Don Blair: The Auckland housing debate - regional strategy needed

Two camps seem to be forming around the Auckland housing problem. The first believes that the answer is to increase taxes - thereby punishing people for investing in property when other investment vehicles in New Zealand are limited. This tactic is designed to discourage people from buying homes by imposing taxes which make them less attractive investments.

The second camp believes that sensible market-based government intervention is called for, but in the form of incentives rather than the stick. The only common view held by both sides is that restricting foreign ownership of houses is necessary, but there is no consensus about how to do it.

I wrote in June about how providing incentives for people and businesses to locate in areas other than Auckland could help cool future demand for housing. The long-term solution to Auckland's development planning takes on fully national significance in light of such a regional strategy. Creating incentives that provide opportunities within the wider Auckland region (including proximate cities such as Hamilton and Whangarei) can be accomplished if affordable housing and good paying jobs are available.

A long-term solution may be to establish 'enterprise zones' around the region, in Hamilton, Whangarei and further into Northland, which badly needs greater economic development.

Enterprise zones would consist of designated geographic areas where incentives are provided for companies to expand or locate new operations, creating jobs and other opportunities for local residents. In the US, enterprise zones have long served as valuable tools for economic stimulation, spurring investment and job opportunities.

Incentives include sales tax abatements and investment tax credits for hiring people with fewer job skills who are located in disadvantaged areas. In Illinois, for example, employment is encouraged through job creation credits: $500 tax credits for five years for each employee hired, with a minimum of five to receive the credit.

Income tax deductions for approved projects within the designated zone have also been created. To spur home building, first-time home construction credits such as those offered in Melbourne could be offered to increase the available inventory.

Renting must always be an option for people who cannot afford a down payment or who would otherwise not qualify for a mortgage. But encouraging development beyond Auckland and enacting policies that encourage job growth and home construction will help to smooth long-term demand in Auckland.

Additionally, creating vibrant residential and commercial markets in the wider region will make long-term infrastructure investment, particularly in transportation, much more viable.

On that note, I want to thank the readers of my June article for their many thoughtful responses, several of which addressed how we can make renting a home a more renter-centric experience. One commenter said that as a tenant they felt they had less opportunity to treat a property as their own and did not have the same rights as homeowners.

As a renter myself, I understand the need to make a place you are paying to live in feel more like your own home, particularly in the longer term. Some changes could create more balance between renters and owners, provided that sufficient securities exist to protect property rights. This should include making longer-term rental a more secure option, as is the case in Europe.

Elsewhere, an article by another economist proposed 'magic bullet' solutions to Auckland's overheated housing market, such as the banning of development fees, with which I concur and beyond which I would suggest a possible moratorium on council consent fees for new construction under a certain value, and the reduction of cycle times for inspections.

I also tend to agree with the vocal minority that support a ban on ownership of residential properties unless you are a New Zealand resident or citizen, at least for the immediate future. With over 8,000 homes going to foreigners this past year, according to the Real Estate Institute, restriction of foreign ownership would help address the shortage of available homes. In my opinion, this is best accomplished by fiat rather than taxes.

Another suggestion was to create an SOE to undercut existing building materials suppliers. But how does creating a government entity to unfairly compete with New Zealand businesses make sense? A better idea would be to provide tax incentives for existing and new builders of high-quality prefabricated homes in the New Zealand market.

Incentivising builders to supply these homes and buyers to purchase them would offer two distinct advantages. First, such homes are typically a lot less expensive than standard stick-built construction. Second, because they are built to specification in the factory and assembled on-site, they can be built three times faster than a conventional home.

It was also suggested in response to my article that imposing taxes like capital gains and stamp taxes will improve the housing market, if only on a temporary basis. I have yet to see a 'temporary' tax remain temporary once government has become accustomed to the revenue stream it creates. Once this happens, there's no turning back.