Auckland's sky-rocketing house prices could do the country a service -- as long as they are not artificially lowered

There have not been a lot of real issues about so far this year. We have had the usual silly season diet of non-consequential stories, interspersed with stories on the weather, accidents, crimes and so on. Often they make pretty terrible reading (why won’t boaties just put on their life-jackets?) but they are the sort of the events that happen anyway regardless of who is on the Treasury benches at the time (even they are on holiday not doing anything). Nothing political there.

Lately this seems to be different in one respect. One genuine issue appears to be arising. There is a growing concern and interest amongst the public at large -- and a growing focus amongst the political parties -- on the issue of affordable housing. Various definitions of affordability are offered; whichever definition is used, the picture now is that housing is becoming less affordable.

Especially in Auckland. The problem is that housing costs more in Auckland than it does in the other major centres (and often considerably more), and it costs even less when one goes to provincial towns and rural areas.

As for Auckland, the bigger it gets, the more it attracts additional people, and the higher its housing costs go. Various predictions show its population becoming a larger and larger proportion of the total population of New Zealand and that happening in quite a short time period. Now I am a happy Wellingtonian myself and struggle a bit to understand why anyone wants to live up there, but that seems to be what is happening.

There is a serious side to this issue. The more this "Auckland growing much faster and to be much bigger than all the rest" phenomenon happens, the more I wonder whether the resulting unbalanced population structure is going to give a good long-term future for New Zealand.

This higher cost for houses in Auckland is really a market signal to say, “Look purchasers -- it costs more to live in Auckland than other places and unless you can find employment or business opportunities to justify the extra cost, you may be smarter to go elsewhere”.

While it is not in New Zealand’s long-term interest to allow housing to become unaffordable, it makes sense to let that signal work.

So while I fully understand why affordability concerns people and want to see it addressed, a bigger concern would be public policies that “solve the problem” by effectively lowering the cost of buying a house in Auckland relative to other places. In short, subsidies on the cost of housing in Auckland. That will attract even more people to go to Auckland because it really doesn’t appear to the house purchaser to cost what it actually costs – the difference would be covered by taxpayers - and the
unbalanced growth problem would be aggravated.

One way those concerned about the additional cost of housing in Auckland could address their concern is to look for other opportunities elsewhere in New Zealand and see their capital go a lot further. I am afraid that the “win that vote whatever the cost” approach all too prevalent in our political cycle will jump on the short-term interest and trump the longer term.

Comments (14)

by Lynn Prentice on January 31, 2013
Lynn Prentice

Yeah right.

The reason that people want to live in Auckland is primarily because there are interesting jobs that involve earning income for NZ outside of farming here, and very few elsewhere in the country.

As a computer programmer who enjoys writing export software, there are heaps of  jobs of that type in Auckland, and I've worked on quite a few over the last two decades. There are either none to piddling numbers elsewhere in NZ. The same applies for virtually every other export industry that relies on brains rather than various forms of resource extraction in the form of soil fertility or mineral extraction.

Most of the interesting jobs outside of Auckland used to exist in Christchurch. But they had some National idiots strip away the local government to satisfy some farmer lobbiest's sense of entitlement. Then followed by earthquakes and and even bigger dickhead called Brownlee throwing his ignorant weight around. Christchurch could survive the earthquakes. But I wouldn't want to move there these days. You never know when the National party appachniks will do something silly in their private concentration camp.

Of course there is your beloved Wellington. Are there any jobs orientated to export down there? As far as I could tell there are just the lobby people looking for handouts like Weka and ummm - you.

Perhaps the government could look at trying to move jobs that have some actual income coming from other sources than taxation and farming down country. But they really seem be be more interested in trying to destroy export jobs. I guess that is why there is that enormous outflux of skills to Aussie.

by Wyatt Creech on January 31, 2013
Wyatt Creech

 

I wonder if you got the point. If we lower the cost of housing artificially we will encourage people to move to where we make it cheapest. I wouldn't bother getting into the Wellington/Auckland/anywhere else "is the best" argument - just observed that I personally am happy where I am. As to your "there are no exciting jobs anywhere else" argument, I can't help but observe that the Lord of the Rings, The Hobbit and others were all shot in Wellington. There are even some really switched on IT companies - wow.  
by nommopilot on January 31, 2013
nommopilot

No one decides they want to live in a town based entirely on house prices.  If there are no jobs to sustain the paying of mortgages then no one will be buying even really cheap houses.

