By Brendon Harre*
Former Finance Minister Michael Cullen recently wrote an opinion piece on housing and monetary policy. To paraphrase him: the Reserve Bank are the Jedi Knights of the economy with interest-cutting lightsabers fighting against the evil empire of inflation. This worked when the problem was stagflation - high consumer price inflation and poor economic growth - but it is not working now when the problem is poor productivity, rising inequality and high house price inflation.
Rather, Reserve Bank Governor Adrian Orr has suggested house prices be included in its financial policy remit - the way it regulates banks. The RBNZ has asked Robertson for debt-to-income (DTI) ratios be added to its macro-prudential toolkit, so it can restrict bank lending to those seeking large mortgages compared to their incomes.
In summary, Adrian Orr is not going to be a Jedi Knight fighting housing inflation but he will continue to protect retail banks from a crash in the housing market.
The Reserve Bank Governor went on to say: “Given the wide range and number of parties involved, and the complexity of underlying issues, there is a need for a single agency or ‘clearing house’ to co-ordinate the government’s response across agencies.”
This statement is not quite asking for an independent housing commissioner, which I will explain could be a way forward, but it is very close.
Michael Cullen sees an opportunity for monetary policy reform “in the current situation to make a quantum leap forward in dealing with some of our needs, which require large amounts of capital.” The primary needs are a big increase in the level of housing construction and infrastructure development, and a large investment in transforming the economy to meet New Zealand’s climate change commitments. There is a strong echo of the First Labour government in this policy prescription.
If the government intends to copy the Michael Joseph Savage Government and use the Reserve Bank to invest in a massive housing, infrastructure, and climate change build programme I would agree wholeheartedly.
Renting in New Zealand is bad - for low-income groups it is the most unaffordable in the OECD - as my previous paper published on interest.co.nz showed. The Government should transition from band-aid solutions like the Accommodation Supplement to comprehensive, long-term solutions like a large-scale public house building programme. But that is not the signal the government is giving.
New Associate Minister of Housing (Public Housing) Poto Williams states the government is on-track to produce 18,000 public and transitional housing places by 2024, or about 4500 government builds a year. This is a significant promise. Without adjusting for population, it would be the biggest government build programme over four years. Bigger than anything seen previously, including the First Labour government. But on a per capita rate it is only half the rate of the Savage government. The promised government build programme is about 12 per cent of total house production (which was almost 38,000 houses consented in the year to October 2020); it is also half the rate of those countries with large-scale public housing build programmes, like Austria.
It is also not clear how the government will go about building the equivalent of 4500 public houses a year. State house builds are currently running at about 2000 a year, although they are on an expansionary trend. There has been no funding announcement for the Community Housing Provider sector, so it does not have a significant build programme. There are some transitional houses, but not that many - currently there is a stock of 3650 with 120 added in October 2020.
Lower quartile rent is inflating faster than average rents and faster than average wages. Source
For the rental housing market, despite some increase in supply, increases in demand is still the greater effect — it is pushing up rental prices, especially at the lower end of the market. As Stats NZ detail in a major review of housing the rental housing market is in even worse shape than thought. The government has tried to respond with initiatives such as Housing First, which created a stock of transitional housing. People are meant to live in these houses for a maximum of 12 weeks, but because there is insufficient long-term housing to move into, residents are staying much longer.
The waiting list for public housing is growing and now exceeds 21,000. This is due to a range of issues, including the private rental sector not catering for those on low-incomes, structural planning restrictions on building, and the public sector having insufficient resources to compensate.
In Parliament, Opposition Leader Judith Collins asked Prime Minister Jacinda Ardern if the $4600 increase in median rents since Ardern took office and the public waiting list ballooning to over 21,000 were signs of a housing emergency.
There are many questions that can be put to government ministers on housing. In effect asking if they are housing Jedi Knights.
The biggest question, though, is whether the prime minister is a Jedi fighting the evil empire of housing inflation. It is quite clear to anyone following politics that National are planning to beat up Labour on housing issues just like Labour did when they were in opposition. Yet, neither party is prepared to go past tokenism and implement a genuine workable housing accord.
Ardern’s recent public comments on housing are closer to former Prime Minister John Key’s then Savage’s, even though Ardern has a portrait of Savage in her office.
By stating recently that the government’s goal is sustained moderation in house prices, Ardern gave the message that the market is too big to fail - that house prices can rise but not fall, and that this price guarantee is government and Reserve Bank policy. And there does not seem to be any suggestion there is moral hazard in these guarantees. Nor even an acknowledgement of the social costs (H/T Bernard Hickey).
