Housing

Politics Taking Precedent over ‘Policy’

Leonard HongLeave a comment

Over the course of the last two years in Wellington, I have come to realise something. Many people enter politics with the best of intentions, however, they end up becoming a part of the system. In my opinion, the majority in the House of Representatives place poll numbers ahead of effective governance and public administration. And this is failing the public. There appears to be no vision, let alone a direction, for the future of Aotearoa New Zealand from either the government or Opposition.

Those who know me well will recall that I campaigned for Labour four years ago, and at the time I was genuinely enthusiastic about Jacinda’s message of hope, change and progress. I was proud to be part of a movement that fostered change. Solving the problems surrounding the housing market, inequality, education, health, well-being, and climate change was a moral imperative for me.

The Labour Party is now in power. But how well have they done on objective metrics such as Housing? With the exception of our crisis management – such as our containment of Covid-19 – they are worse.

In the past year, house prices have increased by 32%. The inequality gap in wealth and income worsened under the current government than under any of the previous three governments combined. PISA rankings in Math, Science, and Reading have all fallen significantly. We have inadequate public health measures due to a limited number of intensive care units, and our doctors and nurses are not receiving the salaries they deserve. Meanwhile, the Ministry of Health bureaucrats have more money in their coffers without delivering any meaningful results. In spite of government commitments to spend billions on mental health, the situation continues to worsen. With regard to climate change, our oil and gas ban has caused market externalities – we burn more coal to generate electricity, which resulted in higher emissions. This is utterly unacceptable.

Politicians always claim in the media that they tried their best. In a company or in the private sector, if this was the performance result, they would all be severely questioned by the Board of Directors. However, in politics, there is no direct accountability. Failures are not grounds for dismissal, except for the voting system every three years.

However, one of the reasons for government failures have to do with the lack of competition. Currently, the Opposition is in disarray. Instead of proposing public policy solutions of their own, they are fighting among themselves. There is little incentive for the leading party to push for positive change when they are dominating the polls without much being achieved. Essentially, there is no need for them to perform better. Furthermore, the quality of politicians throughout the House is abysmal. The fact that the Minister of Justice, Kris Faafoi, had to remain in politics – despite wanting to leave – tells us much about the lack of talent within the party.

Personally, I really don’t care who is in charge so long as the performances are excellent. In a similar manner to when the CEO of a company changes, where outputs and profits stay high. For this to occur in our political system, we must cultivate more competent and talented individuals across the political spectrum. We need people that care more about ‘policy’ not ‘politics’ in the future. This is essential to the economic growth and well-being of the country.

It matters for all of us.

Yes, there is intergenerational inequality on Housing

Leonard HongLeave a comment

House prices have risen to all-time highs. According to the Real Estate Institute of New Zealand, prices have risen by 30.6 percent in the last year. We’ve seen record high housing prices for fourteen months in a row.

A housing crisis? It’s more accurate to call this as a “housing catastrophe.” For many young people, attaining the Kiwi Dream is now close to impossible.

Anecdotally, there have been many reports of growing intergenerational inequality between the young and the older generation because of continued price inflation. Is this, however, supported by empirical evidence?

According to Statistics NZ, the average annual income of today’s Generation Z is $45,188. In 1998, the average annual income for Generation X was $22,256. In nominal terms, incomes have merely doubled.

Conversely, national median house prices have risen from $164,167 to $826,000 over the same time period. Prices have soared by fivefold. Prices in Auckland and Wellington are approaching $1 million.

In 1998, house prices were about 7 times the gross income for Gen X, today for Gen Z, it is 18 times. Buying a home today is significantly more difficult for Gen Z than it was for Gen X in 1998.

According to Demographia International, from the late 1950s to the early 1990s, the median property price was only two to three times the average annual household income. This figure is now 8.6.

As far as housing is concerned, the data shows that our parents and grandparents had it far easier than Generation Z today.

Back then, it was possible to buy a home with just a single source of income. Today’s couples and spouses must both work to cover their housing cost, whether that is rent or a mortgage.

It may be true that the older generation had higher mortgage rates due to higher interest rates during the 1980s. But mortgage rates have little bearing on the affordability of a home. Even though new buyers today may face trouble with higher interest rates later.

