Solving The Housing Crisis: Making Homes

Tuesday, 30 March 2021, 10:11 am
Article: Keith Rankin

Getting the Language Correct

Aotearoa New Zealand has a housing problem; a very big housing problem, and a problem not unique to New Zealand. While political leaders and privileged commentators do acknowledge the problem, the discussion remains befuddled, presumably largely because of the compromised political and financial interests of those who we turn to, to lead the discussion.

We have a problem of language, in which the word 'investing' is used to cover a multiple of activities, some of which need to be supported and others which should be eliminated. Then we emphasise the word 'house', and first-home 'buyers'; we should be talking about 'homes' rather than 'houses', and 'home-seekers' rather than 'buyers' or 'renters'. And the kinds of 'investors' which home-seekers do not like should be called 'land speculators' rather than 'investors in rental housing'; because, in many cases they are not suppliers of homes for rent.

The most fruitful approach to take is to promote the reality that all home-dwellers are renters, thereby downplaying the distinction between 'owners' and 'renters'. Our system of national accounts makes no distinction; the rental value of all dwellings is included in gross domestic product (GDP). The trick is to understand that an owner-occupied dwelling is a property in which the same 'family' is both tenant and landlord. We should also note that, while governments will always need to play some role in the market for homes (and especially in times of income inequality and income precarity), the principal home-supplying institution is and should be the market.

(Here, I am going to refer to all home-dwellers as 'families'. Families are not necessarily all blood-related, and include 'flats' of unrelated single people. And, while families may be households of just one person, we should be able to rely on market forces to supply more small homes in times when there are more small families.)

So let's get some good and clear language. Urban landlords – 'landlords' in this context – are owners and 'letters' of homes; they are people who let the homes that they own. They may own one or more homes, and they may let their homes to themselves or to separate 'tenants'. Landlords – as defined here – are good people; they represent the solution, not the problem. And these 'good landlords', good people as defined, may also be tenants who rent the separate home that they live in, most likely a home of a different size or in a different place from the home(s) they own. Again, these people are part of the solution, not part of the problem.

'Good landlords' – as carefully defined – come within the media category of 'investor'. So do 'slum landlords', people who own poorly-maintained homes which they let mainly to other people (though some who are miserly may themselves choose to live in poor conditions in a home they own) whom they financially exploit. It is a moot point to what extent slum landlordism exists in Aotearoa in 2021, but we know from studies of geography and history that slum housing is the market's response in societies with high levels of income inequality and income precarity. My sense is that Aotearoa's policymakers will fail, and that, say in 2041, a large minority – maybe even a majority – of New Zealanders will live in slums. But 'slum landlords' are not the kinds of 'investors' I am concerned about here.

There is a second type of good investor – genuine 'property developers'. These are people who buy urban land for the purpose of demolishing old houses and building new homes, or making new homes through subdivision, or making new homes by repurposing existing houses. These 'brownfield' developers are an absolutely necessary part of the solution; indeed we see in Auckland many property developments taking place, many in the form of medium-to-high density apartments which are reasonably central and well-located for public transport. These homes, located in places where urban infrastructure is already in place, incur low ancillary costs. There are also costly 'greenfield' property developments on the urban fringe, or sprawling beyond it into places without infrastructure and in which land may be presently used in horticulture. Property developers do tend to respond to market forces, and it is up to central and local governments to incentivise the brownfield over the costly greenfield developments. Good investment incentives – incentives that lower the cost of making homes – will in many cases be effective subsidies, not new taxes.

The bad types of 'investors' are the land speculators, who buy urban land, hoard it, and thereby create land scarcity, and that scarcity forces up the price of land. We know that much of this hoarding is happening, former homes ceasing to be homes, creating a shortage of homes. This reduction in the supply of homes is the principal force that is driving up rents; if good landlords are buying more houses, the result would be an increase in the supply of rental homes, and rents should not be increasing anything like as much as they are. It is this kind of false 'investment' – 'landbanking' as real estate agents call it – that is socially and economically corrosive, and needs to eliminated. This elimination should be able to be addressed largely through targeted cost disincentives, but also by the threat that land hoarding may be excised through compulsory government purchase options.

