COMMENT: How to fix the housing crisis

It seems that everyone has an opinion on how to fix the housing market. Some favour intervention, while others believe that the market will “sort it out” on its own. In the majority of cases, these solutions are based on an assumption that the introduction of their pet initiative or policy (or decision not to act, as is the position of the free marketers) will solve the problem.

In my experience such simplistic solutions are doomed to failure. Either because they lack an underlying understanding of the real nature of the housing crisis. Or because they result in unintended consequences which simply end up creating a new set of problems in place of the ones they’re trying to solve.

So what are we actually trying to achieve? What’s the nature of the “crisis” we read and hear so much about? There are multiple views on this. But, for my money, there are three ‘guiding’ objectives which should underpin housing policy:

• We need to dramatically increase supply to start making a dent in the 100k homes that we need right now (particularly in Auckland)
• For every ten people who need housing, four will live in a rental so we also need to increase the stock of rental housing
• Home ownership rates have dropped significantly over the past 20 years so we need to fix this by doing everything we can to get first home buyers into homes

That’s it. No rocket science – just a clearly articulated set of things we need to achieve as quickly as possible.

Now the solution:

1. Start with the premise that capital values should be protected. Apart from the fact that no one (other than a few canny property investors) is going to invest in a market where values are in free fall, the value of our homes also underpins business investment, personal spending in the economy and the ability to invest further in housing. That means solutions which promote ideas to “crash” property values need to be dismissed out of hand. This must be the primary criteria by which all other policy is measured.

2. Increase LVR restrictions on existing dwellings. Yes, you read that right. If we agree that the objective is to dramatically increase supply we need to discourage the purchasing of existing dwellings for occupation or investment. This won’t affect those who already own a home with reasonable equity. But it will encourage first home buyers and investors to look seriously at buying new dwellings. Which brings me to the next step…

3. Completely remove LVR restrictions on new dwellings for first home buyers. Doing so will not only send a clear message to first home buyers in favour of building, it will also remove one of the biggest obstacles stopping these folk getting into the market. No more need for massive deposits or “the bank of mum and dad”. All they’ll need will be a decent household income and a good credit rating.

4. Abandon plans to punish Investors. The Coalition Governments plans to hit investors in the pocket may play well to a section of their support base. But they fly in the face of the things that we need to do to solve the housing crisis. Other than a drop in LVRs, investors don’t need big new incentives to invest – just the preservation of the environment which already exists. This means shelving plans to introduce a capital gains tax on Investment property and retaining transferable tax losses, either in their entirety, or at least for those who invest in new dwellings.

That’s it! No doubt these ideas could be refined and tweaked. But introducing them, even in this form, would address the objectives outlined above and quickly change the behaviour of the market in a way which would lead to a big lift in the construction of new dwellings.

That said – will they be floated as policy by either of the main parties? Don’t hold your breath.