Sorry, what?

This quote blew my mind: (turns out it came from a release here)

“It is based on the notion that increasing supply of houses at any price will somehow bring down prices. This is trickle-down economics at its most dubious.”

What.

That is exactly what shifting the supply curve right does … unless demand is perfect elastic with respect to price.  That is ridiculous.

Note:  If (marginal) willingness to pay doesn’t change on the basis of the number of houses sold, then it might be a bit difficult for “banning sales” to have any impact on prices …

And how is this “trickle-down economics“.

“Trickle-down” is when you do something like cut taxes for the wealthy, or intervene in the exchange rate to subsidise manufacturers and say this will generate jobs and the such.  [I’ve heard Labour suggest the exchange rate one – making them “trickle-down” proponents themselves!].

Freeing up land will push down land prices around Auckland, thereby reducing the wealth of a whole bunch of landowners via the swipe of the regulators pen – this doesn’t sound like “trickle-down” economics at all. Lower land prices, lower property prices for existing dwellings …

It is “supply side” in terms of the supply side of the property market – surprisingly the term “supply” doesn’t always mean exactly the same thing (there are different markets and macro and micro “supply” is different!), so when it turns up in a sentence we can’t just start ranting “trickle down” :O

What Twyford is trying to say is (I’m guessing), is that if large expensive homes end up being built on the freed up land it won’t sufficiently help to improve affordability for the poorest people – and given that recent Treasury evidence (<3 working papers) suggests that housing costs in the lower (though not lowest) part of the income distribution have been climbing, and given that this issue is “likely” endemic in Auckland, there may be a role to ensure that smaller cheaper housing is built.  Hell even whip out the “the lack of scale in our building industry is biasing construction, helping to make property unaffordable” line.  I don’t fully agree with these, but they are consistent and articulate the idea I THINK Twyford wants to make.

If he wants to say something cutting and more accurate try:

Freeing up land and letting developers decide what to build isn’t going to ensure we get affordable housing to those most in need, we have a genuine issue for those facing hardship in Auckland and this government is willing to ignore it by throwing it in the too hard basket

Again I don’t necessarily agree with this (it is a relative price argument, and one I can see for and against elements for) – but it proposes that the person saying it knows whats up, and has a solution without throwing in random poorly worded rhetoric.  And the affordability line appears – that is actually the point right?

Then this:

The houses were likely to be expensive and snapped up by speculators, he said.

So the houses will be expensive relative to rents (trying to figure out what he means by expensive here), and so in some sense “overpriced”.  And these magical speculators are going to come in and overpay for them.  HELL YES – I love it when magic people come in and overpay me for things!

Wait, Labour wants to ban the “speculators” … what?

Compare this to the Greens:

Green Party housing spokeswoman Holly Walker said the amendments did not address any of the party’s fundamental concerns.

The amended bill retained the Government’s power, criticised as anti-democratic, to directly establish special housing areas and approve residential developments.

They have reasons – logically consistent reasons that are clearly articulated.  Whether you agree with the Greens or not, they aren’t just throwing out “random terms” into the air to see if it will make people like them …

UpdatePaul Walker is also, concerned.

  • detmackey

    It certainly is trickle-down economics at its most dubious, as in not at all

    • I tried to be a bit more sympathetic later on – by reframing the argument as being about the “stock” of land avaliable to certain groups. But even in that light, it looks like dubious rhetoric!

      It is weird, because it seems so easy to actually make a nice sounding affordability argument to “attack the government” (again, not saying I agree). Makes me feel like the quote must be out of context/accidental.

  • Shamubeel Eaqub

    How bizarre. Also why the confusion between housing as shelter vs housing as investment? Stats report shows rent to income ratio in Auckland hasn’t done anything for a decade.

    • I’m thinking it may be politicially more convenient to not define a “problem” and quickly switch between mutually exclusive issues and focus on losers (often ones that cancel out). On this note ALL politicial parties are guilty of that though 😛

  • Blair

    Too right.

