English: Tie housing supply to affordability

Finance Minister suggests house price-income ratio cap to ensure land is released to keep housing affordable.

Finance Minister Bill English says the Government could set a house price-to-income ratio for local bodies to ensure councils release the right amount of land to keep housing affordable.

"It wouldn't be a bad thing if one of the possibilities in the future is that Government mandates a housing to income ratio," he told the Herald during a video interview for the Home Truths series.

"You can imagine a future where Government is not interfering with the local decision-making about what happens in your street, but says that the planning system needs to achieve a reasonable ratio between incomes and house prices."

It would not mean the Government writing plans, but it would mean the councils had to be responsive and release more land if the ratio was nearing the cap. Mr English used as an example the current home affordability ratio of 10 " a median priced house in Auckland now costs 10 times the median income, one of the highest unaffordability rates in the world.

The concept of a ratio was suggested last year by Auckland council chief economist Chris Parker in a report, Housing Supply, Choice and Affordability, commissioned by Mayor Len Brown and Deputy Mayor Penny Hulse.

However Mr Parker was more ambitious than Mr English in suggesting that the council should be aiming to cut the ratio from 10 to 5 by the year 2030.

The report said it was doubtful that a 5.0 median price multiple could be achieved much earlier than 2030 without avoiding a crash in house prices.

"The types of changes needed are structural (and change at a glacial pace), and will take many years to compound.

"Before any such target could be formally adopted, there would need to be further policy work to understand the implications, risks, make refinements, and outline a policy implementation plan. In conjunction with this, the council should advocate and assist to achieve a significant productivity improvement in residential construction.

"This would also involve collaborating with the Government, the residential construction industry, and other councils. A 25 per cent productivity improvement in residential construction by 2030 [relative to 2015] is plausible."

That would, for example, reduce the cost to construct an average 200m house to about $300,000 from $400,000.

Mr English defended the Government's action so far to address the housing supply shortage in Auckland.

But he said no one had expected the demand side to be so strong for so long.

"No one expected migration numbers to stay where they are. No one was really expecting interest rates to be still dropping and that's against the background of quite a bit of confidence in Auckland, despite the dairy downturn. "

Asked what success would look like, he said "Success is flattening and stable prices while incomes grow".

Auckland's Deputy Mayor, Penny Hulse, said setting a price-to-income ratio was a "blunt tool".

The complex factors contributing to house prices included land supply, planning regulations, building industry capacity, availability of loans, and investor behaviour.

"The other side is what people actually earn and that is in the hands of the Government."

She asked what would happen under the ratio if the council removed all its road blocks and freed up land, but the Government had not dealt to the easy supply of money, land-banking or large numbers of investors.

"What is the intervention in there that directs it to first-home buyers? That's the concern I've got."

She said that at the moment the council had enough land supply to supply housing for the next six years.