Politicians have spent years wringing their hands over why Aotearoa’s housing market has got out of control – and there is further evidence to suggest it is land – or rather, a lack of it – driving growing unaffordability

Record low interest rates and a lack of land supply, rather than construction costs and building delays, are to blame for New Zealand’s skyrocketing housing market over the past two decades, a new report has concluded.

One economist sees the findings as further reason to develop additional financial incentives to councils reluctant to free up more land for development.

A report from the Government’s housing technical working group, released on Thursday, has used data from the Waikato housing market to better understand the drivers of house prices and rents.

Politicians and commentators have reached for a variety of explanations in recent years.

The impact of immigration has often come under the microscope, while the Labour opposition targeted foreign buyers in 2015 through an ill-advised use of real estate data to identify what critics described as those with “Chinese-sounding names”.

The cost of, and access to, building materials has also been cited as a factor: the Government asked the Commerce Commission to carry out a market study on competition in the building supplies sector, with a draft report concluding the current structure “favour[s] tried and tested building products over new or competing products”.

But the working group, comprising officials from the Treasury, the Reserve Bank and the Ministry of Housing and Urban Development, has arrived at a similar conclusion to previous studies: it is land, or the lack of it, which is among the most significant factors in price rises.

“Regulations and other constraints to urban intensification (building up) and expansion (building out), particularly in the main urban areas, have restricted land supply with implications for house prices and rents.”

Traditional economic theory linking house price increases to either dwelling shortages or rising construction costs is not borne out by Waikato’s experience, the group says.

A shortage of physical housing should affect both house prices and rents – but in the past 20 years, house prices in Waikato have risen 372 percent while rents have grown by just 114 percent. In the same period, the average income increased by 98 percent, and nationwide construction costs by 142 percent.

The sharp rise in house prices, compared with rental costs, suggests it is not the supply of physical houses that is most significant, officials say. Source: Treasury Housing Technical Working Group. Sources: Stats NZ, REINZ, HUD

“While neither completely abundant or restricted land supply exists in practice, our analysis suggests that land supply in the Hamilton-Waikato area lies closer to the more restricted extreme than is commonly understood. The same is likely to be true for much of New Zealand,” the report says.

The global decline in interest rates is in fact cited as the key driver of house prices over the last 20 years, having “significantly reduced the cost of debt servicing and increased home buyers’ ability to pay” – but only in the context of land supply restrictions.

“If land supply had been more responsive, then over time that initial price rise would have incentivised a larger housing supply response, causing prices to retreat and rents to fall below their initial levels relative to income.

“This did not fully happen, because land supply has been restricted.”

Instead, the drop in interest rates was “captured” by higher land prices, in turn creating less of an incentive to build new houses.

“Consequently, the initial price rise caused by lower interest rates persisted, and the longer-run retreat in prices and decline in rents did not materialise.”

The report says it is aspiring first home buyers struggling to save a house deposit who have been worst affected by changes in the housing market, with many people forced to delay their dreams of homeownership and others “locked out…altogether”.

In contrast to those aspirants and other renters – who have themselves been hit by recent increases in rental costs – those with the capital for a deposit have benefited from lower mortgage rates.

In addition, those who already own houses have benefited from the massive price increases, “amount[ing] to a redistribution of wealth from non-owners to owners”.

The report says tax distortions – such as the lack of a capital gains tax – are also a factor by increasing the value of housing compared to other investments.

“When councils only see costs from enabling growth and central government sees the benefits from growth, that’s a recipe for continued friction between local and central government and for a housing supply shortage.”
– Eric Crampton, New Zealand Initiative chief economist

New Zealand Initiative chief economist Eric Crampton told Newsroom the report was a useful explanation of the effect of land supply constraints on the housing market.

While there had been some improvements in supply through the Auckland Unitary Plan and initiatives like the national policy statement on urban development, Crampton said they had not gone far enough – primarily due to the incentives councils still had to restrict growth.

“It has felt as though councils for the past decade have been using their zoning and consenting functions as a way of protecting their balance sheets against the cost that they perceive as coming from urban growth – so if a council finds it too difficult to upgrade a trunk water pipe to allow a lot more apartment buildings, they’ll find ways of zoning to make sure that nobody can build apartment buildings in those places.”

While the policy statement and housing supply legislation had attempted to remove some of the measures councils could use in that space, the underlying problem of infrastructure costs had not been addressed.

Crampton said more infrastructure funding and financing reforms were needed, such as giving councils the ability to issue debt that did not affect their main balance sheet and could be paid off over decades rather than years.

Councils also needed to be able to share in the benefits of growth through the revenue associated with development, he said.

“When councils only see costs from enabling growth and central government sees the benefits from growth, that’s a recipe for continued friction between local and central government and for a housing supply shortage.”

Treasury deputy secretary and working group chair Dominick Stephens said the group had not made policy recommendations, but a focus on land supply would help the country’s housing system.

The Government’s work on resource management reform and medium density standards could have an impact, Stephens said, while any solutions needed to be national in scale.

Sam Sachdeva is Newsroom's national affairs editor, covering foreign affairs and trade, housing, and other issues of national significance.

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