Metiria Turei dropped a bombshell on today’s Morning Report; the Green Party wants house prices to fall substantially to restore housing affordability. It is encouraging to hear a politician display the courage to tackle this issue. Whether or not the Green Party has the right tools to deal with this issue is another question.
Housing Affordability by the Numbers
Metiria Turei has expressed a desire to reduce house prices to 3-4 times the median household income over time. Let’s put this in context. The international benchmark for affordable housing is for house prices to be three times the median household income. Currently in the New Zealand the median house price is $500,000 and the median household income is $86,000, so across the country prices are a multiple of six times income. In Queenstown and Auckland the multiple is much higher at around 10. According to interest.co.nz the only major centres in New Zealand with house price to household income multiples of less than 4 are Rotorua (3.46), Gisborne (3.34), Whanganui (2.21), Palmerston North (3.88) and Invercargill (2.64). As a nation we are a long way from Metiria’s vision of affordability.
This announcement from the Greens is far bolder than the housing affordability targets from other political parties. Both Labour and National have declared that they don’t want to see house prices fall, just for the rate of price growth to reduce. Think about this for a moment; unless incomes are growing faster than house prices then housing affordability won’t improve at all, it will continue to get worse. And even if house prices are held constant, it would take decades for incomes to grow enough to restore housing affordability. Without house prices falling, affordable housing is unlikely for today’s young families until they are nearly retired (if they can afford to retire).
The Green Party’s courageous vision to reduce house prices dramatically – albeit over time – is the one respite in this otherwise bleak outlook for young families. For that they need to be commended. The only question is whether they have the tools to achieve their vision. Let’s have a look in the Green’s toolkit.
Up until now the Greens having been pushing a capital gains tax, which won’t be enough to achieve their goal for a number of reasons we have discussed previously. This is particularly the case because the Greens want to exempt the family home from the tax. When it comes to tax, exemptions are the mother of all stuff-ups; anyone who can afford an accountant can use exemptions to their advantage. In our view a Comprehensive Capital Income Tax is the ideal solution to housing speculation, although some economists favour the cruder and simpler land tax.
The Green Party has long pushed for an increase in inner city living, mainly because of the environmental benefits. People living closer to town have lower transport costs on average, which translates into lower carbon emissions.
Whether Auckland will go down the path of medium density housing depends on the Unitary Plan, which is released later today. The question facing the Greens is if the Plan doesn’t deliver, what will they do?
Like Labour the Greens have long called for a ban, or at least some form of charge (e.g. stamp duty), to be placed on foreign buyers. This is great in theory and plays well politically, but hasn’t cooled the housing boom in Australia. This is most likely because in a modern open economy there are ways for people to avoid such a charge; for example though trusts, businesses or simply by getting locals to do the buying for them.
A much bigger issue than who is buying the houses is the fact that we have more people wanting to live in them. As highlighted by the Reserve Bank the sheer rate of immigration is an issue, particularly in Auckland where the bulk of migrants are headed. The Government is right to point out that the majority of the change in migration has been New Zealanders returning or not leaving. However, that overlooks the fact that there is a substantial influx of migrants that we can control, particularly in low skilled jobs.
In short, it is great to hear a politician enunciating a bold vision on housing affordability. The question is whether the have the tools to achieve their own goal.