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David Seymour: State of the Nation Speech

Published By   /   January 23, 2017  /   Comments Off on David Seymour: State of the Nation Speech

MIL OSI – Source: ACT Party – Release/Statement

Headline: David Seymour: State of the Nation Speech

12:00pm, 23 January 2017 Princes Wharf, Auckland

Policy summary attached at bottom of speech.

Introduction  
 
We live in disruptive political times. Syria, Ukraine, the South China Sea, last year’s U.S. election, this year’s European ones, or Britain leaving the E.U., there is no shortage of nationalism, distrust, and disruption out there. People who’ve ignored politics for a long time are focusing their attention for long enough to shake things up at the ballot box.
 
We feel isolated from those troubles and, for now, the State of Our Nation is strong.  Unemployment is low, growth is high, public debt is among the lowest in the OECD, and record numbers of people want to live here.
 
That doesn’t mean we are immune to global trends, or that we can afford to stop building resilience. The rest of the world is showing that governments cannot serve up mediocre policy without the voters giving them a serve of their own. This year, New Zealand voters will want to mill some heavier duty grist than changing the flag or a national cycle trail.
 
ACT has always been a liberal party; we believe it is our job to make the world a better place, not just manage whatever policies we inherited.  We stand for freedom, choice, and personal responsibility. We stand against big government in all its forms. Over-taxing, over-regulating, and telling others how to live their lives. I am astonished at those busybodies who are not satisfied with living an entire life of their own, but somehow find time to try running other people’s too.
 
I’d like to talk about one area where the busybodies have had an immeasurably destructive effect on New Zealanders over the past 30 years, sowing the seeds for our own revolution. It is something that everybody knows is a problem, that somebody should solve, but nobody has, least of all the current Government. And I will spell out how ACT would push a future government to permanently restore affordability to housing, should we hold the balance of power after this election.
 
The problem is this. For the last 30 years, through a series of incredibly stupid urban planning and infrastructure funding laws, we have managed to halve the number of homes built per capita, create an absurd asset bubble that can take the New Zealand economy down with it, and create a have-and-have-not society that we’ve always tried to avoid as a nation, a problem that’s already robbed a generation of billions of dollars.

The current Government hasn’t fixed it but, much worse, they’ve actively avoided trying to fix it with a series of paltry policies designed not to work. They thought that rising residential property values would help them electorally.  Perhaps, given the average National MP owns 2.3 houses, they just didn’t care.  In fact, it would be amazing if such a group of people put in place a set of policies that reduced the value of those assets.

Housing Myths and Realities
 
You’ll hear endless theories about the housing market. I happened to spend five years on it, working in North American think tanks. Once upon a time I would have spent the next two days fronting the Canadian media on the Demographia International Housing Affordability Survey.  This year’s edition came out this morning, again showing that New Zealand has runaway house prices even by world standards.
 
I don’t claim to be an expert, there are people here at Stonewood who know more about property than I’ll ever know, but I have followed the policy debate for a decade now, and here are a few things I can tell you are true.
 
First of all, it is real. It’s not just that young people have too-high expectations or drink too many lattes. The price of the median house relative to incomes is now 10 in Auckland and about 6.5 in the rest of New Zealand. Compare that with a ratio of three years’ income to buy a house in the 1980s. Home ownership rates are plummeting across all age groups.  The median house price for New Zealand went up $47,000 in the past year. You’d have had to give up 9,400 lattes, or 26 a day just to keep up with the increase. In Auckland the increase was $70,000, or 350 kilograms of smashed avocado.
 
Second, the problem is not excessive demand, it is insufficient supply. It’s not about demand side factors such as low interest rates, or foreign investors, or the lack of a capital gains tax. If demand was the problem, then more people paying less tax and interest would lead to higher prices and more homes being built.  That’s what happens in any other market, prices go up and more suppliers enter the market until prices go down, then they leave again.
 
In New Zealand the number of houses consented has gone down even as prices have risen.  Auckland consented 50,000 new houses in the 1990s, compared with 38,000 in the ten years to date.  In the 1990s there were half a million fewer people, mortgage rates as high as eleven per cent, and a major recession, but Aucklanders built 25 per cent more houses.
 
The problem is not that the government does not build enough houses.  We have been through this before. When the government was seriously into building houses it took thirty years to build 100,000, while the private sector built half a million in the same period.  
 
Why it Matters
 
One obvious response is, who cares?  There are a lot of reasons why we should care about the performance of our housing market:
 
Take elder poverty. New Zealand currently has one of the lowest rates of elder poverty in the world. If you own your home, and three quarters of over-65s do, then you can live on a $385-a-week pension. But if you have to pay rent, you’re in big trouble.  
 
