Owen McShane: Housing Affordability – A right wing Plot?

The Government has announced the formation of the promised Productivity Commission. Some people have criticised Finance Minister Bill English and Regulatory Reform Minister Rodney Hide, for declaring that one of the Commission's first two inquiries will be into housing affordability. However, the topic is squarely on target. A collection (still in progress) of the negative impacts of excessive land use regulation on productivity currently contains well over twenty items such as:

• Increased inequality and reduced social mobility.
• Loss of international competitiveness.
• Reduced “churn” of land use.
• Diversion of capital from productive uses, to land-price bubbles.
• Reduced business start-ups.
• Reduced efficiency of urban form and transport patterns.

Why would any Government want to inflict such damaging policies on its people?

Adam Bennett, reporting on the announcement in the NZ Herald of April 1st, 2011, advises that the Commission came under immediate fire for advancing the interests of “developers and the political right”. We live in a strange world when affordable housing is deemed to be a right-wing plot.

Many of us remember when the Labour Party’s innovative housing policies, and especially the capitalization of the family benefit, ensured that generations of New Zealanders had access to affordable housing. Indeed, shortly after I joined the Oakland Project at U.C. Berkeley, a brief paper I wrote on these ‘leveraging’ policies (as opposed to direct interventions in construction) ended up on the desk of President Nixon. As a dedicated Berkeley-lefty at the time I was not sure how to respond to this achievement – certainly I never put in in my CV.

Later, I realized Labour’s financing policies were attractive to the right, at that time, because the capitalised family benefit was one of the earliest, and most effective, applications of Milton Friedman’s voucher system to promote government policy by using the “power of markets”.

Good policies create strange bedfellows.

However, when I read that the Commission was to report back by February 1st, 2012, my first response was to ask “What is there left to say?” and “Why should it take so long to say it?”

After all, my own report to the Reserve Bank (The Impact of the RMA on the Housing and Construction Component of the Consumer Price Index) identified the causes of the rapid escalation of house prices in New Zealand back in 1995. (That’s almost as long ago as the time between the two World Wars.)

Even back then it soon became clear that an international trend was underway. In 1968, I told my professor, Aaron Wildavsky, that New Zealand was the first country to appoint a Minister for the Environment. His response was that any Minister for the Environment must eventually become “the Minister for Everything’”. This observation explained what happened once Town and Country Planning expanded into Environmental Planning and Management. Environmental Planning everywhere has progressively enabled central planners to “plan for everything”.

However, the scope and influence of my own report was limited by its Auckland focus, and the absence, at that time, of any tools to enable international comparisons of affordability between different housing markets.

Fortunately, by 2005,Wendell Cox and Hugh Pavletich extended Demographia’s scope to include comparisons of the affordability of different housing markets as measured by the “median multiple”, an index calculated by dividing the median house price by the median household income for the target market area.

Analysts could now examine different housing markets and establish any commonalities between those that were affordable and those that were not. It soon became clear that the imposition of Smart Growth policies  in particular, inevitably led to inflated land prices. Furthermore, the “controlled experiments” of the fifty US States demonstrated that hardly any other policy frameworks – such as capital gains taxes – had any impact at all.

The uncomplicated conclusion is that highly regulated land markets lead to unaffordable housing.

The Demographia annual surveys have been telling us this, every year now, 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 all telling us the same thing. So are individual economists – as diverse as Thomas Sowell, Paul Krugman, Paul Cheshire, Alex Anas, Alain Bertaud, Shlomo Angel, Alan Evans, William Morrill, William Fischel, Nicole Garnett, Peter Gordon, and, of course, Arthur Grimes, Chairman of the Reserve Bank. The only people who hold out against this simple relationship are of course the central planners who invented the Smart Growth planning lore, and their apologists, who are typically beneficiaries of both the compliance cost cash-flows and the asset-bubbles.

On Radio New Zealand's Morning Report Rod Oram complained that the issue of housing affordability was so complex that the Commission could not possibly come up with anything useful in such a short time. He argued that the Commission would have to address complex issues such as “urban form”. Of course, once central planners bring “urban form” into the planning calculus unaffordable urban land is an inevitable outcome.

Furthermore, constraints on the supply of urban land drive up the price of ALL land behind the urban fence, including industrial and commercial land, and of course land needed for open space and for the preservation of natural and cultural heritage. This is why lightly regulated cities like Houston and Atlanta have so much open space, while Smart Growth cities see their open space systematically eroded in the name of preventing urban sprawl. Their great achievement is to ensure that any open space is very far away.

However, while there is widespread international agreement about the negative impacts of DURT (Delay, Uncertainty, Regulation and Taxes) this understanding demands appropriate policy responses.

And this means the Commission has much to do.

The Commission must advise the Government on how to dismantle the whole assemblage of NZ’s planning documents that are dedicated to enforcing these DURT regimes.

You might think that New Zealand’s plentiful supply of land would provide an economic advantage for our productive sector, including manufacturers.

You would be wrong.

Now it’s up to the Productivity Commission to prove what we have been doing wrong – and then set out what needs to be done.