While I'm sure your blog post (particularly the title) will encourage a good number of people to move to the regions, I personally think the drive for growth in the cities is to do with jobs:  It is the supply of jobs in any given place that creates the demand for housing.  Supply of houses affects price levels and thus the distribution of housing (flowing on to the challenges of having everyone in the whole city apparently working on the other side of town from where they live), but everyone has to live within some commutable distance of their income source. If you want to entice people to move to the regions there needs to be a drive to move or create jobs in other places (something I would personally support), but I can't see the current government actually doing anything in that regard and thus I'm afraid this blog is on its own...

There is no reason whatever subsidy you are talking about should apply only to Auckland anyway, it could apply Nationwide, adjusted for local house prices.  All depends on the government's aims and how serious it is about engaging with the problem.

As for what's 'artificially' increasing prices in housing, the tax-free capital gains have a far greater effect than any other subsidy might.

 

by Tim Watkin on January 31, 2013
Tim Watkin

Wyatt, I take your point that high prices are the market speaking. I also agree we need to look at ways of not over-balancing our population in Auckland.

My problem with the argument is that the market is a construct of our own making. It is pricing Auckland high because demand is high and supply is low, sure. But Opposition parties would argue you can tweak the market to send different signals, what with a capital gains tax, different Reserve Bank policy etc. And recent experience tells us that public policies have also helped push property prices higher (eg, allowing banks to offer 95%+ loans).

The reality is also that while our low wages can't keep people in this country, people are leaving the provinces (Gisborne and Northland top the list proportionately), while new immigrants tend to stay in Auckland. Meaning more demand and higher prices. The market isn't going to fix that on its own.

Those points aside, what I wonder about is how we get folk to move elsewhere. In my work, there's nowhere else to be, and many must be like me. And with unemployment like it is, there may not be that many jobs out there waiting to embrace those who do move... So what's the incentive?

 

by Wyatt Creech on February 01, 2013
Wyatt Creech

 

My beef is with policy settings - and very tempting they are – that artificially lower the price and one place at the expense of other places.

While for some the market is a construct, and of course It is never just house prices and some will have no option but Auckland just as people in the fishing industry have Little choice but to go to sea –  and so on. That is just part of a bigger picture called the “opportunity”.

It’s self-evident that I have been around for a while  - maybe we wish someone would turn back the clock for us but that never happens. – but I have seen this sort of thing happen before. Since one commentator appears to see me as a rural person, I will use a farming example.

The eastern hill country of the Wairarapa has been “cleared and broken in” twice – for much of this land it never made sense economically – the soil is too poor and droughty, it needs massive dumps of superphosphate to work, etc.  It happened because we subsidised landowners to do it. In the mid 70’s early 80’s we had the Supplementary Minimum Prices Scheme which effectively subsidised farmers to grow sheep numbers when the market price did not justify it at all, and meanwhile the nation built up a huge stockpile of wool. I well remember it being referred to as the National Thin Sheep Scheme and it was an uncannily accurate name.  Finally there was a lot of pain when it was all abandoned, as eventually it was going to have to be.

Human’s respond to market signals.  It makes sense to avoid market signals distorting where people choose to buy houses or increase stock numbers.

by Lynn Prentice on February 01, 2013
Lynn Prentice

Ultimately it is the demand for interesting jobs that drives the Auckland property market and the relative lack of it that causes lower pries elsewhere.

When I was looking around on trademe at house prices, I spotted what like looked to be an entire street of houses for sale in one smallish Taranaki town for really low prices - less than 50k. If you looked for jobs there then there wouldn't have been any of much interest. 

Even around the periphery of Auckland you can find much cheaper houses than in the city. But they are cheaper because you wind up with a choice of paying for a more for the combined cost of mortgage+transport with a few extra hours taken out of your day in commuting. Good for the retired and useless for working folk. But the retired pour out of Auckland with their capital gains for cheap houses near to hospitals in the provinces anyway. 

