The Auckland housing market

Auckland-city-scene-cropped-2

Guest post

The left in politics delight in reminding us there is no such thing as “free market”. I guess it makes them feel better. Of course, it’s a simple case of a very red herring. The issue is, to what extent markets are allowed to operate freely and, conversely, how much interference there is, especially from central and local governments.

Take the Auckland housing market. There are not too many people describing it as a completely free market with unbridled supply and demand factors operating. There are numerous interventions by Wellington politicians and even more by well-meaning Auckland local bodies. “Well meaning” is used here in a pejorative sense.

Some would say, “Let the market dictate the outcomes and all will be well.”  There is no doubt that under supply and over demand are at the core of the problem. While that truism applies it is also much more complex, and intertwined forces are at play demanding something more comprehensive by way of a solution.

We can presume that John Key’s polling and his usually trusty instincts are telling him there are more “winners” than “losers” in the current shambles. If you are 75 years old and about to sell and go into a retirement home, selling for twice what you would have got five to ten years ago sounds rather comforting. However, there is a fair chance you are already a National voter. My view is that, overall, the Government is now risking votes over the problem and most can see the current measures being trotted out are random, sticking-plaster solutions, not real answers. If you are in your thirties and looking to buy, your eyes will be watering. Being told there are good options in Greymouth or Eketahuna is a tad insulting.

Key has been smart enough to fire a big shot over Labour’s vaunted 100-year celebration: “Auckland housing fixes” due out any day. That’s simply playing politics. Random shots, even big ones, are not helpful. It will need a suite of complementary measures with a lot more commitment than is being demonstrated currently.  When Key whacked Dr Arthur Grimes and his contribution as being “crazy” he was really saying the whole problem isn’t a high priority for his government. Grimes may have been off target but he is a respected economist with the balls to put together an idea. He and the ongoing problem deserve better.

So, the first item on the agenda needs to be treating the problem seriously; making it a priority among all stakeholders and dedicating the time and resource to work through to sensible practical solutions. It means some higher-quality leadership from the Auckland authorities as well.

By the way, many commentators call the Auckland market a “bubble”.  It assumes the market could go bust. I do not think that is at all likely but I do believe a correction is possible and needs to be encouraged.

The second item needs to be committing to a suite of measures that complement and work off each other. No more one-offs please. That means baling up all the stakeholders in a room and locking the door. Not a talkfest but ensuring the solutions are comprehensive and have widespread agreement.

The third item needs to be everyone agreeing a few sacred cows are going to be dispatched to the abattoir. Coming to the table with preconceived and fixed positions based on the “we have always done that” approach or “here is a list of things that are taboo” approach won’t cut any mustard.

A good example? Capital gains tax. Nah, don’t tell me that developers are already caught. Some are but most are not. I am not in favour of taxing capital gain generally for all the good reasons that are well understood, but this is a special case requiring special measures that just focus on housing.

A second example? Auckland city’s environmentally pure beliefs about building up and not out. I don’t care whether it’s in some plan that has been years in gestation and includes countless hours of consultation, is culturally perfected, meets all the goals set at Kyoto or Paris and is a planners’ wet dream. Like everything else, it’s on the table and, if required, drastic actions not currently on the books must be entertained.

There are a number of concrete steps that would take heat out of the market.

Currently, nominal interest costs can be deducted by developers. That should be changed to only the real component of interest (the bit above inflation) being deductible.

Immigration is a big component of our current GDP growth so it is keeping Bill English happy. It needs tackling as soon as possible because of the lag effect. No need to slash and burn – just some reductions and slow the numbers down a tad. Even announcing a cut back will see a market response. So many have invested on the back of continuing high immigrant flows.

Part of the package of measures should be some brake on second home purchases by non-residents. Again it does not have to be draconian – simply some modest measure to curb the pressure from that quarter. Other countries have done it so we don’t have to invent a wheel. I expect there will be ways figured out to dodge such a provision but, again, signalling intentions has an effect.

Nick Smith ran a flag up on compulsory acquisition. That’s a socialist, sledgehammer approach. However, councils should be able to rate land close to development to a level that encourages action. If that was part of a package of measures the attraction of holding on for more value growth would disappear quickly.

There are multiple provisions in the RMA, the Building Act, Local Government Act and related legislation that need urgent and deep cutting of unnecessary costs. It would be good to know how many “net” accidents have been saved by forcing the costs of scaffolding on to home buyers, for example. Watching the guys pull the piping off the neighbour’s house made me think there will be endless accidents and near accidents just in putting up and pulling down the scaffolds.

No one seems to know whether we have the actual employees to speed up house construction even if more land is made available. That needs working on to make sure a physical impediment is not part of the problem. More importing of building materials wouldn’t hurt either – Fletcher Building still has too tight a grip on the building supply market.

One thing needs to be recognised. All the changes under the sun that have been and might be suggested to deal with the problem do not come close to our underlying issue. We are not earning enough as a nation and as individuals to be able to buy nice houses. A wander around Flat Bush in Auckland gives me the “joe blakes”. Is that a ghetto in the making? We need to do better as an economy to avoid having to fix what are mostly symptoms, not causes.


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