Eric Crampton says the government needs to take steps to encourage councils to get new housing built including adopting the Productivity Commission’s recommendations on urban planning

By Eric Crampton*

The accommodation supplement is supposed to make housing more affordable for low income tenants. But whether it can really do that job depends a lot on market conditions. And, right now, it does not seem that likely that the government’s increase in the accommodation supplement will really do much to help tenants.  

Let’s walk it through. 

The basic economics on this stuff is simple, but counterintuitive. It’s covered in every decent intermediate microeconomics course and intermediate public finance. If you had to condense it to one line, it would be this: the side of the market that responds less to price changes winds up bearing more of the burden of taxes, or enjoying more of the benefits of a subsidy. 

If we think about housing markets and the accommodation supplement, imagine two polar cases. 

Suppose that it were easy to build new houses and that there were not zoning restrictions that barred new houses from going up. Whenever the flow of expected rental income exceeded the cost of buying land and putting a new house on it, somebody would build a new house. That means that rents could never get too much above construction costs because new housing would get built. In that world, tenants benefit from the accommodation supplement. Landlords can’t just put up rents, because somebody else would build a house and get the tenant. Competition works. 

But if we think about a world that’s more like Auckland, things change. If zoning rules and consenting and infrastructure all conspire to mean that few new houses get built if demand increases, then an increase in the accommodation supplement means rents go up. 

This doesn’t require landlords gleefully rubbing their hands together in anticipation of hiking the rents on current tenants, though you do hear stories about that too. It’s really much simpler, and less conspiratorial, than that. When lots of tenants show up wanting to let a house or a flat that’s become available, a hike in the accommodation supplement means that the families wanting the place are able to put more money up when bidding against each other for it. In well-functioning markets, you get more houses built; in worse ones, the price of land gets bid up instead – to the benefit of current owners. So what did the government think it was doing when it announced a hike in the Accommodation Supplement in the budget? It relied on advice from the Ministry of Social Development that rents were not likely to be bid up. 

And that advice has now been released through the Official Information Act. 

The Ministry of Social Development’s paper on this, by the excellent econometrician Dean Hyslop, shows that a 2005 increase in the accommodation supplement did not do much to rents. As is typical for a Hyslop paper, it employs a very nice identification strategy: some parts of Auckland received a more generous increase than others, so Hyslop looks for changes across those different treatments. And he found that there was not much effect. 

Now, it’s worth remembering that, in 2005, the median house in Auckland sold for just under six times the median household income, according to Demographia’s survey. The latest survey has it at ten times the median household income. Housing supply in 2005 seemed more able to respond to price changes than it is now. 

And so it is rather dangerous to extrapolate from 2005 findings on the effects of the accommodation supplement to forecast what would happen in 2017. 

While the new Unitary Plan does ease things, a raft of nested constraints all continue to conspire to make housing difficult. There do not seem to be enough builders to meet demand, and nobody seems to have seen fit to provide new visas letting the tradies who showed up for the Christchurch rebuild stay in the country to help Auckland grow. Infrastructure funding remains difficult, so even if land is zoned, getting trunk infrastructure out to service things is not easy.

And because housing has been broken for so long, finding anybody able to scale up to meet current need will not be straightforward – and the combination of material supply regulations and the Overseas Investment Act would make it tough for foreign companies to come in and help. 

If the government wants the accommodation supplement to do something more than bid up the price of land in Auckland and benefit landlords, while maybe giving enough of an appearance of doing something for tenants to tide them through the next election, it will have to prioritise sorting out the Auckland morass. That means starting to move on the Productivity Commission’s recommendations about changing urban planning in New Zealand, with integrated changes across the system so that removing one blockage doesn’t just mean that the next one down the line becomes the main problem.

And if those changes would take a while to work through, the government should be considering as an interim measure, mechanisms that encourage councils to get new housing built. The New Zealand Initiative has recommended tallying up the GST from new housing construction and rebating it to Councils where the building is taking place. That doesn’t just help them fund infrastructure, but also changes their incentives. Where Councils stand to benefit more from new construction, we might just expect them to allow more of it to happen. 

And the Accommodation Supplement might then have some hope of doing the job it’s meant to do. 


*Eric Crampton is chief economist at The New Zealand Initiative, which provides a fortnightly column for interest.co.nz

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20 Comments

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The accommodation supplement is supposed to make housing more affordable for low income tenants BUT................here it is to get Votes only as can kill two birds with one stone : Poor will feel that it is for them but actually it can also be to support/help Investors / speculators.

Election year.

Productivity Commision:
We recommend that you:
a agree to the inquiry selection process set out in Appendix 1
Agree/disagree
b agree that Commission’s second tranche of inquiries be selected on the degree that
they:
• are relatively uncontroversial given the desire to establish broad political support for the Commission

http://www.treasury.govt.nz/publications/informationreleases/productivit...

They don't want them to look into immigration. The Australian Productivity Commission found there was little to no benefit to Australians from immigration, it had all been captured by the migrants. [bet NZInitiative don't agree with that?]

"The Ministry of Social Development’s paper on this, by the excellent econometrician Dean Hyslop" - no need for the adjective "Excellent" unless Dr Crampton is willing to list the "sub-standard" econometricians. It is just like going to the public lectures at Massey University: every academic is introduced with peans of lovey-dovey praise that use up 5% of the lecture.
Surely adding plenty of immigrant builders to Auckland all of them needing housing will add to the immediate problem. Maybe more worth while trying to slow the flight of skilled Aucklanders - do not forget that immigration into Auckland is so high that the fact that NZ born Aucklanders are leaving in excess of other Kiwis replacing them isn't noticed. The final goal must be Auckland a complete United Nations in miniature with every nationality represented except one.

