Friday, 16 February 2018

Housing stocktake

I'm both late and early to this particular party.

Phil Twyford this week announced the results of his commissioned stocktake on the housing crisis. The housing shortage is real and the consequences are substantial. Infrastructure funding constraints block housing supply increases. Given the shortage of housing, the accommodation supplement is likely to be soaked up mostly in higher rents.*

I did like Henry Cooke's noting of something missing
He insisted in the morning the effort was not political and to a certain extent, Twyford would have wanted some solid figures on this made public. But this was unabashedly political.

The report's authors - all well-respected professionals - clearly come at the issue from the left. People who agree that there is a housing crisis but focus on issues of planning rather than rental regulation like Eric Crampton were absent.
I would fill in a couple of missing blanks, though I really like the report overall. I'm late to the party as the report was out earlier this week, but I'm also early since I've been watching this file for a while.

Tenants' Rights

If housing supply remains completely messed up, then there can be a case for strengthening tenants' rights. Just as with the accommodation supplement, the inelastic side of the market bears the burden. Regulating better quality for tenants will mostly be an imposition on landlords, rather than tenants, in an inelastic market - though there can always be undesirable side effects.

But if housing supply is fixed, then the incidence shifts. You then can easily wind up in spots where people would have been happier paying lower rent for a less well maintained property, or having fewer flatmates in a less well maintained property, but aren't able to. If supply is working properly and is relatively elastic, more of the cost is passed through to tenants by exactly the same logic that has landlords currently reaping the benefits of the accommodation supplement.

There's also a fun intersection with the government's proposed change to the bright-line rules on investment properties. Background: New Zealand doesn't have a capital gains tax, but if your income comes from putting time and effort into shuffling capital around, you're going to be taxed on that gain as income. And that's not nuts. National had used a two-year bright-line rule which said that if you flipped investment properties purchased less than two years ago, you were probably buying and selling properties as income so the gain was taxable. Labour's extending that to five years.

But think on the timing. Suppose you bought a house three years ago and rented it out. New rental standards will force you to take on more debt than you're comfortable with, or are able to take on. So you decide to sell your investment property because of the change in investment conditions, not because you're trying to bank capital gains or because you were trying to profit by flipping properties as income. Under the new bright-line rule, more of those sellers will be caught for tax on any increase in their property's value. I wonder how many of the more highly geared ones will find this difficult.

Accommodation supplements and state housing

The report also recommends increasing the state housing stock, noting sharp increases in the waiting list. But this too should be seen in the context of the current crisis. When Council won't let people build, you'll automatically get more applications for state housing because of overcrowding and high rents in private markets.

National recognised that it made little sense for government to own housing stock when the needs of the people it is trying to help change a lot over time. If locational preferences change, it's hard to move state houses. If family configurations change, you can't easily shift around how many bedrooms are available in a state house. And if you sell a state house on a large lot in a desirable location, you can unlock funds that would let you help far more than the one family being helped by the state house.

And so National was trying to shift away from state housing, much of which was due for renewal anyway, and towards more flexible arrangements paying people cash and letting them use the accommodation supplement to get the kind of housing they needed where they needed it. You know how Trump is looking to screw up SNAP in the US by giving people a box of basic food items rather than the current cash transfer that lets them buy the food that makes sense for them? Giving people an accommodation supplement lets them find the accommodation that's right for them instead of a box of house that might not.

But that policy is not nearly as effective as it could be, and is far more expensive than it should be, when Councils don't let people build. The costs of housing assistance, as the report notes, were $1.977 billion in 2017. Recall that core government spending in New Zealand in the last fiscal year was about $80 billion. So 2.5% of core spending went towards accommodation supplements, with much of the benefit enjoyed by landlords rather than tenants in an inelastic market. And nobody in National could or would displace Nick Smith from the housing portfolio.

That failure hardly makes a case for a renewed state housing push though. Rather, it makes the case for immediate liberalisation of zoning rules in Auckland eliminating most of the viewshafts and allowing far more density in the places people want to live. You'll get affordable housing if you let people build the mid-tier density that's missing in Auckland: a lot more terraced housing in the inner suburbs. More people on less land per person through taller dwellings, fewer parking spaces, and smaller yards combine for more affordable rentals. Allowing expansion at the city's fringes prevents the price of inner-city land from being unduly bid up.

The report isn't really about policy - it's about the symptoms of the current mess. But the prescription for those symptoms has to depend on whether the underlying cause of the disease is going to get treated. And I have every expectation that Twyford is serious about getting at the underlying constraints on supply. Let's take a somewhat crass analogy. Suppose a person with cancer has two options: palliative care with a lot of opiates and a low life expectancy, or aggressive chemo that has been shown to be very effective for this type of cancer. If you're going to go with the chemo and fix the underlying problem, you're not going to need the palliative care.

Fixing the underlying supply issues and infrastructure financing would do a lot to fix the symptoms the report identifies. I worry that, if those aren't fixed, neither the private sector nor Kiwibuild can really get going (and if they are fixed, Kiwibuild is hardly needed). And we'll still be hitting capacity constraints in the construction sector.

I wish government could focus on just getting the underlying regulatory and funding issues sorted out rather than trying to be a huge property developer at the same time.


* Fun to see that Labour's report is making this correct point. The relatively inelastic side of the market bears the cost of a tax or enjoys the benefit of a subsidy. And so econometric results from 2005's housing market are of little use in determining the incidence of the accommodation supplement in 2017, like I'd noted last year.

No comments:

Post a comment