Tim Hazledine: House affordability? Blame wages

Labour's housing proposals raise serious questions about cost and crowding-out effects. Photo / Dean Purcell

Closer look at factors affecting market suggests family incomes most in need of our politicians' attention.

Suddenly we are being told that we have a "housing crisis".

The three major political parties have come out with programmes to deal with the crisis, and the whole kerfuffle is threatening to build into a headline issue for the 2014 general election.

Well, housing by itself should not be a decisive election issue. It isn't a political problem in the sense that something major can be done about it by clever politicians. There is no killer policy app, no magic bullet, no free lunch, not even any low-hanging fruit to be easily plucked here. The house market is performing pretty much as well as can be expected, under the circumstances. And therefore the well-meaning proposals of the political parties risk making things worse, with unintended consequences and arbitrary redistributions of taxpayers' incomes.

The National Government has used the issue to intensify its offensive on Auckland City's Urban Limits - perhaps the most successful urban policy of the past half century. It threatens to force the council to "free up" land. Well, the buildable land in our city is just about all in private hands, and could be developed already or soon, if the private sector wished this. Is National planning to confiscate private property to get houses built on it?

Labour has come out with a promise to build 100,000 new houses, which turns out to be half-baked in its lack of detail, and raises serious questions about cost and crowding-out effects. Will the 100,000 houses be additional to the houses that the private sector and local governments would build anyway? If so there will be a lot of empty houses around.

The Greens have devised one of their cunning schemes: to leverage the NZ government's claimed ability to borrow money at below local market rates into financing subsidised housing. This one has been angrily attacked from the usual quarters, so there may be something in it.

There may be something in all these proposals, and in others: getting more competition into our building supplies sector; speeding-up the planning/consent process; redeveloping brownfields land, such as the 50 prime underutilised hectares of the harbour-side Fergusson container park; even, joining the rest of the world in appreciating the virtues of good-quality high-density terraced housing and medium-rise apartments.

But none of the above will make more than a small difference to the price of a stand-alone starter house in the outlying areas of Auckland. Indeed, successful housing policies will increase property values, because they will contribute to making this city an even more attractive place for people to want to live in.

Why is there not more clarity here? Let us unravel some of the myths and misunderstandings that have entangled the debate.

First, home ownership. We read that home ownership rates have declined, to 65 per cent. Well, actually, last time I checked, home ownership rates were bang on 100 per cent: every NZ home was owned by someone. Some - a majority in New Zealand, though not in many other countries - own just one house and live in it themselves; some own additional houses which they rent out, and some are the tenants. Not a problem in itself.

House prices? There are two sides to this: most housing is locally owned, so it's not like the price of oil, or the billions of dollars of easy pickings that the Aussie-owned banks expatriate each year. It's literally different sides of the same kiwi coin. And don't forget the location law of real estate: the most expensive property, here and round the world, is found in the most desirable locations: Melbourne, Manhattan, London, Vancouver, San Francisco ... Auckland. We should be pleased to be in this attractive company. You pay for what you get.

What about the cost of being housed as opposed to home ownership - that is, rentals (which really are the only legitimate concern on the cost of living side)? Over the past decade, which includes the last house price spurt, Statistics NZ's rental cost index has increased at just a shade less than the overall consumer price index. Not a problem.

Shortage of new houses? There has been a predictable construction slowdown following the Global Financial Crisis, but there are still more dwellings than households in New Zealand, and building will pick up as the economy does.

House affordability is measured as the ratio of average or median house prices to median household incomes. On this basis, according to the latest Demographia report, Auckland is slightly more affordable than Sydney, Melbourne and Vancouver; slightly less affordable than Brisbane, Perth and Toronto. But, in the last three cities, average house prices are actually higher than Auckland's. The key is the denominator of the affordability ratio: incomes in all these cities are significantly higher than here.

And that's where our true problem lies. Incomes. Certainly, there are many Aucklanders who wish they were better housed. But they will be wishing they could better afford other good things, too. Ever since the Rogernomics fiasco, wages and salaries in New Zealand - apart from those at the top 1 per cent or so of the distribution - have fallen further behind earnings in Australia, Canada; even the UK. And that is what we should be demanding our politicians focus on: not what New Zealanders pay each other for their houses, but what they get paid for their work.

Tim Hazledine is a Professor of Economics at Auckland University.