Wednesday, 30 September 2015

Bill English on price signals, planning and housing affordability

Yes, I’m as surprised as you are: Bill English has been caught making sense. A sentence I never thought I would write.

I blame his advisers.

His speech last week on housing affordability to was so uncommonly good it deserves the small publicity it quickly acquired, and its author (whomever it might might be) deserves credit.

Essentially, his speechwriter(s) pointed out that the market is excellent at delivering price signals, but the government (central and local) has been even more excellent at restricting the housing market’s ability to act on those signals until too late.

It takes around eight years for the housing market to respond to a shock to demand.

In part that is because changes to council plans can take years, in some cases over a decade.

Resource consents on a housing development regularly take 18 months, including pre-application times excluded from the official statistics.

When combined, those very real delays can exceed the length of the house price cycle.

The point is that when the supply of housing is relatively fixed, shocks to demand – like migration flows increasing sharply as they have recently – are absorbed through higher prices rather than the supply of more houses.

Long lead times in the planning process tend to drive prices higher in the upswing of the housing cycle.

And those lead times increase the risk that eight years later, when additional supply arrives, the demand shock that spurred the additional supply has reversed.

The resulting excess supply could produce a price crash. (Emphasis mine.)

It is the warning about a price crash that sat people up. It is the reasoning behind it that makes the whole piece worth reading.

NB: Others comment:

  • Eric Crampton calls the speech “excellent”—not something I’ve heard him say before about anything said by a Finance Minister—and comments on the speech’s point “that policy itself generates external costs that are underappreciated.”
  • Lindsay Mitchell noted the frightening fact that
            60 per cent of all rentals in New Zealand are subsidised by the Government.
            Six out of ten rented homes are subsidised by the taxpayer…
            [T]he rental property market is still heavily subsidised and still not working.


  1. Yes I thought the points called out by Lindsay were awful - 6 in 10 rentals subsidised by taxpayers (in many cases, taxpayers who can't afford to live in the suburbs where the subsidised live. 1 in 14 Auckland homes owned by the state.

  2. Good stuff, although English seems oblivious to the fact that demand driven by inward migration is a Government policy choice. Ex-Reserve Bank economist Michael Reddell has been at pains to point that out and the fact economic justifications aren't backed by evidence given inflationary impact.


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