The winding road to housing affordability

The announcement of a new way of funding urban infrastructure is a bit like announcing a way of clearing that first big slip on the road from Kaikoura to Blenheim. It’s an important and necessary start but it is only a start.

After the slips are cleared, there will still be a lot of work ahead before traffic can start moving again. The road will need to be rebuilt in places, and slopes will need to be stabilised. And if we expect that traffic will be able to start moving again the day after that first slip is cleared, we will be disappointed.

Restoring housing affordability is arguably the country’s single most important policy issue.

The housing shortage is responsible for a host of direct harms. Overcrowded houses cause health problems. Shortages of rental properties drive up rents and worsen conditions for tenants.

This week, the Ministry of Social Development released its annual report on household income trends. The report shows the proportion of children living in low-income households has been declining. But the proportion of children in low-income households is roughly three times higher when housing costs are taken into account than when measured without counting housing costs.

The housing shortage is also responsible for a lot of indirect harms. It is hard for people to move to jobs when housing is scarce. Auckland schools cannot attract teachers when salaries are set centrally without regard to the cost of living but simply bumping up pay without fixing the underlying supply problems would contribute to the overall problem.

And real experienced inequality in access to housing fuels concern about inequality overall, increasing support for redistributive policies that would do nothing to fix the housing shortage but which would hamper economic growth. It also makes populist appeals against immigrants more compelling.

Debt limit shackle
The problem comes down to incentives facing growing councils. Laying out the trunk infrastructure to accommodate growth puts councils up against their debt limits. Even infrastructure projects that easily pass cost-benefit assessment become difficult if they put councils past their debt limits: The city as a whole then bears higher rates as interest charges rise.

And so the past several years of ruction between central and local government are easier to understand. Councils bear a lot of cost in accommodating growth when they’re at their debt limits, and much of the increase in rates revenue is eaten up in infrastructure costs. Central government benefits from the increase in income tax, GST, and company tax, while bearing fewer of the costs of growth. That by itself is a recipe for discord.

There are several ways of solving that problem. In 2013, The New Zealand Initiative recommended reforming infrastructure financing through community development districts. These CDDs would be able to issue debt to finance new infrastructure and pay off that debt over the lifetime of the infrastructure through a levy on the new housing enabled by the infrastructure.

Taking that initial infrastructure expenditure off a council’s books would remove a large disincentive to facilitating growth. The Initiative also proposed a positive incentive: directing the GST collected from new construction activity back to the councils facilitating growth. Improving councils’ incentives would improve outcomes.

The government’s announced Crown Infrastructure Partners Fund is similar to the Initiative’s earlier proposal: it provides a special purpose vehicle to fund infrastructure via a special levy on those benefiting from the infrastructure. Leaving that financing to the private sector through community development districts has its advantages but the government’s proposal is a definite improvement on the status quo.

The combination of Auckland’s less restrictive unitary plan and better ways of funding infrastructure increases the supply of land for development. Prior infrastructure planning locked up land and built landbanks; Superu put the costs of these restrictions at over 50% of the cost of an Auckland home.

Leapfrogging landbanks
Easier infrastructure financing allows developers to leapfrog existing landbanks, making land supply far more competitive. And this is the first step toward affordable housing.

But it is only the first step.

New Zealand’s construction sector is at the scale that suited the amount of construction activity that zoning has allowed over the past decade. Building the housing necessary to clear the backlog and to accommodate future growth will require substantial growth.

Foreign developers experienced at building large-scale subdivisions would find the Overseas Investment Act stands between them and the opportunity to build.

They might also find it difficult to achieve New Zealand certification of their building materials, even if they use those materials in similarly wet and shaky places like Seattle and Vancouver – or Tokyo. Houses contain thousands of parts, and developers experienced at building to scale may wish to bring their supply chains with them. They may also wish to bring workers with them – and would run up against tightened immigration rules.

These barriers to affordability will start mattering more substantially now that the first big slip on the road is on its way to being cleared. If they are not addressed, the new Crown Infrastructure Partners fund will not live up to its potential – and affordability will not be restored.

Dr Crampton is chief economist with The New Zealand Initiative

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