Is the Housing Crisis Bad for Productivity as well as Wealth Inequality?
People might vote with their feet
The first three parts of The New Zealand Rack-Rent Housing Crisis series focused on housing inequality, an issue that feeds into and underpins numerous societal ills. Bold political action is needed to make housing affordable and prevent the entrenchment of New Zealand society into a class system based around inherited property wealth. This paper though focuses on productivity.
Jenée Tibshraeny, a journalist at interest.co.nz, has done excellent work investigating the inequality effect of printing money, a strategy employed by the Reserve Bank in response to the forecast economic downturn associated with Covid-19 (articles here and here, video here). In New Zealand, that effect mostly relates to housing, raising the question: does housing inflation cause a long-term decline in productivity in addition to its inequality effect?
This is an important issue because of its policy implications.
There is an assumption — held by the Reserve Bank at least — that when house prices inflate homeowners feel more wealthy and they spend more, making it an effective way of stimulating the economy. But perhaps this housing wealth effect is only short-term, within the one to two-year forecasting window of the bank?
In the long-term, an associated decline in productivity could be the more significant effect because of how towns and cities function as labour markets (see here and here). Some economists estimate the productivity cost of unaffordable housing at $1.6 trillion a year for the United States. Housing-related productivity decline might be a slow acting yet strong long-term effect, because changes in the labour market often take time to eventuate.
For example, high house and rent prices affect where a trainee nurse will consider living in five years’ time — after they have completed their training, gained a year or two of post-grad experience and are nearing their peak productivity and employability. Entrepreneurs, too, need affordable space to focus on developing innovative products and companies; many will fail, but the long-term payoff for some will be huge.
The Green Party’s wealth tax policy has merit as a means of addressing the short-term effects of housing inflation, the distributional wealth effect dividing the country into property-owning ‘haves’ and ‘have-nots’. Green Party co-leader James Shaw last year discussed this with Tibshraeny in the linked video above. This week the Green Party continued this line of enquiry with questions in select committee from Chloe Swarbrick to Treasury and the Reserve Bank and in parliament with Grant Robertson being asked by Julie Anne Genter — “Does he agree that it’s now time to respond with bold fiscal policy, including taxation, to mitigate the current wealth inequality impacts of this unconventional monetary policy?”.
But if housing inflation also causes productivity to decline then a different set of policy reforms becomes necessary. There are implications for the governments planned reforms of the Resource Management Act (RMA), active land management by public sector agencies, housing-related infrastructure funding, and for ensuring at least some public housing is responsive to the employment requirements of low-income renters — i.e. adding the Austrian public housing model into the policy mix rather than further expanding the Income Related Rent Subsidy scheme and the Accommodation Supplement.
Reforming housing in New Zealand so that it is affordable for all levels of society — the idea of housing as a human right — will require a combination of Tokyo’s housing abundance and Vienna’s egalitarian housing (a video explaining the role of the Vienna social housing agency responsible for land acquisition, infrastructure provision, project development and urban renewal can be viewed here).
My New Zealand Rack-Rent Housing Crisis series describes how the government could reform housing in New Zealand. If the state fails to intervene with sufficient boldness, to put the handbrake on housing costs rising rapidly out of step with incomes, the housing crisis will become existential — an issue which shatters the foundational myth of New Zealand as an egalitarian society.
In addition to academic theories and models, there is plenty of overseas evidence showing how unaffordable and insufficient housing affects the labour market if there is an extreme imbalance like is being experienced in California.
The way housing affects the labour market may not be linear. If house prices, rents and new builds are unresponsive to demand factors, such as job creation, there might be a tipping point or series of tipping points — each creating an exodus of business and employment.
Policymakers in California are concerned the state has reached a tipping point where the exodus of businesses and workers is now greater than the factors leading to innovation and inward migration that previously powered the state to be the fifth largest economy in the world (a video titled “What’s Driving California’s Mass Exodus?” describes this well).
Other parts of the world are having similar conversations about how housing is undermining society and the need for bold reforms to housing policy settings. For example Irish economist David McWilliams has a podcast with the following description. “Public housing should be addressed with the same urgency as public health. If we can close down the economy, borrow billions, furlough millions and stop the world in the name of public health, we should be able to tear up the rule book when it comes to housing. The property market in Ireland and the rest of the English speaking world is a scam, rigged to push prices upwards, indenturing working families and exacerbating the wealth divide. Here’s how to fix it.”
