Three lonely and large elephants

RMA reforms and higher deposit rules will struggle to encourage enough house building and improve affordability until voters debate and agree to jointly fund the infrastructure costs of high migration

RMA reforms and higher deposit rules will struggle to unleash enough house building and improve affordability until voters debate and agree to jointly fund the infrastructure costs of high migration.


The elephants in the room are always too big to touch in any debate. Politicians do their best to tiptoe around them and hope they don’t tread on a trunk or brush a tail and trigger a stampede.

But they also want to be seen to be moving, otherwise the voters who want change will think nothing is being done. That’s why modern politics is often a delicate dance of appearing to move a lot without actually poking the elephants and moving them into another place.

There was an awful lot of tiptoeing around three big elephants in the national debate room on housing affordability this week.

Finance Minister Grant Robertson started with what appeared to be a hiss and a roar by announcing this year’s Budget would be all about increasing housing supply and that cabinet would decide within weeks on limiting housing demand. He even announced Treasury had projected an extra $7b of capital spending by 2035, mostly for new housing supply.

“Now is the time for bold action. The market has moved quickly and rapidly in a way that is not sustainable,” Robertson said on Tuesday of the Government’s plans for Budget 2021.

“We have to confront some tough decisions, and we will do that,” he told a business audience in Wellington.

Minutes later the Reserve Bank jumped into the room with its announcement of the reimposition of rules requiring almost all first home buyers and investors to have a deposit of 20% and 40% respectively by May 1 to try to put out the fire under house prices.

“We are now concerned about the risk a sharp correction in the housing market poses for financial stability,” Deputy Governor Geoff Bascand said.

“There is evidence of a speculative dynamic emerging with many buyers becoming highly leveraged. A growing number of highly indebted borrowers, especially investors, are now financially vulnerable to house price corrections and disruptions to their ability to service the debt,” Bascand said.

“Highly leveraged property owners, in particular investors, are more prone to rapid ‘fire sales’ that potentially amplify any downturn,” he said, adding he expected banks to start applying the tougher May 1 rules immediately. As it happened, ANZ, ASB and BNZ had already independently put up the shutters on the riskiest lending, in part to give their overwhelmed call centres and loan managers space to deal with the deluge of applications.

Later in the day, Prime Minister Jacinda Ardern also appeared to be moving with purpose in the housing debate. She agreed the reimposed deposit rules were a hurdle for first home buyers, which was "the exact reason we are looking at every lever that we have," to make it easier for them.

"No one wants to live in a country where the only way you're able to get into a home is if your parents can help you into one because that just exacerbates the inequality we already have," Ardern told her post-cabinet news conference.

"So that's one of the issues that's on our minds as we look to things to do to tilt the playing field towards first-home buyers,” she said.

The next day Environment Minister David Parker wheeled out the biggest gun of all: the repeal and replacement of the Resource Management Act. It has become the NIMBY’s best friend, the target of hate from developers and first home buyers alike and a byword for delays, blockages and sky-high house prices.

Parker was careful not to over-promise that the removal of the RMA would immediately solve the housing supply problems, but he was clearly hopeful in the long runsd. All the questions were about how quickly the NIMBYs would lose their favourite weapon.

He said it would take three to four years to see a noticeable difference. The Government’s already-delivered reforms to encourage intensification, to finance local infrastructure and legislate to create Housing and Urban Development Authorities were more likely to deliver houses more quickly.

Parker talked about the potential for a cultural change inside council planning departments to say ‘yes’ rather than ‘no’. Even some councillors and mayors wanted change, he said.

“A lot of local authority politicians are frustrated at the slow pace at which planning departments go about their work, and that there is a cultural issue in our planning system, that seems to preserve the status quo, rather than achieve remedies to social ills like a shortage of housing,” Parker said.

But will the replacement of the RMA, the creation of UDAs and the new local infrastructure financing tools actually make it easier to deliver tens of thousands of new houses quickly? And will this extra supply be enough to start making houses more affordable?

Or will councillors, mayors and council planning departments just find other ways to block new housing supply from coming on stream? Will there be new consenting fees, new development contributions, big new targeted rates aimed at new home buyers or new forms of bureaucratic foot dragging?

Do the ratepayers who actually vote want all this extra development and extra people? Do politicians have permission to increase the population quickly?

Elephant number One: How fast should our population grow?

The brutal truth of the housing debate is that there’s never been a debate or clear societal agreement to double our population growth rate through encouraging 50,000 to 100,000 new migrants to arrive each year to work and study with the vague prospect of residency.

That lack of clear consent has underpinned the use of the RMA to block new housing supply. Councils and voting ratepayers don’t believe ‘growth pays for growth,’ especially in the short term. Many voters simply see Councils bearing the cost through higher rates and debts to pay for infrastructure, while the central Government hoovers up revenues from GST and income tax. Without any sharing of those benefits with councils in the form of GST rebates or a share of PAYE, planners and their elected bosses have squeezed growth through the RMA and planning processes.

