Tuesday, May 01, 2007

Housing minister economically illiterate

It is now clear that Housing minister Chris Carter is economically illiterate.

At the end of last week he suggested that the solution to houses being seriously unaffordable -- with the average price being roughly six or more times the average income, as opposed to three times the average income as it has been in earlier times and still is in other markets -- the solution he said is new regulation to force developers to build affordable homes on land made unaffordable by earlier regulations. Somehow he thinks developers will be queuing up to lose money on new projects.

This economic illiteracy was lapped up by an equally illiterate commentariat, including Sainsbury, Campbell, Uncle Tom Cobley and all.

Then last night Carter dreamed a new dream. As the Housing NZ report issued ten days ago concluded, the problem with unaffordable housing is not lack of demand, it is serious restrictions on land supply that have pushed land prices up over 300% across a decade, and the construction of new houses some four- to twelve-thousand units fewer per year than required to meet demand. That serious demand-supply imbalance is what is driving the serious unaffordability of local housing. Carter's dream ignored that altogether. Carter's new dream is not to free up supply -- not to increase capacity, not to remove restrictions so that four- to twelve-thousand more houses can be built every year to house New Zealanders and clear the market -- but to inflate housing demand even more!

Housing Minister Chris Carter said last night [his "shared equity" scheme] would be a way to provide direct financial assistance to buyers faced with prices which would otherwise stop them getting into the housing market. "You would have partial ownership and share the results of any increase in value," he said on TV3 News. TV3 said a pilot scheme was likely to start in Auckland next year which could involve the Government paying for a 25 per cent or 30 per cent stake in a house.

Despite even a high school economics student being able to tell him what happens when you inflate demand while continuing to restrict supply, no one in the MSM has yet to call him the fucking moron that he is. Perhaps that's because they're mostly as economically illiterate as he is.

The answer is not to further inflate demand; it is to free up supply: to shred the RMA; to get the town planners' the hell out of the way and their hands off people's property; to allow the market in land to function just as every other working market does. If the housing unaffordability crisis could show us anything, it should surely be the imbecility and destructiveness of thinking that meddling mends markets. It doesn't: It makes them worse.

Economic illiteracy is not a winning strategy.

UPDATE 1: Right on cue, the economically braindead Herald columnist John Armstrong weighs in with an encomium to statist stupidity that begins by invoking the "spirit" of Michael Joseph Savage, which, says John Junior, "has been passed down through successive Labour ministers holding the housing portfolio," before sinking into a bottomless pit of nauseating stupidity when it calls the illiterate Carter both "smart" and "savvy" in succeeding sentences.

"Labour," says John, "can hardly be blamed for soaring house prices." Well, yes they can, since the Clark Government has done nothing to avert the outrageous restrictions on land supply brought about under the RMA, and everything to encourage an expanding exchange rate and soaring credit.

Armstrong just gets worse every time I have the misfortune to read him.

UPDATE 2: The economically literate Mike E is also a prospective first-home buyer, but he's no more impressed with Carter's dreams than I am.
This is the government proposing to *subsidise* 25% of a properties value. So for most places this would be about $100,000. To put this in perspective, what have I done, to make me deserve $100,000 of your money - why do I deserver it more than you do? why am I so special? The correct answer is, nothing, I am no more deserving of the money you earnt than you are. I can't support the use of force to have my assets subsidised by your work.
Frankly, who could justify that?

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12 Comments:

Anonymous Hamish said...

It's ironic that only people who would benefit from the scheme would be current home owners. The only losers would be first time buyers. Gotta agree: it's a plan of first class stupidity.

5/01/2007 11:08:00 am  
Blogger Matt B said...

Regulation begets regulation.

5/01/2007 12:26:00 pm  
Blogger MikeE said...

As I blogged:

Is it me, or is this idea completely and utterly insane?

As a first home buyer (soonish) you'd expect me to be the first to support anything that would make it "easier" for me to get into property, not having to pay 25% sounds like a good idea from teh outset, but when you actually consider the economics of it, it gets a bit sketchy.

Firstly, this is the government proposing to *subsidise* 25% of a properties value. So for most places this would be about $100,000. To put this in perspective, what have I done, to make me deserve $100,000 of your money - why do I deserver it more than you do? why am I so special? The correct answer is, nothing, I am no more deserving of the money you earnt than you are. I can't support the use of force, to have my assets subsidised by your work.

Then theres the actual economics of it. This is going to drive demand for housing even more, you are giving people more incentive to borrow and purchase, which with current levels of supply staying static at the same levels of growth means that you are going to have an even larger excess of demand over supply.

And any kid who's managed to scrape a C pass out of 4th form economics would remember that an increase of demand over supply will drive an increase in prices of said product.

So - this concept, which is meant to be a solution to rising house prices pricing people out of the market does the exact opposite of what was intended. It uses your money, to allow me to purchase. Then, it increases demand while doing nothing about supply, further inflating prices, with no real positive gain.

