The NZ Initiative's Jason Krupp says as a response to the housing issues, the Govt's infrastructure fund plan suggests we can expect more piecemeal policymaking, instead of the comprehensive strategy that is needed

The NZ Initiative's Jason Krupp says as a response to the housing issues, the Govt's infrastructure fund plan suggests we can expect more piecemeal policymaking, instead of the comprehensive strategy that is needed

By Jason Krupp* 

Former UK Prime Minister Harold Wilson once quipped that a week is a long time in politics, so you can be forgiven if you’ve forgotten about National’s latest fix to the housing crisis: a $1 billion Housing Infrastructure Fund.

Launched at the party’s conference, the fund would allow debt-constrained councils to borrow on an off-the-books basis to put in the infrastructure necessary for housing development. Once the houses are built and lived in, councils then pay the government back using targeted rates.

The question is whether this is a meaningful policy response or merely a band-aid to get through the next election cycle?

Before answering this, it is helpful to restate why New Zealand has a housing crisis in the first place, and how do we fix it.

The why is clear - the pace of home building has not kept pace with demand for housing. To illustrate, new home completion rates in Auckland have tailed off from a peak of over 30,000 in the 1970s, to less than 10,000 in 2015. During this period, the population of the country increased from 2.8 million to around 4.7 million. In 2015 the city’s population rose by a net 40,000.

The result is that it now takes almost 10 times the median household income to buy a house at the median price in Auckland. Just to show how out of whack this is, economists consider the upper threshold of housing affordability to be three times the median income. Even a multiple of five would be a massive improvement.

The problem is not limited to Auckland either. According to Demographia, excluding Auckland, New Zealand has five cities that are considered severely unaffordable, two that are seriously unaffordable, and none with a median multiple of three or less.

The fix is equally clear, even if it sometimes seems as if policymakers have taken a circuitous route to get there. More infrastructure-ready land needs to be freed for housing development.

This takes us back to the Housing Infrastructure Fund. At first glance it looks like a step in the right direction because it recognises that a lack of supply is the problem. It answers one of the key critiques around previously announced plans to force councils with high house prices to release land, namely how they will pay for the infrastructure.

With more land set to come on stream and $1 billion to help debt constrained councils build more core infrastructure, it must be easy to conclude that the end to New Zealand’s housing woes is in sight.

Unfortunately, a deeper dig into this policy raises more questions than it answers.

The first is whether the fund is big enough. It should be noted that Christchurch, Queenstown, Tauranga, Hamilton and Auckland will all have access to the facility. Equally split, that is a lot less impressive than $1 billion.

True, this may move the infrastructure needle, even in a place like Auckland. But is it enough to build the 150,000 houses that former Reserve Bank Chairman Arthur Grimes says are needed over the next six years for Auckland is to cope with population growth alone? Given the current build rate this seems doubtful.

A related question is ‘what does this fund do to ease regulatory and capacity constraints in the system?’. Getting through the consenting is currently so difficult that central government had to legislate around it using the Special Housing Areas legislation. This policy may put more pipes in the ground, but unless homebuilders can get through the red tape quagmire characterises the consenting process, it doesn’t really solve the supply problem.

Another question is how it affects the respective councils’ debt standings. This debt facility is essentially a way to allow fast-growing councils to sidestep their state-imposed debt constraints (specifically interest payments as a percentage of rates revenue). But this is not the only borrowing constraint on councils. For example, banks and major bond holders have debt covenants covering their lending to councils that this workaround may not address, to say nothing of how ratings agencies will react.

Until these questions are answered, it is hard to assess the merits of this policy in the specific. However, as part of the government’s overall response to the housing crisis, it is disappointing. It suggests we can expect more piecemeal policymaking, instead of the comprehensive strategy that is needed.

Given the negative reaction to this policy received in the media, Auckland’s housing market inferno, and that a week is a long time in politics, we can be assured that the coming months until the next election will feel like an eternity for government.

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*Jason Krupp is a Research Fellow at The New Zealand Initiative, which provides a fortnightly column for interest.co.nz. jason.krupp@nzinitiative.org.nz

