Auckland Housing Crisis: Legal, Policy and Economic Factors

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This piece was written as part of the course LAWGENRL 438: Housing Law and Policy at the University of Auckland.

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Question: What legal and economic factors have contributed to the Auckland Housing Crisis, why is it concerning, and what legal mechanisms (policy) can be adopted to address it?

I           Introduction

Auckland’s median house price rose 18% in 2014,[1] and less than a third of Aucklanders now own their homes.[2] The 2015 Demographia International Housing Affordability Survey ranks Auckland as ‘severely unaffordable’, the seventh most unaffordable housing market in the developed world.[3] Both the Reserve Bank and the Treasury indicate that the housing situation in Auckland is a ‘bubble’, ‘unsustainable’ and a threat to New Zealand’s economic recovery.[4] Qualitative data also show that young New Zealanders are expressing anxiety about their ability to own a home.[5] Housing affordability in Auckland has become a significant social and economic problem (“Auckland housing crisis”).

This main issue in this legal opinion is what legal mechanisms can be implemented to address the Auckland housing crisis?

The analysis will be divided into three parts:

The first sub-issue sets out the context, why is housing affordability in Auckland a crisis and does the government have a moral or legal duty to intervene?

The second sub-issue looks at what legal and economic factors have contributed to the crisis and the effectiveness of existing policies and legal mechanisms,

The third sub-issue is forward looking by looking at how a capital gains tax can be effectively implemented by the government.

This opinion will analyse a combination of laws, policy documents and economic indicators.

II         Nature and extent of the Auckland housing crisis

Why is housing affordability a crisis and does the government have a moral or legal duty to intervene?

          A          Descriptive indicators of a housing crisis

While the government denies a housing bubble in Auckland for political reasons, there are currently four indicators which strongly demonstrate the existence of a housing bubble:

1          The high price to income ratio, indicating banks are lending to high-risk individuals on the expectation that the asset price will increase. The ratio is approximately 14:1. This is due to low interest rates and high business confidence; the danger is that this increase is self-fulfilling and unsustainable. [6]

2          The high price-to-rent ratio. Normally, even when house prices increase, the ratio to rent remains relatively fixed, because if demand for housing is due to occupation and not speculation, the market will correct itself by allocating demand from buying to renting. This indicates that the issue is not just about the lack of supply of housing, else the rent would increase proportionately too. The value is also much higher in Auckland.[7]

3          The proportion of mortgagees who are vulnerable, or have high lending to value ratio or high debt to income ratios. The Reserve Bank shows this has increased since the recovery.[8]

4          We have had the fourth largest increase from the historical average in house prices in the developed world, ahead of the United Kingdom and only slightly behind Australia. The issue here is that New Zealand has not undergone a significant correction in the housing market after the global financial crisis, dropping only 10% instead of the 50% experienced by economies such as Spain and Ireland.[9]

            B          Normative concerns: why should the government intervene?

The first reason is economic. The housing bubble in Auckland is a significant threat to the economic recovery of New Zealand. The current recovery of New Zealand is weak because our recovery has been driven by external factors, such as seasonal improvements in the balance of trade, the appreciating currency of our export partners such as China and the United States, and the Christchurch rebuild which merely replaces lost capital. These are not fundamental improvements in the productivity or health of the New Zealand economy.[10]

The housing bubble locks up resources into speculation, instead of investing in productive assets. Increases in prices of property do not increase the GDP of New Zealand, nor does it increase the capital stock of the country. Auckland households also leveraged large amounts of debt to fund their housing purchases. Debt is not necessarily bad, but only if the debt results in proportional increase in productivity. The housing bubble also increases consumption volatility and the pro-cyclical effects of business cycles. This significantly increases consumer debt due to the wealth effect.[11] These are inherent in the business cycle, and partially caused by the government, thus the market is not able to correct itself and the onus partly lies on the government.

The second reason is social and legal. While there is no express right to housing in New Zealand legislation, New Zealand has ratified a number of international covenants and conventions on rights to housing undertaking to comply with human rights standards surrounding housing. The International Covenant on Economic, Social and Cultural Rights has outlined accessibility, affordability and habitability as the three undertakings. General comment 4 states that ‘everyone has the right to live in security, peace and dignity’.

While there may not be an explicit or reviewable right to housing, something definitely needs to be done at the moral and economic level. 

III        Economic Causes and Legislative Developments

What legal, policy and economic factors have contributed to the crisis and how effective are existing legal mechanisms at addressing this?

