Saturday, 15 June 2013

Tony's Plan

BNZ Chief Economist Tony Alexander has a few recommendations to fix the housing market. Let's take them in turn. My comments are the secondary bullets.
  • Initiate a large builder training programme targeting not just youth but low skilled migrants. "Yes, the migrant gates would need to be opened. Just the signalling of strong intention to boost builder numbers would make investors think twice about their capital gain assumptions," he says.
    • Not a bad idea, but I'd expect expansion in builder training to come with increased demand for new construction; it could be that there are hold-ups in the training schemes with which I'm unfamiliar though. 
    • I would also note that there is a current massive demand pull for Christchurch. It will be difficult to build Auckland out & up at the same time as we rebuild Christchurch. 

  • Ban councils from imposing any development fees and allow developers to install their own infrastructure.
    • A bit further than I'd have gone, but I'll take this over the status quo. We do need to learn from America's municipal utility districts.

  • Create an SOE whose sole purpose is to undercut existing building materials suppliers through bulk purchases from offshore, nodal warehousing and distribution from just three or four locations in the country, with a separate agency responsible for monitoring the quality of materials sourced.
    • I can believe that we have substantial inefficiencies of scale in building supply. But there are so few barriers to anybody who wants to start shipping in container loads of building supplies from abroad, I'm a bit puzzled why we think that inefficiencies would persist once building started ramping up. On the other hand, we have seen substantial materials cost inflation in Christchurch. Count me as skeptical that this one passes cost-benefit. We'd need to pretty clearly state the market failure Tony thinks here is operating and why this is the best way of solving it. I'm reminded of my undergrad macro prof who thought it would be a good idea to have a government-run set of gas stations that used US reference point pricing.

  • Initiate a new large state house building programme relying largely on the to be created new carpenters etc. Constrain new state houses to more efficient building systems including containerised modular housing (this doesn’t involve shipping containers), central and screwed in foundations, etc. Ban house sales to non-residents (even new houses given the ease with which special developments could arise targeting solely folk offshore and soaking up construction sector resources).
    • State housing is really a second-best kind of solution. Where the private sector is forbidden by Councils from expanding supply, I can see an argument for it. But otherwise, surely it makes better sense to allow more building and give poor people money. I'm reminded of the difficulties involved in Housing New Zealand's divesting itself of some $1m+ state houses in Auckland.

  • Impose a tax on all houses owned by Kiwis offshore with the aim of encouraging them to sell them.
    • I'm rather sure that recent numbers have shown few houses are being purchased by people who have no intention of coming here. And recall too that there exists a rental market. For this to screw anything up, it has to be the case that supply constraints remain pretty binding AND that none of these overseas owners rent out the houses that they're not occupying.

  • Put in place a capital gains tax on second properties and farmland and immediately payable stamp duty for all second house purchases.

  • Rezone all land within 10-20 kilometres of existing city boundaries as residential.
    • I'm cool with this, so long as we're not then taxing owners of agricultural land as though Council had provided subdivision-density infrastructure to paddocks.
Update: Thinking more on the SOE plan, if Alexander thinks the thing would be profitable, surely the Bank of New Zealand could simply announce some business plan competition where BNZ would provide financing for the best business plan aimed at improving materials supply and distribution.


  1. Broadly agree with your points. Re the SoE idea - its a bit scary but we have largely monopoly control in this area at the moment and so just as the KIWIBANK idea turned out to be OK I cannot see much wrong with the SoE idea either - some competition would be good in this area.

    Dont agree with you about State Housing being second best either. Its essential is we want a decent standard of housing for more of the population. Firstly, it adds to supply which is what we really need, at an affordable cost. Giving people money might be OK if a) there were no supply issues and b) the transaction costs/knowledge required in building a new house were more within the grasp of ordinary people.

    And - dont see your problem with setting rates on agricultural land at the value that represents the best use of that land. If its best value would be as housing but the owner wants to grow sheep - thats fine but done expect the rest of us to subsidise their rates.

  2. How about:
    - Georgian land taxes at say 1%
    - Explicitly remove "loss of views/light/sightlines" as a grounds for opposing developments and replace with a small compensation payment
    - remove all height limits everywhere
    - limit Heritage designation to building pre 1880
    - get rid of the designation of half of Auckland for single family dwellings on 500m2 and let the market decide.

  3. Alexander’s outlines show what a fruitloop he is. A control freak with ideas for central control of and industry matches that of mad barking dog Morgan. I am amazed that a person of Eric’s integrity and skill takes the idiot seriously with his Social and control.

