Time to build state houses?

Labour has an interesting proposal to build state houses.  I know some other economists who have a more intimate knowledge of the building industry, and they tend to agree with the concept.  From what I can tell the justification is:

  1. The credit market for builders/developers/housing is dysfunctional at present and there is no direct solution.
  2. This is especially the case for the area of the market that state houses would fill.
  3. For social reasons the government wants to carry a certain stock of housing, and this has been run down below the level they desire.

Given the last factor, building state houses may be preferable to say having the RBNZ give direct lines of credit at “functional market” interest rates to builders/developers.

Now, I was wondering if there are people out there with a bit more data and information on this – and whether they can throw down things in the comments.  Such a direct intervention requires a hefty amount of evidence, and while I’m sure that the policy is being put out on well considered grounds I would also like the opportunity to look over this.

  • http://www.tvhe.co.nz/ Agnitio

    Interesting post Matt. I think need we need more explanation from politicians as to exactly why your third point holds. To me the argument has to be that the social benefit/externality of “social housing” exceeds the difference in private profitability
    between “social housing” and the alternative private development (a large expensive house) on the same piece of land.

    • http://tvhe.co.nz/ Matt Nolan

      Muy bien, gracias

  • http://offsettingbehaviour.blogspot.com/ Eric Crampton

    What evidence do we have that the credit market is the binding constraint? I’d have thought that the better argument would have been regs/zoning/stupidity makes private building sufficiently encumbered that we may be stuck with government-building as second-best.

    • http://tvhe.co.nz/ Matt Nolan

      The second best argument occurred to me – but then I thought it was strange to not deal with policy failure directly.

      My post wasn’t intended to say it was a binding constraint per se, but to ask if this was the justification and if there was evidence for it. If I am going to judge the policy, I’d just like to see the evidence for those three points first.

      • http://offsettingbehaviour.blogspot.com/ Eric Crampton

        Sure, but Labour could have spun a better story around a second-best constraint – regs there for good reason, blah blah, unfortunate consequence is lack of low-income housing, so address that directly.

        • http://tvhe.co.nz/ Matt Nolan

          What’s the good reason? And if regulations prevent the properties from going up in certain areas for a good reason, and then the government builds them there, how is that an allocative improvement :P

          • http://offsettingbehaviour.blogspot.com/ Eric Crampton

            I’m not saying there’s a good reason. I’m saying Labour could say “for good reason”, nodding and stroking chin as though the reasons were obvious, then going on. When I say “could have spun a better story”, I meant a political argument, not a truth argument.

            • http://tvhe.co.nz/ Matt Nolan

              Dirty old politicians.

              So if policy is like marketing, do economists need better narrative tools to help inform policy, or are our tools sufficient as narrative devices and the issue is about how we utilise them.

              • http://offsettingbehaviour.blogspot.com/ Eric Crampton

                Start with sound science. Then think about the rhetorical packaging. Never fudge the science for better rhetoric. But never give the science without thinking about the rhetoric.

                And read McClosky.

                • http://tvhe.co.nz/ Matt Nolan

                  All very true. Especially the last sentence.

  • Miguel Sanchez

    Credit is not the problem, and I doubt that Labour is framing it in those terms. 5-10 years ago credit was flowing like water and there was still no interest in channelling it towards affordable houses.
    I would imagine Labour is taking one of the angles of the Productivity Commission, i.e. that land is so expensive that people are obliged to build large, expensive houses to get their money’s worth. Even if you buy that (I think it’s completely backwards), I’m not sure that cheap state housing is the best answer. To me it seems to just shift the problem from being expensive to get on the bottom rung of the property ladder, to being expensive to get onto the second rung. If anyone has some figures on mobility rates in and out of state housing then I could be persuaded otherwise.

    • http://tvhe.co.nz/ Matt Nolan

      “Credit is not the problem, and I doubt that Labour is framing it in
      those terms. 5-10 years ago credit was flowing like water and there was
      still no interest in channelling it towards affordable houses.”

      Very true.

      “I would imagine Labour is taking one of the angles of the Productivity
      Commission, i.e. that land is so expensive that people are obliged to
      build large, expensive houses to get their money’s worth.”

      Yar, the argument seems a bit weird to me as well – didn’t realise that the capital component of housing was a giffen good ;)

      I suspect that people aren’t sure why such large houses are being built, but still want to do something. But without deaingl with the cost of subdivision :P