English's Housing Solutions Won't Work

The housing crisis has been with us for some time and the last Labour Government must also shoulder some responsibility for it. I originally wrote a post about housing four months ago and while it has been a huge issue for all the time that National has been in government it has only been this past week that it has been acknowledged and Bill English has made the first tentative steps to doing something about it. The lack of action before now is probably due to the fact that the crisis has only effected low income earners, who are largely ignored by this government. The fact that English himself once claimed an allowance of $1,000 a week to live in his own Wellington home, is an indication of how removed this Government is from the housing realities for most people. Now that many middle income earners can't to afford to buy a house and many even struggle to find reasonable rental properties, the Government is being nudged into action.

A number of factors have reportedly led us to the current situation (much of the information listed below comes from the Department of Building and Housing Report 2009/2010):
  • The lack of a capital gains tax has meant property investment is very lucrative and this has pushed our house prices up to a level which makes our housing amongst the most expensive in the world
  • The median house price in New Zealand is 5.2 times the median wage and in Auckland houses are 6.4 times the median wage. This makes housing in New Zealand more expensive than New York and Los Angeles.
  • Our housing is generally of poor quality (it has been suggested that the quality of our housing stock is 50 years behind Scandinavia) and the level of abysmally insulated and maintained housing is problematic. The Green's home insulation scheme has supported the insulation of over 100,000 homes but not generally those belonging to the lowest income earners or the cheaper rentals. There are still a large number of leaking homes that need to be repaired (around $11 billion worth).
  • There is little commitment or encouragement for innovation or the inclusion of energy efficient criteria in most new housing construction (e.g. using passive solar heating principles or solar water heating).  
  • Almost half of the current state housing stock are the original state homes built around seventy years ago.
  • The supply of Government housing has not kept up with demand with 350 families on the waiting list for a state house in Auckland alone, many of them desperate. The waiting lists are said to be managed by raising the criteria so that the lists are reduced.
  • One consequence of a housing shortage is the over crowding in existing homes and when this occurs there are often negative health consequences. In 2006 43% of Pasifika people lived in over crowded homes, for Maori it was 23% and for Asians it was 20% (only 4% of Europeans live in crowded conditions). Given the growing shortage of houses these percentages would have got worse over the last six years.
  • According to the Department of Building and Housing Auckland alone will be short of over 90,000 dwellings by 2031. 
  • The cost of building materials has increased considerably, it is 30% more expensive to build a house here than in Australia. It has been suggested that the Fletcher Building's monopoly of the construction industry has a major influence on construction costs. 
  • Due to high construction costs it is uneconomic to build affordable housing, so that almost all new houses are built for the elite market and our new homes are the third largest in the world after Australia and the US. The average floor area of housing being built now is almost double what it was in 1974.
  • With high demand and fewer houses, rental properties are a lucrative business. Even in Christchurch where the shortages are acute the Government has allowed market forces to dictate rental rates, which are now beyond many families and allowing huge profits for landlords. Some families have even resorted to sleeping in cars.
  • The construction industry is losing capacity at a time when it should be in most demand. 15% of the workforce (33,000 workers) have been lost from the industry since 2007. Little has been done in training new workers for the industry and building capacity for the predicted demand.
  • Construction related compliance costs are over five times what they were in 2002.
Given that the Government would have had all this information for at least two years it is extremely concerning how little has been publicly acknowledged until now and only after advice from the Productivity Commission. Bill English has admitted the complexities involved but his business, neoliberal leanings has lead him to the following four solutions: 
  • Increasing land supply - this would include both brownfield and greenfield development and expanding city boundaries. 
  • Reducing costs and delays with the RMA process - This would especially relate to medium sized housing related consents. This may also involve centralizing consent authorities into regional or national hubs and introducing competitor agencies (possibly private?). 
  • Speed up the provision of housing infrastructure - Ensure that the coordination and provision of service infrastructure to housing developments occurs in a "timely" fashion.
  • Improving productivity in the construction sector - Looking at a 20% increase in productivity. 
"Many of the changes that will make a difference lie with councils and the Government expects them to share the commitment to improve housing affordability," said Mr English. He has made sure that he has shifted responsibility from himself and his Government if it doesn't occur. It also looks like developer heaven, with fresh land to develop, cheaper building consents and timely provision of services. With faster, cheaper turnarounds the resulting increase in profits will be welcomed.

