Housing is shaping up to be one of the key battlegrounds in next year's election. Both National and Labour correctly sense that voters - particularly in Auckland, but in other parts of the country as well - are sufficiently fed up with the situation, and want to see the state step in and take action.
  
Many of the proposed remedies to the problem have misguidedly focussed on mitigating demand for housing, but politicians are starting wake up to the reality that New Zealand has a housing shortage.
  
Factors such as population growth, migration, shrinking household size, and the replacement of old stock are all putting pressure on a limited number of houses.
  
At the same time, the collusion of planning rules and the scarcity of land have limited the supply of new houses onto the market to the extent that we have a backlog that will take decades to clear, if at all.
  
That's why we've seen some pretty bold promises from the National Party to build 39,000 houses in Auckland in the next three years. Similarly, at the recent Labour Party conference in Christchurch, newly elected leader David Cunliffe promised to build 100,000 new homes over the next decade.
  
And while this is welcome news, especially for a public policy think tank that has been one of the few organisations to have consistently stressed that the solution to the affordability problem is supply, any intervention of this scale should be treated with a great deal of wariness.
  
That's probably because we've seen state intervention in the housing market go horribly wrong overseas (and also succeed). Ireland is a particularly poignant example for New Zealand.
  
After languishing for decades in a state of economic torpor after World War II, and racking up huge government deficits, a significant reform period in the 1980s turned the country around, laying the ground for what would emerge as the Celtic Tiger in the 1990s.
  
Ireland, long a place to leave for more affluent pastures, became an attractive place to return for many Irish expats, as well others looking to cash in on the boom. In 1987 for example, the country saw its population decline by just over 20,000 people that year, yet by 2004 this had reversed to the extent that the population grew by almost 32,000 people over the same period.
  
That influx met a housing supply that had hardly expanded at all in the low-growth decades. The market was unable to respond to the surge in demand as it was shackled to a planning regime that was more accustomed to a slow growing agricultural economy as well as the activity of land speculators.
  
In a situation that should sound familiar to any Aucklander, predictably, prices rose fast. According to the Permanent TSB House Price Index, the average Irish house sold for 84,800 euros in March 1997, but by the same month in 2003 that had skyrocketed over 200 per cent to 256,700 euros.
  
The state's response was slow in coming, but when it did it came in the form of "build, build, build", with central government putting pressure on local government to ensure the delivery of thousands of housing units (does this sound familiar?) in short order.
  
Those units came in the form of flats and new housing developments which consisted of large numbers of low cost homogenous units - the kind of housing that the Irish were unfamiliar with.
  
The net effect was to fragment the market. On the low end there was surge in supply, which brought prices within reach of first home buyers, but it also sated demand for these units.
  
Homeowners in these low-end housing units, when they were ready to trade up, found it hard to sell. And the houses they wanted to buy in the next tier up were even more expensive than ever because development activity had only focused on the type of homes that could be constructed as quickly, and as easily, as possible.
  
The Irish were left with a simple choice: stay in the small housing they were in but didn't like, or borrow more to buy the housing they wanted, a situation that has many parallels with New Zealand.
  
Excluding the practical difficulties, if the politicians do push through with their plans to build tens of thousands of houses in the next few years, how will they ensure that they don't repeat Ireland's mistakes?
  
What is also missing is any real action on addressing the policy settings that created the housing blockage in the first place: local government being saddled with all the infrastructure costs from new housing but excluded from the economic upside that new residents bring.
  
If we are serious about sustainably fixing the affordability problem, then we need to create the right economic incentives that encourage development, and let the market - which is best placed to respond to demand and absorb the risk if they get it wrong - do the rest.

Source: Housing promises risk an Irish solution