What a bipartisan approach to the housing emergency could look like and why it's needed

National proposes Christchurch-style housing emergency moves and says its open to new ways to fund infrastructure & housing developments. But it's wary of borrowing a lot more to do it or taxing homes

TLDR: National is looking for bipartisan ways to address the housing crisis, including Christchurch-style interventions to increase supply. But it’s not going as far as supporting new taxes on housing or wealth, or increasing current net debt or spending to do it. It’s also wary of setting targets on affordability, supply or migration.

In my view, any bipartisan approach will struggle to change investor expectations or reform the building industry in a way that significantly increases housing supply and reduces demand without properly addressing the two politically and financially expensive elephants in the room.

Councils need help to pay for infrastructure with new funding tools and revenues, and the tax and banking incentives that reward leveraged investment in existing suburban homes need to be changed. Labour and National would also need to convince renters, first home buyers, builders and ratepayers they’re serious and can deliver more affordable homes to buy and rent in a way that won’t take decades.

---

It was a moment of rare candour from a very careful politician and it cut to the heart of the New Zealand’s housing crisis. And it’s been barely reported.

Close to 5pm on December 7, as she was rushing to finish her second-to-last news conference of an exhausting year, Prime Minister Jacinda Ardern inadvertently revealed the darkest political and financial truth of New Zealand’s economy and society. She essentially said her Government could never really improve housing affordability by forcing or allowing house price falls because voters expected unending inflation in the value of their most important asset and it was her job to guarantee that.

The question came out of left field in a way that seemed innocuous, and she wanted it to be the last question of the day. Ardern was asked whether the Government’s latest and ongoing housing policy reset was really only wanting house price inflation to moderate to around last year’s four percent rise, rather than for house prices to actually fall. What would be so bad about a fall in house prices, she was asked.

“It is much more sustainable to have those much smaller increases. I think people expect that you see that in the market,” Ardern said.

“What we also accept is that for most New Zealanders, their house is their most significant asset. So if you see, for instance—as was predicted at the beginning of the year—a significant crash in the housing market, that impacts, of course, people’s most significant asset,” she said.

Ardern was essentially saying voters expected some moderate inflation, and it was her job to provide it. The unspoken mathematical implication of house price inflation being just one or two percent below household income growth of (currently) around five percent is that it would take over 100 years for house price-to-income multiples to return to where they were 20 years ago.

House prices have quadrupled since 2000, but household incomes have only doubled. Only a halving of house prices would restore affordability to the same levels as 20 years ago any time soon. Even if prices flattened forever, it would take 13 years for even those on average disposable incomes to be able to afford that home at the same house price to income seen in the early 2000s.

Financial and political journalist Jenee Tibshraeny asked that last question of the news conference and she rightly reported the reply. Her followup came with a sense of growing frustration and incredulity that many of her renting colleagues in the Press Gallery share: how is housing going to become affordable any time soon when house prices don’t fall, or aren’t allowed to fall?

Tibshraeny is based in the Press Gallery in Wellington and writes about politics and economics for Interest.co.nz, but also writes about personal finance and investment. Her final and plaintive question that elicited the admission approached the implied government guarantee of unending inflation from the point of view of any investor in any other type of asset, such as shares.

Here’s the full transcript to show how the admission came:

Tibshraeny: But just—sorry, one more thing. When I—

PM: Your one question!

Tibshraeny: —go to buy shares, I don’t expect that they will always increase. That’s the part of an investment, they go up and they go down, so why—

PM: And you have got into the heart of the issue.

Tibshraeny: Why is it different for housing?

PM: This gets to the heart of the issue of why so many New Zealanders turn to the housing market. Thanks.”

The Prime Minister then walked up past Tibshraeny and left the Beehive Theatrette.

I was there for that press conference in early December and have seen the reality of the implied Government guarantee and the unspoken acceptance of housing unaffordability over the last decade. The Government and the Reserve Bank rescued the housing market in 2008/09 and again in March last year by slashing interest rates, printing money and protecting tax breaks for property investors.

Then-Prime Minister John Key quickly abandoned his 2007 talk of a sharp increase in housing supply during the Global Financial Crisis, saying too much supply could drive down prices. He also rejected his Tax Working Group’s recommendation for a land tax, saying the resulting double-digit slump in land prices would endanger the banking system. I’ve stopped expecting anything different. It’s one of those deep truths that is so deep no one bothers or risks saying it loud. Especially to renters.