    Three additional points.
    – the housing stock depreciates quite steadily. What are new luxury homes today may be middle of the road in 20 years and affordable housing in 50.
    – from memory, I think Bill English has also been guilty of saying there’s no point building new houses if they’re not affordable.
    – the affordable housing mantra has been a big stumbling block against building more high quality housing near the city centre. Duh, if we build more luxury apartments near the waterfront, the people who move in have to vacate other premises further out, people.

    • Indeed, exactly right – it is hard to think about dynamics in this sense, but that doesn’t mean we shouldn’t be doing it!

  • Seamus Hogan

    Matt. I was teaching this morning and so didn’t get to the piece of low-hanging fruit. So rather than do a separate post, let me put out a bleg. Can someone please write down a simple model in which opening up more land for development *does not* result in lower prices for bottom-end houses, and in which it makes a difference whether or not the houses are bought by foreign speculators. And make the model one in which you can lower prices by having the government build lower-end houses and banning foreign ownership.

    • We have an individual foreign speculator with a higher willingness to pay for all land and property and their willingness to pay is invariant to the quantity they purchase. If we open up more land, they just buy it and build things on it. This all happens because they do not care about the yield on property at all – they just want to own all the land.

      If we ban them, they aren’t in the market. As a result, we set of normal looking supply and demand curves and so increasing supply lowers prices.

      This looks nothing like any form of reality – but it gives me the result we’re after …

      • Seamus Hogan

        That was the model I had in mind. But note that for that model to work, it is has to not only be the case that the foreigners don’t care about yield; they must also leave the houses empty rather than letting people live in them for free or below-market rents (all the while paying insurance, rates, and maintenance). I have a another model but in mind, but it has an even harder time passing the sniff test.

  • Paul Walker

    What I don’t get is why press releases like the one you link to are not checked before being put out. Did no one read Twyford’s release before it was sent to the media? Did no one think to ask one of Labour’s economic advisers to check the release? As Seamus rightly notes this is a piece of low-hanging fruit, how could it have been released?

    • I actually don’t think he meant to say what he “said” – I suspect this is just a misarticulated release.

      But I don’t feel much sympathy, because the poor articulation was due to the determination to use certain rhetoric instead of substance (which is a more appropriate form of rhetoric) … this is disappointing on all accounts.

      • detmackey

        I was about to get stuck in too with a point about how long they’ve had to make any critique coherent, but these bills have been passed under urgency which is unhelpful for good law.

        Anyone got a view on the effects of what’s specifically proposed rather than Labour’s embarrassing response?

        RIS: http://www.mbie.govt.nz/about-us/publications/ris/creating-special-housing-areas.pdf/at_download/file

        • Blair

          Reducing the time limit for greenfield and brownfield consents seems smart. Don’t see anything in there about freeing up height limits, restraints on subdivision, or limiting heritage, traffic and view impediments as grounds for NIMBYism.

          • I agree with Blair’s points (including the idea that parking space limits are a binding constraint). I have two other issues:

            1) The policy justification often “misses the point” and tries to add in other unrelated factors (concerns about bubbles) – this is frustrating.
            2) I am not a fan of central government being able to determine that it will intervene in the way they are suggesting – I think the Greens do have a point. These issues are long-term planning issues, central government jumping in for political expediency is a risk!

            • Swan

              Not clear to me how – letting people do more things with their own property is “intervention” relative to the status quo.

              • Fair point!

                However, if we think communities are trying to co-ordinate building with reference to a long term plan – the threat of central government intervention based on political expediency does create unnecessary uncertainty! The best counter to this is that the council is probably likely to be just as bad!

  • boristhefrog

    Now I am completely convinced Labour’s economic analysis is being done by under achieving 7 year old…. this is just embarrassingly dumb

    And don’t try and apologise for them – clearly they are tits at anything to do with economics at the moment… kick ’em in the nads!!!

    • I think it is best to try to tackle these things constructively – I am trying to be more of a constructive ranter, although I still need to work on that 🙂

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