          A          Demand Issues

                    1          Immigration and Migration

Auckland Council indicated that there is a net migration of 23,006 people to Auckland in the in 2014.[12] There was a corresponding increase in the median price from $614,050 in August to $660,000, which is a 7.5% increase in a single quarter.[13] In contrast inflation for prices before housing cost is actually negative 0.1%, and the median housing price of New Zealand is only at $426,000.[14] This increase is driven partially by the decline of rural towns, migration from Christchurch, and the concentration of foreign immigration exclusively to Auckland.

The Immigration Act 2009 ‘modernises’ but maintains New Zealand’s high immigration strategy, which is driven by skills shortages and exporting our secondary and tertiary education. This addresses skills shortages and reduces our current account deficit, but has significantly increased pressure on Auckland’s housing market.

However, the government is aware of this concentration of demand to Auckland, and has adapted its immigration policy. On 2 July 2003, a change to New Zealand immigration policy granted extra points to people applying for residence under the ‘skilled migrant’ category, if they had a relevant job offer outside the Auckland region. Auckland was very quickly affected by the new policy, ‘with arrivals decreasing from the 2003 peak to 31,000 in 2005, to 5,300 in New Zealand.’[15] This is not usually discussed, the current ‘migration problem’ is not international immigration, but domestic migration from declining rural towns and Christchurch. The government is addressing this, and the Christchurch Housing Accord aims to rectify the supply problem of Christchurch by 2017.[16]

                    2          Speculation

New Zealand’s high housing prices is not just driven by microeconomic demand, which is the demand to live in the house or for rental income. The income (rent) for housing in Auckland is actually 2.5 times lower than the rest of the country, which actually makes Auckland housing look like a poor investment at this level.[17] The demand therefore has a macroeconomic component. Housing in Auckland has become a financial instrument as a result of three factors: (i) the relatively illiquid and small securities market in New Zealand, (ii) absence of a capital gains tax, and (iii) exacerbated by loose monetary policy. This kind of demand for housing is therefore different to immigration, and unrelated to the value of occupation whether privately consumed or rented. It is based on expectation that the price of the asset will go up.

The Reserve Bank Deputy Governor Grant Spencer states:

‘Indicators point to an increasing presence of investors in the Auckland market and this trend is no doubt being reinforced by the expectation of high rates of return based on untaxed capital gains.[18]

The Reserve Bank has decided to raise interest rates in order to counter this. However, the interest rate is a blunt instrument because it determines the money supply but cannot determine where the money goes. New Zealand is currently in a low-inflation environment, and the Reserve Bank has an impossible task of trying to target 2% inflation while tightening credit in the Auckland housing market.[19]

This is compounded by global factors. While our interest rates are low in historical terms, we have relatively high global interest rates which is attracting foreign investment. Japan, the United States and the European Union are going through zero or negative interest environments. This makes New Zealand, and Auckland’s housing market a very attractive return. The Reserve Bank has adjusted the LVR ratio, to dampen down leveraged demand, but this will not significantly impact global demand where finance is secured overseas.

                    3          Extremely high demand for specific areas

Prices and demand for housing in Auckland is driven up by legislation and regulation that reallocates economic rent into specific areas. This concentrates demand into specific areas in Auckland and prevents it from being allocated efficiently to other areas. In particular, this has been the result of school zoning and the public transport system.

Section 11D of the Education Act 1989 provides for the establishment of school zones for the almost exclusive enrolment of students within these zones for public education. This accompanied by the decile system has created high demand for specific areas, such as New Market, Remuera, Grafton and the Central Business District.[20] This concentrates already high market demand into expensive areas, and prevent the market from efficiently utilising land supply in other areas that may be released.

The Land Transport Act 1998 and the Local Government Act 2002 also grant powers to local council to manage the public transport system. International Planning Studies released a report detailing the deficiencies of Auckland’s transport system, in which the 1998 Regional Land Transport Strategy has stated:

‘analysis has shown that heavy investment in passenger transport is not likely to increase the overall proportion of people using passenger transport because of the dispersed nature of trips in . . . Auckland. . . . most . . . investment will be in roading’.[21]

Reliance on roads is initially cost-effective but causes urban sprawl in Auckland. This decentralisation underutilises the potential of land by building out instead of up. The paradox is this decentralisation eventually concentrates demand for housing in more central areas, as living beyond a certain distance – the critical mass (such as Albany) –  becomes unviable for employment and services. This also undermines the demand and development of commuter towns that exist in cities such as Tokyo and London that allows demand to shift to other areas. Public transport which do exist, has to adapt to this distribution of the population, instead of being able to change it. The result is that Auckland has a highly radial transport pattern. Again, this is extremely ineffective as it disproportionately services central areas and makes services to outer suburbs unreliable, compounding the problem further.

