The recent announcements by Minister for the Environment Nick Smith that the Resource Management Act (RMA) is set to undergo a major overhaul is welcome news, representing the first meaningful policy change aimed at tackling the housing affordability crisis gripping New Zealand’s biggest cities.

Although the detail on the changes has yet to be seen, the direction is promising as the RMA has long served as grit in the gears of the housing market, restricting sub-divisions, slowing the build rate, entrenching NIMBYism, while allowing fast growing councils to use it as an excuse to stall development and growth planning.

Research by The New Zealand Initiative, Motu and the Institute of Economic Research have all independently shown how onerous regulations and limits on land supply have contributed to limit housing supply and drive up the price of home construction. These findings echo similar research overseas, with the conclusions broadly summed up as excessive red tape leads to house price inflation.

Yet one voice appears to dissent on this view, with Gareth Morgan claiming supply is not the issue, and that changes to the RMA will only deliver sprawl, not affordable housing. Instead he believes New Zealand’s tax treatment on mortgage expenses and the Reserve Bank’s view that housing is a low-risk asset class are responsible for eye watering house price inflation.

Is Morgan right? Has the economic establishment been guilty of group think on housing, pointing to supply as the problem, when all along it was a demand problem?

It is somewhat tricky to answer this question quickly, as variations in different housing markets mean there is no diametrically opposite comparison to point to. But we can look at different jurisdictions to see if Morgan’s argument stands up.

Tax is an obvious place to start. Under New Zealand rules, owners of an investment property can claim the difference between their mortgage expense and rental income as a tax deductable, a process called negative gearing.
In addition, capital gains on the asset are untaxed, which combined creates a climate favourable to property investors.

Yet the international track record of capital gains regimes suggests taxing the value uplift on property will do little to curb house price inflation. Australia and Britain both tax capital gains on property, yet the latest Demographia report shows London and Sydney are among the most expensive cities in the world in which to buy a house. This phenomenon is not limited to these cities, with most urban areas in both jurisdictions rated as severely unaffordable by Demographia. Notably, both countries have restrictive urban planning regimes, just like New Zealand.

The United States offers some interesting insights. Similar to New Zealand, property owners in the US can deduct the interest expense on their mortgage from their tax bill. Yet the Demographia report shows that this is a very poor predictor of house price affordability, with the US accounting for some of the most affordable and least affordable cities in the Demographia rankings. If negative gearing was the cause of house price inflation, a stronger trend would be obvious in the affordability rankings.

Furthermore, the US Federal Reserve has the same view of property as a low-risk asset as the Reserve Bank does, with rules for private banks aligned along similar lines. But again, the variability in the US market suggests that this is not the root cause either.

So what is the root cause?

Again the US offers an interesting insight here, with a strong link between the restrictiveness of the planning regime and house price affordability. Cities with a laissez-faire approach to urban planning, like Houston, have some of the most affordable houses in the US, whereas those choking in planning red tape, like San Diego and San Jose, have pushed home ownership out of reach for many.

The lesson can be extrapolated to New Zealand, where legislation like the RMA has restricted the supply of land and housing in many of the country’s biggest and most economically important cities.

In New Zealand, and Auckland in particular, housing supply has failed to keep up with demand, with fewer than 15,000 housing units produced nationwide in 2013, well down on the 35,000 a year mark seen in the mid-1970s when population pressures were weaker. The build rate has since picked up, but the momentum needs to increase further if we are to house the growing population.

Morgan is correct in noting that the tax treatment, negative gearing, low interest rates, and the Reserve Bank’s preference for housing as an asset class play a role in the overall problem, as does increased demand from immigration and population growth. But these are only factors at the margin because there is a logjam in the supply of housing.

Put another way, a properly functioning market is like a pair of scissors, with demand represented as one blade and supply the other. However, where one blade has been rusted in place by onerous legislation like the RMA it is easy to point to the demand side and say that is where the problem is.

This is why RMA reform focused on the urban environment and housing is urgently needed. The reforms are also need to stop councils from using the RMA as a scapegoat to resist urban development they are either ideologically opposed to, or don’t want to wear on their balance sheets.

No one is naïve enough to suggest that RMA changes are a silver bullet solution to the housing crisis. We still need to shift the anti-development bias among many councils, but that is best tackled through incentives. However, without meaningful and urban-focussed reform of the RMA, we are not going to put the dream of home ownership with reach of the average New Zealander any time soon, if ever.