House prices at all-time highs are detrimental to our economic prosperity. A more affordable housing market with lower rent prices is associated with greater social mobility. So far, this tradition has dwindled.

For a variety of reasons, housing affordability has deteriorated. Restrictive planning laws, poor incentives for local councils, local obstructions to urban development, and the Reserve Bank’s monetary responses to Covid-19 fuelled the fire. However, the main reason for this is a lack of housing supply.

House prices have skyrocketed, preventing young people from realising the Kiwi Dream. It’s time we change that.

Kiwi Dream? More like a nightmare

Leonard HongLeave a comment

Last week’s Covid cases in Auckland delayed Finance Minister Robertson’s housing policy announcements. The housing shortage has been at crisis levels for a long time, but the delay in this case is not likely to make any difference.

The government has hinted that further tinkering on the demand side is coming, but enabling more building is what is needed.

Demand-side initiatives from both National and Labour-led governments have failed to address the underlying shortage, so house prices continue to rise.

If homeownership is part of the Kiwi Dream, we are deeply into nightmare territory instead.

And the problem is worse than you probably thought.

The Initiative’s new report, ‘The Need to Build‘, discusses the relationship between population ageing and declining household sizes. Places with older populations require more and different housing than places with younger populations. As New Zealand ages, the housing shortage will worsen. The trend holds both here and across the OECD.

The problem is hardly unknown. Statistics New Zealand and local councils already consider declining household sizes when estimating housing demand. But it is underappreciated elsewhere.

We projected new housing needs for 2038 and 2060 – the numbers are striking.

Even if the the border stayed closed for the next 20 years, we would still need to build at least 20,000 new net dwellings every year to meet demographic changes.   

For the six most realistic scenarios in the report, from 2019, New Zealand will need to build between 26,000 and 35,000 net dwellings – above and beyond the replacement of decrepit houses –  every year until 2038, and between 15,000 and 29,000 per year by 2060.

But we also have a current shortage of some 40,000 homes that also needs to be filled. There has not been nearly enough building for well over a decade. While the current construction boom has brought consenting numbers to the highest level since the 1970s, consenting rates are only a little above long term averages.

Population ageing adds fuel to the fire.

The Kiwi Dream for younger generations – Millennials and Generation Z – is slipping further away. Shortages mean high rent and little disposable income after housing costs. Continuously tinkering with demand policies such as the LVR, bright-line tests, and first home buyer programme will do little to make housing more affordable. 

The government must switch priorities to rapidly free up housing and land supply, or find ways to incentivise councils to be more pro-development.

Report: The Need to Build – The Demographic Drivers of Housing Demand

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Leonard Hong

Report: The Need to BuildDownload

The political ‘buck passing’ of the responsibility for unaffordable housing by successive governments in New Zealand has created extremely expensive housing markets in cities such as Auckland and Wellington – and a national housing crisis. Auckland is the sixth least affordable city among 92 major global housing markets, according to the 2020 Demographia housing survey. The real price of housing in New Zealand increased by 171% from 2000 to 2019, compared with just 11% in Germany in the same period. Despite former Housing Minister Phil Twyford’s reforms, the government has prioritised supressing demand and targeting financial speculation from overseas. Demand-side solutions are just tinkering at the edges of the problem. Long-term demographic transformations and changing household sizes are affecting overall housing demand. Inflexible housing development is the core problem, and only freeing up enough supply can solve our housing unaffordability and overcrowding.

The projections in this report show that our housing problems are set to worsen. From 2019 to 2038, the annual average additional dwellings needed will increase from 26,246 (‘low’ migration and ‘low’ fertility) to 34,556 (‘medium’ migration and ‘high’ fertility). From 2019 to 2060, we will need 15,319 (‘low’ migration and ‘low’ fertility) and 29,052 (‘medium’ migration and ‘high’ fertility) additional dwellings annually. These figures do not take into account the annual demolition and replacement rate of dwellings and the current undersupply of 40,000. Since 1992, New Zealand has added only 21,445 net private dwellings annually to the housing stock. We are simply not building enough to meet the looming demographic changes and demands.

