Kiwibuild: Twyford's Tar Baby
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ISSN 2624-0106 | 22 January 2019 RESEARCH NOTE KIWIBUILD: TWYFORD’S TAR BABY Bryce Wilkinson Executive Summary • Relative to income, dwelling prices in New Zealand are among the highest in the OECD. This is New Zealand’s housing affordability problem in a nutshell. • High population-driven demand growth has collided with inflexible supply-side constraints. • Land prices have sky-rocketed, but construction costs are also too high. • This report explains why KiwiBuild – defined as the government’s pledge to build or deliver 100,000 homes within a decade – fails against all the objectives set for it: - KiwiBuild cannot hope to materially increase home ownership proportions – the original 2012 objective. Additional housing, if achieved, will likely lift renting and ownership more or less in tandem. - It is not about social housing to help those at the bottom. - Nor is it about helping struggling first-home buyers. They cannot afford KiwiBuild homes at current costs. KiwiBuild is for the relatively well-off. - It is intended to be subsidy free, since wealth transfers to the well-off are hard to justify. But its inducements to attract private developers are subsidies. - Even more paradoxically, if there were no subsidy, there would be no gap for KiwiBuild to fill. Private developers will meet unsubsidised market demand. - It cannot hope to increase the housing stock sustainably. Only enduring lower property prices can induce people to own more dwellings than otherwise. KiwiBuild reduces neither land values nor construction costs at the margin. • The enduring effect of the policy is a changed composition of the housing stock by decree rather than by public demand. • KiwiBuild is floundering having no clear public interest objective. It constitutes a massive political and bureaucratic distraction from what is really needed – direct action to reduce land values and construction costs. Dr Bryce Wilkinson is a Senior Fellow with The New Zealand Initiative and Director of Capital Economics Limited. 1 The affordability problem New Zealand has a major housing affordability problem, but this report explains why KiwiBuild, defined narrowly as 100,000 government-commissioned dwellings in the next decade, is not the answer. It is a tar baby whose every touch ensnares time and resources. House prices in New Zealand are extraordinarily high relative to income, particularly in Auckland. Demographia assesses housing markets to be severely unaffordable when the median house price is at least five times the median income.1 Its 14th Annual Survey put Auckland’s multiple at 8.8 in September 2017.2 Economists Shamubeel and Selena Eaqub put the average New Zealand multiple at 2–3 for most of the period between 1957 and the early 1990s in their 2015 book, Generation Rent: Rethinking New Zealand’s Priorities. Chris Parker, then chief economist at Auckland Council, endorsed this range and reproduced Eaqubs’ estimates in a 2015 report. Figure 1 reproduces Eaqubs’ statistics as updated by them.3 Figure 1: Average house price to earnings ratios in New Zealand (1957–2014) 9.0 2017, 7.7 8.0 7.0 6.0 5.0 4.0 3.0 Price to earnings multiple 2.0 1.0 0.0 2011 1981 1975 1972 1957 1978 1987 2017 1993 1963 2014 1984 1969 1999 1996 1966 1990 1960 2002 2005 2008 Calendar year averages of quarterly values Source: Shamubeel Eaqub, Personal email (24 December 2018), updated statistics to the March quarter 2018. Original chart published in Shamubeel and Selena Eaqub, Generation Rent: Rethinking New Zealand’s Priorities (2015). OECD estimates reinforce that picture: house prices in New Zealand were 61% higher relative to incomes in 2017 than a long-term average (Figure 2).4 This was the highest ratio of any of the 22 countries surveyed, although Sweden, Canada and Australia were close.5 2 KIWIBUILD: TWYFORD’S TAR BABY Figure 2: Ratio of house prices to income when the long-term average is 100 in each country (2017) 180 160 160 153 152 151 138 140 135 130 128 120 119 118 120 115 107 106 104 101 98 96 96 100 92 91 87 76 80 60 60 40 20 0 Italy Spain Japan Korea Canada Norway Austria France Ireland Finland Greece SwedenAustralia Belgium Denmark Portugal Germany Netherlands Switzerland New Zealand United States OECD - Total OECD - Europe United Kingdom Source: OECD