The policy problem of ‘affordable housing’ is all the rage. But aside from a vague sense that housing is too expensive, what does the term actually mean? Is it really unaffordable, or just more expensive and less accessible than many would like?
Clearly high house prices are a problem – high levels of private indebtedness to pay for unproductive assets are a drag on national economic performance.
What most people mean by ‘unaffordable housing’, is that housing is artificially expensive. One that, for many reasons, cannot respond to spikes in demand the way other markets do.
The problem is of course complex. It has been the subject of a 330-page report by the Productivity Commission, to which the government has made a tentative response and is conducting a more detailed study on the matter.
The housing market has not always been this way. Until the 1970s, New Zealand built more houses per year than now, to service a smaller population with fewer households. Dropping building rates, growing population, and dispersed households due to changing living patterns have resulted in a housing shortage and subsequent price inflation.
New Zealand’s building industry is well known to be a cottage industry that lacks population and available land for large-scale projects, particularly in Auckland. Whether one agrees with the release of more land? or not, land supply is undoubtedly the single biggest factor driving up the cost of land and the cost of building.
On the building and finance side, the picture is far more layered. Infrastructure costs that must be borne by councils with limited methods of raising funds is a crucial issue. Often the economic and political incentives faced by councils do not encourage development.
The situation is complex and some of the fashionable cargo cult ideas floating around to deal with the shortage, such as high-rise dwellings or a capital gains tax, are simplistic and woefully inadequate.
Robust research into why New Zealand’s housing market functions as it does is the key to formulating good policy to fix it.