The Housing Productivity Story
A fair nights rent for a fair day’s work
Housing policy failure impacts heavily on the poor as many commentators, including myself have long detailed. A civilised society should be able adequately house all of its people. Failures like families living in motor vehicles in the carparks of Auckland is confronting and distressing. The call to fix the housing crisis from an inequality perspective is strong and valid.
Housing policy failure though also burdens New Zealanders through loss of productivity. This story has less emotional impact but I believe it has wide ranging detrimental effects that are felt throughout New Zealand's society.
The economic argument goes like this;
The Italian-American economist Enrico Moretti has described who benefits from productivity gains — landowners or workers, as being dependent upon whether a city has inelastic versus elastic housing supply, by using a two city economic model with a positive productivity shock to city b.
3. If housing supply in b is fixed… the entire productivity increase is capitalized in land values in city b… City b becomes more productive but it cannot expand its workforce because housing cannot expand. No one can move to city b, and the only effect of the productivity shock is to raise cost of housing… All the benefit goes to landowners in b. Real wages are not affected, and workers in both cities are indifferent. This is a case where, even in the presence of a shock that makes some firms more productive, labor is prevented from accessing this increased productivity by the constraints on housing supply. Part of the increase in productivity is therefore wasted.
4. If housing supply in b is infinitely elastic… indicating that housing prices in b do not change. For each additional worker who intends to move to city b, a housing unit is added so that housing prices never increase. Landowners are indifferent, and the entire benefit of the productivity increase accrues to workers… indicating that real wages in city b increase by the full amount of the productivity shock. Real wages in city a also increase, but less than in b…
The above paragraphs are from Moretti’s Labour Market Handbook (P. 1264). Note the mathematical proofs have been removed for conciseness reasons.
The evidence points to New Zealand towns and cities since the 1990s being closer to Moretti’s inelastic scenario 3 rather than the more beneficial elastic scenario 4 (benefiting workers and productive firms), as house prices have significantly increased yet house building rates responded very slowly.
Auckland for instance had a significant increase in house prices from 2012 yet four years later in 2016 its building consent rate was only middling. Since 2014 Wellington’s building rate has been slow in comparison to its population growth, resulting in rents increasing by approximately $120 a week or $6000 a year for 2-bedroom flats since 2014. Wellington’s building rate in 2016 was even worse than Auckland’s.
I believe the economic reforms of the 1980s and 90s made many markets in New Zealand more responsive to changing conditions (some would argue too responsive). The labour market, farming, manufacturing, imported goods etc all became more responsive to market forces, but the housing market went the other way, becoming more rigid due to failures with; spatial planning of cities (MoW abolished in 1989), the Resource Management Act (land-use policy captured by NIMBYs) and a lack of infrastructure financing.
This housing policy failure means that productivity gains and other increases to housing demand in urban areas (where 85% of kiwis live) accrue to landowners not workers and a proportion of productivity gains are lost. This also means productive city-based firms in New Zealand struggle to recruit and retain skilled staff.
Many kiwis with labour market skills have moved to areas where they can receive a higher proportion of benefits from their labour. In the common Australasian labour market, the least bad place wrt housing is Queensland which is where the greatest proportion of New Zealand’s large 750,000 diaspora reside. About a third of New Zealanders residing in Australia live in Queensland, with half of them living in Brisbane. Brisbane is the city with the most New Zealanders despite it being much smaller than Melbourne and Sydney. New Zealanders working in Australia, as a group, earn above the average Australian wage, work longer hours and have a higher labour market participation rate i.e. they are economic refugees taking advantage of better labour and housing market conditions.
The policy response to New Zealand’s skills shortage from successive governments has not been to fix the housing market but to open up immigration. This hasn’t been a successful economic strategy. New Zealand’s relative economic decline has continued.
