Want to solve the housing crisis? The answer is deregulation

Politicians generally have no real solutions, preferring instead to ban, regulate or tax to achieve outcomes.

In the UK there is now evidence showing that regulation of housing has contributed massively to the housing crisis besetting the UK.

New causal evidence on the impact of supply constraints on house prices shows land use regulation to be a major culprit of England’s current housing affordability crisis. Absent regulation, house prices would be lower by over a third and considerably less volatile. Young households are the obvious losers, yet macroeconomic stability is also impaired and productivity may suffer from constrained labour supply to the thriving cities where demand is highest.

Thank you very much politicians.  

The UK problem sounds very much like the one currently being experienced in Auckland.

Place matters for productivity and for jobs that involve the creation or exchange of ideas – cities are the place to be. Great cities attract great minds that benefit from being nearby. Glaeser (2011) documents how such agglomeration benefits, in conjunction with the benefits that urban density offers to consumers, have fuelled a stunning urban revival. However, regulation prevents some of the most successful cities from growing, thus limiting the number of people that share in their riches. The economic cost may be steep. Hsieh and Moretti (2015) estimate that lowering regulatory constraints in high productivity cities like New York, San Francisco and San Jose to the level of the median city would increase US production by 9.5%.

The social costs of land use regulation extend well beyond the misallocation of labour across places. Supply constraints render housing artificially scarce and they reduce its affordability. This has been a vital policy concern in Britain for the larger part of the past two decades, leading many to speak of an ‘affordability crisis’. Furthermore, land use regulation may raise house price volatility. For example, Glaeser et al. (2008) find that US metro areas with inelastic supply experience stronger house price growth during boom phases. This may affect the volatility of consumption and reduce stability at the macro level in turn. Against this background, it is important to understand how exactly land use regulation affects local housing markets vis-à-vis other supply constraints.

So the problem isn’t unique. You’d think politicians could find solutions.

In a nutshell, in our paper we use this unique data to test our prediction that house prices respond more strongly to changes in local demand in places with tight supply constraints. In doing so, we carefully disentangle the causal effect of regulatory constraints from the effects of physical constraints (degree of development and topography) on local house prices, holding other local factors constant and accounting for macroeconomic fluctuations induced, for example, by changing lending conditions or interest rates.

Both regulatory constraints and the degree of physical development are arguably endogenously determined. To address this econometric concern, we use exogenous variation from a policy reform, vote shares and historical density, allowing us to identify the separate causal effects of all three supply constraints measures. In a similar vein, local earnings – our measure of local housing demand – may be endogenous. To address this particular concern we employ a shift-share approach to come up with a measure capturing labour demand shocks.

Everyone wants to live in Auckland. The idiot Council wants a compact city and so has constrained development. House prices have skyrocketed.

So how can it be fixed?

The first step would be to remove all the regulations that are impeding development and land supply, along with the council staff and politicians who are causing that.

 

– Vox EU

 


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  • Oh Please

    Socialism and rigid regulations just don’t work. The free market economy does. Simple, basic supply and demand. Auckland would be much better off without Auckland City Council.

    • OneTrack

      Time to go back to before the “super”(sic) city. It was a step backwards.

  • rua kenana

    Regulation usually only causes problems, at least in NZ.
    But we’re actually being regulated now in the number of new migrants we’re forced to accept by central government, not by the local council. I’d much prefer if it were the migrants being regulated than me. I’m very happy with Auckland house prices, except maybe that they’re not yet high enough.

  • one for the road

    And if you were to believe Labour and the MSM you would think that the housing situation is unique to NZ/Auckland, meanwhile it has become a global problem in bigger cities…go figure.

    Problem with complete deregulation is you get cowboys and shoddy outcomes…..which require rework and litigation later!

    Reengineering the end-to-end process from a clean sheet (as all good business need to do when they have a problem or want to stay ahead of the game, to reduce costs, etc) would be a good place to start… The Govt should take the lead and mandate a national approach and so.ution, for all councils to adopt and follow.

  • shykiwibloke

    I would add open up the building consent process to all comers – other councils and properly accredited private companies. Remove the councils monopoly on things that have no need to be monopolised. Could also be applied to sewer and water extensions – telecom resisted it for years before they learnt to play nicer – now wouldn’t that put the cat amongst the pigeons!

  • Seriously?

    An off the wall idea: why not have the taxpayer pay for (or a contribution toward) the moving costs of anyone who wants to move away from Auckland? You might exclude a move to Wellington or Christchurch. Why not consider doing something similar for businesses?

    I agree regarding the freeing up of the development potential on peri-urban land to tackle artificial supply-side constraints, but there is a degree to which the Auckland housing “crisis” is a situation of our own making. If people did not pay the prices currently being demanded, the prices would be impacted. Why not let that barrier be confronted, and help the solution rather than trying to prevent it happening.

    If Auckland becomes an unaffordable place to live, people ought to be encouraged to move elsewhere instead of expecting others to fix their problem so that they can live near to the CBD in Auckland. Equally, if businesses needing lower wage workers cannot find them in Auckland because those workers cannot afford to live there, then those businesses should look at relocation as well.

    This has been going on since the year dot, and trying to fight it is like trying to bail out water with a sieve. Instead, while we can do some things on the supply side, we need to accept that the demand side’s water will find its natural resting place.

  • edenman

    Councils work on increasing the housing intensity on a defined footprint. this limits some growth but increases price which in turn increases valuation, which results in higher rates. If boundaries were increased the value of properties within the original footprint would not increase as rapidly It is in councils interests that valuations rise so they can increase their own income. So the circle continues

  • Brian Dingwall

    Yesterday we reflected on ANZAC actions and losses in many theatres in the battle for freedom. We sang, we prayed, we remembered the men, and remembered their sacrifices. To what purpose?
    This morning we awoke to the sad news that our PM is considering constraining our freedom to trade our houses to whomever we choose. The enemies of freedom are amongst us, and march ineluctably on.

    • Tanmedia

      Sure, to really fix the situation, let it run its natural course. One of the problems with that is that is that consumer spending will get smashed in the event of asset prices falling.

  • Mikev

    The best solution is deregulation. The best example is Houston Texas. Hardly any regulations and plenty of affordable housing.

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