MICHAEL REDDELL ON HOUSE PRICES
Updated: Mar 24, 2021
Throughout my almost 14 years as Governor of the Reserve Bank, Michael Reddell was one of my most insightful advisers. And one of the many issues he warned about was the danger to social and economic stability of a continuing escalation in house prices. As a result of that warning, I commissioned a study on the issue by Owen McShane, who in turn pointed out the potentially disastrous consequences of the tight constraints on the availability of land on which to build houses.
That was in the late nineties, and what has happened since that time amply illustrates what Michael Reddell forewarned about. House prices have been increasing much faster than incomes for some three decades, to the point where New Zealand house prices are, relative to New Zealand incomes, among the most expensive in the world.
But there is absolutely nothing inevitable about this situation. As long ago as 2010, the Key Government asked the newly-established Productivity Commission to advise on the causes of what were already very expensive houses. The Commission concluded that there were four main causes of the situation, three of them related to the policies of local government.
The biggest single problem was the tight restrictions which local governments like the Auckland Council (and its predecessor organisations) had placed on the availability of land for building. This had pushed the price of residential land inside the so-called Metropolitan Urban Limit (sometimes called the Rural Urban Boundary) to some 10 times the price of land outside that boundary.
This also contributed to a second cause of high house prices: because land was so expensive, and typically available in small amounts, the house building industry tended to be very small scale, with many builders building just a handful of houses each year, with no scope for the efficiencies of larger-scale production.
And third, local authorities had tended to become incredibly risk averse and extremely slow in granting building consents, so that there was often a very long delay – sometimes amounting to several years or even decades – between a builder wanting to build and getting consent to do so. And that delay added enormously to the cost of the eventual house.
The Key Government did little or nothing to fix the situation and things have become worse since 2010. When 400 square metres of bare land is on the market for $800,000 in Flat Bush, as currently, it is obvious that we have an extremely serious problem.
Nothing the present Government has done, or seems likely to do, will make any significant difference to this appalling situation. Asking the Reserve Bank to take house prices into account in setting monetary policy was the height of absurdity, and the Governor treated the suggestion with the contempt it deserved.
Indeed worse: after promising to abolish the Metropolitan Urban Limit around Auckland when Labour first formed a Government with New Zealand First in 2017 – something which would have made a real difference to house prices – the Prime Minister has since that time explicitly ruled out that course of action, and made it clear that she wants house prices to continuing rising!
In an article for Business Desk this week, Michael Reddell makes the point that the solutions to the crisis don’t lie in the tax system, or in scapegoating landlords and “speculators”, as can be seen from looking at the US: with an essentially similar tax system across the US, some cities have very expensive housing (though almost none as expensive, relative to incomes, as in New Zealand) but a great many cities have house prices which are very substantially cheaper, with house-price-to-income ratios that are very much lower than in New Zealand and that haven’t changed much in decades.
Mr Reddell argued for four urgent steps:
First, legislate now to establish a presumptive right for any landowner to build as many single or two storey dwellings on any land they own, anywhere. Aggressive competition among landowners on the fringes of our cities and towns, scared that they will miss out and that development will happen elsewhere, is what would underpin much lower urban land (and house) prices.
Second, empower groups of existing landowners in built-up areas (perhaps at a block or individual part of a suburb level) to determine - by super-majority vote (perhaps 75 per cent) - how much, if any, additional density they want to permit on their land. Vote for greater density and they can capture any gains from land made more valuable as a result (which might not be large outside central city areas if new land can easily be brought into development). If not, respect those groups of landowners’ preferences.
Third, the Prime Minister needs to make it a personal priority - featuring prominently in all her communications – that house and urban land prices should fall very substantially and stay down. Serious reforms happen, and are followed through on, when Prime Ministers believe in them and commit their skills and political capital to making them happen. We can’t have any more of senior political figures (both sides of politics) feeding a narrative that house prices should always trend up. They shouldn’t.
Asset markets trade on expectations, and no smart purchaser is going to be keen to pay ever higher prices today when there is a serious chance, by actual reform now and evident political commitment, that the asset will be much cheaper a year from now.
Fourth, as too many ordinary families - just wanting a place to call their own – have been caught in this government-facilitated mess, establish a partial compensation scheme for owner-occupiers (only) who have bought in the last decade and who sell in the next decade. It won’t be cheap, but neither are the economic and social costs of the mess governments have got us into, that among other things has young people convinced that what should be a normal aspiration - buying a first house in your 20s - is now some unattainable aspiration, reserved for the offspring of the rich. Stabilising prices now and hoping low inflation does the job over decades is no adequate substitute for proper reform. Our young people deserve much better.
An unrealistic pipe-dream? On the basis of the Prime Minister’s track record to date, almost certainly. She has explicitly said she wants house prices to continue rising - although paradoxically also claims to care about rising wealth inequality and child poverty. Perhaps she really does care about those issues. If she does, she has to have the courage to fix the housing market once and for all. If she did, she could leave office knowing that she had made a real and positive difference to the lives of millions of New Zealanders – and urbanized New Zealand would still occupy less than 1.25% of our land area.
Michael Reddell blogs at Croaking Cassandra