Owen McShane: Why isnt the economy doing better - Part One

Many New Zealanders are asking “Why isn’t our economy moving out of recession?” A growing number of international urban economists, from Paul Krugman to Thomas Sowell, now agree that economies cannot grow out of recession unless they build their way out of it.

Contrary to central-planning lore suburban housing will be the main driver of that recovery. Over its lifetime every new house generates a huge number of jobs, contracts and purchases.

Many blame the slow sales of big-ticket items on people saving rather than spending. But while New Zealand is building only 12,000 houses a year rather than 24,000, 12,000 new washing machines, kitchens, heaters, carpets and lounge suites are either not bought or are bought in Australia. Over the decades, suburban home owners keep investing in improvements to their suburban improvements such as landscaping, swimming pools, motormowers, new decks and even sleep-outs and granny flats. Renters in high density slabs are stuck with what they are given.

When a residential market is functioning properly the value of land itself may not even keep up with inflation. Residential land, like farm-land is not inherently productive. The value of the land is that it provides the benefits of secure title – until the planners take over and destroy “the right to build and improve”, as they have done in the UK, and in many parts of New Zealand.

The UK residential build rate is currently the lowest since the 1920s, and, like New Zealand, is only half the rate required to meet demand.

These facts are steadfastly ignored, largely because our economic commentators tend to focus on real estate trading rather that actual construction and supply. They see skyrocketing rentals in Auckland as a sign of a “recovering market” rather than as a sign of catastrophic market failure.

Also these collapsing build-rates are closely related to the unpopular truth that highly regulated land markets lead to seriously unaffordable housing. The Demographia surveys have been telling us this, every year, for seven years. Other international research groups such as the Brookings Institute, Standard and Poors’ Case Shiller Index, the Harvard University Joint Centre on Housing, and the McKinsey Global Institute, are now telling us the same thing.

Why is nobody in Government listening?

These findings are also being confirmed by studies of the German and Swiss housing markets compared to those of other countries in the EU. Unaffordable housing markets are associated with those urban economies that impose high up-front costs on the creation of title.

Instead of imposing Development Contributions, that actually fine entrepreneurs who create new titles or build new buildings, German local authorities fund infrastructure by recycling a small percentage of Sales Tax, while the Swiss communes recycle some of their Income Tax Unlike Development Contributions, these consumer taxes align the interests of Councils, Planners and Developers, who work together to compete to attract economic development to their own territory.

Why do our “experts” refuse to recognize the significance of DURT (Delays, Uncertainty, Regulation and Taxes) on housing markets and overall economic performance, when the evidence is staring them in the face?

Instead, our self satisfied environmental élite now tell us that the DURT driven property bubble was caused by our “love affair with property” and that the Kiwi dream of owning one’s own family home is some kind of venal addiction, and we need “to get over it.”

Some forty years ago my bank manager pointed out to me that “Most New Zealanders saved by paying off their mortgage”. He was right at the time. However, such saving is only secure if the land price is about 30% of the total land/housing package, which in turn should cost the family no more than three times their annual income.

Only a few decades ago these ratios were the norm. We did not over-invest in land. We were not tempted so speculate on housing bubbles. We did not need to borrow more than sixty percent of the house/land price. And we did not need to build leaky homes because overpriced land had consumed most of our available funds.

The residential builders are now warning the government that the plunging build-rate (the GST increase has driven it even further down hill) is destroying the building industry, because there is no guarantee of ongoing work. Consequently, many skilled trades-people are leaving for Australia where housing remains affordable outside the major cities, and where their skills are properly rewarded. Back in the early eighties the McKinsey Global Institute pointed out that the construction industry sucks up young unskilled males like a vacuum cleaner, and that the over-regulation of land condemns many of those young males to being predators rather than providers.

And so it has come to pass.

Those advising government seem to have no idea of how housing markets actually work, especially at the level of subdivision consents and the smothering effects of the new wave of District Plans.

One recent Government report on how to promote savings and growth accepts that house prices “spike” in response to inward migration. Why should that be so?

When demand for computers, and cell-phones increase, the market responds by increasing supply and prices fall. Governments should be asking why housing supply cannot respond to increased demand like any other product? Anyone at the DURT coalface knows very well why.

Houston, Texas, is one of the most rapidly growing urban areas in the US, but has the benefit of a lightly regulated land market. Hurricane Katrina caused 130,000 households to migrate from New Orleans to Houston during a single year. House prices barely moved. The market was free to respond. Only the build-rate increased.

If the Government wants to lead us out of recession it must begin by doubling the residential build rate.

Part 2 of this discussion will explore how to achieve this perfectly reasonable, and necessary,
goal.