Monday 25 August 2014

Malthus explains the problem with #TeamKey’s first-home buyer subsidy [update 2]

National launched their election campaign over the weekend, the headline grabber being a $20,000 taxpayer subsidy to first-home buyers.

Even Hard Labour knows this is risible electioneering, but they have no more real answers to fix housing than the Nats.  Not that long ago, socialist Venezuela experienced the same problems with toilet paper as NZ has with housing, and for similar reasons.  Eric Crampton summarises how NZ’s two main parties would be dealing with it:

Eric CramptonLabour would put capital gains tax on toilet paper.
National would subsidise first-time toilet paper buyers.

Neither would have any effect. That is, neither would have any positive effect.

We’ve known for at least two-hundred years that subsidies don’t work the way politicians say they will – at least since British classical economist Thomas Malthus wrote his seminal Investigation of the Cause of the Present High Price of Provisions, which even Uncle Keynes thought was top stuff.

To make it easy for Bill English, I’ve translated the relevant passage into modern idiom:

Adam Smith points out that the actual price at which a house is sold is compounded of its natural price, the price at which it can be made (with a small margin for the builder), and the proportion of the supply to the demand. When housing is scarce, however, its build price is necessarily forgotten, and its actual price is regulated by the excess of the demand above the supply.
Let us suppose that new housing is in great request by fifty first-home buyers, but of which, due to restrictions imposed by District Plans drawn up under National’s Resource Management Act, there is only sufficient, all of them virtually identical, to supply forty. If the fortieth couple from the top has four-hundred thousand dollars which they can spend on a new home (the thirty-nine above them, more, in various proportions; and the ten below, all less), then -- if we assume the cost of construction is covered1 -- the actual price of the article, according to the genuine principles of trade, will be four-hundred thousand. If more be asked, the whole will not be sold, because in our example there are only forty who have as much as four-hundred thousand to spend on housing; and there is no reason for asking less because the whole may be disposed of at that sum.
Let us suppose, now, that Bill English gives the ten poorer couples, who were excluded, twenty-thousand dollars apiece. The whole fifty can now offer four-hundred thousand, the price which was before asked. According to every genuine principle of the market, the price of these forty houses must immediately rise. If they do not, I would ask, upon what principle are ten, out of the fifty who are all able to offer four-hundred thousand, to be excluded?
    For still, according to our example – and if, as of today, very few more are being built -- there are only enough houses for forty buyers. The four-hundred thousand of a poorer couple are just as good as the four-hundred thousand of a richer one; and, if we interfere to prevent the houses from rising out of the reach of the poorest ten, whoever they may be, then to determine who are to be excluded we must toss up, draw lots, raffle, or fight.
    It would be beyond my present purpose, to enter into the question whether
any of these modes would be more eligible …; but certainly, according to the customs of all civilised and enlightened nations, and according to every acknowledged principle of commercial dealing, the price must be allowed to rise to that point which will put it beyond the power of ten out of the fifty to purchase. This point will, perhaps, be twenty-thousand or more, which will now become the new price of the housing. Let another twenty-thousand be given to the excluded ten: all will now be able to offer the same sum. The price must in consequence immediately rise to forty-thousand or more, and so on, and so on.
In the progress of this operation the ten excluded would not be always entirely the same. The richest of the ten first excluded, would probably be raised above the poorest of the first forty. Small changes of this kind must take place. The additional allowances to the poorest, and the weight of the high prices on those above them, would tend to level the two orders; but, till a complete level had taken place, ten must be always excluded, and the price would always be fixed, as nearly as possible, at that sum which the fortieth couple from the top could afford to give. This, if the subsidies continued to increase, would raise the commodity to an extraordinary price, without the supposition of any combination and conspiracy among the venders, or any kind of unfair dealing whatever.

So as long as the supply of housing remains constrained (and under National’s talk-loudly-and-do-nothing housing policy), then National’s first-home buyer subsidy will represent nothing more than a twenty-thousand dollar gift to new-home builders, bought at the expense of taxpayers, and at the expense of those who could have otherwise afforded a home, but who will now be priced out.

As Frederic Bastiat used to say, the policy represents one profit, but two losses.

UPDATE 1National’s policy is a Land Speculators Welfare Scheme, say Hugh Pavletich:

The first home buyers grants announced by Prime Minister John Key at the launch of the National Party Campaaign should properly be regarded as a Land Speculators Welfare Scheme … paid for unnecessarily out of young first home buyers savings and by excessively taxed taxpayers.
This is a cynical attempt by the National Party to buy votes at others expense.
It only fuels housing inflation…
The National led Government is well aware the housing problems are impediments to affordable new supply.
Deputy Prime Minister Bill English made clear at the major October 2012 Government Housing Announcement, that the focus must be on …
*land supply
        *infrastructure financing
        *construction costs
This was followed up with the Housing Accords legislation … and weak Accords entered in to with a number of Local Authorities by Housing Minister Dr Nick Smith.
All talk and no action.
The National-led Government promised some 6 years ago in the lead up to the 2008 election campaign that it would deal with the impediments to affordable new housing supply.
Soon after, then Housing Minister Phil Heatley made this clear at the time of the release of the Demographia Survey early in 2009. ( refer … ‘Bringing better balance to the housing market’ ) …
Prime Minister “can kicker” John Key has always been flaky on housing (refer Housing: Mr Key – Get on the Programme ).
Mr Key is more interested in looking after the interests of Land Speculators and engaging in Crony Capitalism …

The problem for Mr Key, is that the public can see through his cynical Crony Capitalism.

UPDATE 2: Eric Crampton (who’s obviously all over this) points out that the ACT Party are quite right to criticise the housing bribe – and bravo to them saying the ultimate answer is repeal of the National Party’s Resource Management Act – “but solutions also involve allowing intensification, even in Epsom.”

While urban planners often take a lot of stick for wishing to force people into compact city forms, and sometimes rightly so, urban height limits that artificially prevent density impose a regulatory tax that either pushes prices up or pushes cities out. Auckland’s metropolitan urban limit has been pretty binding and artificially restricts building out; regulations barring development upwards need at least as much attention.

Got that, ACTivists?

1. Something like wishful thinking in a building market heavily constrained by the National Party’s Building Act.


Nick K said...

Just go and bash your head against a wall, Peter. That's what I did when I heard this from the Gnats.

Peter Cresswell said...

Mind you, Nick, as Eric points out above, your own party is not above ignoring economic reality and saying instead what they think (part of) their electorate wants to hear...

Peter Cresswell said...

Readers might also like to read Malthus's 'High Price of Provisions' with the Accommodation Supplement in mind -- he explains perfectly why and how the Accommodation Supplement raises rents, and how it represents an almost direct subsidy to landlords.
Once again: one profit, two losses ....