What English has ignored is the poor performance of Housing New Zealand and their hundreds of substandard or unoccupied homes. There is also no indication that any of the soon to be constructed "affordable" housing will have to meet any particular levels of quality (other than building codes) or specifications. When Michael Savage instigated the building of the first state houses there was a concerted effort to ensure their quality was of the highest standards for the time (the fact that so many still form around half of current state housing stocks supports this strategy). With the quality of houses largely left to private developers there will also be no such assurance of quality control, houses will be built for maximum profits, not to meet long term demands or to future proofing them by building them to last.

Gareth Morgan also makes the good point that availability of land is not the real issue and claims those who wrote the Productivity Commission report were using dated thinking around how housing can be created (the quarter acre section is no longer necessary). Morgan suggests a "capital" tax rather than a "capital gains" tax to shift investment from property and make the price of housing more affordable for ordinary New Zealanders. 

I have a concern that there has been no apparent effort by this Government to stop the continuing segregation of communities by their socioeconomic status and supporting the removal of state housing from areas of growing affluence is a concerning precedent. If private interests dictate housing developments they would want to maximise profits and having developments of mixed housing will diminish the value of the higher end houses and so not meet that end. Central government has a role in determining the shape of our future communities and ensuring a more equitable approach, otherwise we will head further to the establishment of exclusive or gated communities at one end of the spectrum and areas that resemble ghettos for the growing numbers of poor.

There also needs to be an investment in training new construction workers from the high numbers of unemployed youth and attract back the 33,000 workers who have left for greener pastures. What we don't want is a reliance on overseas workers to meet labour shortages and a plethora of unskilled, but cheap workers who may create difficulties in quality control. We don't want urgency and cutting of regulations to be the catalyst of another leaky building type debacle.

New Zealand is not a poor country in international terms, our level of government borrowing is growing but we are still better off in this regard than most, and we have $12 billion set aside for motorways that largely fail cost benefit analysis. Surely we need to reassess our priorities and have some minimum standards and expectations for how our most vulnerable children and families will be housed. Unlike the motorways, investing in housing will be cost effective through helping alleviate the billions spent on health care and remedial education, partly caused by unhealthy homes. An investment in energy efficient housing will reduce energy consumption and the costs of  having to continually increase power production.

Michael Savage had it right, good accessible housing can make a huge difference to lifting the living standards and aspirations of our poorest citizens and provide a useful boost to our economy.


Anonymous said…

"A number of factors have reportedly led us to the current situation (much of the information listed below comes from the Department of Building and Housing Report 2009/2010):

The lack of a capital gains tax has meant property investment is very lucrative and this has pushed our house prices up to a level which makes our housing amongst the most expensive in the world."

I scanned through the 105 page Report expecting to find the first-mentioned Capital Gains Tax.
bsprout said…
Anonymous, I said much of the information, not all. I generally provided links to stuff not in that report, but if you're interested here's one regarding the CGT
When the Government is almost alone in rejecting a capital Gains Tax (apart from those who most benefit from it), most countries have one and most don't have such unreasonably high house prices, it's short sighted not to consider introducing one.
Anonymous said…
Thanks for the link. Your links are usually most enlightening and worth following. This one revealed little more than this:

By Political Editor Duncan Garner
A top economist says it's naive for the Government not to consider a capital gains tax on housing
the Prime Minister says they don't work and he will not introduce one...
Labour says the Government's needs a capital gains tax on investment property.
“The Government's got its head so stuck in the sand the whole body has disappeared,” Labour MP David Cunliffe says.
Berl economist Ganesh Nana agrees. “The elephant in the room is the capital gains tax.”
Green Party co-leader Russel Norman says the Government is too scared to introduce the tax.

