By Alex Tarrant
Quit whining about tax changes and instead focus your energy on how to boost the supply of low-priced housing, by opening up the fringes.
That’s the basic message from the Productivity Commission, which released its draft report into housing affordability in New Zealand today. See article here.
Sure, we could have had a capital gains tax in place, or indexed interest payments for inflation (something the Reserve Bank’s been looking at since the 1970s, but as yet to no avail). But those settings wouldn't have stopped that bubble which made houses unaffordable, so why focus on that?
We might be able to make some money off those bubbles, but a capital gains tax is not the solution to making housing more affordable.
Would it have discouraged some small scale investors from entering the property market through the 2000s (and therefore meaning more of the housing stock available for potential owner-occupiers who had to rent instead)? Possibly, but only at the margins.
That’s more a story about how investors had first distrusted equity markets and then came to distrust the finance company sector over the last decade. Where else was there to put your money? Yep, you guessed it.
Anyway a capital gains tax might not have stopped these people entering the market, but rather fed through into higher rents.
If you were/are one of the ones gunning for capital gains, thank God (and policy settings, rising building costs and falling construction sector productivity) for the undersupply of housing that has emerged. Your yields have been pretty terrible (below 4% according the Productivity Commission), so you’re in need of those gains if you’re wanting to make any money.
So how do we make housing more affordable? Particularly at the bottom end of the spectrum, where prospective home-owners have been crowded out by rental property investors over the last decade? The Productivity Commission has the answer:
Make it cheaper to build houses.
Pretty simple really.
We need to encourage more large-scale development to replace the small scale building/investment we’ve been seeing over the last decade.
Commission Chair Murray Sherwin said only five firms in New Zealand build more than 100 houses a year. Rather hard to get economies of scale in that case.
Often when land for subdivisions does become available, it’s an incremental step on the boundary of a city limit, constraining a firm’s ability to build at scale, he says.
The solution? Open up the supply of land much more, and cut the costs and time it takes to process applications.
The Commission was little pleased by the Auckland Council’s ambition for 75% of new building work to take place inside the city’s existing limits. It wants to see the council revise that figure downwards. Now.
In opening up city limits, we then encounter the greenfields vs brownfields infrastructure cost argument. How can you build affordable housing on the periphery of a city when you have to pay for new roads, new sewers, new electricity wires, etc?
Well, you’re going to either have to build a new sewer (greenfields), or do a big upgrade on the old one (brownfields/intensification), the Commission says.
Cheaper construction costs for greenfields development might help counter those costs for roads. Sherwin said construction costs for brownfields development rose considerably once a building went up above two or three stories.
In any scenario there’s going to be demand for both types of development. Just get on with opening up the fringes. And do it big time.
To steal a phrase from that dreadful movie Field of Dreams (see clip above): "if you open it, they will come". (FYI, the actual quote is, "if you build it he will come.")
So to save you going through the 260 pages, the report summed up in four words:
It’s land supply, stupid.