Ryan Greenaway-McGrevy on housing supply, urban planning, earthquakes, rent controls, transportation, foreign buyer bans & more

Ryan Greenaway-McGrevy on housing supply, urban planning, earthquakes, rent controls, transportation, foreign buyer bans & more

Today's Top 10 is a guest post from Ryan Greenaway-McGrevy, a Senior Lecturer in Economics and the Director of the Centre for Applied Research in Economics at the University of Auckland. 

As always, we welcome your additions in the comments below or via email to david.chaston@interest.co.nz.

And if you're interested in contributing the occasional Top 10 yourself, contact gareth.vaughan@interest.co.nz.

See all previous Top 10s here.

1. Oversupply? What oversupply?

Kevin Erdmann at the Mercatus Centre reckons that there was no over-supply of housing prior to the housing crash in the US.

It is an argument worthy of careful consideration. Many (myself included) have long ascribed to the view that any housing crash in New Zealand could not be as bad as in the US because supply has been so restricted here. If Erdmann is right I would have to revisit that view.

2. Subsidising the mansions.

Jaap Weel at the Tech for Housing Blog discusses how restrictive land use regulations subsidise mansions in the US.

A similar point could be made for Auckland. Purchasing a ‘heritage’ villa in the inner suburbs will set you back more than a million dollars these days – putting them out of the reach of most Auckland families.

But think about how much more expensive these suburbs would be if homebuyers had to compete against property developers looking to level the site and build apartments. Much of the inner suburbs are zoned Single House under the Auckland Unitary Plan – and that represents a subsidy for the households that are wealthy enough to buy into those neighbourhoods.

3. Zoning in.

The Californian state legislature looks to take zoning authority away from cities. That is a bold move.

Senate Bill 827, written by state Sen. Scott Wiener (D-San Francisco), would loosen or eliminate restrictions on height, density, parking and design for residential properties near major rail and bus stops

However, the latest news suggests that high-rise apartments have been stripped from the bill.  

Nonetheless, Salim Furth at the Mercatus Center reckons the law would decrease rents in LA and San Francisco by about 5%.

4. Transporting the population.

New research explains why developing economies are often highly-urbanised despite being more dependent on agriculture: Transportation costs.

The corollary is that developed economies have inherited cities that are more evenly-distributed. Paul Krugman ponders whether the smaller of these cities will survive, and concludes that it will be an uphill struggle for regional development policies to preserve their viability.

5. Put a cap on it.

Rent control is making a comeback in the US. It seems that supply cannot keep up with demand, leading to a call for rents to be capped:

Elena Popp, founder of the Los Angeles-based Eviction Defense Network, said expanding rent control is the best way to protect affordability.

“We cannot build our way out of a crisis of this proportion,” she said.

A friend of mine subletted a rent-controlled apartment in in Washington, D.C. She paid market rent to her “roommate”, who held the lease from the landlord at much cheaper rent-controlled rate. Unsurprisingly, her roommate was never there, but she did keep some belongings locked in her “bedroom”.

Is there a point at which the cost of living becomes so expensive that rent controls would be the best of a terrible bunch of options? A note to our local policymakers – please sort this mess out before we reach the point where such drastic measures are required here.

6. Shake it up.

This detailed NYT article on the significant risks that earthquakes pose to apartment buildings and housing in San Francisco offers more than a few lessons for us here in the Shaky Isles.   

7. Foreign buyer bans, housing development, and lessons for New Zealand.

As Vancouver continues to debate a foreign buyer ban, this Op-Ed piece in the Globe and Mail suggests Canada should follow Singapore’s “dual-track” policy by creating massive government-funded housing developments for its citizens.

Today, 80% of 3.8 million Singaporean citizens and permanent residents live in more than one million public Housing and Development Board apartments. HDB flats, as they are called, are affordable, safe, modern and well served by amenities. The country’s 1.8 million non-citizens and wealthier Singaporeans occupy private housing that are among Asia’s most expensive.

Are there any lessons here for New Zealand? Following the Singaporean model would mean putting Kiwibuild on steroids, and we haven’t seen this kind of government intervention for over a generation.