Only 60 per cent of people in their forties own their home.  When that generation retires, there will be a lot more people in trouble.  Some people think the housing market is a young person’s concern, but it spans across generations.
 
What about the taxpayer? The Government is terrified by the costs it will face propping up people who need a home but cannot afford to meet the market. The cost of subsidizing Income Related Rents has been going up by $50 million a year for the last decade, and is forecast to continue.   
 
Any teacher in a poor area can tell you that one of their biggest problems is student transience. Students get moved from house to house, must stay with relatives, and end up moving schools. Students will not succeed when they are forced to change teachers and schools as their parents struggle to find a home they can afford.
 
Then there is the Kiwi dream of equality. As Eric Crampton at the New Zealand Initiative points out, New Zealanders are just as equal as they were 30 years ago if equality is measured by how much people earn, or how much they spend.
 
There is a massive increase in poverty and inequality, though, when you consider that the poorest ten per cent of New Zealanders used spent 20 per cent of their income on rent 20 years ago and now spend 50 per cent. The debate about equality would disappear, statistically and emotionally, if only the housing market had kept up with demand and house prices had remained stable for the past 30 years.
 
Then there is financial stability. Wendell Cox, co-author of the Demographia Survey, measured the losses from the Great Financial Crisis from state to state. It turns out that states who had the worst planning laws also had the highest property values which then fell the farthest.
 
Cox concluded: Any serious effort to prevent a repeat of such destructive price volatility will require removing these destructive land use regulations that have done so much to destroy housing affordability in many markets while adding inordinately to the financial distress that is being felt around the world.   
 
There is the problem that so much of New Zealand’s wealth goes into housing. Put aside the economics for a moment and just ask, would you rather live in a country of residential property investors, or entrepreneurs?
 
Finally there is the real kicker, something that I am hearing from people up and down New Zealand.  It comes from people you’d least expect. From employers worried about their staff. From grandparents worried about their grandchildren, and from voters from Epsom to Invercargill. It is the feeling that New Zealand is no longer a place where anyone who works hard can own their own home. People are worried that only those whose parents own a home will ever be able to afford a home of their own. That those who own property already will get richer while everyone else is locked out of the market permanently.

The Politics
 
What have the political class been doing about this? Surprise, surprise, New Zealand First have blamed foreigners. We know about Labour’s ‘Chinese sounding names’ but you might be surprised to hear the Green Party are in on it too, saying “The Green Party does however want to put restrictions on home ownership for people who are not permanent residents because offshore speculation in our housing market has contributed to the increased price.” Then again, the Greens also want to reduce immigration to 15,000 people, I guess every party has to shake the race tree from time to time.
 
When they’re not blaming the foreigners they’re promising new taxes, even though paying tax has never inspired anyone to build a new house.  More importantly, capital gains taxes have not stopped Sydney, London, Los Angeles, and Vancouver having higher house price/income ratios than Auckland at different times. The Productivity Commission concluded that tax treatment is not a significant piece of New Zealand’s housing affordability puzzle. So long as the underlying market conditions promote rising prices, then no tax rate below 100 per cent will stop prices rising.
 
When the opposition finally talks about the supply of housing, it’s all about the government building houses.  As we’ve seen, that’s not the problem, but the Greens say “The housing crisis is primarily a predictable result of successive governments’ decisions to leave housing to the free market.” New Zealand First wants “direct government intervention in New Zealand’s overheated housing market.” And Labour want KiwiBuild where the Government builds 100,000 houses.
 
So much for the Opposition. The National Party are worse because they have had the power to reform, but have not.  The more the National Party talks about its ‘Comprehensive Housing Plan, the more it sounds like a scene from a political sitcom.  
 
Special Housing Areas have been roundly panned for delivering few actual houses. The bigger problem is that they are a contradiction. They acknowledge the problem: the market is broken, but if that’s true then it must be fixed.  All of the fundamentals of land supply, consents, materials, labour, and infrastructure – the complex web that make up property development. Suspending it in a few select geographical areas is not going to fix it.
 
They “established a $1 billion Housing Infrastructure Fund to accelerate new housing in the high-demand areas where it’s needed most.” The problem, as ACT said at the time, is that one billion dollars won’t deal with even eight per cent of one city’s needs for transport alone, not to mention the fact the councils who borrow from this fund have to pay it back anyway.
 
