Wednesday, 13 February 2008

More meddling while houses turn (updated)

Attention is finally being paid to the problem of housing unaffordability just as the housing market itself shows signs of turning, and there's naturally a lot of talk this morning about the policies announced to combat the problem of housing unaffordability -- specifically the problems of over-regulation and consequent undersupply which have been compounded by the massive amounts of credit pouring out of government printing presses.  (You can see what I said yesterday about the policy announcements here and here.)

Affordable homes in the world's cities cost about three times the average incomes in those cities.  In New Zealand's main cities that factor is now closer to seven.  (See studies here.) There is an affordability problem, and even a thirty percent market correction won't fix that.

Despite taking at least half-a-dozen years for politicians to even notice the problem that they themselves created, there's nothing new in the unaffordability problem.  Let me make it simple.  Over-regulation of land and construction has pushed up land prices and strangled construction on the little land the planners have left available.  What we now call housing unaffordability we used to call a housing shortage.   The main difference now is that for at least a decade the printing presses of the world's central banks have been pouring credit into people's pockets, which in NZ has mostly found its way into the under-supplied housing market -- a market that's about twelve-thousand houses a year short. 

Too much credit chasing an artificially restricted supply of houses and, 'bingo!' you have an unaffordability problem. 

If those huge price rises happened in the market for any other product -- if petrol, food or phone services rose by the huge amounts that houses have -- there'd have been an outcry before now.  That there hasn't been is first of all because middle class NZers have been able to borrow on the back of their house price rises, making them feel richer than they really are; and, second, because incumbent governments generally like middle class voters to feel richer than they are, which tends to come back to incumbent governments in the voting booths.  (It's also because a spineless opposition has never had a clue what's been going on, just as they haven't now.)

Naturally, nothing from either main party is proposed to combat the rampant credit expansion, which Alan Bollard and his fellow central bankers continue to ramp up (the latest name for the expansion of counterfeit capital is a 'stimulus package').  And very little of what's been proposed by either main party will 'fix' the problem of housing unaffordability, since the only two things that can have a substantial effect are the immediate removal of the planning profession's grip on our cities, and a bonfire of the growing mass of building regulations strangling innovation and supply.

In other words, get the hell out of the way.

Despite some little talk, that's never seriously on the agenda of either major party.  Both parties are blowing hard in election year to try and look good, and they're mostly blowing in tune, but neither are willing to perform in the only manner that's seriously needed.  instead we have more meddling.  Let's look at how Clark proposes to meddle again in housing, since in most respects her plans are the same as those of John Key (you can read what I've said before about U-Turn Boy's similar offerings here).

* Clark wants to force developers to produce so called affordable housing on land made unaffordable by earlier regulatory force

   The first refuge of the political scoundrel is always force.  The second refuge is scapegoating.  There is no better scapegoat in existence for the failures of a socialist government than someone who looks wealthy.  A developer is perfect.  Clark clearly hopes that forcing developers to act against good sense will play well in the voting booths, and that no-one will notice how poorly it plays out in reality.  
   The result of forcing developers to build low-cost housing will be to build the slums of tomorrow, and at a cost much greater than building affordable houses would be without the force.  Developers already hamstrung by rising costs will simply be forced to build cheaper houses on land worth far more than the houses they'll be forced to build, and to pass on the cost of the new slums to the buyers of other houses on that same land which will lose value immediately by their proximity to the slums.
   King Canute could have done no better in trying to turn back the tides.
   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.  In Ireland, builders have been walking away from being forced in this manner.  Over a ten year period, in US markets where mandated affordable housing mandates have been implemented, they have reduced supply, on average, by ten percent, and increased house prices, on average, by twenty percent. [Hat tip Owen McShane]. In San Francisco, the scheme has added up to one-hundred thousand dollars to the cost of new homes in new developments.  The Prime Minister told Morning Report this morning that these programmes are "working" in Australia and elsewhere, but as Owen McShane points out, while they may be "operating" they are certainly not "working" -- if by "working" we mean generating genuine public benefits. Governments everywhere are prone to confuse a pledge to spend taxpayers' money with delivering tangible results.
   The fact is that forcing the construction of 'affordable' houses makes housing affordability worse, and has done so everywhere it's been forced on homebuilders.  I suspect that unlike the illiterate Chris Carter who first announced the scheme, Clark and Maryan Street both know that.  The thing is, they just don't care.

* She wants to force land-owners to build even when they're unwilling to build.

   Clark has signalled she intends to strip land-owners of their property if in the view of state goons and council planners their land isn't being used as the goons and the planners would like, and give that land to other developers to use.  As he announced at last year's National Party conference, John Key agrees.  We knew that property rights were almost dead in New Zealand; we didn't know we'd be slapped in the face with that fact from both sides so soon. If you want a simple image of why this is wrong, think of Daryl Kerrigan in The Castle.  
   As is the case with the growing abuse of 'eminent domain' in the U.S., this is a signal for the government to play favourites with large private partners, giving them the power to steal from smaller property owners.  Donald Trump used it to have the New Jersey legislature try and throw people out of their houses in Atlantic City, so that he could build a new parking lot for his casino. It was in the 'public interest' he argued. General Motors had Detroit City authorities condemn a whole neighbourhood to make way for a new auto plant.  This too was in the 'public interest,' they argued.  70 families in Fort Trumbull, New Connecticut were targetted by the City of New London to make way for a 90 acre private development -- 'public interest' was once again misquoted, and once again private interests used the government's gun to steal what they couldn't have acquired otherwise.

