Former UK Prime Minister Harold Wilson once quipped that a week is a long time in politics, so you can be forgiven if you’ve forgotten about National’s latest fix to the housing crisis: a $1 billion Housing Infrastructure Fund.
Launched at the party’s conference, the fund would allow debt-constrained councils to borrow on an off-the-books basis to put in the infrastructure necessary for housing development. Once the houses are built and lived in, councils then pay the government back using targeted rates.
The question is whether this is a meaningful policy response or merely a band-aid to get through the next election cycle?
Before answering this, it is helpful to restate why New Zealand has a housing crisis in the first place, and how do we fix it.
The why is clear - the pace of home building has not kept pace with demand for housing. To illustrate, new home completion rates in Auckland have tailed off from a peak of over 30,000 in the 1970s, to less than 10,000 in 2015. During this period, the population of the country increased from 2.8 million to around 4.7 million. In 2015 the city’s population rose by a net 40,000.
The result is that it now takes almost 10 times the median household income to buy a house at the median price in Auckland. Just to show how out of whack this is, economists consider the upper threshold of housing affordability to be three times the median income. Even a multiple of five would be a massive improvement.
The problem is not limited to Auckland either. According to Demographia, excluding Auckland, New Zealand has five cities that are considered severely unaffordable, two that are seriously unaffordable, and none with a median multiple of three or less.
The fix is equally clear, even if it sometimes seems as if policymakers have taken a circuitous route to get there. More infrastructure-ready land needs to be freed for housing development.
This takes us back to the Housing Infrastructure Fund. At first glance it looks like a step in the right direction because it recognises that a lack of supply is the problem. It answers one of the key critiques around previously announced plans to force councils with high house prices to release land, namely how they will pay for the infrastructure.
With more land set to come on stream and $1 billion to help debt constrained councils build more core infrastructure, it must be easy to conclude that the end to New Zealand’s housing woes is in sight.
Unfortunately, a deeper dig into this policy raises more questions than it answers.
The first is whether the fund is big enough. It should be noted that Christchurch, Queenstown, Tauranga, Hamilton and Auckland will all have access to the facility. Equally split, that is a lot less impressive than $1 billion.
True, this may move the infrastructure needle, even in a place like Auckland. But is it enough to build the 150,000 houses that former Reserve Bank Chairman Arthur Grimes says are needed over the next six years for Auckland is to cope with population growth alone? Given the current build rate this seems doubtful.
A related question is ‘what does this fund do to ease regulatory and capacity constraints in the system?’. Getting through the consenting is currently so difficult that central government had to legislate around it using the Special Housing Areas legislation. This policy may put more pipes in the ground, but unless homebuilders can get through the red tape quagmire characterises the consenting process, it doesn’t really solve the supply problem.
Another question is how it affects the respective councils’ debt standings. This debt facility is essentially a way to allow fast-growing councils to sidestep their state-imposed debt constraints (specifically interest payments as a percentage of rates revenue). But this is not the only borrowing constraint on councils. For example, banks and major bond holders have debt covenants covering their lending to councils that this workaround may not address, to say nothing of how ratings agencies will react.
Until these questions are answered, it is hard to assess the merits of this policy in the specific. However, as part of the government’s overall response to the housing crisis, it is disappointing. It suggests we can expect more piecemeal policymaking, instead of the comprehensive strategy that is needed.
Given the negative reaction to this policy received in the media, Auckland’s housing market inferno, and that a week is a long time in politics, we can be assured that the coming months until the next election will feel like an eternity for government.