Markets and Auckland Housing

Like many similar cities around the world, Auckland housing has become much more expensive very rapidly over the last few years. There are many reasons for this, and it is having various effects, positive for some (e.g., those whose houses have increased in value) and negative for others (e.g., those who have never bought a house and would like to, but cannot at current prices; and further down the income scale and more worryingly, those who cannot afford rents). There have been heaps of articles on this from all sorts of different angles, such as this one this morning. I agree with some bits of the article, but this sentence got my goat:

“Only the most laissez faire of free-marketeers still believe that this housing market is working as it should, as increasing numbers of families are forced to sleep in their cars and young Kiwis give up any hope of owning their own home.”

As my loyal reader knows, I have been trying to learn basic economics this year, as a hobby project, like how I learned Spanish starting a couple of years ago. I have also become a lot more open to classical liberal ideas than I used to be. However, it is a myth that all economists are laissez faire non-interventionists. Economics is a properly heterodox field, and Milton Friedman lovers are only a subset of the profession (and are probably right on many things and wrong on others). Anyway, I thought the sentence was a lazy throwaway line to appeal to some popular falsehoods that “everyone knows”: i) only greedy rich people support free markets, and they don’t care about poor people; ii) the current system is a free market; iii) therefore it is inherently perfect (as opposed to probably better than many alternatives you might try to come up with).

So I started thinking about what market forces are involved in the housing crisis and how prices have mitigated the effects of it, even if they haven’t “solved” it.  First though, some familiar reasons why prices have gone up:

i) Immigration to Auckland is high, increasing demand (= more people are willing and able to pay more for the same thing than used to be the case).

ii) People who have money to invest see housing as an option for this, and substitutes have becomes less attractive (rates of return on bonds and cash are low, shares have also become expensive over the same time period as houses).

iii) People seeing the fast price increases are incentivised to buy houses in expectation of becoming wealthier in the future as a result (i.e. the ‘bubble’ explanation).

iv) Auckland is becoming a better city to live in and the NZ economy is doing quite well. If a city becomes a more desirable place to live, that increases demand for housing there (this is related to (i)).

Now, here are some market forces that have mitigated the crisis (made it less bad than it otherwise might have been). Here are a few off the top of my head.

i) High prices signal that Auckland houses are scarce, and encourage people to economise. For example, my wife and I bought a 2 bedroom 80 square metre unit instead of a 3 bedroom 150 square metre house (which we would have bought if we’d had a lot more money). Some good friends of ours were renting a unit in Devonport but their landlord had to move back in. They looked for their next rental house in New Lynn due to high prices in Devonport. This frees up the scarce and highly-valued resource of Devonport housing.

Overcrowding is another example of economisation of scarce resources, but with more tragic human consequences.

ii) High prices act as an incentive for developers to build more houses as they can make a profit from this activity as houses can be sold for a lot of money.

iii) High prices act as an incentive to get people who have houses beyond their current needs to sell. For example, a retired couple downsizing and funding their retirement with the proceeds.

IMHO, one of the major problems is that effect (ii) has been hamstrung by how difficult and restrictive the rules are around building more houses. The council’s “Unitary Plan” should improve this situation somewhat. It will do this by making the rules around building a little bit more free-markety, not less. Basically, the fact there are problems with housing does not mean that markets aren’t doing useful things. They could be doing more useful things and they will once we let them.

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About Brendon J. Brewer

I am a senior lecturer in the Department of Statistics at The University of Auckland. Any opinions expressed here are mine and are not endorsed by my employer.
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