Unfortunately, the central Government hasn’t come to the party to help with large enough, early enough and strategic enough lump sums of capital for infrastructure. That’s because Budget deficits make it difficult to deliver the tax cuts voters want. Both National and Labour have chosen over the last 20 years to repay debt, run surpluses and cut the size of Government to get re-elected.

The end result is councils and the central Government don’t want to ‘subsidise’ the cost of new infrastructure for housing through higher rates and taxes. Voters in both Council elections and general elections have never given their social license or permission to pay broadly for the infrastructure costs needed to cope with very fast migration.

Parker acknowledges the stresses on councils, but believes there is still enough of an appetite among councils to go for growth.

“It's a fair point to make that the high rates of population growth can make it hard for a planning department to respond. And you know that's a very fair point. But, no, I think that there is an appetite in New Zealand to solve the housing crisis. People don't like to see the next generation struggling to get into affordable housing,” Parker said.

He thinks the infrastructure financing law passed last year will help, along with the Government making densification compulsory and allowing councils to blame the Beehive when angry locals protest against the building of townhouses on their street.

“Part of the answer to that lies in infrastructure financing that we are assisting with. Part of it does lie in the centralized role that takes out of the hands of some local government some of the difficult decisions that they would like to take, but find difficult, and we've done that through the National Policy Statement on urban development,” he said.

The problem is the revolts are growing at local level to the ‘Auckland solution’ being imposed from the Beehive. Local voters in Wellington and Christchurch are up in arms over the densification order. It is symptomatic of a wider quiet ‘revolt’ at the ‘Big New Zealand’ immigration policy that has become the default for both National and Labour over the last 20 years.

The RMA has been the tool of choice for the locals revolting over that policy so simply removing the tool won’t make the underlying revolt go away. Parker still hopes he can tiptoe and nudge through to a freer approach.

“At the moment we stop things under the RMA for non-environmental reasons to protect the status quo and we want to push through that,” Parker says.

Labour’s Parliamentary majority and a wide consensus for the need to replace the RMA mean those laws are likely to pass before 2023, but they leave the core blockages to housing supply in place.

New Zealand’s population has grown much faster than planned for the last 20 years and there is no plan or debate about what it should be for the next 20 years. The default position is fast growth of 1-2% per year (50-100k/yr) as seen over the last decade, with potentially even faster growth of 2-3% per year (100k-150k) if New Zealand is swamped with returning ex-pats and freaked-out skilled people wanting a competent and stable place to live after Covid-19 over the next decade. Ardern, business leaders, international educators and tourism businesses will welcome new migrants, tourists, students and working holiday makers with open arms once the borders open.

National, Labour and the Greens don’t have population policies, particularly around any limits for temporary skilled migrants, or any sort of residency limits. The only party that tried to create a policy, the Greens, were shouted down within a week by supporters accusing their leaders of racism in disguise.

Elephant number two: Who should pay for the agreed growth level and how?

Even if there was a societal agreement on population growth, there would need to be an agreement about how it is paid for, and particularly who should pay.

Should we tax wealth, income, rates or spending broadly so the cost of all the infrastructure necessary for the next million residents (let alone the last million new residents) is smeared equally across all ratepayers and taxpayers?

Or should it all be loaded up on the buyers of new houses through development contributions and targeted rates to fund special bonds for new greenfield and brownfield developments? The default position from both major parties has been the latter for the last 30 years and it got us into this mess.

Treasury and both sides of politics are trying to tweak that current default setting via the Infrastructure Funding and Financing Act passed last year. In my view, it won’t work at the necessary scale or speed because our bond markets are not as deep or sophisticated as the models (the United States, Britain and Australia) the Act is based on. Much of the infrastructure needed is too fragmented and small to be paid for with this system. It also front-loads the high cost of infrastructure onto the ‘marginal’ house supply that sets the price for the whole (very inelastic) market. It also relies on Councils to take the initiative and have the skills to make these work.

Elephant number three: Should we tax wealth to pay for the infrastructure needed for that population growth? The eternal and painful debate about a Capital Gains Tax over the last decade is an example of how that social license has not been obtained. In my view, the clearest, fairest, fastest, simplest and most consistent way to raise revenue to pay for the infrastructure is a broad-based and low rate land tax designed as a hypothecated payment to fund housing and climate change infrastructure.

A 0.5% tax on land values in urban areas would raise around $5b per year and support $250b of crown debt raised over the 100-year life of these assets. It would smear the cost fairly across those who have benefited most from the quadrupling of urban land values over the last 30 years and fund the infrastructure needed for the two million increase in our population likely between 2000 and 2040. No one is suggesting this.

Ardern has ruled out a Capital Gains Tax in her political lifetime and has ruled out a wealth or land tax in this current term. Despite saying she would leave no stone unturned, the wealth tax stone is safely stuck in the mud for now, as is the use of more Government debt.

Robertson chose this week to bank the proceeds of economic growth by borrowing $60b less over the next 15 years, rather than use it to deal with the infrastructure shortage. He was described as “fiscal conservative at heart” as he announced the budget settings.

The three elephants remain quietly in place. The RMA repeal, the LVR news and the Housing Budget of 2021 are good sidesteps, but the tough work of shoving the elephants out of the room remains untouched.