Announcing the Government's response to the Productivity Commission inquiry into home affordability, the Finance Minister, Bill English, was keen to play down expectations. The issue was complex and there was no quick fix for spiralling house prices, he said. This was the cue for a broad-based prescription for a longer-term solution that included opening up more land both within and outside city limits for new housing, the further densification of cities where appropriate, and reducing the delays and costs associated with building consents.
This is all good, but only as far as it goes. The present situation is indicative of a market where demand is running ahead of supply. The Government's response will help to increase the supply of new and affordable houses. To that end, Mr English made it clear that local councils would be expected to play their part. This was an obvious, and largely justified, challenge to the Auckland Council's preference for a compact city. Young adults should have access to affordable housing, as their parents did, and some greenfields developments will be an unavoidable part of that.
But the affordability issue will not be tackled effectively until the Government also looks at the other side of the market equation and seeks to reduce demand. That demand is being driven by investors in rental properties. They, in turn, are motivated by a tax system which proclaims loudly that borrowing and buying houses is the most sensible form of investment. If property was placed on the same tax footing as other investments through the introduction of a capital gains tax, demand from that quarter would drop, there would be less money driving up the price, and the supply of houses would increase.
The lack of such a tax has far-reaching consequences. Too much of people's savings going into property leaves too little for more productive capital investments. This has increased the country's demand for foreign capital, keeping the dollar high and creating difficulties for exporters. Over the years, Mr English has talked of correcting this investment imbalance. Yesterday, he was at it again, speaking of "reducing New Zealand's vulnerability to foreign lenders and removing economic imbalances caused by a disproportionate investment in housing". Yet his efforts to deter rental property investment have been timid and, predictably, unsuccessful.
His unwillingness to grasp the politically difficult capital gains tax nettle has, unfortunately, been aided by the Productivity Commission's analysis, which did not see the absence of such a tax as a significant cause of the housing price surge. The current working of the Auckland market suggests that is an unrealistic conclusion. Certainly, it is at odds with the report of an OECD review committee, which last year tied the absence of a capital gains tax to the country's poor savings performance.
The commission's focus on the need to free more land on city fringes for home-building is certainly more politically palatable. Likewise, there will be only limited opposition to the decision to place a six-month limit on council processing of medium-sized projects, including housing developments. But the latter response, and any subsequent move to ease the building consents process, will simply make it easier for people to pay existing house prices. This is no avenue to more affordable housing.
Mr English is tinkering around the edges in a manner not too different to that of the previous Labour Government in its last year in office. While the current tax distortion remains, so will much of the housing affordability problem.