Fixing the Pinch: How to Save the Housing Market

Auckland has the fourth least affordable housing in the world behind only Hong Kong, Sydney and Vancouver. We have a growing homelessness problem and many of this generation of young adults may well grow old having never owned a home if we don’t fix this acute housing shortage.


New Zealand’s small populist core, embodied by the Rt. Hon Winston Peters and his New Zealand First party, would have you believe that the issue with Auckland and other housing markets – Queenstown and Tauranga in particular – is the continued immigration into these key markets. And while immigration is partially behind the strong demand for our real estate, it is not the problem.

The market for residential homes is standard economic market comprised on two economic sides: consumers and producers. Consumers (families, individuals and yes, investors) create the demand for the housing while producers (developers, builders and other homeowners) supply the homes for sale. In order to solve our housing issues, we must address both sides of the market equilibrium.

Demand Issues

On the demand side, significant progress has already been made. Of special note is the Reserve Bank implementation of Loan-to-Value Ratio restrictions, which both lowers the availability of credit to speculateive investors and reduces the systemic risk caused to our financial markets by low-equity loans made in a high-price environment.

With reference to the popular conjecture that foreign migrants are responsible for all Auckland’s problems – including housing – we believe that our high level of high-skilled foreign migration is a sign of New Zealand’s growing and successful economy and high quality of living and is of vital importance to our economy. We don’t believe that Winston Peters and his supporters have it right; we believe immigrants are valuable and that nobody shouldn’t be the subject of uneconomic, bigoted xenophobia. We reason that rather than restricting the immigration of high-skilled workers, we should alter other policies to keep pace and better all New Zealanders, natural-born and immigrant alike.

Essentially on the demand side, our problems are mostly solved.

Supply Issues

However, when dealing with the supply of residential homes we have substantial issues. We see that both our planning and rating systems require radical, liberal reform in order to put a lid on rampant house price inflation.

On Planning

New Zealand’s planning system is not well set up to deal with change. Processes for updating land use rules are slow and uncertain. There is too much unnecessary, poorly-targeted regulation. Many councils have sought to manage or direct the evolution of cities in highly-detailed and prescriptive ways. Resistance to change from local residents and barriers to funding new infrastructure also inhibit a city’s ability to grow and respond to change.

New Zealand Productivity Commission

We agree with the Productivity Commission regarding the spirit of planning laws. These highly-restrictive laws are both philosophically and economically flawed.

From a philosophical perspective, we view such stringent planning restrictions as undue impositions on owner’s property rights – essentially, they own the property, what right do council bureaucrats have to tell them what they are permitted to build or do on it?

And from an economic perspective, planning restrictions cause inefficiency in the property market. By artificially restricting the areas in which various types of property may be built, planning laws cause generally higher prices.

We believe in a wholesale reform of New Zealand’s planning laws, which are primarily contained in the Resource Management Act. Our plan is as follows:

First, we would repeal the RMA and replace it with two separate acts dealing with its individual parts: a Planning Act and a Communal Resources Act.

Communal Resources Act

The Communal Resources Act would address the protection and preservation of important public resources, for example clean water and air. Under the CRA, all those wishing to undertake action which could seriously or irrevocably impact such communal resources would be required to either gain permission from those who would directly affected in applicable circumstances (for example with regards to a stream) or from the Regional Council or equivalent body concerned. Users of communal resources would be entitled to sue those who, without permission, seriously damage or impair said resource.

Planning Act

By contrast, the Planning Act would deal with the planning of cities and towns and the location of various types of property. The Planning Act would take a positive-by-default view of all development – that is, unless any provision of the Act says otherwise, development can go ahead.

First the Planning Act would enable neighbours and other affected parties to sue property owners for a legislated form of the common-law tort of nuisance in a new Planning Tribunal, appealable to the High Court.  This new method of redress would provide the central plank of the new law.

The Planning Act would require property owners wishing to develop their property in a manner possibly offensive to others to provide all those possibly affected with plans for the development and to lodge such plans with their Regional Council. Those wishing to object to the development would then be entitled to provide a ‘Notice of Objection’ to the property owner and the Regional Council. The property owner would be required to respond to each Notice and make good faith efforts to address legitimate problems noted.

Property owners and objectors would be entitled to enter mediation to address problems noted and both sides would be contractually required to obey the the results of said mediation. Should large numbers of Notices be received, the property owner would be entitled to request a mass mediation conducted under the auspices of the Council, the results of which both sides would be contractually required to obey.

If mediation or agreement could not be reached, the objector would be entitled to take the property owner to the Planning Tribunal preemptively in order to prevent the development occurring. If the objector did not preemptively take the property owner to the Tribunal, he waives his rights to suing for a standard tort of nuisance.

This new common law, property rights-based approach to urban planning in New Zealand will allow property owners greater flexibility with their land and will ease the pressure on housing costs by increasing the supply of housing and decreasing the time required for resource consent. It must be noted, for the absence of confusion, that we are not advocating for the removal of building consent processes regarding safety but rather the replacement of extraneous processes that attempt to address neighbours’ rights.

On Rating

The current council taxation system in New Zealand is fractured and, in many cases, inefficient. There are three valuation approaches that can be utilized by councils when considering how to charge rates:

  1. Annual value – a measure of what the property would fetch if rented on the open market 2.
  2. Capital value – the value of the property if it were to be sold on the open market.
  3. Land value – the value of the property if it were unimproved land.

Only one of these techniques is supported by the vast majority of economists: Land Value. Even the founding father of economics, Adam Smith, supported it. Their reason for supporting it is simple: it doesn’t detract from investment in property improvement. Whereas the other methods of rate valuation punish property owners to improving their land, land value taxes don’t. This concept is further explained by the Economist in their Economist Explains piece on ‘Why land value taxes are so popular, yet so rare’.

We believe that land value tax is the only rational choice for council funding and that it should be mandated for all councils.

Conclusion

We believe that the key problems in Auckland, Tauranga and Queenstown’s housing markets are on the supply side. We think that in order to solve these problems we must address both our rating and planning systems. Our planning system reform would involve a complete change in approach from the current Resource Management Act based on property rights and the common law, while on the rating system, we advocate a move to land value taxation.

Footnotes

  1. Local Government Glossary
  2. Local Government Glossary
  3. Local Government Glossary

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