Our housing needs are also set to rise much faster than population growth. The average annual number of dwellings needed based on just projected population growth, excluding the smaller household size, was between 5,452 (‘low’ migration and ‘low’ fertility) and 21,543 (‘medium’ migration and ‘high’ fertility) to 2060 in our analysis. The difference represents an annual shortfall of 9,867 dwellings for the former and 7,509 for the latter (or 64% and 26%, respectively). This means housing policy using only projected population growth will markedly underestimate future demand.

Covid-19 and the Reserve Bank of New Zealand’s monetary response to the ongoing recession has led to much financial capital flowing into the housing market. Consequently, the national house price average reached $725,000, an increase of 19.8% from October 2019 to October 2020. Low interest rates created incentives for greater borrowing and investments in real assets such as financial stocks and housing. However, if sound institutional arrangements were established and growing supply could meet growing demand, there would be far fewer speculative incentives.

Local councils and Statistics New Zealand already factor demographic changes in their household and dwelling projections, but the effect of the average household size on housing demand is rarely discussed in the public sphere. The aggregate housing demand is based not just on population growth, but also the composition of each household. With household sizes shrinking, fewer people living with many children, and population ageing, we have ‘empty nests’ and ‘crowded houses’.



For this report, we calculated long-term population numbers using the demographic software Spectrum. Based on three fundamental factors – net migration, total fertility, and life expectancy – 36 scenarios were projected to 2060 (and 2038 for dwelling projections). In 33 out of the 36 scenarios, New Zealand’s population in 2060 will be larger than it is today. Under all 36 scenarios, the median age will be higher. The 36 scenarios were further narrowed to the six most plausible based on New Zealand’s recent demographic history. Among the six, the variation in median age and population size by 2060 was vast – the projected population ranged between 5.55 million and 7.26 million, while the median age was between 41.0 and 48.5 years. Even if migration is low (say, 14,000 per annum), New Zealand’s population will still grow substantially over the next few decades.

The current housing crisis is just the tip of the iceberg – if the government does not change course, future generations will face abysmal housing affordability prospects. Stopping migration completely would only produce new problems while doing little to fix the housing problem.

Demographic changes also have long-term implications for fiscal prudence. Under the six most plausible Spectrum scenarios, the dependency rate rose with population ageing, and the number of those over 65 years by at least 23% by 2060. This will result in fewer future taxpayers and more demands on working-age New Zealanders to fund public services such as healthcare and pensions.

Policymakers need to make our economic institutions more versatile so New Zealand can cope with any combination of demographic or household scenarios in the future. New Zealand had net zero migration in 2020 due to Covid-19 related border closures but this did not stop housing inflation. Politicians should stop blaming the housing crisis on migration, land banking investment, and speculation, and instead find policy solutions to free up urban development and housing supply. Faster productivity growth too would help fund additional public services in the long term.

Building now and fast is imperative for the nation’s future economic and social wellbeing.

Click below to download the two-page summary of The Need to Build: The demographic drivers of housing demand.

The Need to Build Report SummaryDownload

Housing crisis? You ain’t seen nothing yet

Leonard HongLeave a comment

NZ Herald

Against the predictions of most economists early last year, the housing market has boomed through Covid-19. Since March last year, house prices have risen by 20%, rents by 12%. During the period, the economy suffered its worst-ever quarterly fall in GDP, and net migration has been virtually zero. Low-interest rates and limited land supply make a powerful combination.

But there is even more trouble on the horizon for housing. An ageing population results in declining average household sizes – this will add fuel to the housing fire. These demographic changes will be with us for decades, long after the Bitcoin becomes the primary global currency.

If you think the current housing circumstances are dire, wait till you see the potential long-run implications – you ain’t seen anything yet.

The housing crisis is a core supply problem. For decades, housing construction has not kept up with the growing population, which means house prices have gone through the roof.

Analysis by Infometrics shows more construction in a region slows down the rate of housing inflation. Auckland and Wellington’s stagnant building resulted in rapid inflation of 20% for the last decade. In comparison, Christchurch and Hamilton’s construction building surge resulted in prices increasing by only 13%. 

Gross construction rates across New Zealand have increased substantially in recent times. According to Statistics New Zealand, residential completion numbers peaked at 38,624 in November 2020, the highest number since the 1970s.