    ““ Create an SOE whose sole purpose is to undercut existing building materials”” .. that’s great Alexander thanks for the introduction to big brother

    ““Initiate a new large state house building programme relying largely on the to be created new carpenters etc. Constrain new state houses to more efficient building systems including containerised modular housing (this doesn’t involve shipping containers), central and screwed in foundations, etc. Ban house sales to non-residents””“ ...... Yes that right Alexander, import carpenters and builders
    from overseas and refuse them the right to but own houses. An economist worthy of the National socialista front. Lets isolate New Zealand

    “”Impose a tax on all houses owned by Kiwis offshore with the aim of encouraging them to sell them.”” ............Of course, Alexander why should New Zealanders own property overseas, lets get central control though tax policy , why not make them wear grey suits with armbands, so we know who do throw rocks at

    ““Put in place a capital gains tax on second properties and farmland and immediately payable stamp duty for all second house purchases.”” ...........
    Why not go the full hog Alexander and make a complete idiot of your self. Go for
    Gareth Morgan’s Capital tax, more money for your mad ideas Alexander

    “”Rezone all land within 10-20 kilometres of existing city boundaries as
    residential””......... Nah,just nationalise the farmers land Tony,this will help the economy big time .

    I wouldn’t have Tony Alexander as economist of the New Plymouth buy racer’s v8 team, much less print him in newspapers

    Paul Scott

  4. Not worth spending a minute providing counterpoint to ideas others find sensible?

  5. Rates are basically fee for service with a bit of progressivity introduced by valuation-linking. If ag land's highest valued use is in residences it'll get there, barring legal impediments, without a tax push.

    If there are big problems in materials supply and no particular barriers to entry, why not give it a go instead of having the govt do it? I know you can't afford it, but Tony has a huge freaking bank behind him that could finance you. Unless he doesn't really believe his line here.

  6. Not quite sure what Tony meant by "Ban councils from imposing any development fees and allow developers to install their own infrastructure."

    Developers already install their own infrastructure and vest it in the council when it is complete. For their part the councils upgrade their networks to handle the extra load imposed by the development and charge a Development Contribution to help pay for that work. To not charge the Development Contribution would be to grant a free ride to the developers. As far as I can tell Development Contributions do not even cover all the costs of growth so existing ratepayers have to subsidise development anyway.

    I don't think there is any legal reason why a developer shouldn't do a sort of independent gated community. It would be down a dirt road because the council wouldn't upgrade the roading network around it. The developers would have to sink their own wells, build their own effluent disposal system and stormwater disposal system; they would have to apply for consents from the Regional Council and comply with Ministry of Health and Ministry for the Environment rules (same as councils). And when the developers drive off to bank the cash the residents would have to form some form of body corporate to collect rates, er---charges, and manage all these assets. If this was a fabulous idea it would already be being done.

    Pegasus could have been the star exemplar but even in their marketing literature they displayed a council-owned library, service centre and swimming pool (which came as a huge surprise to the council who had no intention of providing any of those things).

  7. Eric my reasons for opinion are clear in the response I gave. They are the counterpoints
    Transposing Word files to blogs gives display problems . I lost some bits in translations.

    If other people fine Alexanders central control and taxation policies , sensible I could not respond to that politic.His ideas are a non starter , except perhaps Central NAT Govt wishing to emasculate local bodies .

  8. above utterly absurd from Blair .

    ""Explicitly remove "loss of views/light/sightlines" as a grounds for opposing developments and replace with a small compensation payment
    - remove all height limits everywhere"

    so thats right , we rezone the city boundary within 20 km, why shag around with residential, this is prime industry land, is lets make it industrial, and a ten story concrete factory beside you.
    And while we are at it lets do something concrete with that dead zone East Christchurch, Factories, suck here familes .

  9. and then of course there are comments like this over at Kiwi blog

    Viking2 (9,602) Says:
    June 16th, 2013 at 12:20 pm

    Actually. I read most of these guys stuff and Alexander would rate the pits. He’s a Bernard Hickey type. another less than capable economist/journo.

    Two good ones are Bagrie from ANZ and Roger Dickens. Vote: 9 0

  10. and of course here is this from the Farrar column on Alexander, be brave Eric, do not censor us

    Redbaiter (3,458) Says: June 16th, 2013 at 12:56 pm
    So the BNZ’s Chief Economist is a commie.

    How long before they are holding out their hand for a taxpayer bailout????

