Prime Minister Christopher Luxon has called for New Zealand to “go for growth” through a plan that includes reforms to foreign investment, planning and competition laws, and an emphasis on tourism and mining sectors. However, his vision faces a significant hurdle: much of New Zealand’s capital is currently tied up in expensive and unproductive housing.
This issue, long-standing and acknowledged in the past as “a housing market with bits tacked on,” may find a solution through deregulation and policy reform that can make housing more accessible. Such changes would free up capital, which could then be redirected to critical growth drivers such as infrastructure and business investment.
The Housing Investment Dilemma
Over the past two decades, rapidly growing house prices have strongly incentivized investment in the housing market. On average, house prices have increased by around 8% per year, significantly outpacing household income growth. In 2005, the median house price was about five times the average household income, but by the middle of the pandemic, that figure ballooned to nine times the average income.
These soaring prices have made residential investment highly profitable, which has directed savings and investments into real estate instead of other productive sectors of the economy. The issue, however, is that increased investment in housing has not resulted in a substantial increase in new homes due to restrictions imposed by local and central government rules and regulations. As a result, more investment has often led to higher prices without increasing supply.
The Need for Housing Supply Reform
While the housing market’s current state presents challenges, it’s not an indication that investments have been misplaced. High prices and profits are precisely what the market needed to encourage builders, who face numerous bureaucratic obstacles such as zoning rules, delays, and opposition from local groups.
Despite efforts like banning property speculation to reallocate investment into other sectors, such moves would not solve supply constraints. Lower housing prices might reduce returns on investment and discourage builders from constructing new homes. Without addressing these supply issues, the country risks producing more goods and services but fewer homes in which to live.
Steps Toward Reform
Fortunately, New Zealand has begun to make strides in addressing housing supply issues. Cities like Auckland and Lower Hutt have changed zoning laws to facilitate construction, and Wellington City has followed suit. These reforms have led to construction booms, lower house prices, and more affordable rents.
The introduction of policies such as the National Policy Statement on Urban Development, Medium Density Residential Standards, and housing growth targets for local councils has helped ease the path to building new homes. These reforms reduce house prices, making homes more affordable, while also freeing up capital for other productive sectors of the economy.
As house prices decrease, New Zealanders will no longer need to dedicate nine times their income to purchasing a home, allowing them to invest in infrastructure projects, small businesses, and innovative startups. This shift will help foster long-term economic growth.
Conclusion
New Zealand doesn’t need to choose between housing and economic growth. By continuing to reform housing policies and enabling construction, the government can unlock much-needed capital for infrastructure and business investments, ultimately supporting the country’s broader economic ambitions.
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