Land hoarding takes various forms. While the most blatant form of hoarding is that of empty houses, the new euphemism is 'short-term rentals'. This may include listing properties on platforms such as Airbnb, even though the property is empty most of the time. It may include other situations which might best be called house-sitting, and in which house-sitters may be the adult children of the property hoarders. And it may include properties administratively signed over to property managers on the understanding that these managers are working, like lawyers, solely on behalf of their extortion-motivated clients. Either way, these hoarded urban properties contain houses that are not able to be proper stable family homes. For present purposes, I will include empty properties as extreme cases of 'short-term rentals'. Short-term rentals are houses that are not homes.

Supply of and Demand for Homes

We keep hearing that 'supply' is the problem, and many economists emphasise the supply of land on or beyond cities' fringes. Other aspects of the supply issue – as promoted in the media – are bureaucratic 'red tape' and the unpreparedness of local governments to generate infrastructure to support such greenfields housing. Surprisingly, these economists underplay the opportunity costs represented by the existing uses of such land, and the goods and services that would need to be given up to assemble a greenfields housing labour force. Also, they have underplayed supply constraints on building materials, and on construction education.

The real supply issue is that properties which were once homes are becoming 'short-term rentals'. Thus, the supply of homes diminishes every time a house with a family in it – a home – is acquired by landbanking 'investors' and thereby ceases to be a home. The supply problem would be much less if, every time a home is sold, that property continued to be a home. In cases where one tenanted home is sold by one landlord to another, the default situation should be that the tenancy is simply transferred to the new landlord.

The critical issue is what happens to homes after they are sold. Because there is too little political will to actually solve the home-shortage problem, there is too little will to collect statistics about what happens to homes when they are sold to 'investors'. We continue in an information vacuum. The convenient but untested fiction is that all investor-purchased houses are 'rentals' that are subsequently let to families. Just because lazy commentators label a house a 'rental' does not mean that the house is actually rented out to a family.

So, if the acute shortage of supply is a result of houses ceasing to be homes, then the immediate corrective is to reverse that process, using policy levers to ensure that all existing houses – or at least all houses in New Zealand's urban centres – can become someone's home. It matters little if these new homes are tenanted or owner-occupied; what does matter is that our houses are owned by good landlords (and noting that an owner occupier is a landlord, and usually a good landlord).

We need strong incentives against inappropriate land 'investments', and effective subsidies that support genuine investment in the processes of making homes.

Re the demand for homes, there should be no pretence that an owner-occupied home is in any sense a superior home to a tenanted home. A home is a home; the structural maintenance is the responsibility of the owner, and the homeliness of a home results from the ability of families to make their dwelling feel like a home. Most 'first-home' buyers are both making a home and an investment, whereas successful renters are simply making a home. While increased demand for homes is determined by demographics – especially population increases, employment opportunities will also substantially determine which places see the greatest increases in demand. Well-functioning markets – supported by effective and appropriate subsidies – should ensure that supply responds to demand; locally, nationally, and indeed globally.

Earlier I alluded to the issue that good landlords 'may not live in any of the homes that they own'. A special case that needs supporting is that of families who own just one home, which they let to others, while living as tenants in a home they rent from someone else. While this situation is an obvious one for families who migrate from a provincial city to a metropolitan city, and helps to develop a home rental market in provincial cities, it also makes sense as a responsible way of getting on the 'property ladder'. A well-functioning property-owning democracy – a liberal democracy – should have both dispersed private property holdings and acknowledged public property rights.

What should happen is that such families only pay tax on their net rental income. (If they pay more in rent than they receive in rent, then they should pay no tax on their rental income; indeed there is a good economic efficiency case that they should 'pay' a negative tax on a negative net rental income.) At present such people cannot offset rent paid against rent received, having to pay marginal tax rates (eg 33%) on the full rental income, though net of certain expenses including mortgage interest. If these people, whose activities facilitate the supply of homes, lose the ability to deduct interest costs from their rental earnings, then they will suffer double jeopardy.

