Tuesday, 1 April 2014

Two! Two! Two bad policy ideas in One!

No, sir, I don't like it.
The Government should be intervening in Christchurch's housing market by making low-interest loans available to developers so the cost of building homes is reduced.

That is the view of Christchurch City Council finance committee chairman Cr Raf Manji, who is worried that simply adding more sections to the market will not stimulate enough building activity to generate the 10,000-plus new homes that Christchurch needs.

''The main issue for developers is not so much the demand, as that is clearly there. The problem is affordability. Section costs are too high, building costs are too high, consent costs are too high and, with interest rates rising, funding costs are too high. Put that altogether and the risk-profile rises, so the smart approach for a developer is to wait until demand is at an elevated level and then build. By that time it's too late,'' Manji said.

''We need some kind of government intervention. The Government cannot afford to wait around and see a severe housing market squeeze, with inflated prices and major shortage of stock.''

Manji believed the Government should be accessing cheap funding from the Reserve Bank and using it to fund a large-scale house building programme in Christchurch.
The main problem in Christchurch is a consenting and zoning-related near-vertical supply curve. Where Council has made a couple moves to ease things up, like allowing the building of secondary suites in homes, I've heard they're charging extortionate development contributions on those - it's implausible that a second flat built inside an existing home really places that much burden on the infrastructure. If we have a near-vertical supply curve, low-interest loans that push out the demand curve doesn't much help.

And while Manji wishes to loan the money to developers rather than to buyers, that doesn't really fundamentally change things. Why? Rents accrue to the factor in fixed supply. If supply of zoned sections is limited, measures reducing the borrowing costs of developing a new section will just mean that developers can afford to bid more for existing zoned sections: the increase in the cost of sections offsets the reduced borrowing costs on developers. While Manji's right about costs being too high, the solution has to start with easing the section supply restrictions. That brings down section costs and allows economies of scale in development that bring down construction costs.

But perhaps more pernicious is the idea that there's a free lunch to be had by borrowing from the RBNZ instead of issuing normal government bonds. I don't know if the social credit fallacy is underlying things here or some other form of monetary crankery, but it's not good. I had thought that Robert Muldoon's propensity for seeking financing from the RBNZ was one of the things that helped lead to central bank independence in the post-Muldoon era; directing the RBNZ to provide cut-rate loans to developers would be very much in the really really bad ideas category.

The RBNZ probably needs to put out a primer entitled "Why the RBNZ is not a lending bank." It could be targeted at high school students, and would be useful for them, but perhaps would also have a broader readership.


  1. I would be pretty sure that if the cost of new housing is expensive in ChCh, that it is not because of the finance rate that builders need to borrow at. Actually building a new house is one of those businesses where borrowing costs must be reasonably low due to the fact that they get large deposits from house clients (before any building has started) and they get good/free credit for nearly a month from their suppliers. On a related matter though, we built our house 3.5 years ago - but have just had to go through the new process of working out the replacement cost for insurance purposes. I am shocked at how much building costs have risen in a short time. If the price of beer had risen as much I dont think I could afford to drink.

  2. yewah, my house for sale, fix here, land sale only $NZ250,000 ,was before $500,000, near centre of Christchurch, nice place see photographs, unknown future,do not buy Eric's home, he is liberal, and he lives East, near the water

  3. "Rents accrue to the factor in fixed supply."

    Beautifully succinct. I shall steal this and use it liberally.

  4. Hunh. I was sure I'd heard it elsewhere, but Google only finds it here.

  5. But the RB prints all the money, so it is free :)

    Do a special print run and hand it out, just pay it back hen you can......

  6. What is the flat rate? We pay about $60 per month on average for a three person household in Auckland. So the flat rate must be pretty low?

  7. Eric,
    I'm afraid your comment on NZ occupational licensing is not correct. You can see the official list here:
    This just refers to regulations that have a specialist body. (Even so, it includes Real estate agents!) You will find many interesting anomalies in the way these organisations work. For instance, of particular interest to a Cantabrian would be the building regulatory bodies that have set up a system that means the average age of an apprentice is 28 (twenty eight).
    There is no overview whatsoever of how these bodies go about their regulatory task. Such overview is not about specialist knowledge, but simply asking those organisations how they implement legal obligations to protect consumers. e.g. I do not know how to be a dentist, but they could be obliged to show how they assess patient safety and the criteria they use to decide whether or not a procedure could safely be done by a non-professional. No regulatory body in New Zealand is asked to do this.
    However, this is scratching the surface. The two tricks in New Zealand are highly restrictive "health and safety" laws that in practice exclude many low skilled people from jobs because they have not done low value courses costing a few hundred dollars. Low cost to you and me, high cost to a kid on welfare if they have no guarantee of a job. The other restrictions are demanding academic qualifications. Three decades ago it was possible to be an an academic with a masters degree. Now a PhD from an overseas university is needed. That's what I call a restrictive practice!
    David Smith