  11. Read Ed Glaeser's The Triumph of the City for a fuller exposition of what Blair proposes around height limits, Paul.

  12. Not clear to me that new residents need to be charged a fee that existing residents aren't.

    Surely rates reflect the cost of supplying services, including all costs of capital. So therefore the cost of a new subdivision to a council shouldn't be dramatically different than the cost of an existing one. Unless the existing one is becoming empty because of the new one, then both are covering their costs. If they need to levy different rates in different locations to reflect the costs of delivering services to those locations, then they should do that.

    Otherwise, this just sounds to me like existing residents seeking for new residents to pay a tax that they themselves didn't have to pay.

  13. Good question. It will take an economist or accountant to explain it properly but I will give it a go.

    Just to be clear about a few things first. In a new subdivision the streets and little water, sewer and stormwater pipes are put in by the developer; you pay for these in your lot price although ownership is handed over to the council. The subdivision, as a whole is then connected to the core network. In the case of sewer the little sewer pipe outside your house connects to larger mains, sumps, pump stations, poo ponds and effluent disposal. The Development Contribution is supposed to help pay for upgrades to the core network only and has nothing to do with the infrastructure within the subdivision.

    The justification for the Development Contribution is appealing at a gut level. The existing community wouldn't have doubled the size of the ponds except to accommodate growth so they shouldn't have to bear the financial burden of such growth.

    Your argument that councils could simply recover the additional capital outlays through additional rates revenue is absolutely right. And we see this principle in action every day with ISP's, lines companies and telecoms companies. So why are councils different? The two reasons I can think of are (1) how they get their revenue and (2) how they manage the risk of 'lumpy' growth.

    The first is probably more important. Councils are basically cost-recovery institutions. They are not supposed to purposely make a profit on their operations. Unlike those other companies they cannot deliberately build in a margin to their prices to build up a war-chest for future expansion. For this and other reasons growth related capital expenditure is often (always?) debt-funded. Without some capital injection in the form of capital contributions there is a danger that councils could become too constrained by debt to accommodate ongoing growth.

    The second reason is that growth-related projects are often significant and 'lumpy'. They will try to accommodate the projected growth for 20-30 years in area not just one subdivision. As a matter of practicality the contributions also help smooth out the costs and risks of building under-utilised capacity.

    Last but by no means least, the setting of a budget in a council is a political one. Common sense is definitely not at home to Mr Politics. The whole point of democracy is to find someone else to pay.

  14. I really hate the tradeoff with which we seem stuck.

    If we allow Councils to set cost-recovery development fees, many of them will use the fee-setting as a way of restricting entry rather than simply recovering costs.

    If we set development fees to zero, then we get too many new subdivisions relative to infill development.

  15. There's an argument raging over whether we are experiencing a planning or infrastructure crisis (almost anywhere on I say neither it's a funding crisis. One of the reasons we have local government is that demands for local infrastructure far outstrip the willingness of ratepayers to pay so we have to prioritise. If funding was not an issue I doubt a single councillor anywhere in the country would give two hoots about urban form. In that respect I see planners as decoy runners for the engineers.

    If we were to take another look at capital contributions we should consider that not all Councils are the same. Where there is low growth in an urban environment (Wellington? Invercargill?) I suspect the arguments for capital contributions are very weak. A field trip to places where growth has a material impact on council finances (Selwyn, Waimakariri, Kapiti Coast, Tauranga, Western BoP) would probably identify the actual problems that need fixing and probably some better solutions than we currently have.

    And asap if we are to get anywhere in Auckland. The original housing accord promised to add a Dunedin to Auckland within three years. The book value of Dunedin's local infrastructure is $2.8bn. So, before anyone builds a single house, a single new school or hospital, a single social housing unit, or a single shop, funding to the tune of $2-3bn needs to be found just to make the new lots buildable.

  16. Right, but my point is that at some time in the past that same investment was made for existing suburbs, usually without this sort of development levy. The current ratepayers are effectively paying the cost of capital for that original investment.

    Consider your example of the sewerage ponds. So maybe the ponds need to double in size, but the existing ponds have a cost too. And those existing ponds are being paid for by the existing ratepayers.

    Is there any evidence that the larger ponds cost more on a per-head basis than the existing ponds? Is there perhaps evidence that in fact the larger ponds would be more efficient, and actually having additional subdivisions would lower the per-head cost?

