Thursday, 13 October 2016

Nick Smith & Phil Twyford are both right, and both very wrong

 

The major party’s various spokesthings have all been arguing through the media over how many “affordable” homes have been built in the last three years, yet none have bothered to ask whether that tag in the context over which they’re arguing means anything.

The story first. Looking for a headline, Labour’s Phil Twyford “released official Auckland Council figures that showed in the past three years, only 18 houses built on special housing areas were declared to be an affordable dwelling.” Which sounds damning. In response, “Housing Minister Nick Smith said more than 500 homes from two special housing sites have been completed and cost under $650,000” – 190 homes at Weymouth, and 327 at Hobsonsville. Which sounds better.

But which one’s right? And does it actually matter?

Well, they’re both right, because they’re both talking about different things – one about houses for which a “statutory declaration” of being affordable has been made as part of a so-called Special Housing Area (SHA) developement, the other about houses in the SHAs a cabinet minister might call affordable.

But does it matter?

Well, let’s ask the Prime Minister who, in 2007, said

I think it’s dangerous for the Government to pretend that developments such as that [government-promoted scheme] at Hobsonville are some sort of panacea to the housing affordability crisis…

And he was right. Still is. Because as he went on to say, “Well, let’s get real here.” Which is to say, if we’re to speak with the bark off, either 18 or 500 – that’s a drop in the fricking bucket compared to the thousands of houses needed to break the ever-spiralling cycle upwards! The only solution, as the Prime Minister understood in those halcyon days before he actually took office and became a wind-up Smile-and-Wave Doll, “If we want to make houses more affordable for first-home buyers, we need more houses to be built as cost-effectively as possible.”

Which, to be blunt, means him and his cronies getting the fuck out of the way.

If they did, we wouldn’t need to be arguing about how many houses with the government label “affordable” on them had been built, because builders would be able to get out there and build by the thousand the houses that would make the overheated market actually affordable again.

They wouldn’t need to build them on Special Housing Areas or make goddamn “statutory declarations” about how many alleged affordable units were in each development if both the RMA and the Building Act were properly euthanased. Instead, we could simply rely on the ability for builders to make a fair profit on their spec houses and the age-old mechanism of “churn” – the housing version of The Double-Thank You Moment.

Churn?

“Churn” in this context refers to the chain of purchasers who “trade up” after a new house is bought and folk move into that house and out of their old one—leaving their old house empty for someone else to move into, which leaves their house empty for someone else to move into, which leaves their house empty for someone else to move into, and so on and so on right on down the line.

In a healthy housing market, one house purchase by one family can start off a chain reaction of up to ten, twelve or even twenty moves further down the line as each family moves out of their old and up to their new home.

Why do I say “move up”? Because this is the housing equivalent of the weird double-thank-you moment we talk about in economics:

How many times have you paid $1 for a cup of coffee and after the clerk said, "thank you," you responded, "thank you"?
There’s a wealth of economics wisdom in the weird double thank-you moment. Why does it happen? Because you want the coffee more than the buck, and the store wants the buck more than the coffee. Both of you win.

Equally, when you decide to sell what you’ve got now to move into a new place, it’s because you want the new place more than the old place—and your new buyer wants your old place more than their old place, and so on down the chain. You each want the new place because in your minds your new housing situation is going to be better for you than your existing housing situation.

It’s just the same for every buyer in the chain.

So every time a new house is built and purchased, of whatever value, that opens up opportunity for many other families to make their situation better. 

So while the buyer of the $300,000 may not know it, that new $485,000 house is what just made his own life better. He’s at the end of a chain of churn created by that first purchaser and his vendor saying “Thank you!”

This is what happens when the housing market is not broken by regulation, as it is now.NewHome001

Here’s something else that seems contradictory until you think it through a little: It turns out too that in a healthy housing market a new more expensive home creates more openings down the line than a cheaper more affordable home does—up to twenty housing moves for an upper-quartile home as compared to less than five or six for one in the lower price quartile--meaning, strangely enough, that the more expensive houses that are built the more folk actually benefit.*

If that idea makes your head hurt, then consider this question: is it better in general to build better houses or lesser houses? Wouldn’t we all agree that better quality is far better than lesser? So as better houses costing more are built and folk move up to what in their own view are better houses, the overall housing stock for everybody is improved.NewHome002

Isn’t this better than flooding the market with houses of lower cost and lesser quality, which actually produces fewer moves helping fewer people, and resulting in the end only in having created the slums of tomorrow?

The real answer to affordable housing then has been provided neither by the Blue Team nor the Red Team.

The answer is to fix the broken market.

And how do they do that?  They stop pretending they know what they're doing and just get the hell out of the way.

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2 comments:

  1. >> So every time a new house is built and purchased,
    >> of whatever value, that opens up opportunity for
    >> many other families to make their situation better.

    ... unless that house (or until one down the chain) is purchased by someone who's not also selling, e.g. an investor, or someone buying their first home. I wonder if there any data for how that plays out in NZ?

    ReplyDelete
    Replies
    1. The government has been asked repeatedly for comprehensive housing data and they refuse. Because it will show what a speculation-driven mess it is.

      But you don't need data to realise the premise of this article is nonsense: it takes one circumstance - people upgrading to a better house - and extrapolates it. Ignoring the fact that many wealthy older people choose to either stay in their house, or downgrade to a smaller place since they no longer have a family to support.

      Delete

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