The problem Ardern has with progressing a housing affordability agenda is that when the government is distracted by multiple needs, such as responding to Covid-19, housing demand and supply pressures can - and did - get out of balance, meaning house and rent prices inflate excessively. This creates a new, higher floor-price in the housing market and the ratchet effect of the rack-rent process stretches renters and first home buyers (FHB) even further.
Ardern’s second problem is the rack-rent process has created the perception she is soft on housing - that there will be no meaningful consequences if house prices and rents continue to inflate unsustainability. Meaning investors’ and others’ expectations of further capital gains is being reinforced.
Environment Minister David Parker has the task of replacing the Resource Management Act with two new acts - a Natural and Built Environments Act for most consent applications and a Strategic Planning Act for issues like transport - plus a separate law on managed retreat from land threatened by climate change.
This would be a heroic task in the best of times, but with a prime minister soft on housing - like they all have been for the past 20 years (arguably the housing political football started 70 years ago when the cycle of one government building state houses was followed by the next government selling them) - the task becomes mission impossible because no legislation can perfectly align all the involved entities (local authorities, government departments, developers, construction industry, iwi etc.) for all potential circumstances.
Parker has been set a heroic task but he lacks support from the head of his government because the prime minister does not have the credibility in the housing space to get everyone on the same page. David Parker needs a friend -he needs a housing Jedi Knight.
This is not a situation unique to Ardern. The last National-led government under Key faced the same difficulty with housing. New Zealand, therefore, has already seen what happens when the prime minister has their hands tied on housing. Action inevitably degenerates into the various involved parties acting at cross-purposes to each other, blame-shifting and finger-pointing.
Politicians have been in this situation before. The stagflation of the 1970s meant politicians lost credibility to run monetary policy to tame consumer price inflation. In particular, they lacked credibility to change the public’s inflation expectations.
But public opinion needs to change, too. As journalist Andrea Vance says, housing should be a right for all New Zealanders: “we should think of it in the same way we regard universally available services, like schools, hospitals and public transport”.
Successive governments at the central and local level have manipulated the housing situation for their own ends. As journalists such as Bernard Hickey have detailed, they have taken the fiscal benefits from a massive immigration boom yet underfunded the required infrastructure. They have deferred maintenance on out-of-sight infrastructure for decades because they did not want to impose rates increases on homeowners, creating a multibillion-dollar infrastructure deficit. Local government and electorate politicians have actively worked against moderate urban planning initiatives. The political class cannot put the affordable housing genie back in the bottle.
An independent entity with clear targets and tools is required to ensure housing as a human right is delivered for all New Zealanders.
Could an Independent Housing Commissioner be the Housing Jedi Knight that New Zealand needs?
I think it could be if the independent Reserve Bank governor concept is used as a guide.
What would the policy targets be?
I would suggest the following, in order of importance:
- Rents as a proportion of income falling below 30% for the lowest 20% of income earners.
- Median house prices inflate slower than median income increases.
- Housing market remains stable and does not destabilise the wider economy.
What would the tools be?
- Ability to fund an expansion of social housing placements as needed. Preferably using the Austrian social housing model because of its cost/benefit efficiency, its stability over the political cycle, and its transparency in achieving multiple goals - social, economic, environmental, architectural/construction quality.
- Ability to buy land in support of urban area spatial plans and release it at cost for urban development as deemed necessary. As a last resort, the Housing Commissioner should be able to use the power of compulsory purchase if there is evidence of land banking. For each and every instance of compulsory land purchase Cabinet level sign-off would be required.
- Ability to appoint and direct Independent RMA Hearing Panels to review planning regulations, such as occurred with Auckland’s Unitary Plan.
- How to fund this? - the Housing Commissioner uses the mana of their position to publicly request funding as required - something like the Climate Change Commissioner. Or possibly something like a 1% housing fund income tax that Austria has (see programme funding section here) for funding land purchases and capital grants for the social house build programme.
How would this work?
The housing crisis has grown for the last 30 years - it might take half that time again to resolve. Over time, the solution could look like this:
- Housing Commissioner focuses on their first goal - reducing rent as a proportion of income for low-income groups.
- Housing related inequality reduces.
- The Housing Commissioner’s credibility with the public increases.
- Capital gain expectations in the housing market declines.
- There is more investment in other more productive areas of the economy.
- Labour productivity improves.
- Housing Commissioner use policy tools to work on second housing target - house prices relative to incomes.
- Incomes rise faster than house prices.
- Eventually the housing market becomes affordable - first for renters and then for first home buyers.
- Policy success - Yah!
This is a repost of an article here. It is here with permission.