What Will It Take to Fix the Housing Crisis
Yesterday was a big day for housing. The Government announced a $300m package to deal with growing levels of homelessness. This is certainly better than doing nothing, but we all know this announcement was just parking another ambulance at the bottom of the cliff that is our housing market. Classic politics, to appeal to their base Labour just has to do slightly more than National would in the same situation. It’s nothing to do with solving the underlying causes of the problem.
However the same day a new report came out purporting to do exactly that. The Helen Clark Foundation set out their “housing policy as if young people mattered - and voted”. That is a great sentiment, but sadly their policy looked like a rebooted version of Labour’s 2017 Manifesto. We all know how that one ended. The problems in our ailing housing market run far deeper, and will need far bolder action than what is suggested in the report.
Let’s take a look at the four policy prescriptions they have put up in turn:
- Comprehensive Capital Gains Tax
- Debt to Income Limits
- Scale up Government Delivery
Comprehensive Capital Gains Tax
We have previously discussed why a Capital Gains Tax is such a bad idea. For starters the family home exemption means that 2 out of 3 houses and 75% of the value of the housing market is excluded. That equates to a real tax rate of about 8%. This exemption makes it toothless from the outset and will see even more money pour into the family home (the so-called Mansion Effect we see in Aussie).
Secondly a capital gains tax won’t stop prices rising. It will simply make sure further rises get taxed, so it might slow things down a bit. The right time for a capital gains tax (including the family home) was 30 years ago.
There are plenty more reasons - including complexity and being bad for business - but let’s not bore you with that. It’s a mess. We shouldn’t tax capital gain, we should kill it. A capital gains tax is only still talked about because Labour spent so long educating the public about it.
Debt to Income
Now this proposal would actually work; making sure that people can only borrow a certain multiple of their income. This would be like a nuclear device, wiping out all first home buyers (and some highly leveraged investors) from the housing market. Demand would crumble. Prices might fall, or maybe those with money to invest would buy them all and most people wouldn’t be able to buy their own home any more. It is hard to tell.
Either way, politicians and regulators are terrified to even talk about this one. So full points to the Helen Clark Foundation for being prepared to go there, but it is far from a clear winner.
The community housing sector - including iwi - should be involved in housing a lot more. We should help them scale up, and fast. In fact, TOP suggested achieving that by handing over the existing Housing NZ stock to them. Overseas experience shows this has been the best way to help community housing operators scale up. Sadly, this isn’t what the Helen Clark Foundation is suggesting. Their proposal will take decades to scale up and won’t provide much of a solution in the immediate future.
Scale Up Government Delivery
Bob the Builder, can we fix it? Yes we can! The Helen Clark Foundation thinks the problem with Kiwibuild wasn’t that it was a bad idea, it was just that it wasn’t bold enough! Private developers are the problem, but Government delivery can solve everything!
Really? Hasn’t the abysmal results of Kiwibuild been enough to show the ridiculousness of this blinkered approach. Where the Government has managed to build houses, often they can’t sell them to first home buyers!
What Will it Take?
The problems with our housing market run far deeper than public sector good, private sector bad. Let’s list a few of them:
- Land prices are a key driver of cost. This is a result of speculation driven by the loopholes in the tax system. TOP proposes using the Risk Free Rate Method to dampen down this problem - making sure all assets pay at least the same amount of tax as a bank deposit.
- Building costs are inflated due to the lack of trained labour, our restrictive code, and the building supplies duopoly.
- Local Government has no ability to fund the infrastructure that enables new housing, and no incentive to encourage growth. As a result they take the easy option and listen to the NIMBYs. Where there is growth the RMA encourages sprawl, which ends up costing everyone more.
- High levels of unplanned immigration which didn’t come with any commensurate investment in infrastructure.
I could go on - indeed these are all issues we will elaborate on in our forthcoming Housing Supply policy. But the point is that these problems have stumped Kiwibuild as much as they have stumped private developers in the past. Thinking the public sector is somehow superior at delivering housing is not only plainly wrong, it is lazy, dogmatic thinking.
Doing housing as if young people mattered will entail a Government with a clear commitment to do whatever it takes to keep house prices in check. And remember we will need to do that for decades so that incomes can grow enough to catch up. That may involve prodding some sacred cows. It will certainly take far bolder action than a reheated version of Labour’s 2017 Manifesto.