Dr Oliver Hartwich: The House That Luxon Built

New Zealand is building its way out of its housing crisis. A few years ago, the island nation was synonymous with unaffordability. Auckland, its largest city with approximately 1.7 million people—about a third of New Zealand’s population—routinely ranked among the most expensive housing markets in the world. But something remarkable is happening. New housing consents have hit forty-five-year highs. Apartment construction is booming. In Auckland, rents are falling in real terms, even though they are still soaring elsewhere.

New Zealand’s cities are being reshaped by a surge of new housing development. The transformation of Auckland is particularly striking. Where there were once endless suburbs of single-family homes, townhouses and small apartment buildings are sprouting up.

This building boom is the result of some of the most ambitious upzoning reforms in the world. And unlike many policy shifts, these reforms have enjoyed support across the political spectrum.

The shift began after the 2011 Canterbury earthquakes, which destroyed much of central Christchurch. With 7,000 homes “red-zoned” as uninhabitable and 167,000 buildings damaged, the region faced an unprecedented housing crisis.

The National government under Prime Minister John Key and Minister of Finance Bill English responded with an emergency directive that forced Christchurch to immediately zone enough land for thirty years of housing supply. This bold intervention created a natural experiment in housing policy. Despite predictions of chaos from planning advocates, the rapid upzoning worked. Christchurch’s housing market stabilised even as prices soared elsewhere. The city emerged from the disaster with better housing affordability than other major centres.

Encouraged by this success, National then turned its attention to Auckland. In 2016, under National’s leadership, Auckland adopted its Unitary Plan, which upzoned a staggering 75 per cent of the city’s residential land. This was achieved by the government making it clear to Auckland Council that if it did not accept ambitious rezoning, central government would intervene. The council, faced with this pressure and mounting public concern about housing costs, ultimately embraced significant reform.

When Jacinda Ardern’s Labour government took office in 2017, it continued and expanded this approach. Despite her administration’s general tendency towards greater regulation, on housing it took a more market-friendly approach. Labour strengthened property rights by removing restrictions on what landowners could build, requiring all major cities to allow six-storey buildings near transit stations and commercial centres.

Most dramatically, in a rare show of bipartisanship, Labour and National together pushed through reforms that further enhanced property owners’ development rights, requiring councils to allow three homes of up to three storeys on almost every residential site in the major cities.

The results speak for themselves. Building permits in Auckland doubled within five years. Development has also shifted inward—85 per cent of new housing is now within the existing urban boundary, up from 65 per cent before the reforms. The market, freed from excessive planning restrictions, is delivering the kind of compact, efficient development that central planners long tried and failed to achieve through regulation.

A 2023 study found that Auckland rents are now 26 to 33 per cent lower than they would have been without these reforms. That is tangible evidence that reducing government interference in land use can improve housing affordability.

For Australians grappling with their own housing affordability crisis, this should be of keen interest. Sydney’s median house-price-to-income ratio stands at 11.3—similar to Auckland’s pre-reform levels. Melbourne, Brisbane, and other major capitals face similar challenges.

Yet while New Zealand’s reforms deserve praise, my two decades of involvement in housing policy debates suggest their foundation may be less secure than many realise. In 2005 I was working in London for Policy Exchange, a Centre-Right think-tank. We were trying to answer a puzzling question: Why were house prices spiralling out of control in the United Kingdom while remaining stable over decades in countries like Germany and Switzerland? The conventional wisdom blamed Britain’s strict planning rules. However, our research revealed something surprising.

Germany and Switzerland were just as highly regulated, if not more so. The difference lay in their systems of local government finance. Take my home region, the Ruhr in Germany. Cities like Essen, Dortmund and Bochum compete for residents and development. When new housing is built, the local council receives a direct share of income tax and VAT revenue through Germany’s tax-sharing system. The incentives are even stronger in Switzerland. Cantons and municipalities set their own tax rates and compete vigorously for residents in order to increase their budgets. In the greater Zurich region, surrounding cantons like Zug and Schwyz maintain streamlined planning processes and adequate land supply specifically to attract residents from the high-tax city centre. The result is a virtuous cycle where local authorities champion rather than resist development.

By contrast, in the UK, Australia and New Zealand, the costs of new development fall on local councils while the benefits—in the form of increased tax revenue—accrue to the central government. Infrastructure requirements, increased service demands, and local NIMBY opposition create significant challenges for councils, while they receive little direct financial benefit from growth.

This misalignment of incentives helps explain why New Zealand’s reforms, despite their success, may prove fragile. The National Party, having previously helped craft the Medium Density Standards, withdrew its support in 2023 under pressure from suburban homeowners. Also, the infrastructure funding needed to support development remains inadequate, leaving councils to face the costs of growth while central government still reaps the revenue benefits.

These challenges point to a fundamental weakness in New Zealand’s approach. While planning reform is crucial, trying to impose it from the centre without addressing councils’ underlying incentives is like building a house on sand. Yes, the government can mandate more permissive zoning, but if councils still see growth as a net cost, they will often find ways to obstruct development.

New Zealand’s new Centre-Right government appears to understand this challenge. Housing Minister Chris Bishop has unveiled the most comprehensive housing reform agenda the country has seen in a generation. Beyond maintaining the planning reforms, Bishop is proposing to share GST revenue from new builds with councils, abolish remaining urban boundaries, introduce a presumption in favour of development into planning law, and establish a new fast-track consenting regime. The government’s proposed City and Regional Deals framework would give councils additional funding tools and the incentives to embrace growth.

For Australia, the lessons are clear. To make housing more affordable, planning reform is necessary but not sufficient. To create lasting change, reforms must align the incentives of all levels of government. By learning from New Zealand’s successes and weaknesses, Australia could build an even more durable foundation for housing affordability.

Rather than just mandating more permissive zoning—though that is certainly needed—Australian governments should look at ways to make councils willing partners in development. This could involve sharing GST revenue from new construction, as New Zealand is now considering, or developing other mechanisms to ensure local governments benefit from growth.

Infrastructure funding is another crucial piece of the puzzle. In both New Zealand and Australia, councils often resist development because they cannot afford the infrastructure needed to support it. Yet the increased tax revenue from new development flows almost entirely to higher tiers of government. Breaking this impasse requires new funding tools that let councils access future revenue streams to fund infrastructure today.

The Swiss and German examples show this is not just a theoretical idea. When local governments have both the power to enable development and a direct financial stake in growth, they become enthusiastic advocates for housing supply. Their planning systems remain highly regulated, but the regulations are implemented by authorities with strong incentives to say “yes” to development where appropriate.

Meaningful housing reform means rethinking the relationship between different levels of government and ensuring that those making decisions about development face the right incentives.

This may seem like a more complex path than simply mandating upzoning from above. But New Zealand’s experience suggests that taking the time to get these structural incentives right could be the difference between temporary and lasting reform.

After all, no one should be keener to build more houses than local communities themselves—if only we can ensure they share in the benefits of doing so.

Dr Oliver Hartwich is the Executive Director of The New Zealand Initiative think tank. This article was first published HERE.