Yes, Auckland does need more houses. Urban planner Joe Jeffries explains why.
A recent article in The Spinoff made the extraordinary claim that increasing housing supply cannot improve affordability and seemed to suggest it could make things worse. That article relied on a strawman version of Economics 101 supply and demand, claiming that model doesn’t take into account the role of cheap credit and the financialisation of housing.
This is a misrepresentation. The argument for more housing supply is based on the fact that the effects of cheap credit and speculation are amplified by a real housing shortage. This is because an on-going shortage is the thing being speculated on. Cheap credit has the effect it does because of the underlying scarcity. Boosting housing supply is the best way we have of undermining speculation and improving affordability.
If supply doesn’t matter, and housing is inherently a speculative financial product detached from underlying supply and demand, then why are prices not being bid up in Mataura? Why isn’t there a price boom in Taumarunui? Of course those places are different from Auckland but the key thing that makes them different is the balance between housing supply and demand.
The lack of speculation in towns with the same credit conditions as Auckland suggests that housing is not inherently an appreciative financial product. It only becomes one when real demand outpaces supply.
Speculation does affect house prices but the thing that is being speculated on is the underlying scarcity.
Auckland has added more households than houses
Auckland needs to build over 14,000 dwellings a year just to keep up with annual population growth of over 40,000 people. Last year only about 9000 dwellings were consented, and much less in the years before that. This has led to a cumulated shortfall of 25,000 houses over the last five years alone. Auckland’s strong population growth is likely to continue, and every year construction rates fall below population growth the shortage will get worse.
Rents are expensive and rising
The rental market is much closer to an expression of the real demand for houses as places to live, as distinct from speculative demand. You cannot speculate on rent and you can’t use cheap credit to pay more than what your income allows. Landlords will charge as much as tenants will pay, and the less housing there is the more landlords can put up prices. In a tightly constrained market rents will rise up to the limits of what incomes allow people to pay.
But it doesn’t have to be this way – new housing supply can put downward pressure on rents. For example Denver, Colorado experienced a notable drop in rents after constructing a record 9962 new apartment units in 2016.
The evidence from Auckland is that rents are expensive and rising. Data from Trademe shows that rents in Auckland rose 4% between 2016 and 2017 to a median of $520 a week. The city has experienced a rent rise of almost 20% since 2012. While rents have not increased as fast as house prices over the past few years they have risen much faster than wages, decreasing real affordability and indicating an underlying shortage.
Where are the empty houses?
The only way rents could be rising in a well-supplied market would be if speculative investors are buying up houses and leaving them empty creating a shortage in the rental market. There is no evidence of that happening. The 2013 census recorded 33,360 unoccupied dwellings on census night in Auckland. This may sound like a lot but it is only 6.6% of the approximately 500,000 houses in the city and includes holiday homes, houses empty for renovations, and houses temporarily empty for holidays or between occupiers.
It is a slight decrease in the percentage of empty homes in Auckland when compared to the 2006 census, and it is one of the lowest rates of empty houses in the country. This data does not show an unusual number of empty homes in Auckland. And if the number of empty homes has increased since 2013 (there is no evidence to say this is so) it is a difficult thing to disincentivise because it suggests property owners are willing to forgo tens of thousands of dollars in lost rent to keep houses empty.
Filtering works
Imagine what would happen to the price of second hand cars if we stopped importing more expensive newer cars into the country. A brand new Lexus is not affordable on its own but it improves affordability by reducing demand for Honda Civics further down the chain.
Housing markets work in a similar way. New housing does not have to be affordable on its own to improve affordability across the market. Each person buying or renting a newer more expensive home is one less person bidding up the price of an older more affordable one. This is known as filtering and it works where there is sufficient new housing supply.
However, in cities like Auckland the supply of new homes has fallen so far below demand that the filtering process has broken down. The lack of new houses being constructed means that the wealthy continue to demand older stock, preventing those older houses from becoming affordable.
Cars in Cuba
Some will say it is wrong to draw comparisons to car markets because they are fundamentally different from property markets. However, the thing that makes the two different is that housing supply is artificially constrained and car supply is not. In a situation where the supply of new cars is choked off car markets do in fact behave like property, with values appreciating and people profiting from speculation.
This is what has happened in Cuba where heavy restrictions on car imports have created cars with appreciating values and an industry of speculation. In one case a 25-year-old VW Golf doubled in price in 10 years.
Solutions
1. More supply
The solution to the housing crisis starts with more housing supply – and lots of it. Enough supply to drive prices down. Enough supply to drive rents down. Enough supply to make it so that housing is not worth speculating on.
And if it’s not possible to build enough to reach some objective level of affordability, more supply is always better for affordability than less. $550,000 houses may not be objectively “affordable” to everyone, but in a market with a $1 million average, more of these would be a huge improvement.
2. Make renting better
Give tenants more rights and landlords more responsibility. Get rid of sneaky rorts like letting fees. Require landlords to disclose more information about the houses they’re offering, and limit the intrusive and discriminatory personal information they can demand from prospective tenants.
Give tenants the right to opt in to long leases while maintaining the ability to leave if circumstances change – the kind of power rebalancing asymmetry we enjoy in employment contracts. You can leave your job with a few weeks’ notice but your employer cannot usually dismiss you as easily. Why can’t rental agreements be the same?
Make Judith and Murray Boomer take their role as a housing provider seriously or get out of the way for someone who will.
3. More social housing
Some people may never be able to afford market-rate housing no matter the policy settings, so it will always be important to provide some state or social housing. But far from being an argument against increasing housing supply this is another reason to support it.
It will always be easier and cheaper to provide social housing when there is more general housing supply rather than less. And in a well-supplied market, where more people can afford market rate housing, demand for social housing will be much lower even if it doesn’t disappear altogether.
4. Address demand too
Addressing the demand side needn’t be mutually exclusive of supply side measures. We can and should do both. Increased supply will reduce the impacts of speculation and cheap credit, but demand-side responses may still be useful for a number of reasons.
Increasing land taxes will decrease land-banking and stimulate quicker development. A capital gains tax is desirable from a tax equity point of view considering how lightly taxed capital gains are and how income earners shoulder a disproportionate share of the tax burden. And even if supply is the biggest issue demand-side responses may make a difference at the margins.
The worst thing Auckland could do now is curtail building out of a misguided idea that increasing supply is ineffective or somehow makes affordability worse. Auckland’s housing shortage has built up over years and it may take years to fix. Progress in improving affordability may be slow but slow progress is no reason to stop.
Improving affordability has to start with building more houses. Curtailing construction on the other hand can only serve to benefit existing homeowners and speculators.
Joe Jeffries is an urban planner and writer on cities, transport and housing.