Government needs to take steps to encourage councils to get new housing built

Dr Eric Crampton
12 June, 2017

The accommodation supplement is supposed to make housing more affordable for low income tenants. But whether it can really do that job depends a lot on market conditions. And, right now, it does not seem that likely that the government’s increase in the accommodation supplement will really do much to help tenants.  

Let’s walk it through. 

The basic economics on this stuff is simple, but counterintuitive. It’s covered in every decent intermediate microeconomics course and intermediate public finance. If you had to condense it to one line, it would be this: the side of the market that responds less to price changes winds up bearing more of the burden of taxes, or enjoying more of the benefits of a subsidy. 

If we think about housing markets and the accommodation supplement, imagine two polar cases. 

Suppose that it were easy to build new houses and that there were not zoning restrictions that barred new houses from going up. Whenever the flow of expected rental income exceeded the cost of buying land and putting a new house on it, somebody would build a new house. That means that rents could never get too much above construction costs because new housing would get built. In that world, tenants benefit from the accommodation supplement. Landlords can’t just put up rents, because somebody else would build a house and get the tenant. Competition works. 

But if we think about a world that’s more like Auckland, things change. If zoning rules and consenting and infrastructure all conspire to mean that few new houses get built if demand increases, then an increase in the accommodation supplement means rents go up. 

This doesn’t require landlords gleefully rubbing their hands together in anticipation of hiking the rents on current tenants, though you do hear stories about that too. It’s really much simpler, and less conspiratorial, than that. When lots of tenants show up wanting to let a house or a flat that’s become available, a hike in the accommodation supplement means that the families wanting the place are able to put more money up when bidding against each other for it. In well-functioning markets, you get more houses built; in worse ones, the price of land gets bid up instead – to the benefit of current owners. So what did the government think it was doing when it announced a hike in the Accommodation Supplement in the budget? It relied on advice from the Ministry of Social Development that rents were not likely to be bid up. 

And that advice has now been released through the Official Information Act. 

The Ministry of Social Development’s paper on this, by the excellent econometrician Dean Hyslop, shows that a 2005 increase in the accommodation supplement did not do much to rents. As is typical for a Hyslop paper, it employs a very nice identification strategy: some parts of Auckland received a more generous increase than others, so Hyslop looks for changes across those different treatments. And he found that there was not much effect. 

Now, it’s worth remembering that, in 2005, the median house in Auckland sold for just under six times the median household income, according to Demographia’s survey. The latest survey has it at ten times the median household income. Housing supply in 2005 seemed more able to respond to price changes than it is now. 

And so it is rather dangerous to extrapolate from 2005 findings on the effects of the accommodation supplement to forecast what would happen in 2017. 

While the new Unitary Plan does ease things, a raft of nested constraints all continue to conspire to make housing difficult. There do not seem to be enough builders to meet demand, and nobody seems to have seen fit to provide new visas letting the tradies who showed up for the Christchurch rebuild stay in the country to help Auckland grow. Infrastructure funding remains difficult, so even if land is zoned, getting trunk infrastructure out to service things is not easy.

And because housing has been broken for so long, finding anybody able to scale up to meet current need will not be straightforward – and the combination of material supply regulations and the Overseas Investment Act would make it tough for foreign companies to come in and help. 

If the government wants the accommodation supplement to do something more than bid up the price of land in Auckland and benefit landlords, while maybe giving enough of an appearance of doing something for tenants to tide them through the next election, it will have to prioritise sorting out the Auckland morass. That means starting to move on the Productivity Commission’s recommendations about changing urban planning in New Zealand, with integrated changes across the system so that removing one blockage doesn’t just mean that the next one down the line becomes the main problem.

And if those changes would take a while to work through, the government should be considering as an interim measure, mechanisms that encourage councils to get new housing built. The New Zealand Initiative has recommended tallying up the GST from new housing construction and rebating it to Councils where the building is taking place. That doesn’t just help them fund infrastructure, but also changes their incentives. Where Councils stand to benefit more from new construction, we might just expect them to allow more of it to happen. 

And the Accommodation Supplement might then have some hope of doing the job it’s meant to do. 

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