Proponents of a high immigration rate may argue that New Zealand’s immigration policy has limited the countries economic decline. I am not informed enough to judge the overall merits of a high or low immigration rate. I do though want to acknowledge New Zealand has an internationally high and volatile net migration rate. New Zealand’s current net migration rate at 13 people per 1000 population is almost four times as high as the United Kingdom and the United States. That fast population growth has caused housing market difficulties whilst the arriving immigrants are arguably less skillful than the departing emigrants.
New Zealand’s economy has remained dependent on rural based industries — farming, forestry and tourism, despite the economic reforms of the 1980’s and 90s intending to diversify the economy. New Zealand firms have not been able to move up the value chain. Productivity growth has been dismally poor. A low wage, low skill economy has become entrenched. New Zealand is gradually falling behind comparable OECD economies — most of whom have adapted to urbanisation better than New Zealand.
Matthew Rognlie’s analysis of Piketty’s inequality thesis on the fall and rise of net capital share, has found that capital income is not growing at the expense of labour. This refutes one of the main theories of economist Thomas Piketty’s popular book Capital in the 21st Century. Rognlie’s closer examination of the quantitative data shows that the long-term rise in capital income is mostly driven by housing. This should concern New Zealand because since the 1990s we are one of the countries whose house prices have risen the most.
A capital gains tax would have addressed some of these concerning symptoms by taxing and redistributing a percentage of future accruals in landowner wealth, but it would not have fixed the underlying cause. Thus, from a housing perspective there would have been an argument for capital gains tax on fairness but not on efficiency grounds. Given the political difficulties of imposing a capital gains tax on the family home there was huge implementation problems as well. It is not surprising that capital gains tax has been taken off the political agenda.
Barring some dramatic change in the political environment it seems Jacinda Ardern’s government will get at least a second term. Her government should use this time to embed structural changes in the housing market to make it more elastic so that workers not landowners get a greater proportion of future productivity gains. This would be a transformational change that addresses one of two crises that the next generation are most concerned about — the housing crisis (Generation Rent).
The other concern is the existential ecological crisis of climate change (Extinction Rebellion). To address both of these crises New Zealand will need to look at modelling off cities with flexible housing markets and small ecological footprints, like Tokyo rather than cities which achieve flexible housing markets at the expense of large ecological footprints, like Houston.
Structural reform to the housing market is politically achievable (the first rule in politics is being able to count) because these reforms are in the coalition agreement and the Speech from the Throne. The capital gains tax unfortunately wasn’t achievable because there was no agreement between coalition partners.
Jacinda Ardern calls herself a pragmatic idealist. I hope her idealism includes addressing the housing crisis and climate change. I hope her pragmatism gives her insight into the viable routes for successfully achieving these goals.
This article was re-published by Interest.co.nz which encourages comments from the public. The comment section gives a useful insight into how a segment of New Zealand’s society views these issues, with the important caveat that people who comment on the internet are a special breed who are unlikely to be fully representative of the New Zealand public.
The best comment provided a video from Germany showing the sort of innovative and sustainable housing and urban development that New Zealand needs (H/T Kiwimm).
This became the basis of my next paper…
Additional Reading:
Housing Constraints and Spatial Misallocation By Chang-Tai Hsieh and Enrico Moretti
The Causes and Economic Consequences of Rising Regional Housing Prices in New Zealand by Peter Nunns
New Zealand cities struggling to compete with Australian cities -New Zealand cities struggling to compete with Australian cities New PwC report reveals income and cost of living impacting ability to attract talent
New Zealand has nearly as many New Zealanders living abroad (750,000) as it does migrants living in New Zealand (1,000,000) according to the Wikipedia entry on New Zealanders.
New Zealand has an estimated resident population of around 4,885,300 (as of June 2018). Over one million New Zealanders recorded in the 2013 New Zealand census were born overseas. While most New Zealanders are resident in New Zealand, there is also a significant diaspora, estimated at around 750,000. Of these, around 640,800 lived in Australia (a June 2013 estimate), which was equivalent to 13% of the domestic population of New Zealand. Other communities of New Zealanders abroad are predominantly concentrated in other English-speaking countries, specifically the United Kingdom, the United States and Canada, with smaller numbers located elsewhere.