* She wants to use spare crown land to contribute to new urban housing projects.

   This is an unsuccessful 'Army Surplus' approach to housing pinched from British Labour in which the bottom of the Crown land barrel is scraped to provide spare land, in a way and at a rate that will have no impact at all on housing prices, while providing plenty of scope for election-year photos of ministers in hard hats.  Like much of New Labour, it's another victory for spin over substance.
   The announcement pretends that using the spare half-percent or so of unwanted Crown land around the country to build new government slums will somehow have more impact than would be achieved by removing the planning controls that keep ninety-nine percent of the country's land locked up, and the remaining one-percent that is urban New Zealand enmired in planning restrictions. 

* Clark promises to "tackle issues in the building consent process which were adding unreasonably to the costs of building a house, beginning with simplifying the design and building consent processes for first homes."

   Good luck.  Anyone who thinks this is anything more than the empty electioneering we hear every three years from every major party should give me a call about a bridge I have for sale.

* The Department of Building & Housing is also looking at "a proposal by Building Minister Shane Jones to design a standard simple 'starter house' which could be fast-tracked through the building consent process, to cut the price of getting a consent."

   What makes Shane Jones think he's so special? 
   There are already literally hundreds of designs for simple starter homes around the country, any or all of which could be 'fast-tracked' -- just as every single housing project in the country could be fast-tracked if the growing mass of building regulations strangling innovation and supply were put to the blowtorch, and the number of people on the 'dark side' administering the regulations went back to their jobs of producing houses rather than getting in the way of house production. 
   This is nothing more empty attention-seeking that makes about as much sense as a former Labour housing minister's plan to have all the country's state houses lifted up and rotated so they all face the sun.

* The Clark Government is working on a shared-equity housing scheme where the taxpayer puts up part of the capital of a house and takes a share of the gain (or loss) when the house is sold. This could cut the amount first home buyers themselves have to put up by as much as half.

   This plan to make the taxpayer a sub-prime lender is in the end as empty an electioneering policy as Labour's 'Welcome Home' Loans, which have been taken up with all the enthusiasm people have for flat beer the morning after, and are just as flatulent.    
How empty it is can be seen in the fact that the scheme already been announced fourteen times before, and the many problems associated with its introduction have still yet to be ironed out so it can be introduced.
   And in a market in which the problem is under-supply, even the likes of Michael Cullen, Bill English and any other random observer of U.S. sub-prime lending should be able to work out what happens if you try and supercharge demand with another subsidy for high-risk buyers. 
   Put simply, to the extent the scheme is picked up to any great extent, the greatest effect of it will be to fuel price rises of the very 'starter houses' it's supposed to help people into.

So there you have it.  Another winning combination of flatulence and force.  And if you think you've heard much of my analysis before, then it's very possible you have.  Most of it has already appeared before in my swathe of posts on housing, building and urban design.  Help yourself if you want to know more.

Cheers, PC

UPDATE 1: Now here are three genuinely creative solutions to making housing less unaffordable that don't rely on smacking builders, developers and land-owners around the head: three simple solutions that can be effected tomorrow to bring about cheaper rural, urban and suburban housing.  See 'Three Simple Remedies for Housing Affordability.'

UPDATE 2:  Owen McShane points out that "land-banking," which is blamed by planners, politicians and all assorted busybodies for the problems they themselves have created, is actually a symptom of the problem -- it is not the cause of it.  "'Speculation' only takes place when prices rise faster than holding costs," and it is planners, politicians and sundry assorted busybodies whose meddling has driven prices up.

There is nothing to be gained from holding on to land unless the increase in value of the land is greater than the total holding costs over the same period... if annual holding costs are higher than the annual increases in value then the landowner has every incentive to bring the land to market.  So we should not blame the landowners. We should blame those whose rules and regulations strangle the supply of land and inflate prices.

The real offenders are not the landowners, but are the regional and local councils who administer the Resource Management Act and the Central Government for endorsing and encouraging these policies of Growth Management or Smart Growth.

The solution is release land for market and reduce compliance costs.


  1. What would be really helpful is if people such as yourself or Danyl could detail some of the changes in the building regs that add costs to compliance or construction. That is, what reasonable things can’t you do now that you could do in the past and how much paper/time does it take to achieve it (bearing in mind you will have a different definition of reasonable I suspect)

    The ones I have heard of are earthquake proofing (just how many houses have been destroyed by earthquakes that might not otherwise have been), watertightness (growing bureaucrat paranoia over a relatively small issue) and insulation (another form of carbon tax IMO) but these may just be builders’ gossip.


  2. As Gerald Ford said, "A government big enough to give you everything you want is a government big enough to take from you everything you have".

    Speaking of which, the Housing Affordability: Enabling Territorial Authorities Bill is a step or three along That path.

    Just imagine, the TLA's are being given Extra powers to do more of what arguably got us into this whole mess, especially since the 2002 'general competence' debacle.

    Words fail....

    And anon, try these for starters

    - building at heights - certification and scaffolding costs. Ten years ago, long ladders were fine.
    - electrical certification yearly for every power tool. Hence the boom in high-wattage cordless.
    - trades certification looming. Only 30% of present tradies will qualify. Time to retire or head to Oz?
    - fencing of construction sites.
    - time (= money) taken in any consenting process
    - you get the picture by now - nanny state imposts which do nothing to aid the cause of either safety or lower costs. The saddest thing is that they are widely ignored. In Southland and on the West Coast, "the hills are high and the Emperor is far away"....


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