It is worth noting that Singapore is one of the few countries that ranks higher than New Zealand in the Heritage Foundation’s Economic Freedom Index – a measure of an economy’s competitiveness and openness – yet it is not averse to large-scale government intervention when necessary.

Would opponents of our own foreign buyer ban would welcome this kind of state involvement instead?

While we are on that topic, there are good arguments against our government’s impending ban on foreign buyers.

Unfortunately, there have also been some less-convincing arguments put forward over the past few months. To round out this week’s top ten I will look at some of the arguments that don’t really fly.

8. It’s xenophobic.

Some have gone so far as to suggest that it is racist. This is an easy argument to debunk, since the ban applies to non-residents irrespective of their ethnicity.

It’s also a bold claim to make about a country with one of the highest foreign-born populations in the world. Nearly one in four kiwis was born overseas, which is much a much higher proportion than that of the US or the UK. If anything, we seem to be more welcoming to people from overseas.

But if we are going to start a conversation about ethnicity and home ownership in this country, I would humbly suggest that we start with the fact that the proportion of Pasifika people living in owner-occupied housing plunged by thirty-eight percentage points between 1991 and 2013. The figure for Māori is not much better, at thirty-two percentage points.

Let that sink in for a moment.

Home ownership comes with a lot of benefits in New Zealand – particularly for families, which tend to need stability in order to thrive. It really is unacceptable that any community in our country would be so severely marginalised.  But aside from some brief coverage, this sad fact is not persisting in the headlines.

Perhaps it is the things that we are not saying, and the conversations we are not having, that really reveal the ongoing battle with prejudice in our country.

9. It is anti-free trade – and our economy depends on free trade.

This is another easy one to debunk. Trade refers to the exchange of goods and services – production, in other words. But land is not produced – in fact it is an input to productions. That means land - and housing - is fundamentally different to milk powder or lamb exports.

Need it be said that building an economy around selling-off irreproducible assets is unsustainable?

Nonetheless, this view resonates with the all-to-pervasive idea that free markets are always best. But residential housing will never be a laissez-faire market – and I am willing to bet that most of us like it that way.

In a free property market, I can buy the place next to yours and turn it into an iron foundry. Or a night club. Or both. I hope you like C & C Music Factory, because I do. But I digress.

The vast majority of us want various regulations to protect our properties and neighbourhoods. But make no mistake, those same regulations infringe on your rights as a property owner.

Free markets are integral to the ongoing wealth of our society, but they cannot solve all our problems. We must remember that free markets are a means to an end, not the end in itself.

10. Fewer luxury golf courses.

We have families living on the streets and kids growing up in motels.  But if we are not careful, we could end up with fewer high-end golf courses.

I am not even sure this is a sound argument, since golf courses like Kauri Cliffs are profit-seeking businesses, and we continue to welcome foreign direct investment.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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25 Comments

I have argued for Rent Controls in the past, and as many have pointed out to me, internationally these are a dismal failure. But having followed up the criticism of me and my argument, i researched the documents recommended and found that my suspicions were correct - rent controls in isolation are risky and generally do not work. By the time Governments have introduced rent controls, the problems with respect to housing have become too big and too complex for a single piece of regulation to be effective. In league with rent controls other regulation must be included which must cover the standard of the accommodation, and prevention of land banking to ensure all available property is rented. This should prevent the creation of slums and ensure the supply is maintained. i also believe that such regulation will take quite a few people out of the property investment area, reducing the overall cost of homes and allowing First home Buyers back in at more affordable costs.

Equally I am concerned about the fall in Maori and Pacifica ownership, and suspect that in part it is also a consequence of the overall Free Market Economy model which generally has had a greater adverse impact, (because these groups are over represented in the lower socio-economic groups), as well as the housing crisis.

Golf courses are one of my (many) hobby horses. Some clubs are privately owned - many on council owned land. If you look at the value of Golf courses owned by Auckland Council it is in the range of $2-3 billion. In other words the inherent subsidy of golf is greater than the subsidy of public transport.

This is also true of bowling clubs, where Auckland bowls have a documented policy to quit land they own, sell the assets and move to Council-owned sites with a couple of million in their pocket.

You touch on the inherent subsidy of white middle class interests in the zoning of 'leafy suburbs' . It amuses me to hear people rail against the Treaty Settlement where there is so much massive on-going subsidy of the narrow interest of a narrow interests of middle-class communities.

