Straight Thinking – By Owen McShane

The Prime Minister has confirmed Government’s intention to enable the mandating of affordable housing within private residential developments (what Americans call “inclusionary zoning”) – effectively endorsing the “Enabling Territorial Authorities Bill”, already tabled by Housing Minister Maryan Street.

The next day the Prime Minister told Morning Report these programmes are “working” in Australia and elsewhere. However, they may be “operating”, but they are not “working”. Governments everywhere tend to confuse spending taxpayers’ money with delivering results.

Unfortunately for the Government, US research confirms that over a ten-year period, in those US jurisdictions which have mandated affordable housing laws, they have reduced supply, on average, by ten percent, and increased house prices, on average, by twenty percent.

In their 2004 papers, “Housing Supply and Affordability: Do Affordable Housing Mandates Work?”[1] urban economists, Benjamin Powell and Edward Stringham, conclude:

“If more affordable housing is the goal, governments should pursue policies that encourage the production of new housing. Ending the price controls of inclusionary zoning would be a good start.”

Their papers also show we are not talking about nickels and dimes:

“Inclusionary zoning causes the price of new homes in the median city to increase by $22,000 to $44,000. In high market-rate cities such as Cupertino, Los Altos, Palo Alto, Portola Valley, and Tiburon we estimate that inclusionary zoning adds more than $100,000 to the price of each new home.”[2]

This kind of legislation leads to a flow of downstream legislation to address consequent anomalies. For example, the Councils soon regulate to prevent people buying an “affordable” home on Monday and selling it for market rates on Tuesday, or renting it out on Wednesday. Typically they ban sub-letting and prevent resale for up to 25 years, or require that 100% of any capital gain be passed back to the local government.

This has two unfortunate outcomes. The subsidized homeowners are reluctant to improve their “affordable” home because they will lose their “sweat equity” on resale. Worse, they are reluctant to buy these homes because they are locked out of any long term capital gain – which is an important reason for aspiring to home ownership. As one might expect, in one surveyed development 50% of the subsidized households had violated their resale and rental restrictions.

Hence, the homes frequently end up being occupied by associates or family members of the developer or the council.

There is no need for New Zealand to repeat this failed experiment. The failures are well documented by experts who have studied these “mandated markets” over many years. We should not be surprised by these outcomes. “Inclusionary zoning” is simply disguised rent-control and has produced the same outcomes – reduced supply and higher prices.

Land-banking is a symptom – not a cause.

Defenders of Metropolitan Urban Limits and other constraints on the supply of land, claim there is no shortage of available lots, and that the apparent shortage is the result of greedy speculators sitting on land-banks and withholding supply.

Such commentaries overlook the way markets operate. Landowners gain nothing from holding onto land unless the increase in value of the land is greater than the total holding costs over the same period. On the other hand, if annual holding costs are higher than the annual increases in value then the landowner has every incentive to bring the land to market.

So don’t blame the landowners. Blame the regional and local councils whose rules and regulations strangle the supply of land and rapidly inflate prices..

The solution is to release land for market and reduce compliance costs.

Capital Gains tax is an issue only when speculation pays.

Similarly, many commentators insist that the major driver of inflated land prices (and hence the overall cost of housing) is the absence of a capital gains tax on investment properties.

However, the absence of a capital gains tax is only an issue when increases in property values are higher than the rates of inflation, or higher than added value from improvements.

Capital gains taxes on investment properties will have unintended consequences.

Any nation's housing stock suffers ongoing obsolescence over time.

Old houses (and even not-so-old houses) need upgrading of wiring and plumbing, new kitchen design, better insulation, and even basic structural repairs to keep the housing stock in line with current market demands. Much of this upgrading of the housing stock is carried out by enthusiastic “do-up” amateurs, who invest their capital, their own “sweat equity” and their skills to upgrade houses for on-sale. If we tax their capital gains they will have to enter long negotiations with IRD over the contribution of inflation, their sweat equity, and their skills.

Most will find better things to do with their time, and the quality of housing stock will suffer over the long term.

Young entrants into the housing market make a greater contribution to this “do-up” activity than regular investors who typically invest-to-rent. Our TV screens document these activities from markets all around the world. They leave the world a better place. And what would the Living Channel do without them?

These new entrants will not be competing with the “wealthy dentists and doctors” if the wealthy dentists and doctors find the sharemarket provides better returns than an inflating housing market.

Once again, we should address the root cause rather than use a symptom of market interventions to gather more tax revenue and repress healthy economic activity.

Government is about to become a Sub-Prime Lender.

The Prime Minister also confirmed that Government will launch a shared-equity scheme in July to assist low income households buy into the presently highly-inflated housing market.

Launching such a scheme at this time is fraught with risk.

In effect the Government will be entering the “sub-prime” mortgage market by either supplying or guaranteeing loans to purchasers who otherwise would not qualify. Naturally, the Government will demand the sub-prime loan must be repaid on sale of the property.

It is proposing to do so just when the housing bubble in New Zealand appears about to burst, which will mean that many borrowers will see their equity disappear as valuations fall.

The first equity to disappear will be the Government's “Shared Equity” because it has topped up the loan.

We have seen what happened to the financial sector in the US when the housing bubble burst and there is no reason to assume the same thing will not happen here.

Any Government which becomes a Shared Equity investor at such times has a massive conflict of interest.

On the one hand it wants to make housing more affordable, but will soon realise that falling values will destroy its Shared Equity investments.

Hence the Government's financial interest is best served by keeping housing over-priced and unaffordable.

Which way will the Government jump?

The Good News

Mayors Brown (Far North), Semenoff (Whangarei) and Tiller (Kaipara) have presented a plan which would reduce Councils’ liabilities for building failure by moving towards a system based on insurance, and guarantees, and consequently allowing Councils to reduce their red tape which is mainly based on protecting council from litigation.

The good news is that Building and Construction Minister Shane Jones is taking the Northland Mayors’ ideas seriously. Most overseas jurisdictions limit the term of Council liability for building failure to say five or seven years, or to the first sale. After that “the buyer should beware”, and use building surveyors to assess the fitness of any potential purchase.

The Privy Council warned us against going down the never-ending liability route in its 1995 decision (Invercargill City Council v Hamlin, AC 624.)

These Northland Mayors have their feet firmly on the ground, and Shane Jones has the good sense to look beyond his officials for advice.

Watch this space.

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