Thursday, 6 December 2007

Maryan Street: Making housing unaffordability worse

Another day, another move by government to make life worse.

After years of deliberating over what, if anything, to do about rapidly increasing land costs, compliance costs and the unaffordability of housing (in major NZ cities it's now officially seriously unaffordable) former housing minister Chris Carter demonstrated back in May that he wasn't just illiterate when writing emails, but he was also economically illiterate.

His solution to the affordability problems caused by earlier regulations making housing seriously unaffordable was to be new regulation forcing developers to build affordable homes on land made unaffordable by earlier regulations. Brilliant!

Before handing over the reins of his ministry to Maryan Street, he prepared a bill along those lines which she is now peddling with even less understanding of the issues that cause housing unaffordability than Carter had. It deals with the serious problems that are causing rising house prices by making things worse for those building houses; by insisting that developers who are already hamstrung by rising costs simply be forced to build cheaper houses, and on land often worth far more than the houses they'll be forced to build.

King Canute could have done no better.

The bill purports to foster a method by which more affordable housing can be built: it does so by making life impossible for the builders and developers who will deliver them.

On top of all the regulatory hurdles already in place for those building new homes, this bill adds one more: the decree that developers, whose margins are increasingly slim, will have to add so-called 'affordable housing' to their developments -- low-cost housing on high-cost land; land made more expensive by the meddling of planners -- leaving any profits to be made from these homes to the purchasers who subsequently onsell them (which may happen relatively quickly). As I said when this nonsense was first proposed:
This will not result in an increase in affordable housing: it will result instead in developers' margins becoming even slimmer, and their ranks as a consequence becoming even fewer. Fewer developers with ever-slimmer margins will do nothing to decrease galloping demand, but it will help to even further decrease supply (and to demonstrate once again that the laws of economics are not be be repealed even by the decrees of a minister).

Carter has learned nothing from Canute, or from history -- or from the Law of Unintended Consequences. The history of government controls is like the story of the Emperor's New Clothes in reverse: New controls are added all the time in order to fix the problems caused by previous controls, but no one is listening to the little boy who is saying, "Why not just take off the controls altogether, and then you won't need to make up new ones." Why not just get governments both central and local the hell out of the way altogether?

Ever-increasing and ever-higher interest rates designed to squelch booming housing prices; the mortgage levy; the de facto cartelisation of NZ's 'big five' banks; now a decree that more affordable homes be built ... all measures desperately calculated to fix the symptoms of exploding housing costs while ignoring the regulatory causes.
As long as the regulatory causes of galloping unaffordability are ignored, unaffordability will continue to increase, and the working lives of builders, designers and developers made more onerous. But don't just believe me. The same scheme has been a disaster in all the countries in which it's been introduced, from Ireland to Britain to Canada to the US. The US figures (described by Owen McShane) are representative:
Over a ten year period, in US markets where the mandates had been applied, supply reduced, on average, by ten percent and house prices increased, on average, by twenty percent. This does nothing to make housing more affordable and indeed only makes things worse. Also, the restraints on resale actually made those "lucky" enough to acquire a "below market" house ended up much worse off than the rest of the population.
McShane's comments are backed up by research presented at a recent conference in San Jose. Economists Tom Means, Edward Stringham, and Edward Lopez presented Below Market Housing Mandates as Takings: Measuring their Impact a draft chapter from a book on "takings." The three economists have updated their 2004 findings and present more rigorous and detailed statistical analysis. "Their conclusions," says McShane, "should kill off any thoughts of forcing developers to provide a percentage of below market priced housing in return for development consents." These three University economists conclude:
Over a ten-year period, cities that impose a below-market housing mandate on average end up with 10 percent fewer homes and 20 percent higher prices. These results are highly significant. The assertion by the Court in "Home Builders Association v. Napa" that “the ordinance will necessarily increase the supply of affordable housing” is simply untrue.
Don Brash, now Chairman of McShane's Centre for Resource Management Studies, supports these findings, saying
We have been warned, and before any government forces New Zealand home builders and land developers to provide houses at below market prices someone will need to demonstrate why these findings regarding supply and price will not apply in the housing markets of New Zealand.

That will be a difficult task because both papers are based on the simplest and most firmly established economic principles linking supply, price and demand."
We know that Labour cabinet ministers have no interest in repealing law. I wonder then why they think they are able to repeal the laws of supply and demand and price?


  1. Maryan Street was on National Radio this morning explaining how she thinks this measure will reduce land prices. I'd have failed a second year econ student giving her explanation. Absolutely nonsensical.

    Stringham was a classmate of mine at George Mason...good to see his housing study being picked up...

  2. It was hearing her 'explanation' that fired me up to write the post. She's either dumber than a thicket of potted plants, or she's 'just following orders.'

    This new law will get the problem out of the headlines until election day by allowing the dumbarse pricks to say they've "done something."

    Meanwhile it will be biting everyone else on the arse.

  3. It is exactly what Kiwis need and deserve. Meanwhile for those already owning property, this will increase the returns and increase the cap values. Ironic that a socialist govt is doing this. Perhaps they're aspiring slumlords themselves!


  4. I heard Maryan on National Radio. You could almost hear the fear in her answer. I would guess that she is familiar the law of unintended consequences. I would guess that she can see it rearing its head in this arena, but she has recived the hospital pass and must run with the ball.
    It's something for the building industry, developers and housing charities to raise in election year. Oh wait, they will only be able to spend up to $120k...

    I foresee developers landbanking, awaiting a change of government...

  5. Meddling socialists sure know how to turn the motor of production off. Why would one bother being in the business if your production is dictated by an unproductive busy body?

    Flashgordon is right, landbanking would be likely, until developers are regulated into production, or have their land nationalised.

  6. or you just go ahead with your development and the very very last thing you build are the so called affordable homes, so as to not reduce the value of the development. Then when you come to build it, all the surrounding properties will have lifted their value and the value of the affordable home, so it is no longer affordable.



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