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It is fairly clear that $1 billion loaned out for as yet indeterminate projects is tinkering at best. You get the sense that Bill English is so conservative that he cannot think outside any recent orthodoxy, or in even moderately large numbers. He also appears to want to control every step of the way.
The article is a good segue back to the news last week that Australia is likely to lead NZ to sensible but slightly unorthodox policies, that would seem very appropriate for our current housing crisis.
Notably the ANZ's David Hisco pointed to the following article:
http://www.bloomberg.com/news/articles/2016-07-14/rba-says-it-favors-mul...
The Aussie Reserve Bank acknowledges that going to ultra low interest rates has not/ will not work, they say beyond 1%. Clearly the 1% is a post justification guess on their part, and I would argue that the positive effects of very low interest rates diminish at an OCR of closer to 3%, but that is an aside.
The ARB have floated that helicopter money is very much on the table. They reasonably enough consider that the central banks "loaning" the newly printed money to the Treasury to spend is preferred to directly just giving it to Treasury. Given the BOJ, the BOE and the US Fed clearly have zero expectation of getting similar recent "loans" paid back in anyone alive's lifetime, whether the new money is a loan or a grant is moot, but a loan is apparently more politically acceptable.
So in my view between the RBNZ and the government, they could help solve three major issues in one.
Instead of heading down yet another interest rate drop, that even the RBA admits will achieve little, they could commit say $10 (or 20) billion of direct funding to the government for infrastructure purposes over the next three years.
The signal would suggest to the markets that a one way bet on the NZD is no longer quite the easy money it has been; it would then help get inflation back towards a growth trajectory, infrastructure issues would be addressed in a semi meaningful way, and the housing crisis in both numbers of houses and pricing would be somewhat addressed.
The fact the ANZ pointed us to the article is important. I had thought our commercial banks would resist such moves, but here we have NZ's largest commercial bank saying get on with it.

I agree that the Infrastructure Fund needs to much larger,say a minimum of $20bn and I also agree that just reducing the OCR wil have little effect.

What I am not convinced about is that somehow, this would get inflation back up to 'acceptable' levels, presumably around 2%. I have been convinced for quite some time that low inflation is structural rather than cyclical. If you look at long-term inflation graphs, the trend has been clear for many years and relates to global movements, though RB inflation targeting has also been an important factor.

How come all experts when it comes to housing forget that controlling demand (whatever possible, specially non resident buyer) is also very important.

Just one measure to control non resident buyer along with RBNZ measures and supply will go a long way, hopefully. Even if it is not very effective, does it mean that it should be not be tried.

Exactly - more properties for us Kiwi investors to buy. This is something I am hopeful will be eventually implemented.

I don't know of any out of work builders - could it be that we have a significant capacity constraint here?
Even having more infrastructure ready land, won't lower house prices and it won't increase wages.
In Queenstown the Council has not turned down any housing developments recently and there is land available zoned for 100's of sections - if not 1000's. BUT still the price of land here is over $200K/600m2 site - if you can get in quick enough.
No developer is trying to sell land for less than $200K - even though it costs about $60K/site to get it infrastructure ready.
If the government is serious of getting housing costs down then it needs a dedicated focus on a number of work streams to deliver 10,000's of high density, energy efficient dwellings in a 3 years time.
Can't see it.

Capacity constraints in building are a very good point. The views I've expressed above on a mix of monetary and fiscal approach to the issues of infrastructure partly address that. Our economy does not need major stimulus in terms of consumption or employment- it is ticking along okay in those respects. The issues we all understand are inflated house prices; a lack of housing and other infrastructure for a quickly growing population in some areas, and only slightly related, a perpetually overvalued exchange rate leading to constant pressure on trading industries.
The RBNZ feeding money into infrastructure will necessarily take some time due to the constraints you mention, and that time would be okay. Such a move would though solve the financing such that infrastructure would not be on the never never; and also would signal that real moves can be taken re the exchange rate.

Have been repeated earlier also by many on this website.

Supply though very important but by in itself will not serve the purpose. This is just national party tactic to divert attention as they for some reasons/understanding that they have with foreign friends do not want to take any action on demand otherwise why would they themselves not act along with RBNZ and council.

What is made to understand is that our government is so committed and obliged to Asian with whatever understanding that they have had with them behind closed doors that are so helpless that even if they want cannot act.

Has the government ever mentioned anything about controlling demand - NO. Question is WHY as any ecenomoist or experts will say and are saying that one also have to act on demand specially speculation along with supply - which will takes it own time but need to control demand NOW (RBNZ is doing their part but what about government as RBNZ action by in itself is not good enough but if national government too acts now along with RBNZ will go a long way in controlling the hosing Crisis)

This is to indicate that National Government has No Will To Solve The Crisis as a result Denial and Lies

Yet another commentator who can't use the word immigration.
When a mechanic fixes your car, does he get some paint and paint over the problem?
Of coarse not, so why do our commentators and media dance around the subject using phrases like supply problem?
We need to call a spade a spade and identify the problem to have a serious discussion. Its not racist, we don't owe the World a place to live and sure as hell shouldn't have to pay for the infrastructure needed to house180,000 people in 3 years.
the infrastructure cost for this many people is 50 plus billion. If we have 1million tax payers that's $50,000 each tax payer
Or are we going to just sell them our housing stock and then create slums for our less fortunate to live in.
This countries roads and bridges and hydro dams and hospitals aren't the natural landscape. They have all been built and paid for with just a small debt of $10 billion when this government took office. We now owe 36 billion and have a huge deficit of infrastructure needed for all these people and we have commentators and media who can't use the immigration word because its bad manners?