A telling exchange

But I’d never seen this implied guarantee for home owners stated so baldly. The closest I’d seen was in the Newshub leaders’ debate before the election when Patrick Gower asked Ardern and Opposition leader Judith Collins whether they wanted house prices to drop.

"I don't want them to keep escalating, it's not sustainable," Ardern said in that debate.

Gower challenged her on whether prices should fall, rather than just not rise.

"I don't want them to grow Paddy, simple," Ardern answered. "I want them to stabilise so that people can get to the market," she said.

Collins was also wary of supporting any fall in prices.

"In some cases they're going to have to go down, but you don't want to have people who have borrowed up to the hilt to buy a house suddenly having negative equity - and that I think is the problem Ms Ardern has," Collins said in that debate.

The exchange clarified the brutal Catch-22 politics of trying to move to affordable housing after a quadrupling of prices in 20 years that now means so many voters depend on untaxed capital gains to support their small businesses and their retirements.

To illustrate this, the value of New Zealand’s houses rose $136b in the 2020 year, which was worth three quarters of total household disposable income from actual work. House values rose nearly 17 times more than incomes rose over the last 12 months. Most home owners now ‘earn’ far more from their houses than their jobs or New Zealand Superannuation, and have done for most of the last decade.

To make housing affordable for both renters and buyers in a voters’ lifetime, any credible politician would have to allow or force house prices and rents lower. They know they can’t without losing an election. That was proven just over a year-and-a-half ago when Ardern walked up those same steps in the Beehive Theaterette after declaring she would not introduce a Capital Gains Tax while she was Prime Minister, having failed to convince Winston Peters to agree to one. She said Labour had tried in three elections and failed, so she wouldn’t try again. She went on to rule out wealth and land taxes in last year’s election campaign. She was re-elected with an unprecedented landslide. The only parties actively campaigning to tax wealth in houses in 2020, The Green Party and The Opportunities Party, saw their vote share drop from 2017, when Labour also campaigned (until the last week) for a CGT. (Corrected from an earlier version that only referred to the Green vote share, which did not drop)

Assuming the political restraints around taxing houses and pushing house prices down are impossible to solve, what can politicians therefore do to rein in the beast, if not slay it? And how much could they achieve?

What air cover could look like

Some sort of bipartisan approach would take a lot of the heat out of the issue and reduce some of the political risks. National has begun signalling it is open to changing some of its approaches around housing, and even helping the Government, particularly around increasing housing supply and funding infrastructure for new housing.

National’s new housing spokesperson Nicola Willis has offered to take a bipartisan approach with Labour to use Christchurch earthquake-style emergency measures to open up new brownfields and greenfields land for new housing right around New Zealand, and to help Councils fund the infrastructure needed for those houses.

“Change is needed and we are open to new ideas,” Willis says.

“For us and the Government, improving housing affordability must be a central focus,” she says.

The ambition only goes so far though. Willis is not in favour of taxing houses or any large increase in Government debt beyond the current forecast track to do it. Or widespread falls in prices of suburban homes or land.

“We need to see some house price stabilisation,” she says, pointing out that median and average prices could fall without the prices of larger, existing suburban homes falling if many, many more one and two bedroom apartments and townhouses were built at lower price points for first home buyers.

Housing Minister Megan Woods was on leave and not available for comment. A spokesperson said the Government expected to make announcements in “coming months” about its review of housing settings launched late last year.

Stabilise first

Both sides of Parliament and first home buyers have their work cut out, given Core Logic reported earlier this month that house values rose 6.4% in the December quarter alone, which was the fastest growth rate since the first quarter of 2004. Despite the Covid-19 shock to the economy, prices rose at double-digit rates for the year in Hamilton, Tauranga, Wellington and Dunedin. Auckland values rose 9.1%.

Willis says the Labour Goverment can’t just wait to repeal the Resource Management Act as a pathway to opening up more land for new homes.

“We can’t afford to wait years for this Government to get on with Resource Management Act reform while house prices continue to rocket,” she says.

“Faced with an emergency of inter-generational proportions, action is required.”

Christchurch was the one exception to the worsening housing affordability over the last decade. It was already more affordable than Auckland, but static to slightly-lower prices after a post-quake building boom helped widen its affordability improvement.

The then-National Government broke both the unwritten rules of central Government around new housing supply with its response after the 2010/11 quakes. It over-rode the Resource Management Act to accelerate the opening of new land on the fringes of Christchurch and it used central Government money to pay for infrastructure.

