To achieve real growth, the NZ government needs to relax the rules around housing

Prime Minister Christopher Luxon wants New Zealand to “go for growth^[1]”.

But his plan, focused on reforming foreign investment, planning and competition laws, as well as boosting the tourism and mining sectors, is hampered by a fundamental reality of New Zealand’s economy: much of the country’s capital is tied up in unproductive (and expensive) housing^[2].

While this issue is not new, with New Zealand’s economy once described as “a housing market with bits tacked on”^[3], the solution may lie in making housing more readily available through deregulation and policy reform. This would free up capital for drivers of growth such as infrastructure and business investment.

The temptation of housing

Rapidly growing house prices over the past two decades have provided strong incentives to direct investment to the housing market.

On average, the price of a typical house has grown by around 8% per year^[4], far outpacing household income growth. For example, in 2005 the median house price was roughly five times the average household income^[5]. By the middle of the pandemic house values had ballooned to nine times the average income.

Soaring prices have made residential investment extremely profitable for a long time. This means savings and investments have tended to flow into residential property rather than other productive sectors of the economy.

Constraints on housing supply

The problem is that in recent decades additional residential investment has not led to a substantial increase in new homes.

Local and central government rules and regulations have long hampered the construction of new houses. Instead, more investment in real estate has generally led to even higher prices.

As concerning as this is, it does not mean investments in housing have been misplaced. Rather, high prices and profits are what the market required in order to encourage those willing to build (few that there are) despite the costs, delays and uncertainties associated with bureaucratic battles with councils, planners and local NIMBY^[6] groups.

Banning property speculation might have kept prices down and reallocated investment to other productive uses. But in the absence of those speculators, the supply constraints would not have been any looser. Lower prices mean lower returns over building costs, leading to even fewer houses built.

Shifting capital out of the housing market in this way would not have benefited the country – we might have produced more and goods and services but fewer homes in which to live.

Reforming housing supply

Fortunately, New Zealand has made meaningful progress on housing supply recently. For example, Auckland^[8] and Lower Hutt^[9] changed zoning laws in the 2010s making it easier to build, and Wellington City^[10] has recently followed suit.

These changes have led to local construction booms and, crucially, lower house prices and rents.

More recently, central governments of both stripes introduced policies like the National Policy Statement on Urban Development^[11], Medium Density Residential Standards^[12], and housing growth targets for local councils^[13].

These reforms make it easier to build, reduce house prices and mean less investment capital is required for each new house built. So these policies have the dual benefit of improving housing affordability and freeing up capital for other productive sectors of the economy.

As prices come down, New Zealanders will no longer need to pour nine times their income into a home.

That will free up funds for investments in new bridges and tunnels, small businesses, and exciting new startups that will help drive innovation and generate the long-run growth we seek.

New Zealand need not give up its housing dreams in order to get business moving. Rather, it can do both.

All that requires is for local and central government to continue to let people build the housing they want so that we can free up the capital our infrastructure and businesses need.

References

1. ^{^} go for growth (www.beehive.govt.nz)
2. ^{^} unproductive (and expensive) housing (www.rbnz.govt.nz)
3. ^{^} “a housing market with bits tacked on” (www.stuff.co.nz)
4. ^{^} grown by around 8% per year (www.rbnz.govt.nz)
5. ^{^} five times the average household income (www.interest.co.nz)
6. ^{^} NIMBY (www.britannica.com)
7. ^{^} Hagen Hopkins/Getty Images (www.gettyimages.com.au)
8. ^{^} Auckland (www.sciencedirect.com)
9. ^{^} Lower Hutt (www.sciencedirect.com)
10. ^{^} Wellington City (www.thepost.co.nz)
11. ^{^} National Policy Statement on Urban Development (www.hud.govt.nz)
12. ^{^} Medium Density Residential Standards (www.hud.govt.nz)
13. ^{^} housing growth targets for local councils (www.hud.govt.nz)