This is great news, except that the population in the 1970s was 3 million and today it is 5.1 million. On a per-capita basis, we are nowhere near historical peaks. There were 13.2 new builds per thousand people in 1973, but only 7.6 per thousand people in 2020.

New Zealand’s housing construction rate is nowhere near adequate in proportion to population, let alone the long run effects of an ageing population.

The Initiative’s new report, ‘The Need to Build’, shows that long-term housing demand in New Zealand is set to rise as New Zealand’s population becomes larger and older, adding fuel to the ‘housing crisis’ fire.

An older population results in fewer people living per dwelling and a larger population further increases housing needs. Across all the OECD countries, including New Zealand, the average household size has declined, which means more houses are needed per capita regardless of net migration levels.

In the report, we consider a range of housing for the period 2038 to 2060.

Under all the six most realistic scenarios, from 2019, we will need between 26,246 and 34,556 per year by 2038, and we will need between 15,319 and 29,052 additional dwellings per year by 2060.

The point is that cutting migration entirely would stop new housing demand – it does not because we still have an ageing population.

Even in extreme scenarios where net migration is zero for the next few decades, it does not stop new housing demand. By 2038, New Zealand would still need between 20,933 and 24,665 per year under medium life expectancy.

The report’s figures exclude the annual housing replacement rate, and the ongoing undersupply of 40,000 – estimated by Infometrics – adds to the chronic housing shortage.

What does all this mean for the outlook for housing in New Zealand?

The projected figures in the reports are well above the average annual construction rate of 21,445 since 1992. The implication is that house prices will rise a lot more unless house construction is much greater.

Fortunately, New Zealand is relatively young, with a median age of 37 years. Older countries across the OECD provide a window to the future. Kiwi policymakers have a unique opportunity to prepare what we can do now regarding housing policy.

In countries like Germany, the country is ageing, and the average household size has already been decreasing. Germany’s median age went from 37.6 in 1990 to 45.9 in 2020 and the average household size dropped from 2.3 to 2.0.

Since 1990, Germany’s population has been roughly stable at just above 80 million, but the household numbers went from 35 million in 1990 to 42 million in 2020 – 7 million more households in 30 years.

New Zealand is on a similar trajectory. New Zealand’s median age is currently close to 37 and is expected to increase to around 43 by 2038 and 50 by 2060. Our household size is also likely to drop from 2.6 to 2.4 by 2038 and even lower afterwards. The German illustration shows a potential image of New Zealand’s future, albeit with a far smaller total population size.

Even if annual construction increased closer to the 1970s, it would likely struggle to meet a more extensive and older population’s housing demand.

And estimating housing demand just on population growth is insufficient. On our projections, the dwelling stock in 2060 will be between 64% (‘low’ migration and ‘low’ fertility) and 26% (‘high’ migration and ‘high’ fertility), below what is needed to cater for the projected population need.

Tinkering the edges of demand will do little to address the chronic shortage in housing supply. Once the border opens, housing demand will continue to escalate, and the problem could become even worse.

All of this is fuel to the house fire, especially considering the revival of an open international economy after the global pandemic ends.

The housing crisis affects all Kiwis, but especially the millennials and Generation Z. There has been a growing intergenerational inequality preventing younger Kiwis from fulfilling their Kiwi Dream. The younger generation’s homeownership prospects are close to nil unless their parents are homeowners. Housing supply must expand substantially to give the younger generations a chance. 

Building for the Future

Leonard HongLeave a comment

Everyone knows that the status quo with respect to housing is “unsustainable”. The Prime Minister now seems to recognise the need for fundamental change and the opposition has recently offered to work with the government to find non-partisan solutions. 

While many people in the public assume that a key driver of house price growth is migration, recent trends show that even without migration rapid house price inflation can occur.

Because of Covid-19, the government closed the border for international travel early last year. As a result, monthly net migration was close to zero for most of 2020. Nevertheless, over the last year, both rents and housing costs increased by 12% and 20%, respectively.  

Migration is only one part of the story. A myriad of factors contribute to housing dynamics in both the short and long-run, but not all of these receive equal attention.