“If we get the regulations right, developers will build at scale and pace,” Willis says, pointing to the success over the last 10 years of private infill townhouse developer, Williams Corporation.

Williams is based in Christchurch and is now also selling townhouses in Wellington and Auckland. Launched in 2010, Williams said this week it sold 577 homes worth $310m over the last 12 months, which was more than double the amount sold in 2019.

Willis says National is also open to funding both developers and Councils differently to help accelerate supply, using existing tools and funds such as Kainga Ora borrowing, NZTA funding and an Infrastructure Bank, as National proposed at the election last year.

She suggests using funds set aside for KiwiBuild to underwrite new building or infrastructure, along with new ways for first home buyers to buy their homes such as rent-to-buy and shared equity.

She also points to the billions currently being spent on Accommodation Supplements and emergency housing assistance as both a sign of failure and a potential way to fund new developments. Rent subsidies paid by the central Government are forecast to rise from $2.6b last year to $4.2b by 2025. They have already risen from $1.9b over the last four years, Treasury figures show. Just as first home buyers use their rent to calculate how much they could afford to pay in interest, the Government could currently borrow over $400b with that $4.2b of rent subsidies. At $500,000 per dwelling, that $400b would ‘buy’ 800,000 new homes, which would be half the current housing stock of the entire country.

The increase in rent subsidies also before the sharp rise in motel and emergency accommodation costs as families unable to get private rentals join the state house waiting list.

“This is costing $1m per day putting New Zealanders up in motels,” Willis says.

“There are families raising kids in boarding houses and hostels. That has massive inter-generational costs.”

Willis says even the most enthusiastic National voters are telling her the worsening housing affordability situation is bad for their own families and society as a whole. She points to the inevitable harm to the health, education and work prospects for kids growing up in housing poverty.

“The negative effects are leaking into all aspects of our national life,” she says.

National was willing to revisit its views on how councils were financed. New Local Government spokesman Chris Luxon was looking at how to better fund councils, she says.

But the new thinking can only go so far. National still opposes a capital gains, wealth or land tax and there are no signs of it loosening its opposition to public debt being much more than 20-30% of GDP over the long run.

“You can’t tax your way out of a housing crisis. More taxes doesn’t make more houses,” Willis says.

She is also reluctant to set any targets around the numbers of new houses needed or the appropriate measure of housing or rental affordability to target. She also refers questions about limiting population growth through tighter migration settings to National’s other spokespeople.

Are we there yet?

National and Labour aren’t there on a bipartisan approach yet: not even close. They combined in the late 1980s and early 1990s to wage war on double-digit consumer price inflation by giving the Reserve Bank independence and setting a formal target of keeping inflation around two percent. That involved passing acts of Parliament and essentially promising voters they would stick to that two percent. It worked. Expectations changed.

We are still a long way from a bipartisan approach that would change the expectations of home owners, landlords, renters, house builders and, ultimately, voters.

Possible bipartisan moves on housing

• Emergency legislation or regulation to remove urban limits and rezone both greenfields and brownfields land for homes

• Supporting the use of Kainga Ora, NZTA and other infrastructure funds to build both new state houses and community houses

• A joint approach to body corporate reform to make apartments more attractive

• Support for extra funding for buses, trains, cycling and walking to encourage more buying of brownfields apartments and townhouses that don’t always have car parks.

Litmus tests for politicians et al

How can you check whether politicians, planners, protesting residents, bankers, developers and landbankers are serious about improving affordability?

• Do they want house and land prices to halve back to where they were 10 years ago? If they answer no they’re not serious. The Reserve Bank’s most recent stress tests of banks showed they could handle a 50% fall in house prices at the same time as a massive recession and unemployment over 13%.

• Do they support the Government or Councils borrowing more to fund infrastructure? If they answer is no because they fear higher taxes in the long run and/or higher rates now then they are not serious.

• Do they support the rezoning of single-story residential land into medium-density three-to-four storey apartment and townhouse developments? If they answer no they’re not serious.

• Do they support significant subsidies for public transport, cycling and walking to encourage the densification of growth cities? If they answer no because they don’t want to pay potentially higher rates or taxes then they’re not serious.

• Do they support turning wide inner-city roads into cyclepaths and walkways and removing parks in CBDs? If they answer no they are not serious about improving affordability.

• Do they support taxing wealth tied up in land? If the answer is not they’re not serious about paying for the long-term costs of investment in housing and climate change infrastructure needed over the next 20-30 years.

Ends