Are you saying the value of golf courses is increasing $2-3billion per year? Surely the subsidy of PT is an annual figure.
Just as a thriving PT benefits car drivers so do golf courses/bowling greens for nearby home owners whether they play or not. I lived in London with all its open parks (inherited from royal hunting grounds) and preferred it to when I lived in NY with its minimal public parks [with the exception proving the rule - wouldn't Manhattan be hell with its central Park?].
BTW the nearest golf course or bowling green to my house is about 5km.
In the UK during my life councils sold off school playing fields for a one off profit and an eternal mistake.

Absolutely correct on Number 2. My home was zoned single home and is not subdividable by right under the new plan as it's not > 800 m2. While my home is expensive with a supposed value of $2,500,000 the cost per square meter of land and occupied space is lower than most other options, which is why I can't get value in downsizing. I'm economically trapped in a gilded cage (cue sounds of violins)

10
up

#8 Xenophobic. ??? I have a belief we would do much better if we had policy that aimed to benefit New Zealanders. Including highly restricted immigration, limits of foreign ownership, and sometime frank protectionism. I am strongly of the view that we should put New Zealand first. (No, not the political party)
Many would argue thats benefits us, and that's ok. But it is hugely aggravating to hear those proposals described as xenophobic and racist.

Nonetheless, this view resonates with the all-to-pervasive idea that free markets are always best. But residential housing will never be a laissez-faire market – and I am willing to bet that most of us like it that way.

In a free property market, I can buy the place next to yours and turn it into an iron foundry. Or a night club. Or both. I hope you like C & C Music Factory, because I do.

A very important point. Actual free-market exponents are incredibly rare. Most people simply want regulation that favours them.

Yes, but then there is the competing interest between the incumbent entitlement and what rights others have to take/diminish some of that entitlement. If it's open slather it will be those with the least resources that will end up worst off.

Yes, so the point is we should avoid the absurdities we see posted sometimes, e.g. "These nasty people just want to regulate everything, they think they know what's best for my life, we just need government to get out of the way, it's Orwellian to have government thinking of laws to create good outcomes for more people, nanny state!" and be a little more realistic about things.

Rick - a poor analogy that confuse building and noise. There would be no problem building a combined iron foundry and night club next door to me so long as you keep to noise control regulations. It gets interesting with rules about shading the neighbour - so the 2 metre fence seems a decent if arbitrary regulation to me. BTW a previous owner attempted to install a 1.5 metre retaining wall and then add a 2 metre fence on my property - fortunately for my neighbour that was knocked by by council planning consent.
Arbitrary rules can work so long as they are fairly clearly understood by everyone and do not change like yoyos. Ref city driving limit of 50kph.

Not at all.
In the case you assume laissez-faire, you also assume perfect mobility of labour and some notional indifference condition between noise and value.

No regs, no rules, no problem:

https://youtu.be/LaTGrV58wec

.

Ok. I'm driving on the right from now on.

Number 7. Having worked in Singapore I agree these HDB flats work well. I believe the reason they work is because Singaporean people are law abiding citizens who co-exist well and have mutual respect for each other whereas if 1 Million of these were built in central Auckland the undesirables would take over and turn the places into slums.

The only way it would work would be a dedicated policing force and laws made specifically for the people living in or visiting these apartments.

Having been brought up in state housing (wasn't John Key too?) but in the UK so long as a broad cross section of society live in them all is well. It is once they start empathising need while curtailing numbers that problems occur.
BTW the house next door is a state house with nobody living in it since November - does anyone know how I can find out what is happening to it? It looks OK to me and having known the previous occupant for 15 years fairly sure it is not a meth contaminated house and if it was why no work being done to it?

On the issue of rent control. Firstly Phil Twyford has promised no rent controls. So there clearly is a very high chance of rent controls being introduced. No point in making a promise then not breaking it.
My understanding of the tenant laws in USA states is where the percentage of renters to owner occupiers exceeds 50% then more tenant friendly laws are passed. New Zealand has had rent controls in the past. They last as long as the party who passed them stays in power. Nuf said!