Discussion of the effects of demographic change and an ageing population on our housing markets is limited. Yet, these drivers are also set to contribute to our housing woes over the coming decades, especially if the housing supply does not respond. That is because ageing populations require more homes for the same number of people.

For instance, when the typical group of a hundred people consists of 20 couples, each with two young kids, and ten retired couples, those hundred people fall into thirty households. Thirty homes might be needed. When the hundred instead are 15 couples with two kids each, and 20 retired couples, 35 homes might instead be needed.

In New Zealand, the average household size has fallen from 3.2 in the 1970s to 2.6 in 2020 (like other OECD countries). According to Statistics New Zealand’s projections, it could fall even further in the next two decades or less.

So, are we gearing up to build the additional housing that our changing demographics require?

Policies that target land supply and infrastructure bottlenecks are key. However, the asymmetry of political and economic incentives between councils and the government has created a frustrating gridlock.

Growth and economic expansion in areas bring little revenue to councils but impose upfront infrastructure costs, such as water pipelines. This adds to councils’ reluctance to free up land for development.

Restrictions on density further add to housing supply issues.

The housing market is bad enough already, even without considering the effects of demographic change that will only worsen the problem. The government’s proposed policy responses must address the root of the problem rather than tinkering around the edges.

The housing shortage is worse than you’d thought

Leonard HongLeave a comment

NZ Herald,

According to the OECD’s Building for a Better Tomorrow report, New Zealand now has the least affordable housing market for the poorest families. We have left more Kiwis with a slimmer chance of achieving the Kiwi Dream and exacerbated social inequality.

New Zealand’s housing is a national catastrophe. House prices have gone up by 37% nationally since 2015, according to ANZ. Shortages drive rising prices. And the problem will only worsen as an aging population means even more housing will be needed.

At a press conference last week, Prime Minister Ardern too called the housing market “unsustainable,” a U-turn from last year’s position of “sustained moderation” of housing inflation.

But the Prime Minister’s proposed solutions, thus far, have addressed the symptoms of the housing shortage rather than its root causes.

The Prime Minister re-launched the Public Housing Plan to build up to 18,000 social houses by 2024. Social housing is important, but would there be nearly as much need for it if a surplus of housing overall made for affordable rents? The barriers faced by private developers are also faced by government-led building initiatives, as Labour discovered with KiwiBuild.

Making it easier to build more housing in places where people want to live is the only thing that can solve a housing supply shortage.

While demand-side measures, like banning foreign buyers, can be tempting, they do not address the problem. The pandemic has done far more than any foreign buyer ban to curb housing pressure arising from overseas. International students and international visitors, each of whom needs a place to live while here, have largely gone away. Net migration has dropped to zero. But rents and housing costs are sharply up regardless.

Hopefully, vaccination programmes in 2021 can restore normality to the border. But even if the border remained closed forever, migration is only one part of growing demand for housing.  Demographic change and an aging population, all on their own, will also worsen the shortage.

An aging population, all else equal, requires more dwellings. And while those kinds of changes are incorporated in household projections by Statistics New Zealand, and consequently into Council forecasts of future housing demand, they are underappreciated in popular discussion of housing pressure.

Long-run demographic changes in household composition (such as from nuclear families to single-person households) and population ageing affect overall housing demand and require flexibility about the kinds of housing that can be built.

In New Zealand, average household size has dropped from 3.2 in the 1970s to 2.6 in 2020 (similar to OECD countries as seen in the figure below). It could drop to 2.4 in the next two decades or less, according to Statistics New Zealand’s projections. 

As family sizes reduce, median age increases along with demand for housing.

When the typical group of a hundred people consists of 20 couples, each with two young kids, and ten retired couples, those hundred people fall into thirty households. Thirty homes might be needed. When the hundred instead are 15 couples with two kids each, and 20 retired couples, 35 homes might instead be needed.

Aging populations require more homes for the same number of people.

The causes of the housing shortage have been reasonably well canvassed. Over decades, councils have borne the costs of accommodating more housing while central government enjoys the tax revenues that flow from growing cities – higher income tax, company tax, and GST revenues. Making it harder to build more housing has been one way that councils have sought to contain the costs of growth.

Years and years of restrictions on development have resulted in a construction sector scaled to the amount and types of building that have been allowed, rather than the amount and types of building that might be demanded by a growing and changing population.