But since the Nats only seem want to enrich land-bankers and developers with their instant McMansion commuter slums on the periphery, to want to block building anything else, block required public transport and want to build largely useless motorways, and generally act like fools in Auckland governance over the decades since the 50's... Well then we have a massive shortfall in the building of useful housing within economic reach of work inside Auckland.  Their interferance in the market is one of the driving Only their recentl aquired expertise in making jobs disappear to Aussie  is preventing it from going stratopheric. 

Sure people can move elsewhere in the country. But unless you are retired, there aren't the jobs anywhere else that are worth going to move for. Housing prices reflect that market reality. The reason that housing is so ridiculously expensive in Auckland is largely  the result of interference in the market by successive National governments preventing the changes that would allow Auckland to deal with their own infrastructure. The current deadlock is just the latest running back as far as the Nationals idiotic decision to rip the tram system lines out of the Auckland roads back in the 50s.

by Andrew Geddis on February 01, 2013
Andrew Geddis

"Human’s respond to market signals."

True that. But isn't the issue that the "market signals" being given out are an amalgam of both individual decisions ("how much do I want to live in a particular place for a particular purpose ... and can I afford to pay for that desire?") and existing background policy settings? So, for example, National claims that house prices in Auckland are "artificially high" because of supply-side issues ... and that the council must act to change its planning rules to free up more land. Labour/Greens claim that house prices in Auckland are "artificially high" because of things like tax settings or economies of scale in building ... and that central government must act to alter these. 

The point then is that any sort of tinkering with the already existing policy settings will potentially affect the price of housing, which in turn will influence individual decisions - if housing becomes cheaper, more people will be able to follow their dreams to the Big A (or whatever marketing slogan Auckland now uses for itself). Wyatt's point would seem to be that we should therefore be cautious about changing policy settings, because by doing so we'll create potential externalities for the rest of the country ... the "good" experienced by those able to live and work in Auckland will manifest as a "bad" elsewhere in the country.

But doesn't that then just boil down to a call not to ever change anything, in case we just make things worse? 

by Lynn Prentice on February 01, 2013
Lynn Prentice

Wyatt's point would seem to be that we should therefore be cautious about changing policy settings, because by doing so we'll create potential externalities for the rest of the country ... the "good" experienced by those able to live and work in Auckland will manifest as a "bad" elsewhere in the country. 

We have two competing market systems operating in NZ.

One is that larger cities work better for producing viable export based industries. You get clusters of cooperating industries, companies, and people together and they can do things like build the hardware and software systems far far more efficiently than is feasible in a place like (say) Dunedin. 

I worked there in the local computer industry for a number of years after I finished my MBA there back in the 80's (my partner at the time was finishing her law degree). A lovely town. But a really really long way from rest of the world market and where companies simply didn't even see the world markets. Like when I left Hamilton after my first degree, it was a relief to get back to Auckland with its business focus on export. Hamilton has been getting more exported orientated over time, but the tech companies there maintain development centres in South Auckland as well to maintain access to the tech industry cluster. Dunedin doesn't seem to change much.

Problem is that apart from what is left in ChCh and Weta, there are no other significiant employers in the types of concentrated industry clusters in NZ required to get sufficient expertise to develop for the rest of the world. The only other industries around are the agricultural/forestry industries working with local resource advantage.

The IP industries are major employment multipliers where you find the interesting employment with good wages and large numbers of people being employed directly and indirectly in providing for external markets. While the locally orientated industries here have been largely stagnant for decades (as they have throughout the country), the export ones keep growing.  So Auckland keeps growing. That drives the demand for services like housing. 

The biggest and longest term market distortion around is that Auckland has been constrained by silly decisions from central government and ministries like NZTA over decades. This is expressed as increasing property prices because what housing is going into Auckland isn't of the type and/or volumes required. Getting rid of that so that Auckland can build the transport structures and housing that are required here would be a good start.

by Lynn Prentice on February 01, 2013
Lynn Prentice

Thats annoying - it lost my paragraph structure after I used blockquote? Bug?

