Unaffordable housing market holding all of New Zealand back

Dr Eric Crampton
23 July, 2019

If we could fixing the tangled mess of regulation stymieing new home construction, it would help alleviate real misery.

The housing shortage leads directly to rents that take up too much of our paycheques, to overcrowding, and potentially to poor health. It has led to inequities across generations. If that were not sufficient reason for finally dealing with the issue, it has also hindered economic growth.

The Economic Development, Science and Innovation Select Committee of New Zealand's Youth Parliament asked me what Parliament could do to increase economic growth while not worsening inequalities in wealth. I pointed them to housing policy.

The Youth Parliament Select Committee was right to worry about a link between the two.

Policies aiming to reduce economic inequalities can come at the expense of economic growth, making everyone more equal but poorer. 

New Zealand's income inequality statistics, by the Ministry for Social Development's figures, have been roughly flat for 15 to 20 years, depending on the measure.

But concern about inequality, at least as measured by the number of newspaper headlines, followed the rise in Auckland house prices rather than the flat inequality statistics.

The real experience of inequality comes in household budgets strained by too-high housing costs and in worries about whether they or their kids will ever be able to afford a home. The latest report from the Ministry of Social Development tells us that almost 40 per centof our poorest renting households are now spending more than 50 per cent of their income on housing costs. 

Fixing the housing mess will directly work to mitigate those inequities. Doing so will also improve, rather than hinder, economic growth. Here is why. 

When housing construction cannot increase to meet changes in demand, overcrowding and high house prices are only one set of bad consequences. What is harder to see is that it also affects mobility, and consequently productivity.

When people cannot move to the places that best suit their skills and preferences, they make do with their next best alternative here in New Zealand, or move abroad. 

The problem is hardly unique to New Zealand. Many of America's cities are burdened with strict zoning controls preventing new housing from being built to meet demand.

That has coincided with what seems to be an increase in productivity in places with lots of other skilled workers – economists call it agglomeration. Silicon Valley has been excellent for technology companies because there are so many other technology companies around. But San Francisco's tight zoning rules have led to housing nearly as unaffordable as Auckland's. 

American economists Chang-Tai Hsieh and Enrico Moretti note that these restrictions have had substantial consequences.

Their latest work, published earlier this year, shows that American zoning restrictions reduced overall economic growth by 36 per cent from 1964 to 2009, the period of their study.

When productive technology workers cannot move to the Valley because the rents are too darned high, they are made worse-off; overall economic growth is hindered as well. Allowing more building in Silicon Valley would, as they put it, raise income and welfare for all American workers. 

The effects in New Zealand are also substantial.

Earlier this month, Peter Nunns presented work at the New Zealand Economic Association putting numbers to it. Allowing New Zealand's cities to grow by removing the restrictions that prevent development in the places people want to live could increase total economic output by up to 7.7 per cent, and increase per-worker output by just under 1 per cent. A lot of our friends who have fled to Australia in search of pay packets that leave a bit more in the pocket after housing costs would return home. 

The New Zealand figures, according to Nunns, are smaller than those in the United States because New Zealand cities vary less in their productivity characteristics. Auckland and Palmerston North are far less different than San Francisco and Detroit. But the effects remain substantial. 

And the story told in the numbers resonates with lived experience here. How many people in some of our poorer communities would have found better lives for themselves and their families if they could afford to move to places where wages are higher?

Broken housing markets mean higher wages just turn into higher land prices in places where people want to live, so it is hard to do well by moving to places with more opportunities. 

Fixing the problem would see more housing built in response to increases in demand rather than substantial house price appreciation. And it would remedy one of the greatest current inequities in wealth: the generational housing gap.

I encouraged New Zealand's Youth Parliament to push even harder with the reforms Phil Twyford initiated. They show much promise. But they need to deliver on that promise soon. Those youth parliamentarians may be entering the housing market before too long.

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