    In short, my belief is that in order to justify this development levy you have to demonstrate that the new subdivisions cost more per head on an annual basis (including cost of capital) than the old ones, not just that there is investment needed that someone has to pay for. The existing rates already cover the cost of capital and maintenance for an investment of $x per head of ratepayer per annum. So long as these new subdivisions fit within that amount on a per head basis, no issue. If they don't, then we have a case for differential rates, not for capitalising it into the land value.

  17. Paul I am tending toward your point of view even if it is not that obvious (don't know if you could see my reply to Eric when you wrote this). Given the complexities of managing complex networks developed over many decades with many different sources of capital there is no simple answer to the "DC good?/DC bad?" question. As an example some of the sources of capital include:

    - sales of windfall assets: many councils were seeded in the 19th C with land "acquired" by the government from iwi. Sales of this land raised some capital. In more recent times some councils were able to sell shares they received in port and airport companies.

    -taxpayer subsidy: today about half of the capital poured into rural roads comes from the taxpayer not ratepayers

    - upfront levies: it used to be a common to require ratepayers to make an upfront payment to completely fund capital works

    - retained reserves: councils would build up a war chest by deliberately running surpluses (I think this is still common the electricity industry)

    There are all sorts of unfairness built into those sources of capital. The only truly fair way of raising capital for long-life assets is to raise debt and match the debt repayments exactly to the life of the asset so that the day you make your last repayment is the day you start tearing the asset down to put in its replacement. I can guarantee you there is no appetite in this country for operating that way and, until there is, some imperfect hybrid will have to do.

  18. Sorry Paul, didn't understand your question properly. No, current ratepayers do not pay for cost of capital. Councils have no owners in the accounting sense so there are no dividends or cost of capital payments. Even if something is debt-funded the moment the debt is repaid rates "drop" - a theoretical concept - because there are no longer any payments to be made. As far as ratepayers are concerned the moment something is built they have paid for it and newcomers are getting a free ride.

    I have enjoyed musing over what would happen if councils did have to pay themselves a dividend to pay ongoingly for their capital.

  19. I'd argue a bit of yes and no.
    In that councils clearly have capital invested, and councils are ultimately owned by the ratepayers, then clearly the ratepayers are paying the cost of capital. The question is whether that cost of capital is correctly set.

    If that's the argument, then my question becomes why new subdivisions must pay a different cost of capital than old ones. Surely if we've agreed that actually ratepayers don't have to fund the cost of capital, then that should apply equally to newcomers to a city as to those who already have houses in expensive suburbs?

    I guess a different spin on my thoughts here is I don't see why we're assuming capital funding (up-front investment). For assets that deliver benefit for many years, is not the prevailing economic theory that we'd debt fund them and pay the interest? And is that not effectively a cost of capital discussion? I'm still struggling with a development levy in that situation.

    Of course, I suspect the incidence of a development levy that is capitalised into the value of the land is probably quite similar to the incidence of a targeted rates valuation that reflects the cost of capital for the borrowed money. But once you shift to considering it as borrowed money/cost of capital, then it starts to flag the question of why I have to pay it when I buy a house in a new subdivision, but don't have to pay it when I buy a house in an existing subdivision, since they both clearly have capital invested.

  20. Sorry, and to extend that slight, is that perhaps the reason for the development levy? It makes it "OK" for the current ratepayers to be getting a benefit at the expense of the newcomers. Whereas if you stripped it down to the basics, it's perhaps not OK. Since the current ratepayers are the ones that vote for these policies, no surprise we end up here.

  21. Sorry I don't quite follow your argument and suspect we are talking at cross-purposes. Although 100% debt-funding of capital projects is the only truly fair way of raising capital it will never happen. You need only reflect on how much stick local government gets for the debt it carries even though, by law, debt can only be used for capital works. Of the remaining methods of funding capital growth each has its good and bad points. The one good point for DCs is that they are capitalised into property values so you can at least withdraw some of your contribution when you leave.

  22. My argument is that irrespective of whether you debt fund or not, ratepayers are paying the cost of capital. The problem is that many councils fail to correctly set the cost of capital - so they don't charge ratepayers as much as they should.

    Further, what they're now doing is to leave the existing ratepayers paying those low rates (artificially low cost of capital), and ask the newcomers (new subdivisions) to pay something approximating the true cost of capital. What this does is deliver windfall gains to the existing ratepayers - their land is now worth more because the newcomers have to pay more.

    In short, we have a scheme where existing ratepayers vote to increase their property values by applying charges to newcomers. Nice scheme.

  23. We are probably testing Eric's patience here. What is your definition of 'cost of capital'? Bear in mind I am an expert in council process not an economist or accountant.