Auckland Council has begun recognising this problem, and in its 2013 Regional Public Transport Plan, it has outlined a plan to develop rail to outer areas, but more importantly, started designating hubs called ‘major interchanges’ and shifting the transport strategy into a more circular pattern that connects these hubs instead of all departing to and from the city.[22] Auckland does not have the population density to implement a metro system, but in effect the Council is emulating one. Effective implementation of this will take considerable time, but can have commensurate impact on housing demand.

          B          Supply Issues

                    1          Public Land

Ministry of Business, Innovation and Employment has indicated that there is still a shortage of 22,000 houses in addition to the additional 50,000 residences in Special Housing Areas targeted by Auckland Council’s plan.[23] However, caution is required when framing Auckland’s housing problem as a supply issue in these absolute numbers. The shortage is related to ‘an adequate supply of quality, affordable housing, located near jobs or transport links.’[24] Releasing public land must keep this proviso in mind. The other issue is that, removing the supply constraint is a long-term solution, as there is a time-lag to development.

Central government has recently intervened to address this. The 2015 Budget’s move to ‘[set] aside a $52 million capital contingency to facilitate housing development on Crown-owned land in Auckland’ will contribute 10,000 residences on 500 hectares of land.[25] This is a step in the correct direction.

However, there are a number of problems. First, offering land for development is not the same as actually having that land developed effectively. There is currently a labour shortage, which can drive up the cost (of labour) of development or compromise quality. Second, this policy has diminishing returns, the government will eventually deplete its capital stock, and will have to rely on a market solution. Third, the problem with the market is that that owners of land are not developing it. There are two options presented. First, to compel development or acquire the land under an amendment to the Public Works Act for development. A better solution is to make the consent and development process more efficient so that old land supply can be redeveloped.

Notwithstanding, the other issue is that the government must balance its social goals with market mechanisms. The recent 2015 Budget also announced that the Tāmaki Redevelopment Company will build around 7,500 new houses in Tāmaki to replace 2,500 existing properties currently owned by Housing New Zealand.[26] This will increase the land supply in absolute terms, but there are significant concerns about gentrification and exporting the supply problem to ‘less desirable areas’. The architect of the original Labour and National housing policies, Alan Johnson, has now expressed significant regret (and caution) about this utilitarian approach in the policy report ‘Adding it all up: the Political Economy of Auckland’s Housing’.[27]

                        2          Zoning and Intensification

The issue of supply is also not strictly the supply of land, but what can be built on that land. Auckland Council prior to the Unitary Plan, has highly restricted mixed use, commercial and intensification of large amounts of central areas.[28] This may be due to heritage concerns, but also affected by the Kiwi Dream of everyone having a family house and a quarter acre section. In the case of development zoning, it has primarily been the product of political capture by wealthy residents in these areas. The Unitary Plan 2012 consultation document has started to resolve this, by allowing more mixed use and high density development in areas such as Mount Eden and Wynyard Quarter.[29] There is still significant opposition by examining the Unitary Plan submissions by relatively wealthy and politically organised residents in these areas. Whether Auckland Council will act in the public interest, or at least what is efficient for the market, will depend on how the ‘Proposed Unitary Plan’ is implemented.[30]

IV        Comprehensive Capital Gains Tax and Implementation Issues

          A          How can a capital gains tax be effectively implemented by the government?

There are many legal mechanisms which can be adopted, including a land tax recommended by the Treasury, or restricting foreign ownership. A main cause of speculation at the moment is low interest rates, but Reserve Bank Act prevents the government from interfering with interest rates. Given the limited political capital of the government (and the scope of this essay) we will focus on the capital gains tax.

The Role of Tax in Maintaining a Sustainable Fiscal Position report by the Treasury has recommended a comprehensive capital gains tax as capital gains is the largest category of untaxed income.[31] The absence of a capital gains tax has caused housing investment to ‘be worth 25% more than it otherwise would in the absence of tax distortion’.[32] The most efficient mechanism is to tax capital gains tax as they accrue and deducting capital losses. The owner will pay tax or get a deduction based on the change in market value or QV value of the house. The tax within sale of two years proposal currently adopted by the National government is not a comprehensive capital gain tax and is only an empowering provision for the Inland Tax Revenue that clarifies section CB 6 of the Income Tax Act 2007 and allows it to deem sales within two years within the definition of ‘land acquired for purpose or with intention of disposal’.

