Regulatory incidence and housing

Knowing a bit about tax incidence is useful if you want to be able to figure out what policies might help with Auckland's housing affordability issues. Here's me in last week's NBR:

Auckland’s housing markets are a mess but they are not the hell of perfectly inelastic supply. The burden of taxes and regulation in housing markets are shared between buyer and seller. If we expect that housing will become relatively more elastic as the unitary plan takes effect and as central government policy around infrastructure improves, then effects of other policies change.

Measures like rental warrants of fitness could actually provide net benefits to tenants – if we do not expect supply conditions to improve. But as soon as regulations around housing and infrastructure shift to allow more supply, then those same rules flip to making tenants worse off.

When supply is working properly, tenants sort into the quality and price tier that best suits their preferences and budgets. Rental warrants of fitness then at best compel landlords to provide what tenants were already demonstrating that they wanted, and at worst make rental accommodation too expensive for some tenants.

And so politics makes for strange policy bundles.

Labour proposes fixing regulation so that more housing can be built: abolishing the rural-urban boundary and improving infrastructure financing. But Labour’s promised Healthy Homes Guarantee makes the most sense if housing supply issues are not addressed. And if zoning and infrastructure are sorted out, there is little need for the government to be directly involved in building more houses.

Meanwhile, National has spent the past nine years avoiding fixing the underlying urban planning and infrastructure financing problems. It has blamed coalition politics but has remarkably managed to fail to take up those opportunities that have arisen.

Its general preference to avoid undue intervention into rental markets should really be coupled with policies that would allow new development.

Tax incidence can yield counterintuitive conclusions about who benefits from policy. A simpler question for voters to ask: will this policy make it easier for new housing to be built? If it does, then builders could get on with the important task of exercising their comparative advantage: easing the housing shortage.

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