Housing Affordability: A Vicious Cycle

The Herald has reported on the results of a recent survey which show that New Zealand is now the least affordable place to buy a house in the world. The study reaches this conclusion by examining average wages and house prices.

Given the well documented gap between wages in New Zealand and overseas, the housing bubble and some of the worlds highest interest rates it isn’t really surprising that we have the least affordable houses in the world. The problem is of course exacerbated by the the fact that our Reserve Bank is mandated to control inflation and thus the increase in house prices has caused interest rates to rise: It sucks to buy a house right now!

So we know why houses aren’t affordable, but should we really be the least affordable place in the world to buy a house? It’s not like we are struggling for land to build houses on: We have the population of Sydney spread over roughly 20 times as much land. This is why the authors of the study suggest that freeing up more land on city limits could help solve the problem, something that Don Brash has apparently suggested previously. This seams like a logical solution for a country like New Zealand.

One can only wonder where the government got it’s advice for the Housing Affordability Bill. The Property Council and Master Builders Federation point out that requiring developers to include low cost houses in any new development will just force the developers to subsidize this by increasing the price for the other houses in the development. The best this policy can achieve is a zero sum.

5 replies
  1. terence
    terence says:

    Aaron, yeah rents v prices would be good to see for NZ.

    Matt – if land shortages were really the issue, wouldn’t we expect to see relatively low wages for builders and excess supply of them? (builders being a complimentary good). As far as I can tell the opposite is the case.

    Also, opening up more land (if enough were really available and remember green belt has its value) might just be (in the mid term) offering more fuel for the bubble.

    I definitely agree that Labour’s solution is a lackluster one though.

  2. Matt Nolan
    Matt Nolan says:

    Hi Terence,

    The authors don’t seem to show up on the articles anymore, this one (and a few before it) were by the other main author on this site, James 🙂

  3. Matt Nolan
    Matt Nolan says:

    Actually, I got the wrong author as well, its actually another one of the authors agnitio 😉

    “wouldn’t we expect to see relatively low wages for builders and excess supply of them?”

    That is an excellent point, and one that many economists are uncertain about at the moment. In some regions there is definitely a shortage of land to build in (eg Wellington), and according to official figures there is an excess supply of builders, relative to the amount of building activity that is occurring (building sector productivity has collapsed over the last few years). In this case we would expect wage inflation to be slower in the building sector than in other sectors, however it has accelerated to an average annual rate of 7.3% as of September (using QES data), the fastest rate of all sectors and well above the 4.4% average for the economy.

    It is possible that construction firms are ‘labour hoarding’, however I find this unlikely given that construction activity is expected to ease (with weakening house prices reducing the expected return from building). However, there is a simpler explanation that involves a mixture of compliance costs and rising house prices.

    The government has spent the last few years adding requirements and costs to the building sector, in order to make the homes they build safer etc. In this case building firms need more staff, increasing the demand for labour (this would also explain the dip in productivity). Now, this would usually imply a dip in activity, but rising house prices, and the fact that the industry was capacity constrained to start with, keeps businesses involved in building houses. With higher labour demand, we can expect wages to rise relative to what they were.

    As a result, the lift in employment and wages in the building industry is entirely consistent with government intervention in the industry, implying that it is still possible that the residential building market is capacity constrained.

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