Hardly a compelling analysis of Capital Gains Tax.
Why would TV3 even run that as news?
The article apparently was the response to Government's moves to dampen house prices in Auckland.
No comment from anyone on what is proposed?
Is this standard fare on TV3?
bsprout said…
Good point, Anonymous, I was using the link to show that there is widespread support for a CGT not as a critique of its actual usefulness.

Capital gains form around 40% of the income of those who are our most wealthy and when the majority is untaxed it means that in reality the wealthiest are taxed at a lower rate (in relation to their overall income) than middle and low income earners. A classic example is Presidential candidate, Mitt Romney, who is a multimillionaire and yet only paid 15% of his income in tax (this is despite having a CGT in the US). There are calls for a "Romney" tax to deal with obvious inequities: http://www.slate.com/articles/news_and_politics/the_best_policy/2012/02/the_romney_rule_raising_capital_gains_taxes_is_both_morally_right_and_good_for_the_economy_.html

A perusal of the NBRs rich list reveals that the majority of New Zealand's wealthy rely on Property investment for part or all of their income. Even successful business friends of mine claim that their property investments tend to be more lucrative than what is supposed to be their core business. It is clearly obvious that there is too much money going to non productive assets and inflating the price of property well beyond what its true value should be.

A capital gains tax would shift money to more productive sectors (and hopefully manufacturing) that would give the wider economy a much needed boost. Money only goes to property because without a CGT it is easy money, but we really need investments that can translate to growing jobs, exports and to bring a better balance to our economy.

This next link takes a narrow, academic view of a CGT and, while doesn't strongly support it, it does show it can be done and that New Zealand is unique in not having one. http://www.victoria.ac.nz/sacl/cagtr/twg/publications/3-taxing-capital-gains-burman_white.pdf

Anonymous said…
Thanks again for the link. Pretty heavy going, but worth reading. Perhaps it should be a must read for anyone who favours a Capital Gains Tax.
The complexity of any system, as described in the link, would make it difficult to get agreement on which method was best should CGT seem desirable.
Its desirability, currently, would seem to be that it will only apply to the wealthy so let's do it.
The argument that we are one of the few countries that does not have a CGT is not a reason to have one. We do not have snakes either.
A Capital Gains Tax would reap the biggest return for the Government during periods of high inflation, and the least (even a net outflow) in times of economic meltdown, when the Government's are already in a stressed condition.
High inflation hits hardest those who struggle to keep up at the best of times, whereas those who would prosper from inflated values would keep 80% while the taxman took 20%. The rich will still get richer, and the poor will still get poorer. High inflation is a given with Labour Governments, so understandable that they should favour such a tax, although it is their voters who fare the worst in that economic climate.
Small investors, who might venture into shares, might lose any gains to pay for accounting advice to navigate through the plethora of regulatory "ins and outs".
With houses, if you are buying and selling on the same market, a CGT might make you stay in the same house instead of moving because the CGT will widen the margin between the old house and the new one. The timid amongst us will feel trapped.
The link's conclusion seems to be that the current taxation regime is far from perfect, so a little more imperfection won't matter.
Anonymous said…
"A capital gains tax would shift money to more productive sectors (and hopefully manufacturing) that would give the wider economy a much needed boost. Money only goes to property because without a CGT it is easy money, but we really need investments that can translate to growing jobs, exports and to bring a better balance to our economy."

