"Fix housing regulation and you go along way toward fixing malinvestment."

"Most people don’t understand this process. When they see it play out, they misdiagnose what is actually going on. I see article after article claiming that [central banks like] the US Federal Reserve 'artificially' lowered interest rates, and that this created “malinvestment” into unproductive projects. They claim the problem can be fixed by raising interest rates to a level that imposes discipline on investors, a rate that doesn’t allow for low quality investments to be profitable. That’s wrong.
    "[New Zealand] does have a malinvestment problem, but it’s not at all what many pundits assume. The cause of the malinvestment is zoning and other regulations that make it difficult to build housing. And housing is not just another sector; it’s a key part of investment. These bad regulations push saving into areas that are less productive than housing construction, including marginally productive government and corporate investment.
    "The problem of malinvestment cannot be fixed [just] by having the [Reserve Bank] tweak interest rates; it requires much more fundamental solution. The only way to fix malinvestment is to remove regulations that prevent developers from building what people really want, which is high-quality housing. [Cities like Auckland were transformed in the 1920s when a ring of affordable yet attractive California bungalows were built by profit-seeking speculators at the end of new tram lines. But New Zealand has lost the ambition for such things, and settled instead for three-storey stagnation.]
    "If you ask most people what stands in the way of them having the sort of lifestyle they wish to have, not many will mention a lack of food or clothing. Most have adequate cars and TV sets. Most have a school to send their kid to and some form of health care. Instead, housing is the one area where lots of people are dissatisfied, where dramatic improvements in living standards are still possible. But that requires building new housing in locations close to good jobs. Bandaids such as rent control do not result in a single extra person having housing, and indeed reduce the housing stock in the long run. More housing is the low hanging fruit to raising living standards. Fix housing regulation and you go along way toward fixing malinvestment."

~ Scott Sumner, from his post 'Zoning and 'malinvestment'' [US references have been localised]