statistical country tables (downloaded November 2018). How can houses be called unaffordable when buyers continue to pay those prices? After all, if the prices were unaffordable, no homes would be sold at those prices, but they are, week after week, month after month, year after year. If new homes were unaffordable, none would be built. Yet developers are building and selling thousands of new dwellings each year.6 Nor are rents obviously unaffordable overall. On average, rents seem to have become cheaper relative to incomes since 1998.7 The real affordability problem is that people are not getting the housing stock they want because government laws and regulations have artificially driven up prices to ridiculous levels. This has created real difficulties for would-be first-home buyers, and those wanting to live close to their workplace. Figure 3 compares the falls between 2001, 2006 and 2013 in the proportions of 20- to 34-year-olds and the rest who own in full or in part their usual places of residence. For the younger group, the proportion fell between 2001 and 2013 by 32% (from 28% to 19%). For the other age groups, the fall was only 8% (from 64% to 59%).8 RESEARCH NOTE 3 Figure 3: Falling home ownership by age groups 20- to 34-year-olds All other age groups 70% 64% 63% 59% 60% 50% 40% 28% 30% 25% 19% 20% 10% 0% 2001 2006 2013 Source: Statistics New Zealand: Successive population and dwellings censuses. When did real house price inflation in New Zealand take off and how does it compare to other Anglo-Saxon countries? The Bank for International Settlements’ database on house prices in many countries since 1970 provides answers to these questions. House prices in New Zealand have risen very sharply relative to the consumer price index since the mid-1990s. There are strong parallels with other Anglo- Saxon countries, in particular with Australia (see Figure 4). The much lower real property price appreciation in Germany, Japan and Switzerland (Figure 4) indicates that more factors are in play than just lower global real interest rates. Different rates of population growth are another factor.9 Population growth has been fastest among Anglo-Saxon countries, excluding the United Kingdom. Anti-development regulation is another factor. The Resource Management Act 1991 requires landowners to get a resource consent if they wish to change land use. Councils have used this and their planning powers to choke off the extensive supply of land for housing.10 A 2007 analysis by economists Arthur Grimes and Jun Liang found that land just inside Auckland’s urban boundary was around 10 times more expensive than land just outside the boundary.11 4 KIWIBUILD: TWYFORD’S TAR BABY economies of scale of economies are part the problem. of the building. cost of of Regulatory 25% about account barriers for achieving to now assessment within from recent the industryA more is that regulation and compliance a dwelling the additional in cost asubdivision, between added $32,000 and $60,000. 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Website), property pricestatistics,” database(BIS,“About Price Property BISResidential sources, National Sources: Base 1970(1) = 100 Base 1970(1) = 100 (1970–2017) Figure In 2015, ArthurIn 2015, Grimes and Ian assessed Mitchell that council regulations in Although construction higher cost land inflation values factor, is are the major also 1 1 2 2 3 3 4 4 5 5 0 5 5 0 5 0 5 0 5 0 5 0 0 0 0 0 0 0 0 0 0 0 0 1970-Q1 1971-Q2 House4: price rises in nine countries ofthe in excess rise in each country’s CPI 1972-Q3 1973-Q4 1975-Q1 1976-Q2 1977-Q3 1978-Q4 1980-Q1 1981-Q2 1982-Q3 1983-Q4 1985-Q1 1986-Q2 1987-Q3 1988-Q4 1990-Q1 14 1991-Q2 1992-Q3 1993-Q4 I r 1995-Q1 e l a n 1996-Q2 d , U 2 1997-Q3 0 n i 0 t e 1998-Q4 7-Q1, 465 d K 2000-Q1 i n g 2001-Q2 d o m 2002-Q3 , 2 J 0 2003-Q4 a p 0 a 7-Q4, 481 2005-Q1 n 2006-Q2 2007-Q3 G e r 2008-Q4 m N a n 2010-Q1 e y w 2011-Q2 Z e a 2012-Q3 l a S 12 n w d i 2013-Q4 U t , z 2 13 n e 0 i r 2015-Q1 t l 1 e a 7-Q4, 430 d n d 2016-Q2 S t a 2017-Q3 t e s RESEARCH NOTE 5 I N S A C U G J U r a w a e u e n n e p n l s r w i i i a t t a t m t a e e n z r n d Z a e d d a d a e l r n i K S l a a y a t i l n n a a n t d g e d d s o m 2 KiwiBuild from 2012 to 2018 2.1 KiwiBuild as proposed in 2012 KiwiBuild is a policy that Labour proposed in 2012 when it was in Opposition.