It would be easy for New Zealand to reach a housing-related labour market tipping point; there are already large expat communities of New Zealanders overseas who would aid others leaving the country as the housing situation becomes more dire.
Reforming our housing settings will be a difficult task, fraught with finger-pointing and the shifting of blame. It is naive to think any one government minister — such as Environment Minister David Parker, who is leading the RMA reform process — is capable of solving the housing crisis. Successful housing reform will require coordinated action from ministers of the environment, housing, local government, transport and finance at a minimum. It will require a prime minister — or entity the PM has given executive power to, such as a housing commissioner — who can coordinate these ministers by publicly expressing a clear set of housing targets and tools. Without this strong, coordinated approach the various housing-related institutions will pull in different directions.
For example, Auckland Council is already pulling away from the National Policy Statement on Urban Development (NPS-UD), a directive released last year which requires councils to relax height restrictions, remove car parking minimums and encourage density. Councillors and the mayor seem to believe the issue is not the restrictive nature of the district plan but the lack of infrastructure funding (see the second half of this video of the council meeting debating the NPS-UD).
Will a future Auckland Council faithfully implement the new RMA legislation if it directs local government to further liberalise planning restrictions, or will they find excuses to obstruct it? The 1991 Resource Management Act will be repealed and replaced with three new laws this parliamentary term, namely:
- Natural and Built Environments Act (NBA) to provide for land use and environmental regulation (this would be the primary replacement for the RMA)
- Strategic Planning Act (SPA) to integrate with other legislation relevant to development, and require long-term regional spatial strategies
- Climate Change Adaptation Act (CAA) to address complex issues associated with managed retreat and funding and financing adaptation.
“I expect that the complete NBA and the SPA will be formally introduced into Parliament by the end of 2021, with the NBA passed by the end of 2022,” Environment Minister David Parker said. A full explanation of this process can be read in the Richard Harman article titled — Parker is playing the long game with his far reaching RMA reforms.
Business journalist Bernard Hickey explains the viewpoint that reform to urban planning and environmental laws cannot deliver the necessary housing supply without first dealing with the politically untouchable roadblocks of population policy, infrastructure funding and the need for a wealth tax.
It is hard to know the size of New Zealand’s housing related infrastructure deficit and need for additional funding, it is probably sizeable but how big is uncertain. Transparency is not a hallmark of our urban development system. Overseas, more transparent systems, such as, Austria’s gold standard public housing provision that houses a quarter of their population and anchors their housing market is funded by a regionally applied 1% PAYE tax. Not an impossibly onerous level of funding. This indicates the infrastructure deficit and taxation/funding issues might not be the political untouchable roadblock that Bernard Hickey describes.
Although how any additional funding or taxation is spent could be an issue. If the Finance and Infrastructure Minister Grant Robertson does assess local government infrastructure deficits to be genuine and therefore increases funding to local government, would councils faithfully spend it on the required housing infrastructure (much of which is below ground, or not immediately obvious)? Or would they find other spending priorities, kicking the can down the road and allowing infrastructure deficits to mount up, as has happened in Wellington with embarrassing consequences — the raw sewage flowing down city streets and into the harbour.
What is required is an honest broker between local and central government, an entity which is not beholden to either parties’ flawed political processes. What is needed is an independent housing commissioner loyal only to a set of housing affordability targets. A housing commissioner could fairly adjudicate the issues of planning restrictions and infrastructure funding in order to get central and local government on the same page. Being independent, they would be expected to advise and direct government ministries and local councils — whatever is required in order to meet their affordability targets.
A bipartisan approach to the housing crisis at the central government level seems possible. A housing commissioner could be widely accepted across the political spectrum. Opposition National Party leader Judith Collins says suburbs will need to change their character in order to solve the housing crisis. In an interview with Stuff, Collins said Kiwis need to understand that the country needs more housing and that requires suburbs to change. Her party is now backing the Government’s National Policy Statement on Urban Development, which will stop councils from enforcing height limits of less than six storeys near major transit routes in an attempt to intensify cities.
It should be possible for New Zealand to start solving the housing crisis without blame-shifting and finger-pointing. And the sooner we act the sooner we prevent our towns and cities being priced out of contention, becoming failed labour markets that are not attractive for the next generation of kiwis.
To prevent an exodus, to address housing-related inequality and its attendant social markers — think poverty, families living in cars, rheumatic fever — New Zealand must pursue a path where housing is seen as a human right. Action is needed, not later but now.