I don't think you can conclude that a CGT would shift money to more productive sectors. Many people regard the share market as gambling, and huge payouts to CEOs and directors as creating a poorer return to the investor. Houses are "bricks and mortar" that survive most situations. Starting up businesses is not the realm of the faint-hearted, and most fail within two years. Entrepreneurs are special folk who are prepared to back themselves to the hilt. Investments that translate into growing jobs are for those with huge self-belief, not for the dabbler with a few dollars to spare. Industry and commerce are not "as safe as houses".
If I was in the market for investment, what would you suggest was a better option than a Bank Term Deposit? (Please be reasonably specific).
bsprout said…
Anonymous When property prices continually rise at a rate well above inflation, and there is little tax on this income, it will always attract investment because it is easy money (and as you say far more stable than the share market).

As I mentioned before a friend of mine puts any extra money into property rather than his business because it achieves a higher return. I would have hoped if the property market was cooled down a bit then it may make people think about reinvesting in their own businesses, in R+D and concentrate more on exports. I wasn't thinking about the average income earners investments I was really referring to those who have the most capital to invest.

The manufacturing sector is probably our biggest employer and unless we can get people to concentrate their money and energy into productive business we won't increase jobs or income from overseas.

The huge levels of private debt we have is largely because of borrowing to purchase property (private homes, commercial property and farms) and this just feeds the Australian banks who are making huge profits at our expense.

Most income earners should be able to afford a reasonable home that doesn't cost 6 times more than their annual income (it should only be about two times) and keeps them trapped in a high debt situation for most of their lives. Mortgages should be easily managed and be able to pay off in 10 -15 years.

I think that you are being overlay simplistic and talking about extreme economic situations. Your claim that Labour Governments mean high inflation doesn't stack up, especially with the last Labour Government that was economically conservative and ran government surpluses.

The poor have suffered from a sort of reverse inflation currently when their incomes are not keeping up with inflation but food, housing and power is increasing at a much higher rate. Inflation is being currently managed by keeping wage increases low. Some level of inflation is necessary but where it occurs is important when we are trying to lift household incomes.
Anonymous said…
"...... property prices continually rise at a rate well above inflation......"
Moreso the greater the rate of inflation. Not so much when inflation is low. That is why it is important that inflation is kept under control.

"As I mentioned before a friend of mine puts any extra money into property rather than his business because it achieves a higher return."
Without knowing what sort of business your friend runs, comment is difficult. Has your friend reached the limit of market share? If your friend expanded further and then was forced to retrench, how many other people would be adversely affected? Is your friend using returns from his business to buy property rather than paying down money borrowed for the business (which is tax deductible while money borrowed for the property would not be)?

"I wasn't thinking about the average income earners investments I was really referring to those who have the most capital to invest."
The average income earner was typically the one who got burnt in the share market excesses of the 1980s. They were the ones who got involved in the "share clubs" that abounded in towns all across the country. The same thing happened in the early 2000s. The average income earner went to property seminars where the "white shoe salesmen" told them how to borrow 100% of the development costs on apartments (mostly), houses, and commercial syndicates. The banks were falling over themselves to lend them money. House prices trebled in some places between 2000 and 2007.
What would happen to house prices if the purchaser was required to have a 40% equity deposit?

"Your claim that Labour Governments mean high inflation doesn't stack up, especially with the last Labour Government that was economically conservative and ran government surpluses."
Labour 1972 to 1975: Inflation grew from 5.5% to 15.5% in three years.
Labour 1884 to 1990: The obscene sharemarket excesses and property development. Interest rates into the high 20s
Labour 1999 to 2008: Massive Government spending creating highly paid extra public service employment jobs. Massive rises in value of residential property. High interest rates.
bsprout said…
Anonymous, I also agree that high inflation isn't good but not as the single focus and there has to be careful thought around how inflation is managed. When property prices rose interest rates were increased which mainly affected lower income earners. At the moment inflation is being managed by keeping wage increases low and yet power charges and house prices steadily rise. The Government has even raised GST.

At the same time CEO salaries are going through the roof and the wealthiest have increased their wealth by 20%. One of the key ways to manage increases elsewhere is to keep general wage increases low.

