Proof market capitalism fails
Long term renters in New Zealand have rightly complained long and hard about how high rents are. The propaganda to explain this is high prices are caused by a chronic supply shortage due to a failure to build because of the problems with building and planning consent processes i.e. private enterprise would have built but weren’t allowed.
Complete and utter lies on planning* and no excuse to destroy our cities. But we do need to build more affordable homes for renters (and purchasers) and government policies of encouraging ‘build to rent’ so you rent for life show they believe the private market is the appropriate model to deliver affordable housing but here is proof the market will not provide it.
We know that a lot of the current rental housing in New Zealand was taken up with supplying short term accomodation e.g. tourists, (approx. 4M tourists before Covid many using AirBnb etc), and overseas students coming here, studying while working. This excessive demand helped create the housing shortage and drove up rents. Often short term rentals were seen by landlords as more valuable because they paid high but people were not in the accomodation as much and consequentially did not cause as much wear and tear. Less work overall.
But Covid has collapsed these demand markets. We don’t have tourists. We don’t have overseas students. We know their are hundreds of vacant rental properties in Wellington. Surely this would have a massive impact on the rental market, wouldn’t the rental market have collapsed! Er, no.
Long term renters are still paying a fortune. Because landlords/entrepreneurs hold onto their properties empty and maintain their high asking prices to rent. Otherwise some of their existing tenants may try and leave their current rentals to get a cheaper one elsewhere and that would not maximise the landlords profit. But even if prices drop a little, what is the point for the renter in going elsewhere if the price is very similar.
And our tax system allows losses that help maintain this practise of holding rentals empty so the market does not drop; ring fencing losses does not fix this.
Also the long term rental market is quite inelastic. People don’t find it easy to move as they need predictability for schools, work, transport, and recreation opportunities. So that inertia is exploited in price because there is no mechanism for existing rentals to access a lower market price, except by leaving. You can argue the price they continue to pay reflects their needs for staying in the rental. But that price no longer reflects that there is an oversupply and prices have not dropped. And the much promoted solution of cheaper competitors coming in to undercut the higher prices is very difficult with a high cost product like housing. And even then any new competitor wants to maximise profit so they don’t want to undercut too much.
What this all means is that the price at which affordable housing is delivered by the market is not primarily determined by supply, but by pricing. And pricing is determined by the need to maximise profit. And if a high price exists every incentive is there to keep it high, to maximise profit.
And of all people, our Labour/Green government are putting their faith in the private market to supply housing to fix the affordable housing crisis. At best this is misguided; at worst it is simple stupidity and ignorance in the face of plain and obvious facts. (I say this strongly because some people/children sleep in cars, and we have a rheumatic fever problem). When housing prices are unaffordable as currently; the market simply rations by price. If you can’t pay you can’t have. This is a socially unacceptable outcome for an essential like shelter. Let the market deliver hotels, up market houses, and similar. But the private enterprise market is simply not an appropriate mechanism to deliver affordable housing because it can’t.
The government must get rid of tax subsidies (interest) for ‘build to rent’ rent for life companies (possibly an exception is made for non-profits, and Maori authorities if non-profit, but this depends on how they set prices). This will slow private builds freeing up resources that can be focused by the government, through contracts, for the building of affordable houses to fix the crisis. More can be said on how this crisis can be fixed quite quickly.
Note:
- New Zealand doesn’t have a proper or adequate urban planning process so private enterprise is constantly trying to build the wrong types of developments in the wrong areas because it is cheaper for them to do so and they can increase their profit. And that inadequate planning process comes about because governments and councils are constantly trying to appease business and their desire to make profit because that is good for the economy. Business is coddled through property rights and zoning restrictions.
So today’s announcement for us to cheer over was Labour have increased state housing stock by 8000 in the 5 years since taking power and promising so much .2000 of those were purchased so deprived first home buyers of those houses . Along way to go to get on top .. I know some will qickly point out National reduced stock but how long do you keep repeating the mistakes of the past and focus on the here and now .
I personally think any home in all major centers that is not lived in should pay a lot higher rates and be subjected to a epecial tax on profit made when sold unless the buyer is the State.
I previously warned you that attacking landlords would just push up rents, and so it has.
Look at the 60s for the appropriate house-to-income price ratios that allowed young families to own their home. I am not going to pretend that everything was good back then but neither are things today.