There is a high correlation between these myths and the views opined by one Mike Hosking (I note he figures in the links more than once), I'm not sure if it's an indictment of our media or our society that a clearly deluded and self absorbed individual get so much attention, his free trade, market forces and investment views regarding shelter beggar belief and should be ignored.

Thank you - that was written with great self-control.

#1 Undersupply of housing: just to get my head around today’s voodoo economics...with interest rates virtually certain to rise at least 2% in the next 2-3 years, one can see a time soon where there will be no bids at auctions. Will our economists still be calling it a “shortage”? I guess if you classify an economic “need” for housing as unfulfilled, then there will always be a shortage, as there will be those who “need” a house but couldn’t even afford to scrape $1,000 deposit if that was the requirement.
#5 Rent control: that would be a sure fire way to destroy the rental market here. Private landlords would logically exit the market if returns were not covering costs and an acceptable return on capital (already happening). What then...the govt just increases state house supply and becomes the landlord for a major chunk of the population?

#5 Rent control: that would be a sure fire way to destroy the rental market here. Private landlords would logically exit the market if returns were not covering costs and an acceptable return on capital (already happening). What then...the govt just increases state house supply and becomes the landlord for a major chunk of the population?

Is it? According to the lastest corelogic report:
"Movers continue to bide their time, so this leaves multiple property owners as the key buyer type of interest. After easing off in the wake of LVR restrictions, they have returned their share of the market to 37%. To date, extra regulations around the
provision of rental property do not appear to be deterring investors"

That was nationwide, for Auckland they are at 40%. First Home buyers are 22 and 24%

#5. Demand to purchase housing falls immediately. Prices would fall to the point where rental yields are attractive at the rent-controlled rate. So current landlords would take a hit, but there's nothing they can do about it. Meanwhile first time home buyers get a chance to get into the market at a reasonable price.

The problem with rent controls is that they remove the incentive to make a house attractive. Although when I ask people from Europe - where rent controls are common - they seem to think their housing is up to scratch.

#3 Zoning: California has the highest net migration figures of any state in the US, so it’s not exactly up there on the desired states to live in list, for very good reason. Rampant regulation, on a par with the period during the decline of the Roman Empire, is evidence of the decline of California, so it’s not a model that we should be looking at.

2 - subsidising mansions.

But think about how much more expensive these [inner] suburbs would be if homebuyers had to compete against property developers looking to level the site and build apartments.

A bit less than 15.3% in Ponsonby, if I read your last post correctly.

Try comparing mansions in Whitford with a suburban development in Howick or Beachlands to see what a real subsidy looks like.

https://www.interest.co.nz/opinion/93280/rezoning-allow-more-intensive-d...

#1. Missed the point 1. As per your article:

‘There are two very different housing markets within the United States: the Closed Access market, where new housing is highly constrained, rents rise relentlessly, and households are forced to make difficult choices as housing expenses eat up their budgets; and the rest of the country, where homes can generally be built to meet demand, housing construction is healthy, and housing expenses remain at comfortable levels for the typical household.’

In Texas, ie ‘the rest of the country,’ where ‘homes are generally built to meet demand’ ie no over or under supply,’ had the least movement in house prices re the GFC. There was no bubble in the rest of the country to begin with, so no bubble to burst. Prices remained stable, pre, during, and post GFC at approx.. 3x multiple income.

Restrictive/Closed Access markets have booms and busts, both in supply/demand and price, with the curves being counter cyclical ie volatile in supply/demand and price. In less restrictive markets the curves lie almost on top of each other and the price remain low and stable.

#2 Missed the point 2. It’s not the house is artificial cheap or subsidized, but the restrictions placed on all the other land makes them a lot more expensive than it should. Old villas on large sections are no more subsidized than rural zoned land means that farmers are being subsidized.

If these restrictions were removed, then developers would buy the land that was the most cost effective to develop, which wouldn’t be the costly done up villas, but the empty/run down/derelict sites and buildings.
And if these historic villa areas were worth preserving then the owners can always put private covenants on them to preserve it in perpetuity.

If you want to find solutions to NZ’s housing unaffordability, you need to look to those jurisdictions that already have true affordability, not those that have the same problems we do.

Did we not have rent controls back in the 70's? Did they not remove them as we ended up with not enough rental properties.