Procure the place and infrastructure

In prior articles we covered modern methods of construction and how we can use the spare capacity in our tourism sector and education system created by COVID to massively upskill. And in article one we talked about how changing your thinking makes anything possible. This article is a bit more of that.

There have been endless studies on why housing costs are so high in NZ. Some blame urban limits, some the RMA, some the price of building materials. Recently I have been intrigued, less with these seemingly endless studies about ourselves that haven’t changed anything, and more with studying other countries that don’t have this problem. Luckily for me several scholars have been before and laid the path.

As Oliver Hartwich laid out in an opinion piece and follow up interview, we are thinking about this backwards. Housing price increase is actually inflation and here in NZ we have built a “cult of house prices” as have our close Anglo-Saxon neighbours. He goes on to examine the curious cases of Switzerland and Germany where you can still buy a house for the same real price as the 1970s. Oh, and also theirs are properly designed, built, warm, dry and energy efficient.

I recommend you listen to his interview here https://www.nzinitiative.org.nz/reports-and-media/media/nzers-dont-realise-how-unlucky-they-are/.

So what lessons can we learn? Cutting to the chase: land and devolution.

In countries like Switzerland and Germany there is devolution. In the Anglo-Saxon countries like NZ we have the case where the local government incurs the large costs of development and the national government reaps the benefit. Mr Hartwich points out we shouldn’t be surprised when these tiers don’t talk to each other and we end up with a seemingly intractable mess.  But here in NZ we keep tinkering with demand and completing endless studies – see above.

Phil Goff, Auckland Mayor, was speaking on national radio on 27th January about the problem faced by councils to fund the large development costs for the infrastructure required to support the development. I think he’s got a point.

So, what should we do? One: Open up land. Two: Devolve to connect the funding to the development. Three: Have a strong national conversation led by our political leaders that housing prices must fall (relative to any sane comparator).

How might we connect the funding more locally? Unlike central government, local government can’t spend funds into existence. It does have budgets to work to. How do we make that budget bigger? Consider the value of the land in a region or metro. The value of it is due to the quality of the location, amenities and infrastructure. The value of one piece is created by the other pieces it is close to. So, land value increase is created from improving these things, not really just from scarcity and hoarding. How about we give the local governments the same kind of power they have in countries that have avoided the problem we have? Allow local governments to receive a stronger funding stream from a levy created from the improvement to the land in their region.

We’ll need a mechanism to get ourselves out of the mess we have got ourselves into, and that will take some time. The levy would need to separate land value from improvement value. It would also need to be progressive. This series of posts are just some ideas, and there would be considerable work required to do the detailed process work and modelling to arrive at the actual mechanisms.

As a thought experiment, we might imagine a scale that incentivises fair sharing (see article 6). The scale might say your contribution is a ratio, imputing the value of the inflation of the asset value of the land portion as step one. Step two would then divide by 2, which allows for the family home and perhaps the bach, or additional property to help the kids. So, if you have only the family home, the levy to the local authority would be ? of the imputed value. If you have two, 2/2 = the imputed value. If you have 20 properties it would be 20/2 = 10x the imputed value. To kick this off and start the change we might set the imputed value at a discount to current to start with, but with a defined path to increase allowing the over-invested time to exit gracefully.  

Having a strong national conversation about this issue is required. There have been overtures in Parliament about bi-partisanship approaches to fix the problem. Sounds like a good start but we might need the whole team of 5 million as well. The national conversation could start with agreement on how not do things that would provide counter pressures or incentives, as mentioned above where under our current settings extra money supply just ends up inflating the cost of existing housing stock.

Ideally, we would have a government that has just been given a strong mandate, has a platform and heritage founded on social justice and a leader with a gift for communication. Check.

So, what’s left? See the next post…

References

https://morganfoundation.org.nz/german-house-prices-flat/

https://www.nzinitiative.org.nz/reports-and-media/reports/priced-out/document/36