Labour goes for leasehold, but may still be hiding some trump card up its sleeve

Helen Clark announced new housing policy today, the very policy that Idiot Savant and I thought could be their trump card in this campaign. Well, if housing is the card Labour strategists have been keeping up their collective sleeve, they haven't played it yet. Today's announcement has its uses, but it's neither a political nor a social circuit breaker.

The Dominion Post sums up the proposal in its headline, "Labour Policy: Buy house, not land". Clark said, "Labour's new HOPE (Home Ownership on the Public Estate) initiative would result in low-income people paying for the building of their house on the land". They would be buying leasehold in other words, but presumably not paying any ground rent.

A Labour government would make 1500 sites around Auckland available over the next four years.

The idea is that it reduces the barriers for those on low incomes who want to enter the property market. But as Professor Laurence Murphy, the head of Auckland University's Department of Property, told me this afternoon, it completely recasts the average New Zealander's idea of home ownership and what it means. Most people buy their first house in the hope of making a capital gain and moving up the property ladder. The idea is that by retirement you have an asset that will help see you through the golden years.

But most of that capital gain comes from land values, not from the improvements to that land (ie houses). Land after all is the scarce resource. So if the government retains ownership of the land, the home owner's capital gains will be limited.

Indeed, that's the very point of such a scheme. By retaining ownership of the land, the government keeps the house and section affordable for the next buyer and the next one after that. National has a not dissimilar leasehold plan, but it allows the home owner to buy the land off the government when they can afford to. That's all well and good for that first home-owner, but it means the property has no ongoing social worth as an "affordable first home".

The problem with Labour's plan is that if those first owners can make only a small profit from their house, they have little opportunity to move on and make the property available for someone else. If leasehold is to be a first half-step on the property ladder, then there has to be help for those families starting in leasehold to carry on and reach the freehold rung.

Nevertheless, even though the home owner won't become a property magnate on the back of this scheme, there are benefits for them. For a start they get a home of their own. They get the chance of limited capital gains on their house. And they get the chance to establish a good credit record with a bank, something likely to be of real value over the next year or two.

Those benefits aren't to be sneezed at, but they will have limited impact on housing affordability, which is an issue crying out for a bold, generational policy from one of the parties. No Right Turn has a useful link to the Ministry of Social Development's Social Report, which says that since 1988 the percentage of New Zealanders spending more than 30 percent of their disposable income on housing has more than doubled, from 11 to 24 percent.

The dream of home ownership is precious to New Zealanders, as is the tangible financial reward. It's still fruitful ground for any party wanting to capture a surge of support from the middle class. As I said last night, I was surprised Labour was releasing its king-hit today. Clark understands the importance of timing–to win an election all you need is the numbers on the day. The polls are week before or after are irrelevant. So I had assumed they'd wait another week or two before playing their trump card. And a careful read of Labour's announcement today suggests I still have the chance of being right. At the end of the statement, it notes, "Labour's overall housing policy will be released later in the election campaign". Perhaps that big whammy policy card is still to come.

Comments (1)

by Keith Ng on October 16, 2008
Keith Ng

Tim, re: the idea that land prices will go up perpetually because they're not making any more of it, that is to economics what perpetual motion machines are to physics.

It goes against the most basic principles, and having a whole nation relying on capital gains from land is an awful, awful idea.

If a piece of land that's worth $500,000 now is going to be worth $1m in 10 years' time, then I'd go to the bank, borrow $500k and buy it. And if I reckon it's a great deal, somebody else would, too. There'll be a bidding war, and prices would rise until it's only marginally profitable, given the risks.

That risk - the risk that it *wouldn't* be worth $1m in ten years' time - is what doesn't appear on paper, and hence makes the ROI look so good. That's the exact thing that makes it a dire retirement fund.

There's no such thing as a free lunch...

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