Priced Out - How New Zealand lost its housing affordability

[Full report: PRICED_OUT__FULL_RES.pdf]

Priced Out
How New Zealand lost its housing affordability
Michael Bassett and Luke Malpass

Executive Summary

New Zealand’s housing affordability problems are well documented. Barely a week passes when housing in New Zealand is not in the news: either because prices are rising, or as in 2008–09 when prices briefly fell and many people were upset about paying too much for a house.

This report examines the development of housing in New Zealand since the early 1900s, the current state of the housing market, and its journey to this point.

New Zealand is suffering a shortfall of houses caused by anti-development attitudes, tighter building regulations, and artificial restrictions on land supply. Some of these attitudes reflect the rising discipline of urban planning: a discipline pregnant with questionable assumptions, some of which have proved to be self-defeating.

This stands in marked contrast to New Zealand’s post World War II attitude to building and construction. Housing was a key plank of New Zealand’s post World War II welfare state. The state, through State Advances Corporation 3% loans and a corporatist approach to building and construction, ensured that New Zealand enjoyed very high rates of building and higher levels of private homeownership than had previously been the case.

Despite a richer and larger population, New Zealand’s rates of building since the 1980s have not reached the levels of the 1960s and 1970s. As a result, New Zealand’s new house building is lagging with a shortfall of at least 10,000 new houses annually – a shortfall that is continuing to grow.

The trend can be explained by several key changes to New Zealand’s economy, culture and legislative arrangements in the past half century.

First, the economy slowed down quite drastically from 1974 onwards. There was less government money available through the State Advances Corporation to stimulate the construction of new homes for first-home buyers. This fading of government stimulation was accompanied by the formation of new types of family units (or family households) – partly due to cultural change, partly due to welfare and partly due to a rise in divorce and remarriage rates. The number of new houses built dropped from a record 34,400 in 1974 to 24,200 in 1978. Although the economy improved in the 1990s and early 2000s, housing completions have seldom reached the rate of new household formation.

Second, since the 1970s, there has been a misplaced fear of urban sprawl. Less than 1% of New Zealand is built upon even after including landfill and roads. Fears of ‘using up all our farmland’ are grossly exaggerated.

Third, this fear of ‘urban sprawl’ has resulted in urban limits and restrictive and prescriptive zoning, which have conferred a virtual monopoly market power on landowners near the city fringes. Regardless of how many thousands of sections of land are available within urban limits, they are only worth the developer opening them up at a certain price. The experience of Auckland’s Metropolitan Urban Limit (MUL) is similar to that of Portland, Oregon, with land outside the city limits costing nine times less than within city limits.

Fourth, as New Zealand has become more prosperous, green agendas of more affluent New Zealanders have trumped traditional egalitarian social aspirations, such as suburban homeownership.

Although a slim majority of New Zealanders now think rising house prices are undesirable, the current policy quagmire has created a situation where the interests of those who are lucky enough to own property are often opposed to the interests of non-owners or younger people seeking to get a first step on the property ladder.

However, it should also be remembered that since the 1980s, houses in New Zealand have not only become more expensive but they are also much bigger with a far greater square footage and better insulation and fittings. These improvements are partly the result of changes to government and local authority rules in recent years. As a result, many first-home buyers now have an unrealistic expectation of what standard of house is available at what price.

Changing the face of the housing market will require political will and perseverance as well as overcoming a central part of New Zealand’s economy that sees investment in housing as a way, or indeed the best way, to make individual wealth. We should remember that individuals can get wealthy off housing, but the country cannot.

[Full report: PRICED_OUT__FULL_RES.pdf]

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