In general, no policy that adds to the cost of home-making should be countenanced. The plan to remove the ability of good landlords to deduct interest costs from their taxable income is such a policy that should not be countenanced.

The interest rate and migration fallacies.

In addition to the widespread clamour to increase the supply of homes through costly suburban sprawl (while ignoring the on-going reduction in the supply of homes as a result of land-hoarding), many commentators point to two other factors that may be creating an excess demand for urban land.

The main bugbear over the last decade was increased immigration of people. This argument was largely false, because such immigrants tend to rent their homes, meaning that rent-increases should have preceded house price increases; in fact, it was house price increases that came first, with rents lagging. (In addition, last decade, rising house prices, predominantly in Auckland, caused a substantial exodus of population from Auckland. Those parts of Auckland with the fastest increasing house prices were the parts of New Zealand with the slowest population growth.) However, in the last decade, the immigration of capital was an important factor. Much of the immigration of capital took place within the banking sector; eg Westpac Australia lending to Westpac New Zealand.

The second issue is that of interest rates. While it is true that low interest rates stimulate consumer borrowing – hire purchase, cars – and productive business borrowing – that is, they stimulate the demand for goods and services – they do not particularly stimulate the borrowing that funds speculative asset purchases. (The most important speculative assets are land, and company shares.) The best way to see this is to consider the speculative processes at play in the years before the 2008 global financial crisis. These were years of high and rising interest rates. What happened was that banks shovelled money into the speculative markets because the high interest rates rendered productive but unsecured lending to be high risk. The situation today is similar, with – for a variety of reasons – lending to non-speculative borrowers being constrained.

(In and around 2008, I was teaching financial economics with the help of a textbook by a well-known right-wing American economist; yet that textbook made the point I have just made, with clarity. Speculative borrowing is insensitive to the rate of interest, because, during periods of high expected capital gain, the returns on such borrowing substantially outstrip even high interest costs. This was also true in the 1980s when really high interest rates also contributed to property speculation, including the overwhelming of Auckland's city centre.)

Interest rates are low in New Zealand and the world because they need to be, to fund construction projects and consumer durables. Arguably interest rates in some countries – eg New Zealand – needed to be even lower over the last decade than they were. Countries in Europe with negative interest rates – Denmark, Sweden, Switzerland – did not have housing bubbles on the scale of countries such as New Zealand which had significantly higher interest rates.

Rent Controls?

Finally, rent controls are not the answer to the present (or any other) home-making crisis. Rent controls lead to a contraction in the supply of the homes for rent that we desperately need more of. They exacerbate shortages of homes. One possible benefit of such controls, could be an increase of house sales to people who plan to live in those houses. More likely, we would see an increase in the rate of presently rented homes being disestablished as homes upon being sold, and converted into the euphemistic 'short-term rentals'. (I wonder how long it will be before the government resorts to becoming a customer of Airbnb, as another – in addition to motels – expensive source of emergency housing!)

Conclusion

Any policy (including but not only a tax policy) that forces landbankers to divest themselves of hoarded land – and only targets these landbankers, not home-owners nor brownfields property developers – is a good policy. The result is that houses which are not homes at present become homes once again, and that newly built dwellings in established urbs and suburbs will all become people's homes.

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Keith Rankin, trained as an economic historian, is a retired lecturer in Economics and Statistics. He lives in Auckland.

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Keith Rankin

Political Economist, Scoop Columnist

Keith Rankin taught economics at Unitec in Mt Albert since 1999. An economic historian by training, his research has included an analysis of labour supply in the Great Depression of the 1930s, and has included estimates of New Zealand's GNP going back to the 1850s.

Keith believes that many of the economic issues that beguile us cannot be understood by relying on the orthodox interpretations of our social science disciplines. Keith favours a critical approach that emphasises new perspectives rather than simply opposing those practices and policies that we don't like.

Keith retired in 2020 and lives with his family in Glen Eden, Auckland.

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