The capital gains tax will address demand from speculation, which is the primary reason for price increases if we compare the rent-to-price ratio, loan-to-value ratio and the price-to-income ratio. There is the concern of ‘lock-in’, which goes back to the efficient markets hypothesis, that capital gains tax makes property owners ‘defer’ their sales.[33] As we have established the market is currently already inefficient due to tax arbitrage of capital, and heavily pro-cyclical business cycle, and inefficient allocation of money from consumption to disproportionate speculation, the ‘lock-in’ will actually make the market more efficient, and lower housing prices.

            B          Issues with Implementation

The political realities of implementation is that it likely to take a less ideal form in terms of economic efficiency and administrative simplicity.[34] It will likely take the form of the Australian capital gains legislation. Under Income Tax Assessment Act 1997 (Aus), ss 102-105 sets out the provisions assessable income which include net capital gain.

The Australian capital gains tax regime can be summarised by the following:[35] Capital gains taxed on realisation; Exemptions such as owner-occupied housing; Tax discount of 50% if owner holds property for over a year; Rollover provisions such as being part of an estate which is sold; There are also concerns about compliance and administrative costs, especially when the source of revenue is very volatile and correlates with the business cycle.

The Treasury report has indicated that exemptions adds to administrative complexity and undermines the efficiency of the tax.[36] Focusing on the example of homeownership exemption: home ownership might have some social benefits, but this exemption is a mismatch to that benefit. If home ownership was a concern, there should instead be an exemption for selling to first home buyers, not a tax incentive for a first-homebuyer to sell their property. An exemption for selling owner-occupied housing is often done for emotional reasons or ‘political sustainability’. There may be some constraints on labour mobility, but it is probably marginal. If it is implemented, the exemption is not only inefficient, but also inequitable and may be abused. The Treasury recommends that in the likelihood that this exemption will be adopted, a threshold on the amount of the gain that is exempt should be set.

‘This limits the amount of investment that can be diverted into owner-occupied housing to enjoy a tax preference, and it would also increase the overall progressivity of the tax.’ [37]

The capital gains tax should also be announced clearly, in advance and staged. This is so the property market can slowly deflate instead of a prick that pops the bubble.

V          Conclusion

Auckland’s housing crisis is a function of the lack of supply of quality land and demand from migration and speculation. Supply and city planning are long-term solutions. Speculative demand can only be resolved by implementing a comprehensive capital gains tax. Given more scope it would be useful to evaluate the effects of other policies such as a land tax. In the short-term the government can also adjust the LVR ratio, although this will have marginal effect on foreign demand. There government needs to act now.

References:

Angel, S. (2015). 11th Annual Demographia International Housing Affordability Survey: 2015, Demographia.

Auckland Council (2012). Unitary Plan, Auckland Council.

Auckland Council (2013). Auckland Profile: Initial results from the 2013 Census, Auckland Council.

Auckland Council (2013). Proposed Unitary Plan, Auckland Council.

Auckland Council (2013). Regional Public Transport Plan, Auckland Council.

Auckland Council (2015). Ethnicity and Migration in Auckland, Auckland Council.

Auckland Council (2015). Special Housing Areas, Auckland Council.

Burman, L. (2015). Taxing Capital Gains in New Zealand: Assessments and Recommendations, Victoria University: 2.

Christchurch City Council (2013). Christchurch Housing Accord, Christchurch City Council: 2.

English, B. (2015). 2015 Budget, National Government.

Johnson, A. (2012). Adding it all up: the political economy of Auckland’s housing, Salvation Army.

Mees, P. (2007). Backtracking Auckland?: Technical and Communicative Reason in Metropolitan Transport Planning, International Planning Studies.

New Zealand Treasury (2013). The Role of Tax in Maintaining a Sustainable Fiscal Position, New Zealand Treasury: 40.

New Zealand Treasury (2013). The Role of Tax in Maintaining a Sustainable Fiscal Position, New Zealand Treasury.

New Zealand Treasury (2013). The Role of Tax in Maintaining a Sustainable Fiscal Position, New Zealand Treasury: 41.

New Zealand Treasury (2013). The Role of Tax in Maintaining a Sustainable Fiscal Position, New Zealand Treasury: 42.

OECD (2015). Focus on House Prices, OECD: 1.

REINZ (2015). Auckland Marches On, REINZ.

REINZ (2015). Auckland Marches On, REINZ: 2.

Reserve Bank of New Zealand (2013). A closer look at some of the supply and demand factors influencing residential property markets, Reserve Bank of New Zealand.

Reserve Bank of New Zealand (2014). Financial Stability Report, Reserve Bank of New Zealand.

