What role should state housing construction play in addressing New Zealand’s issues with housing affordability and housing quality?
Starting in the 1930s, state housing has played an important role in shaping New Zealanders’ expectations around housing. As Oliver Chan observed in a January article for The Spinoff, successive governments backed the idea that the state should guarantee decent housing for all. Unlike in the UK, state housing never accounted for a majority of new housing construction, but it still played a significant role in the postwar years.
Moreover, as John P showed in another post, we’ve built hardly any state homes since the 1980s. So: should we do more, and how?
Securing affordable, decent-quality housing for all depends more on the total quantity of homes that we build, rather than the number of state homes we build. The government was building more state homes in the 1950s and 1970s than it is today – but the private sector was also building more. While state housing may play a special role in guaranteeing access to decent homes for vulnerable people, it is likely to remain only a part of the overall housing mix.
Consequently, I want to ask whether state housing construction can help us build more housing in total, and hence escape our affordability problems across the board.
There is a risk that state housing will ‘crowd out’ private development. For instance, right now the Auckland construction sector seems to be approaching capacity, meaning that building another state home may simply divert builders from a private development, leading to no net increase in the quantity of construction. People on the waiting list for state housing would benefit from this, but people looking to buy their own home would lose out.
But at other times, that hasn’t been the case. For instance, after the Global Financial Crisis, housing development in Auckland crashed, meaning that there were plenty of builders twiddling their thumbs (or, more likely, moving to Australia). Consequently, ramping up state house construction in 2009-2011 wouldn’t have crowded out much private development. If we had built more state homes then, Auckland would have fewer housing affordability problems now.
Private housing development is quite sensitive to short-run changes in house prices. The following chart (compiled from RBNZ and Statistics NZ data) compares annual changes in house prices with quarterly residential dwelling consent numbers. When the rate of house price inflation falls, dwelling consents also fall off, and they don’t pick back up again until after prices start to rise again.
Because house price growth tends to be volatile, this means that the pace of private housing development is also quite volatile. This has two main detrimental effects:
- First, it discourages builders from investing in better workforce training or new equipment and techniques. Why invest if you aren’t sure whether anyone will be hiring you to build homes next year? This in turn contributes to the poor productivity and high prices we see in construction.
- Second, it virtually ensures that we will have a large and growing backlog of unmet housing needs. The current pace of around 30,000 consents per annum is probably just sufficient to keep up with population growth. That would be fine if we hadn’t been building at half that rate from 2009 to 2012. Essentially, the construction industry can’t build fast enough in the booms to overcome the shortfalls that arose in the busts.
State housing construction could help fix both problems, but we would have to take a significantly different approach than we have traditionally done. The government would need to commit to building more whenever private development started to flag, while getting out of the way when private development picked up.
The barrier to doing that is the politics. When affordability is seriously under the pump – ie when we’re in the ‘boom’ part of the cycle with rapidly rising prices – the pressure comes on politicians to do something about it. State housing construction is a part of that, as the government’s announcement the other week showed. But, as I’ve argued above, there are risks to ramping up construction in the booms, as it can simply accelerate prices without getting more built in total.
Conversely, when prices are flattening – or, heaven forfend, declining! – the heat comes off, and so politicians may decide to spend scarce public resources doing something else instead. Although this is probably a better time to build from an economic perspective, the political incentives point in the other direction.
This seems like a problem worth solving. For instance, it might be worth investigating whether to set up Housing New Zealand as an independent entity with some independent funding sources and a target of ensuring that a certain minimum amount of housing gets built, every year.
The gains from preventing housing development from falling off a cliff when prices stop increasing could be large. If, for instance, we’d kept building new homes at the same pace as in the mid-2000s construction boom and the current upswing, we’d have around 100,000 more homes than we actually do, and more affordable housing as a result.
What direction do you think state housing should take?