Thursday, 8 October 2015

What's your model?

Labour is mad that the TPP might preclude them from one of their preferred policies: banning foreigners from buying existing houses. They expect that forcing foreign buyers to build new houses rather than buy existing ones means more houses get built.

There is an issue here: because regulatory constraints make new building incredibly difficult, foreign money wanting to be in NZ housing generally winds up in existing housing.

But I am curious about the underlying model. The number of houses built will depend on demand for housing, not demand for houses per se. Suppose that total demand for buying houses is split between foreigners and domestic residents. If total demand is enough to bring more new housing on-stream, I have a hard time seeing how it matters, for the total stock of housing, whether foreigners are required to build the new housing or whether they can buy existing.

The only way I can make sense of things is if we assume that foreigners don't care about the returns in housing and only want to park money here to hide it from their home country. If your view of the world is that a Chinese billionnaire is happy to lose some of his money by investing in too much Auckland housing because he'd lose more by keeping the money in China, then forcing him to invest in new dwellings could change the total amount built. But didn't the IRD changes make that kind of story implausible?

I'd like to know what Labour's implicit model is here.

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