I wondered if the *excellent* had an element of sarcasm about it?

Dean Hyslop is arguably the best econometrician in NZ - and certainly he's of world class.

Formerly an economics professor at Victoria University of Wellington and now with prestigious consultancy, MOTU.

Thanks, ToThePoint. There was zero sarcasm intended. If I had to point to worse econometricians, I'd start by pointing at myself. If I remember right, Hyslop trained with David Card, and has spent his whole career since doing applied econometrics.

I don't know if Dean is the best econometrician in the country, but I can't name anybody I'd put ahead of him. When Peter Kennedy was alive and visiting us at Canterbury (as he often did as an Erskine visitor), Kennedy would have been the ranking econometrician. He's written arguably the world's best undergraduate text in metrics. When Sir Clive Granger was visiting at Canterbury, he would have been the ranking econometrician - he did get the Nobel for his work in time series econometrics.

When Peter Philips is in the country, he's probably the ranking econometrician. Otherwise...

Assuming 3 people to a home
1,377,000 Auckland Inhabitants
459,000 Homes
9,180 Replacement assuming a buildings last 50 years

45,000 Auckland Incomers
15,000 Homes required

Therefore incomers are 62% of the problem.
As a pure guess half are recent (this year) immigrants - this includes students and various work visas as well as. It is hard to estimate immigrants into Auckland: there is nothing to stop any Kiwis moving to Auckland and some students are exactly that - studying serious subjects at reputable universities and planning to return to their place of origin. Also the old family reunion visa would have had many immigrants simply moving in with their family but that category was arbitrarily frozen a year ago but the totals unchanged so there is probably a 10% larger demand on housing, schools, doctors, etc than in previous years.
Dr Crampton may be right - have developers financed by the government rather than tenants.

Housing in NZ is so broken in NZ, especially Auckland, one doesn't know whether to cry or laugh.
The Unitary Plan, if introduced 10-15 years ago, would have made a huge difference. But it's just far too late.
House prices have elevated too far in Auckland.
A govt mass building programme is the only solution now. Labour's Kiwibuild isn't enough, but much better than anything being dished up by the Nats

Dr Crampton wants foreign tradesmen to build in Auckland. I'm not totally against the idea if and when absolutely essential. However there are only three groups who believe that a country should have an open door immigration policy: (1) extreme right wing neo-liberals (2) extreme left wing Trotsktites (3) Ivory tower academics. In the real world it has been reported that because of demand building labourer wages have increased from $40 to $50 per hour. This will cause the price of new houses to be slightly higher and it will also cause more apprentices to be taken on.
I'm sure Dr Crampton will argue that we all benefit from minimising buiding costs and that a labourer from the 3rd world is the same as a kiwi labourer in the eyes of God. My son started work as a building labourer in Auckland two weeks ago. He is enjoying it. I can't prove the moral argument but I'm happy that we don't have a total open door immigration policy and that my son doesn't have to compete with the world's cheapest workers.

Bob is your son looking at being in construction for the long haul or is it a short term gig? Is he getting paid well? Is the industry upskilling him?

Forever unless he can get paid for playing rugby. Only two weeks employment. Enough money for him to leave home this week. He starts with a zero level skill - after two weeks he has tools.

What I can never understand is why there is a 'skill shortage'.
It just doesn't add up, given our current issues.

Gee there was a lot of noise in that walk through.

Perhaps it would be much easier just to say that the Accommodation Supplement would not be needed if wages were higher for those on low (and now, middle) incomes and the cost of living (particularly in Auckland) was lower.

Maybe there is an excess of labour driving wages down in the low skill/low wage labour market (hence government needs to top up household disposable incomes via an A/S).

Maybe incentives need to be changed to deter excess capital from chasing loss making assets (hence government needs to subsidise those loss making assets via an A/S).

Maybe we need the government to withdraw itself from funding the private rental market - so that these markets distortions are removed. Perhaps at the same time as it announces the removal of these subsidies, it can announce a corresponding lift in the minimum wage.

Landlords will soon adjust prices accordingly, or sell off their loss making assets.

Wouldn't they?

Your comments seem reasonable on the whole.A sudden changemight be too drastic but if announced and then brought in gradually it could work. What about students - would they have to increase their loans? Would they prefer to move to universities with cheaper rents?? Close down Auckland Uni - that might sort out the crazy rents in the CBD.

I suspect there won't be much movement on reforming the bubble-inflating Accommodation Supplement - which I should add I'm receiving - until there's a Depression-grade collapse of the NZ housing market. Then central & local government would be in a better position to undertake a mass building programme.

As for low wages, a Scandinavian/German approach to training would fix a lot of issues. To pay for vocational training for people who would otherwise be stuck on minimum wage or long-term unemployment - while minimising the burden on the taxpayer and employers - one of the least worst solutions would be to increase migrant levies, while slightly loosening the points criteria in return.

I agree with you especially the 2nd para. It needs an education blog but I reckon my son just wasted his last couple of years at school - he would sleep in more often than not but now he is actually working he is up and out at 6:30am. I've trouble knowing it is the same boy.

There is no way in hell the accommodation supplement will ever reduce rents !

Its like subsidizing an alcoholic , the only ones who win are the booze makers and pubs

Anything given to someone for free is simply wasted , and the tenants will willingly hand over this largesse for a "nicer" house .

Good article Eric, thanks

I'd limit immigration to those who can bring their own houses.

That would mean only snails and a handful of crustaceans could settle here.