The effects are stark. Housing shortages and high resulting housing costs undermine social cohesion. Families are forced to live in less pleasant and overcrowded dwellings, leading to deprivation, adverse health and social outcomes, and unstable environments for young children to grow and learn.

As of 2018, one in nine Kiwis were living in crowded housing, with Maori and Pasifika families most affected.

It will be impossible for the government to achieve promised increases in wellbeing without changing the fundamental direction of housing policy. But whatever your view on the best way of enabling more supply, the extent of the shortfall is larger when an aging population all on its own will increase the number of homes that are needed.

The government will soon be announcing its plans for remedying the problem. When thinking about the government’s proposals, ask yourself whether they enable more housing to be built, or whether they provide more tinkering around the demand side. Reform of the Resource Management Act will also be coming, but unless it improves the incentives facing Councils to enable more housing, it will not be as effective as it should be.

The housing shortage is bad enough already, even without considering the effects of demographic change that will only worsen the problem. Let’s hope that the government’s proposed policy responses strike to the root.

Why the Housing Crisis in New Zealand?

Leonard HongLeave a comment

It is clear that so far both sides of politics have failed to address the ongoing problem of housing unaffordability. It’s been more than five years since the leaders of both major political parties acknowledged the housing crisis. Now, it’s 2020 and housing has become even more unaffordable with prices increasing by 19.8% with the median price of $725,000. Despite Covid-19 ‘supposedly’ cutting aggregate demand, how on earth did this phenomenon occur? It’s caused by multifaceted reasons which I will explore by sections:

Migration and Foreign Investment – Not the core factor

There is a fundamental misunderstanding of the housing crisis. Many New Zealanders believe that migration flow and population growth are the core reasons for growing housing prices. On face value, that is correct. Growing demography does mean growing housing demand. However, this would not be a problem if the growing demand is matched by a growing supply. Anti-developmental sentiments from central and local government artificially restricted land supply and housing development. In fact, migration is critical to our prosperity (especially those that are young with high skills and educated). The housing crisis is a supply problem rather than a demand problem.

Foreign investment and speculation are also conjectured by many in the public as the cause of housing hyperinflation. This is also incorrect. Much of the housing inflation is caused by local New Zealanders purchasing property and spurring up demand. In fact, only 3% of housing purchases were from foreigners between January and February 2016. Whilst further should be done to see the extent of the speculation over a long period of time, such evidence suggests that the effects are minimal.

Housing Supply < Housing Demand = Price increase

The core reason for the housing crisis is simply because growth in demand has exceeded growth in supply. One of the core fundamental economic principles is supply and demand. Housing has become extremely expensive because we have not built enough housing in New Zealand to address growing demand. In 1974, New Zealand was building 34,400 annually. However, because of the oil crisis in the 1980s and our unsustainable fiscal position, new annual dwellings dropped to 15,000 in that era. The current government have made some changes that resulted in a growing supply with 24,100 houses built in 2019. We need to note that the population in NZ was 3 million and now just over 5 million. Population growth and demographic ageing do mean that there is consequently excess demand. My research paper released in the new few months will explore this. 

In the last three years, the current government has attempted to curb aggregate demand and expand supply with Kiwibuild. There has been progress with better infrastructure financing to aid local councils and important changes to the National Policy Statement on Urban Development. This removes unnecessary regulations that so far prevented intensification. On the negative side, the government passed new laws such as the ban of foreign buyers (with the exception of Singaporeans and Australians), extended the bright-line test to 5 years, amended the Overseas Investment Act, and tried to legislate a new capital gains tax. For supply, Kiwibuild was a colossal failure with only 548 houses being built. There has been some definite progression in contrast to the previous government, but also multiple failures.

The Reserve Bank’s Impact in Housing

The global Covid-19 pandemic has forced many central banks around the world towards expansionary monetary policies. The Reserve Bank of New Zealand (RBNZ) is no exception. Under Adrian Orr, the bank committed to $100 billion of quantitative easing and also cut the OCR rates to 0.25%. This is unprecedented regarding the scale of the policy (a third of our GDP). These two decisions alone will raise the returns from investment in housing and increase pressure on house prices. Low-interest rates mean cheaper mortgages incentivise investors and consumers into the housing market. These policies led to higher equity and asset prices. Although, some of their policies are completely understandable considering Covid-19’s impact on employment and the economy. However, regardless of the pandemic, this level of quantitative easing is unprecedented. Saying this, it is undeniable that RBNZ’s policies have made a significant contribution to greater aggregate housing demand.

