressure, but only so much. Stick within the limits, and a lot of useful work can be done. Go beyond the design capacity and the rig will fail in spectacular ways.

Parliaments are pressure-cookers, too. They have to be; pressure gets work done.

But they can only take so much. When political pressure hits the redline, parliaments can fail. The pressure to do something speedy and visible can overwhelm the need to act responsibly.

The pressure facing this Government, today, on housing must be enormous.

Labour was elected in 2017 on a promise to fix housing. Now in its second term, Labour presides over a worsening housing supply shortage.

Labour made small progress in its first term. Housing minister Phil Twyford delivered a new infrastructure financing mechanism and a new National Policy Statement On Urban Development that will make it easier to get new housing built, eventually.

But none of this can possibly happen quickly enough to match the speed of Reserve Bank money-printing. Had Labour made better progress, low interest rates and easy credit could now be funding a substantial building boom. Instead, easy credit is stoking the fires of real estate auctions.

Greg Ninness this week pointed out that while take-home pay for median wage-earners grew by 8.2 percent over the past three years, the price of homes in the most affordable quartile rose by 43 percent. Saving up for a deposit, when house prices substantially outpace both wages and Kiwisaver earnings, is rather difficult.

If Parliament had a pressure gauge, the needle would be redlining. That pressure risks venting through policies to target the symptoms of the current shortage while worsening the real problem.

The Prime Minister highlights government schemes like Welcome Home Loans and the First Home Loan grant that support people buying their first home. She also pointed how hard it is for new buyers face in building a deposit for a first home. It would be rather surprising if Ministries have not been asked to give her some policy options to assist those buyers.

But programmes that subsidise home buyers, when housing supply is constrained, will mainly boost the price of existing homes. They won’t get new housing built. If real estate auctions are a game of musical chairs with more buyers than available seats, giving bidders more money only increases prices.

Boosting housing demand through subsidies to buyers, when construction cannot keep up with demand, might look helpful but is actually making things worse.

The Government has other unhelpful ways to vent political pressure.

The Green Party has proposed wealth taxes; Bernard Hickey proposes land taxes. But it is difficult to see how new taxes get more houses built.

The current shortage combined with house price inflation benefits landlords, making rent control policies more attractive. But those policies can make investment in new apartments and townhouses even more fraught. In the immortal words of Swedish economist Assar Lindbeck, rent control is “the most efficient technique presently known to destroy a city – except for bombing.”

And policies to help tenants while supply is tightly constrained – like rental warrants of fitness – risk doing harm over the longer term.

The real problem is hard to solve in a hurry, which is a problem when you’re in a pressure-cooker.

For decades, councils shouldered all of the costs of accommodating urban growth while central government took the increased tax revenue that came with economic growth.

As consequence, councils created rules and processes to make it difficult to get new housing built in a hurry. Is there a better explanation for why it takes a year for an Auckland developer to get new street names approved?

When councils only allow small amounts of new building here and there, for years and years, the construction sector adapts to serve the kind of market it faces. Construction now appears to be going flat out, with consenting in Auckland hitting recent records – but still nowhere near the pace of building needed to seriously address the shortage.

Solving the problem requires changing the incentives. Councils need to be encouraged to accommodate growth, rather than look for ways to stymie it.

An entrenched problem has no quick fix. Construction takes time. Training new tradies also takes time. Even if the Government conjures a perfect set of reforms tomorrow, it could be years until enough houses are built to seriously address the shortage, even if councils responded immediately.

But a credible promise of houses tomorrow can affect house prices today. If everyone knew a substantial volume of housing would be on the market two years from now, that would reduce buyer demand today. People would wait, knowing that more housing is coming, rather than bidding up the price of the last few houses on the market today.

Creating those expectations requires something bigger (and more credible) than KiwiBuild.

If Labour said, from 2021, a million-dollar build came with a $150,000 grant to the local council, the council would have 150,000 new reasons to enable more housing – and fewer reasons block it. Giving councils the equivalent of the GST from New building could help defray infrastructure costs or improve local parks and services to turn NIMBYs into YIMBIES (Yes In My Back Yard). It would also help address any of the myriad other costs councils face when accommodating growth.

“Something” must be done, and the Government must appear to have a suitable “something” ready. Parliament cannot easily withstand this kind of political pressure on housing. Labour will not want to enter the 2023 election with no substantial progress on housing.

Let’s hope the current pressure turns Labour’s first term lumps of coal into diamonds.




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