On affordable housing

Luke Malpass
Insights Newsletter
20 July, 2012

Housing affordability’ has been subject to heated political debate this week. The term doesn’t refer to social housing but to ‘more expensive than they should be’ houses. In particular, it expresses an anxiety that homeownership, a valued part of New Zealand life, is being put beyond the reach of large sections of the population.

This is a dominant part of an emerging narrative: houses are expensive to build in New Zealand. As the Productivity Commission explains, New Zealand is a nation of boutique house builders, mostly sole traders, building made-to-order houses one at a time and procuring materials off the bloke they had drinks with on Friday night. The inefficiency and extra cost of this industry structure is borne by the end consumer.

The housing industry in Australia may have its own problems but it does have the advantage of fewer builders, economies of scale, and more ‘off the shelf’ house designs compared to New Zealand.

Even if construction prices in New Zealand were reduced by 15% to roughly match those in Australia, this would account for only a 15% reduction in 40% of the average total new house cost. This would mean a $30,000 saving on a $500,000 dollar house – an amount that is certainly not something to be sneezed at but it also does not tackle the underlying driver of price: high land value.

As the commission pointed out, 60% of a house price comprises land value. And while there is little that government can do to ‘fix’ the scale of the building industry, it can make more land available for construction.

This is largely a function of supply, not programmed land releases – or a centralised, top-down approach that essentially relies on Soviet-style targets.

Affordable housing is not just about making more land available but incentivising local government authorities and making it worth their while – and doing all this in a way that overcomes the political incentives skewed against development. And that is not a small task.

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