[Ed: Problem fixed. This is what happens when you hire Talent2 to run your comments thread ... .]

by Wyatt Creech on February 01, 2013
Wyatt Creech

"Market signals" are an amalgam of complex individual decisions made against a background of the policy settings determined by government in the broadest sense (not just central government, but local, regional and independent parts of the bigger whole like the Reserve Bank).  I’m certainly not arguing for not changing policy settings Andrew – that is the policymakers all too frequently exercised prerogative. I am just observing that choosing a setting that artificially lowers the price by subsidisation to make houses "affordable" (and win votes) is the wrong change. It will aggravate the situation rather than fix it.

I know that one lot are arguing that the problem will be solved by making more land available (increasing the supply to lower the cost) while the others are arguing that we should resist urban spread and go for infill. Dont think that will change anything quickly, especially the cost of  housing. The new Governor of the Reserve Bank is chipping in too, trying to jawbone down prices but so far not making any changes to actually constrain borrowing.

In Kiwiland Auckland is our Big Apple and like the big Big Apple it attracts people – it would do that anyway. Auckland growing reflects the modern age reality, just as a century ago it was Dunedin – in those days Dunedin had land, gold, wealth, new migrants, energy and all that.   

Call me a cynic if you like, but my guess is that house prices in Auckland will continue to rise. Let’s check next year. I say that because there is a clear housing shortage – price rises are the natural response.

by mudfish on February 02, 2013
mudfish

"...there is a clear housing shortage – price rises are the natural response."

Just how far can that go before it's unsustainable and socially unhealthy? What would unsustainable look like? Europe? Detroit?

I wrote a whole set of pessimistic uninformed scenarios but I've scrapped them and instead left a bunch of meandering questions:

How has the ratio of debt to income for various age-group bands changed over time? Is there a time-bomb there? To me it doesn't seem very cheap to buy/build in the sticks (areas in decline with no jobs excepted) throughout NZ, let alone Auckland. 

 "There is a serious side to this issue. ... the more I wonder whether the resulting unbalanced population structure is going to give a good long-term future for New Zealand." What problems is the current level of imbalance causing? At what level would it become really problematic? (Off-topic - can we ask the same things of inequity in general?) In what way would a capital gains tax help or hinder?

"...there is a clear housing shortage – price rises are the natural response." Is the other natural response for more houses to be built at an affordable level, i.e. cheaper? (Yes, it'll take more than a year or five to make much impact).

If we build flat out for a decade and then realise the population is about to flatten off, what'll that mean for our economy? Would the political response to a population stall be to open the doors wider? And since the doorstep is Auckland, is there a feedback loop at work here?

That'll do for random questions for now.

by DeepRed on February 05, 2013
DeepRed

Wyatt: "In Kiwiland Auckland is our Big Apple and like the big Big Apple it attracts people – it would do that anyway. Auckland growing reflects the modern age reality, just as a century ago it was Dunedin – in those days Dunedin had land, gold, wealth, new migrants, energy and all that."

There's a world of difference between a proper city with 1.5m people, and an overgrown country town with 1.5 million people, and the biggest differences are how they grow and the interactions between different people.

A partial factor in NZ's housing inflation is an insistence on clinging to the quarter-acre romance at any cost, but in the long run it'll be inevitable for Auckland to grow taller instead of fatter. On the other hand, the shoebox towers that blight central Auckland are a reminder of the foreign student bubble that popped in the late 1990s.

As for sub-$100k houses currently on the market - what Demographia et al won't tell us is that they have a 3-5 hour commute, the Mongrel Mob as neighbours, are near a sewage/toxic site or in a WINZ dead zone, or a combo of the aforementioned.

by Brendon Mills on February 06, 2013
Brendon Mills

We wouldnt have such high house prices had the cabinet that Creech was in didnt flog off thousands of state houses and jack up rents in the rest of them causing poverty, overcrowding, homelessness and diseases. And dont get me started on chopping the Housing Corp mortgages, and slashing wages across the board.

 

If I had my way, Creech, you would be on trial for crimes against humanity.

by stuart munro on February 11, 2013
stuart munro

Let's skip the trial Brendon, I'm sure I can find a bit of rope somewhere.

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