Reserve Bank of New Zealand (2015). Action needed to reduce housing imbalances, Reserve Bank of New Zealand.

Reserve Bank of New Zealand (2015). Economic implications of high and rising household indebtedness, Reserve Bank of New Zealand.

Reserve Bank of New Zealand (2015). Reserve Bank announces new LVR restrictions on Auckland housing, Reserve Bank of New Zealand.

Spencer, G. (2015). Action needed to reduce housing imbalances, Reserve Bank of New Zealand.

Statistics New Zealand (2015). Home ownership, Statistics New Zealand: 2.

Statistics New Zealand (2015). International migration to and from Auckland: 1996-2013, Statistics New Zealand: 2.

Treasury, A. (2013). Capital Gains Tax, New Zealand Treasury: 40.

Footnotes:

[1] REINZ (2015). Auckland Marches On, REINZ.

[2] Statistics New Zealand (2015). Home ownership, Statistics New Zealand: 2.

[3] Angel, S. (2015). 11th Annual Demographia International Housing Affordability Survey: 2015, Demographia.

[4] New Zealand Treasury (2013). The Role of Tax in Maintaining a Sustainable Fiscal Position, New Zealand Treasury: 40; Reserve Bank of New Zealand (2013). A closer look at some of the supply and demand factors influencing residential property markets, Reserve Bank of New Zealand.

[5] Auckland Council (2013). Auckland Profile: Initial results from the 2013 Census, Auckland Council.

[6] Spencer, G. (2015). Action needed to reduce housing imbalances, Reserve Bank of New Zealand.

[7] OECD (2015). Focus on House Prices, OECD: 1.

[8] Reserve Bank of New Zealand (2015). Reserve Bank announces new LVR restrictions on Auckland housing, Reserve Bank of New Zealand.

[9] OECD (2015). Focus on House Prices, OECD: 1.

[10] Reserve Bank of New Zealand (2014). Financial Stability Report, Reserve Bank of New Zealand.

[11] Ibid.

[12] Auckland Council (2015). Ethnicity and Migration in Auckland, Auckland Council.

[13] REINZ (2015). Auckland Marches On, REINZ.

[14] REINZ (2015). Auckland Marches On, REINZ: 2.

[15] Statistics New Zealand (2015). International migration to and from Auckland: 1996-2013, Statistics New Zealand: 2.

[16] Christchurch City Council (2013). Christchurch Housing Accord, Christchurch City Council: 2.

[17] Reserve Bank of New Zealand (2015). Economic implications of high and rising household indebtedness, Reserve Bank of New Zealand.

[18] Reserve Bank of New Zealand (2015). Action needed to reduce housing imbalances, Reserve Bank of New Zealand.

[19] Reserve Bank of New Zealand (2015). Economic implications of high and rising household indebtedness, Reserve Bank of New Zealand.

[20] Reserve Bank of New Zealand (2013). A closer look at some of the supply and demand factors influencing residential property markets, Reserve Bank of New Zealand.

[21] Mees, P. (2007). Backtracking Auckland?: Technical and Communicative Reason in Metropolitan Transport Planning, International Planning Studies.

[22] Auckland Council (2013). Regional Public Transport Plan, Auckland Council.

[23] Auckland Council (2015). Special Housing Areas, Auckland Council.

[24] Auckland Council (2012). Unitary Plan, Auckland Council.

[25] English, B. (2015). 2015 Budget, National Government.

[26] Ibid.

[27] Johnson, A. (2012). Adding it all up: the political economy of Auckland’s housing, Salvation Army.

[28] Auckland Council (2012). Unitary Plan, Auckland Council.

[29] Ibid.

[30] Auckland Council (2013). Proposed Unitary Plan, Auckland Council.

[31] New Zealand Treasury (2013). The Role of Tax in Maintaining a Sustainable Fiscal Position, New Zealand Treasury.

[32] New Zealand Treasury (2013). The Role of Tax in Maintaining a Sustainable Fiscal Position, New Zealand Treasury: 40.

[33] Ibid.

[34] Burman, L. (2015). Taxing Capital Gains in New Zealand: Assessments and Recommendations, Victoria University: 2.

[35] Treasury, A. (2013). Capital Gains Tax, New Zealand Treasury: 40.

[36] New Zealand Treasury (2013). The Role of Tax in Maintaining a Sustainable Fiscal Position, New Zealand Treasury: 41.

[37] New Zealand Treasury (2013). The Role of Tax in Maintaining a Sustainable Fiscal Position, New Zealand Treasury: 42.

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