Don Blair: Affordable housing for all? Bad economic policy

Is the drive for home ownership bad economic policy? Photo / NZH

Opinion

In New Zealand as in most countries, the housing market is driven by two main variables: income and price. In a stable market, people purchase a home they can afford based on their income rather than the condition of the available inventory.

Like other needs, the requirement for housing is best met when people limit their choices to what is affordable instead of what is most desirable. This allows people to 'vote with their feet' if they perceive the cost of housing in a given location exceeds their income, is more than they are comfortable paying, or both.

The release of the unitary plan for Auckland has prompted much discussion. What we must bear in mind is something that sounds like a cruel elitist statement but boils down to pure economics: not everyone is meant to own their own home.

According to Maslow's hierarchy of needs, physical needs (safety and security) are basic, and housing is central to these. As long as safe, appealing and affordable housing is available to all who can afford it, people should be indifferent as to whether they own or rent their home. In most cases, renting is a much more affordable option (according to the 2012 Housing Europe Review, only 40 per cent of people in Germany own their home).

The drive for ownership might make good sense in a fairness and equity argument, but is often bad economic policy waiting to happen, and can be socially disastrous.

As an American, I have firsthand experience of how wrong the push for home ownership can go. Having been raised to believe that a good down payment was a key to financial security, I watched many friends and family members lose 30 per cent or more of their home's value in the 2007-8 market correction; for many, the loss represented the entire value of the initial down payment, plus improvements.

In the early to mid-2000s, spurred by the belief that every American had the right to own their own home, political pressure was placed on lending institutions to loosen credit restrictions and criteria to facilitate ownership for people for whom it was not otherwise possible. The demand for housing increased substantially in a short time, and housing prices reached unsustainable levels. For many, owning a home became an investment vehicle to ride the wave of rising home values.

With many having purchased a once-unaffordable home with little or no down payment, homeowners began pulling out equity and spending it on holidays and luxuries. When variable interest rates rose sharply, borrowers found themselves unable to make their payments, and either abandoned their homes or lost them in foreclosure. We're familiar with the GFC brought on by these toxic loans, which were sold in global investment portfolios.

The real task in New Zealand is to make adequate, non-state housing available to all who can afford it, while staying clear of policies that have a dampening or even catastrophic effect on the market. The lack of sophisticated financial instruments and a sizable stock market has made real property a primary vehicle for capital investments, with many New Zealanders owning two or more residential properties.

A key to the real estate market's growth of investment and capital has been the absence of capital gains and property taxes, and I've always believed that the more you tax something, the less of it you get. With 75 per cent of New Zealand businesses earning annual revenue under $5 million, the country is dominated by small business, and many owners rely on the capital generated by real estate to invest in their businesses.

Rather than tax real estate and thus limit its investment potential, leave it be and instead benefit from the GST revenue that new and growing businesses generate.

A little-discussed tool to increase affordable housing levels may be to incentivise people to leave Auckland. Creating tax incentives for people to move to other parts of the country can accomplish two things: it lightens demand for Auckland housing, and has an income-smoothing effect by redistributing income geographically and thereby diversifying the tax base.

As policymakers contemplate expanding the Auckland footprint, caution should be taken not to disadvantage low-income workers by situating them further from their jobs, in a reverse case of the economic hypothesis of spatial mismatch where workers are forced to locate far from their jobs. Low-paid workers who fall victim to this are worse off due to higher commuting and job search costs, with debilitating effects on working families. We do not want this for Auckland.

Don Blair is an economist and leads Probity Consulting's National Performance Improvement Practice.