Why would anyone reinvest in their business when it provides a modest return and property is so much stronger. http://www.chranz.co.nz/pdfs/rbnz-trends-and-cycles-in-new-zealand-house-prices.pdf

I agree that the banks are hugely responsible for the extent of borrowing. A few years ago we wanted a modest extension to our mortgage, our income was assessed and the bank wanted to give us the facility to borrow hundreds of thousands.

I am not really a Labour supporter but you are being a little dishonest with your figures to show there is always inflation under a Labour Government. Some of the highest ever levels of inflation have been under National: 17% in '76 and 18% in '80. We currently have the highest inflation in 20 years under this National Government.
Anonymous said…
"Why would anyone reinvest in their business when it provides a modest return........"
With or without property prices, isn't this the dilemma in these difficult times?

".....the bank wanted to give us the facility to borrow hundreds of thousands."
You weren't tempted to start a small manufacturing business with the funds?

What would happen to power prices if the aluminium smelter closed down?

The nuclear power option is not valid in NZ because we do not use sufficient power to justify a minimum-economic-scale plant. Besides it would need to be built close to the biggest need , which is Auckland.

Electricity is still cheap, and extremely versatile. What adds to its cost in NZ is transmission from generator to end user and the losses incurred in that transmission. Ideally we should shift Auckland to Otago.

You accuse me of being a little dishonest regarding inflation under Labour when it was higher under National in 1976. Inflation was ramping up under Labour from 1972 to 1975, trebling in those three years. That trend was difficult to arrest. I thought it was higher than your 17% in 1976. You will recall that Muldoon introduced the wage and price freeze to "break the inflation cycle". He argued that people lived beyond their means to buy goods that would be so much dearer if they waited until they had more money. If they knew the price would be the same in a years time, they might put off that purchase. As Chris Trotter noted recently, Muldoon got inflation down to 4% before leaving office in 1984. Of course inflation took off again with the change of Government, but you know that.
When Labour won in 1972, it was such a convincing victory that every observer, including National supporters, believed Labour would be in power for at least two, and probably three, terms. The massive turn around in support in just one term was because so many people were hurt by that inflation. The most badly hurt were Labour voters.

"We currently have the highest inflation in 20 years under this National Government."
Currently, or last year? Was that a one-off reflection of the lift in GST in Oct 2010? Or am I being a little dishonest again?
Is this Reserve Bank inflation graph reliable ? Current to Oct 2012, I believe.

Do you have any guesses as to what will happen to inflation if we get a Labour/Greens/Mana/NZ1/Maori Party Government in 2014?
bsprout said…
Anonymous, using your own inflation graph you can see that the years spent in high inflation over 6%. in the last forty years was around 17 years. 11 of those years were under a National Government and only six (almost half) were under a Labour Government. The highest inflationary peaks over the last twenty years have been recorded under this current National Government.

I accept that your graph is probably more reliable than the one I used.

My guess as to what inflation would do under a Labour/Green Government would be that inflation may remain much the same as at present. However, I would say that inflation on its own is not a reliable measure of a well managed economy. I would rather measure the equitable nature of income spread. I do not believe that everyone should earn the same but in tough economic times everyone should share the burden of a struggling economy and when times improve increased productivity and income should be shared. We currently have our wealthiest celebrating a 20% increase in income while the median family income is dropping.

I also think Russel Norman makes a lot more sense than Bill English when he describes what we need to do at macro and micro level. He believes that Governments should be involved in ensuring our economy works for most New Zealanders, not just the top quintile, as most successful economies do. He doesn't believe, like Bill English does, that a small economy such as ours can rely on purely "market forces" to deliver the right outcomes. Market forces tend to be reactionary and operate in the short term, we need to have longer term planning and work towards a more sustainable economy. We also need to provide incentives for businesses to become more energy efficient and make sure our "clean green" brand (that 75% of our exporters rely on) has some basis in fact. We were top in the OECD for environmental management and in the last few years we have dropped to 15th and are no longer publishing environmental overview reports. Branding is extremely important for insuring export incomes and we are close to losing ours.
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