Minister of Housing Phil Heatley recently admitted that up to 5000 Housing New Zealand tenants were earning enough to pay market rents. He told TVNZ he was reviewing the system for the allocation of state housing.

He should go a lot further.

Housing New Zealand owns $15 billion worth of property, it houses 200,000 people in 69,000 houses, and there are still 10,000 people on the waiting list.

On top of this, the Ministry of Social Development pays $1.1 billion in housing allowances to more than 300,000 individuals, which means 500,000 citizens are receiving accommodation assistance.

This money is mostly wasted.

The OECD estimates that New Zealand has a relatively unresponsive housing market, meaning that an increase in demand for residential property causes prices to rise, rather than stimulating new house construction. Take away the subsidy and rents would fall.

The Government would do better by taking that $1.1 billion and building 3000 houses. Or, better still, stop borrowing money to waste in ineffective transfer payments. It should then start selling state houses. A small number of individuals need emergency housing due to exceptional circumstances but not 200,000. It is naive and patronising to think otherwise.

The problem with state housing is the perverse incentives it creates. If you have a state house you want to keep it, meaning you will be reluctant to move to to pursue employment. Rent is linked to income, reducing the incentive to earn more and, once circumstances improve, there is no incentive to move out to allow the next family to move in.

Housing New Zealand also secures long-term leases with private investors and leases the property at a reduced rate. This is a shockingly perverse thing to do because without the state intervening, home owner and tenant would agree on a price. At least the cost of this arrangement is transparent.

When the State owns the property, the cost of subsidised housing is obscured, although we know that the Crown receives a paltry $104m return on its $15 billion asset base.

The only sustainable way to address housing affordability is to increase the responsiveness of the property market to increases in demand - put simply, build more houses.

The Productivity Commission has been tasked with addressing housing affordability, a thankless pursuit. They should find unblocking the barriers to new housing development is the answer, not State ownership of the existing housing stock.

Housing New Zealand appears to be an effective and well-run organisation but the premise of its existence is flawed. Its assets should be sold and the market left to regulate the rental market. Isolated cases of real hardship can then be transparently addressed.