So end result is massive amounts of Government spending, but if supply is the same, no real gains. Those who already own property will experiance windfall profits due to government intervention, first home buyers who get in straight away before the market corrects itself might do ok out of it and also make some capital gain - but on average it will do nothing positive.

An this is why an understanding of economics and incentives is required before making policy decisions. While it will likely win votes from people - its unlikely to have any positive effects, but will have some nasty unintended consequences!

5/01/2007 12:54:00 pm  
Blogger Berend de Boer said...

I hope this becomes policy. I will immediately sell my home to a first time buyer and take the 25% additional increase which I will put on my home as well-deserved bonus for the good taxpayer I am.

And move to Australia.

5/01/2007 01:45:00 pm  
Blogger Crampton said...

As an econ lecturer, I can't ask for much better. Last year, I set an exam question for 200-level students asking them to work out why resale royalties are a bad idea for new artists; this year, the government proposes them. The year before, we got to work through what a forward-looking student should do with zero percent loans. This year, I'll get to ask students to map out what happens to prices when you have a near-vertical supply curve and introduce a 25% subsidy to buyers. Students are always happy to be shown that they're rather brighter than our politicians....

5/01/2007 03:00:00 pm  
Blogger MikeE said...

Crampton - do I get a pass?

5/01/2007 03:56:00 pm  
Anonymous Alan said...

YOu know what pisses me off?

i have spent the last 4 years helping people buy their first home, through helping them save, how to structture parents gifts or budget a 100% loan.

i have also spent the last 4 years saving my ass off, while building a business that paid less than when i was a bar manager for the first couple of years, and last year despite earning a lot more, i basically stayed at home and saved.

and for my troubles i got a house, its two bedrooms, not 3 like i want, its cross lease (bottom unit of two) not stand alone, and its in an area that i like now, but had to settle for. and its cheap, why becuase thats realistically what i can afford.

now some lazy who sobs to the gummint will get to walk into a house twice as big as mine for a lot less effort, drive the prices up more, so that when i have actually built some equity (by paying off the loan, not just rising value) and want to upgrade, i have to pay more, becuase i decided to work for my house, not just put my hand out.

I hope this scheme stays in auckland and flounders there, i don;t want to see the greedy local civil servants get a wiff of it.

I wonder what lindsay P thinks of all this. i'll ask his brother in law, it will make an interesting discussion.

Alan

5/01/2007 04:59:00 pm  
Anonymous Hamish said...

Alan - you do realise that your property value will increase significantly as a result of this kind of idea - it would actually be soundly in your interests for it to happen.

5/01/2007 05:42:00 pm  
Blogger MikeE said...

"Alan - you do realise that your property value will increase significantly as a result of this kind of idea - it would actually be soundly in your interests for it to happen."

So will other properties accordingly. It only is in your best interests if you are planning to sell up and go back to renting.

5/01/2007 07:03:00 pm  
Anonymous Hamish said...

...or move out of the high demand areas, or overseas. The point is that current home owners don't loose out, only new home buyers. And presumably if the offer is only for first time buyers then you could expect the price difference between expensive and cheaper houses to flatten (by cheaper house becoming more expensive)... good Alan since (I assume) his house is not at the high end of the spectrum.

At any rate, we can all agree that it's a Bad Idea.

5/01/2007 08:12:00 pm  
Anonymous Nik Haden said...

To me it seems like a reasonably sensible thing for the government to do. It takes an equity stake in a large number of houses and the policy artificially pumps up house prices.

Because of the shared equity component the government gains from the house price increases.

Obviously it is rather dishonest of them to represent that they are doing this to help people, but as a money-making scheme it is quite a lot better than many the government has tried.

It effectively gives them a leveraged exposure to house price increases without the need to take on debt. The return can be almost guaranteed as the government can pump house prices any time it wants to by, for example, imposing high taxes on the construction on new homes or toughening up the RMA.

5/01/2007 08:42:00 pm  
Anonymous Alan said...

I know i will personally benefit in the shorter term, but its a house of cards.

i 'don't' want artificially inflated prices, becuase you can;t be sure what will happen later.

and while it might flattten some of the price differences, allowing me to sell up and purhcase up, don;t you think that if 'first homes' go up, then people with the next level up will want more for theirs.

eg, if you previously would have gotten 300K for your house, and now the 200K house down the road is worth only 20K less than yours, you are going to want at least 80K more for yours (but probably more), which pushes up prices more.

to be completely selfish, i will make more money as i am a mortgage broker as well as a financial planner, but its just a bad idea, and if i was totally out for myself, i would go into government.

and i am also thinking of those clients of mine who have just bought a house, and have scrimped and saved, and can;t afford to raise their mortgage. who could have, for the same level of debt (presumably the govt will not expect you to pay their share as a mortgage), gotten a larger house under this scheme.

i am interested to see how the lenders react. if you buy a 400K house and the govt takes 25% stake, are they putting up actual cash? if so, then you can get a 75% loan, with no deposit. way to stimulate good spending and saving habits helen!

will the lenders still expect you to have some deposit, or is 75% the new 100%. interesting times, and stupid times.

5/02/2007 02:53:00 pm  

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