Forget demand – address supply

Tuesday 3 May 2016

Focus on demand side measures is just tinkering and obscures the real, more complex, issue of supply, experts say.

By Miriam Bell

A pervading sense of panic, and impending doom, currently surrounds any discussion of the Auckland property market.

It seems the summer lull in price growth led many to believe that there may be an end in sight to the city’s housing market pressures.

Now price growth has rebounded and most days see new headlines about Auckland’s world-beating affordability issues.

In response, concern over what this all means, for both house buyers and the country’s financial system, is mounting.

But the reality is Auckland’s housing market’s core problem – a severe lack of supply - never went away, and nor is it likely to for years to come.

Auckland is on an isthmus and, as such, has physical restrictions; it has long suffered from an undersupply of housing; and the city’s population growth is at a record high.

The resulting shortage of housing supply has been ignored for many years and it still isn’t being adequately addressed, according to commentators from across the spectrum.

Economist Shamubeel Eaqub said that trying to solve the problem with demand-side measures, like a land tax for overseas buyers, was worse than merely tinkering, it was embarrassing.

“Imposing such a land tax is a tiny, inconsequential move which avoids the real problem, which is of a huge scale.

“There is a list of possible solutions, but it seems that list is being tackled upside down, with the least effective solutions being adopted first.”

Increasing supply is the best possible solution, he said.

But current supply-side measures, like the opening up of Special Housing Areas and Crown land for development, are simply not enough.

Eaqub said that to significantly boost supply issues such as infrastructure funding, urban planning and land use policies, and the insecurity of, and resulting lack of capacity in, the construction sector have to be addressed.

“This is where things become difficult – because politics comes into it.

“Related issues like tax redistribution for infrastructure funding in areas that will see the most benefit, intensified use of land, and the private sector’s ability to drive the construction sector are highly controversial.”

In his view, to affect change and adopt the solutions necessary, a fundamental change in mind-set and culture is necessary.

For example, Housing New Zealand should have the sort of involvement in the provision of housing that it did in the past.

“This would create a steady base of demand for the construction sector, which means that it could move out of its boom and bust mentality. In turn, this would lift the sector’s capacity, productivity and quality.”

However, Eaqub doesn’t rule out the necessary change of mind-set happening.

“As the list of solutions is worked through backwards, the less effective solutions will be tried with negligible impact.

“The problem will still be there, so more of the solutions will be tried. Eventually, the solutions which seem to politically difficult now will have to be adopted.”

Prominent Auckland property investor David Whitburn agrees the best solution to Auckland’s housing problems is to focus on supply issues.

He too said that demand-side measures, like a land tax, are flawed and would have minimal impact on the essential problem.

“But significant structural shifts to a wide range of contributing factors need to be made to effectively tackle the supply shortage.”

These factors include infrastructure costs and the developer contributions involved; the consent culture at Councils; the building materials duopoly which effectively controls construction costs; and the shortage of skilled tradies.

Whitburn said that addressing these factors would lead to increased production of supply and, in particular, an increase in smaller dwellings, like terraced houses and apartments, which are more affordable.

“We shouldn’t be worrying about silly little things, like a land tax on overseas buyers, which won’t achieve much. Instead we have to throw ourselves into increasing housing supply.”

Comments from our readers

On 4 May 2016 at 3:33 pm Aardvark said:
I fully agree that if there were a slight surplus of houses in Auckland, house prices would come down. The trick is to generate that surplus. The Commerce Commission needs to look at the monopolies that are driving up the cost of raw materials. Also, if councils are imposing excessive costs for developing land. Once the cost of building is brought down, the barriers to cheaper housing will be minimised. At present it can only be financially viable to build the more expensive, unaffordable houses.

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