Lacking incentives for local government 

One of the key reasons for the current state of the housing market is because of poor local government incentives. Much of the infrastructure financing is imposed on the local councils, meanwhile, the revenue is centralised to government officials in Wellington. The current system gives far too much political leverage for those in central government, rather than allowing local officials to make important decisions on urban development. There are questions on whether the centralisation of such power into a larger government institution such as the Super City of Auckland Council led to efficient outcomes.

New Zealand’s current system does not incentivise local councils to grow but slows down development. Local government officials don’t want more people in their area, because that means greater demand for water, schools, housing, local parks, and other public infrastructure to accommodate growing demand. Meanwhile, the central government does not allocate funds based on proportionality, but rather on ‘democratic means’ of serving respective electorates and other political factors. The finance gets imposed on the councils with growing demand, but not given the finance from the central government. For example, more than 40% of newly arrived migrants settle in Auckland rather than other regions that need people. Auckland Council currently has growing debt and it wants to tackle that problem rather than expand urban development outwards. The same applies to many other local councils across the country. Without sufficient revenue provided by the central government, why would they want to grow? They would not want to free enough brownfield nor greenfield areas for housing development because all the costs are imposed on them.

To address these problems for New Zealand’s local governments, I advocate for ‘localism’ as it provides greater political leverage to local governments and decentralises decision-making. Countries such as Germany and Switzerland follow this form of local administration. In the United States, Houston in Texas also has a very decentralised governance system. At the federal level, they simply set out basic regulatory frameworks and for the implementation of policies, they leave it to local councils.

For instance, let’s take the case of Essen and Dortmund – the two regions have a competitive and cooperative governance arrangement. The reason is that the tax revenue created is tied to the number of residents in their area. It is essentially a form of a ‘means-test’ requirement for local officials to get their revenue. Because of the incentives to have more residents in their area, the government understands that they need to have good institutions, a clean and green environment, affordable housing and sound public infrastructure. the two cities needed to allow enough land supply available in their area to deal with growing demand. If certain residents leave their regions, they lose tax revenue consequently. In essence, a solid local structure that incentivises competition. Currently, both Essen and Dortmund have affordable housing. Since the 1980s, prices have only risen by 10% in the last 30 years. Simply by changing the tax incentives with a decentralised local government system, it leads to more optimal urban development that matches growing demand with sufficient supply.

Germany’s economic system is a strongly Keynesian-oriented system with high levels of taxation, a generous welfare system and a decentralised form of governance. Localism is neither a right nor left policy subscription, but an example that has worked in these areas. Experimentation in New Zealand wouldn’t be a bad start and we can learn from these international examples. I am not advocating for the de-amalgamation of Auckland Council, but rather changing the tax structure so that local councils get the incentives. Decentralisation of command towards district councils, for instance, is a potential alternative without removing the Super City’s institutional arrangement. As stated by renowned American investor Charlie Munger stated,

“I think I’ve been in the top 5 per cent of my age cohort all my life in understanding the power of incentives, and all my life I’ve underestimated it.”

Basic economics is about incentives. Incentivising local government to grow public infrastructure and push for housing development requires the officials to have the incentives. This will help the expansion of supply – both housing and infrastructure. 

Conclusion

These are the many reasons why housing is unaffordable. Housing is an extremely complicated subject but this post attempted to explore fundamental factors as to why house prices increased in New Zealand despite housing demand ‘supposedly’ very low under the current era of Covid-19. It is clear that housing supply has not expanded fast enough to accommodate growing demand. RBNZ’s policies have exacerbated the problem fueling investment into the property market, and the current set-up of local governments prevents them from wanting to expand development because most of the costs are imposed on them, rather than the central government.

It is imperative for the new Labour government to push for the expansion of housing and land supply rather than continuing to just curb growing housing demand.

Picture of Houses in Suburbs.