If we are to keep the Kiwi Dream, says Jack Salmon in this guest post, NIMBYs and planners will have to be put back in their box.
House prices continue to rise dramatically across NZ, particularly in urban areas. The ever escalating prices make the “Kiwi Dream” of owning a home far less likely for an increasing number of millennials. With around one third of NZ households now renting homes and apartments, we have to ask ourselves – why is the NZ Dream dying?
Data from the Stats NZ reveal that the US homeownership rate stands at a mere 67.8%, down from 73.8% in 1991. Whilst this is up slightly from a record low of 62.9 percent in the previous three months, it is still down year-on-year from Q3 2015.
The unaffordability problem is a supply issue with housing supply falling short of demand by around 65,000 units in 2015. We are currently facing a severe lack of housing that will only result in continued price rises (and more inflation), unless drastic action is taken to enable substantial growth in supply.
As house prices continue to rise much faster than incomes, the biggest hurdle to buyers is affordability. As house prices rise as fast or faster than savings, it becomes increasingly hard to save for a deposit.
What is causing this? To find out, it’s useful to look at American cities, which share the same basic institutional and cultural factors, but with some important differences creating stark disparities in house prices in different cities.
It is especially interesting to notice that the unaffordability of houses in urban areas is only limited to certain cities. Whilst cities such as San Francisco become increasingly unaffordable, some of the nation’s fastest growing cities such as Dallas remain very affordable.
It’s almost like there are two sets of cities with different rules!
The reason for this great disparity in affordability between U.S. cities is the result of limited supply in some cities with heavily restrictive building regulations, such as San Francisco and Los Angeles; contrasted with cities such as Dallas and Houston, which tend not to take drastic action to control urban sprawl.
With limited supply mandated by restrictive government policies, both state and local, existing homeowners essentially receive very special treatment as they sit back and enjoy their misbegotten gains -- while renters become further impoverished and first-time buyers are severely punished if not squeezed out altogether.
The Link Between Zoning and High Prices
A study by Economists John Glaeser and Joseph Gyourko analysing the impact of building restrictions on housing affordability found that “zoning and other land-use controls are more responsible for high prices where we see them…Measures of zoning strictness are highly correlated with high prices”. If policy advocates are truly interested in making housing more affordable, they would do well by starting with zoning reform.
Similar findings are highlighted in a policy paper recently released by the Cato Institute’s Randal O’Toole. The paper underlines how municipal governments, especially at America’s county-level, impose strict growth management policies and heavy-handed regulation of land use to prevent urban sprawl. The result of this approach in many of America’s urban areas has meant median home prices in those areas most “managed” by planners (see the left-hand chart above) typically being two to four times more than homes in unmanaged areas (see the more sane chart on the right).
O’Toole hits the nail on the head by prescribing as a minimum “minimising the regulation of vacant lands outside of …cities. Allowing developers to build on those lands in response to market demand will also discourage cities from overregulation lest they unnecessarily push development outside the city”.
Unfortunately, the actions taken by many municipal governments thus far have been entirely contrary to the suggested prescription suggested by Randal. This is certainly the case here in Northern Virginia, for example, Fairfax County has vast swathes of land allowing only 1-2 dwellings to be constructed per acre. And also around Auckland, where on house per every ten acres has become a virtual planners’ touchstone. Not to mention the thousands of acres around all cities reserved for public parks, farmland and the all-important golf courses.
A recent Mercatus Center research paper noted that the biggest barrier to reforming land-use regulation would be the vested interests or NIMBY’s (Not In My Backyard) preventing such reforms at a local level. One possible way suggested by the authors of increasing the feasibility of such reforms would be to shift the implementation of zoning powers from local to central level, further removing policymakers from opposition to development. (Though experience in Christchurch does not offer much hope that this would do much, if anything.)
Another way suggested by the NZ Institute is an incentive to local government that would encourage more housing development, by allowing them to keep a cut of the GST so generated.
In any case, action should be urgently taken that encourages both central and local governments to reduce their land-use constraints, especially urban growth boundaries. It is also important that, aside from recognising the role of central banks in creating the monetary demand, the government does not misdiagnose this crisis as one simply of demand and not supply. Government policies aimed at increasing demand will only worsen the situation by pushing house prices even higher in areas that already face supply restrictions.
Things have been bad for so long and have been getting worse not better, so if we are going to preserve the Kiwi Dream we are going to need an industrial house-building revolution on an enormous scale. The only legitimate solution to this housing crisis is to repeal the central and local rules that restrict urban expansion, and repeal the Resource Management Act that gives planners the power to restrict development, and prevent NIMBY’s from killing the Kiwi Dream for millennials and for generations to come.
Jack Salmon is a research associate at the Mercatus Center.
This post first appeared at FEE. It has been localised.