They promised to reform the Resource Management Act but the deal they’ve managed to strike with the Maori Party so that they could be seen to pass any legislation at all is  means it won’t be any more effective than the previous 18 times it’s been amended.
 
They introduced a kind of poor man’s capital gains tax in the form of the ‘Bright Line Test’ even though official advice forecast that the whole country would pay only $5 million dollars’ worth of tax through it. There are probably real estate agents who earn more than that in a year.
 
They passed restrictions on what councils could charge for infrastructure on new developments, but of course this has the opposite effect of “establishing a $1 billion Housing Infrastructure Fund to accelerate new housing in the high-demand areas where it’s needed most.”
 
Then there is the HomeStart package. While banks are pulling back from lending to overleveraged home buyers, fearing a collapse, and the Reserve Bank is introducing Loan-to-Value Ratios, National changed the rules around KiwiSaver to encourage young people to pump more money into the market.
 
Contrast that approach over the past eight years with with these words from Opposition Leader John Key eight years ago:

[W]e need government leadership that is prepared to focus on the fundamental issues driving the crisis. National is ready to provide that leadership. Earlier this month I announced our four-point plan for improving home affordability:

1. Ensuring people are in a better financial position to afford a house.
2. Freeing up the supply of land.
3. Dealing with the compliance issues that drive up building costs.
4. Allowing state house tenants to buy the houses they live in.

National’s goal is to turbo-charge the supply of housing in New Zealand by confronting the fundamental constraints that have kept a lid on it.

The National Party’s total lack of ambition is not surprising given their MPs’ personal interests, and the belief that rising prices would keep the economy buoyant and the incumbent government popular. It will go down as one of the most cynical pieces of politics in New Zealand’s history.
 
But, what would ACT do?
 
Land Use Planning
 
The problem is not that housing has been left up to the free market. There is not a free market for housing.  In fact it’s one of the most regulated markets in the world. No government can regulate the market for clothes or electronics, for instance, because there are so many producers around the globe. The land, infrastructure, and building that goes into housing, though, is entirely under control of New Zealand governments. The central government and council decide what you can build, to what standard, where, how high, and what building materials and infrastructure you can use for it.  But sure, it’s pretty much the Wild West out there.
 
The problem is not that people have the wrong attitude to living into apartments. I’ve lived my adult life downtown in four different cities, mostly in apartments. They’re a good option for some stages of life, but not many people move to downtown London because “it’s a great place to bring up kids.”  And it’s not true that the destiny of a city is to get denser over time, anyway.
 
Most cities get less dense over time.  The reason is that faster and better transport comes along, so people can afford to live farther apart. If you have to walk everywhere then Mt Eden is a pretty distant suburb. If you’re catching the bus you can get to most of the isthmus easily, but if you have a car you can commute from Muriwai. There’s no reason to think this trend won’t continue in the 21st century as cars learn to drive themselves and traffic systems become ‘smart.’
 
In fact, the obsession of the last 30 years with so-called “smart growth,” “newurbanism” and “urban containment” has been the most destructive policy of a generation. We have managed to create the absurd situation where New Zealand, a country that is 0.8 per cent developed, by area, now has a shortage of urban land.
 
The most obvious example of this is Auckland’s Metropolitan Urban Limit, a line around the city beyond which thou shall not build.  Land outside the line is nine times cheaper because you can’t build out there. The Auckland region is 1.2 million acres and is forecast to have one million more people in the next 30 years.  Even if they all lived on quarter acre sections with only 2.5 people per house, it would require only 10 per cent of the region.  The artificial land shortage is just nuts.
 
The proof is in the prices.  Where the cost of a new home used to be around 25 per cent land, the Productivity Commission reported in 2012 that it was 60 per cent. No doubt the recent boom will have taken that figure higher as land is the restricted ingredient here.
 
When I got elected I visited some of this restricted land.  It belongs to a group of landowners who would desperately like to subdivide about 50ha of land, right outside the boundary in Henderson, three minutes from a train station, but they are not allowed to because it is outside the boundary and zoned rural. The neighbours could put together enough land for 500 quarter acre sections. At least one of them would like to offer some of the land to an adult daughter who cannot afford her own house. There you have the New Zealand housing crisis in a nutshell.
 
A shortage of land also means that there are few large-scale builders. In 2011, 4,604 firms built just one house, while only five firms built more than 100 houses each.  The way we build homes is as if each person buys their car in parts then pays a mechanic for three months to assemble it in their drive way.  It’s insane.  
 
Part of the reason goes back to the lack of land supply. Who will invest in a factory to mass produce affordable housing if there is no reliable or plentiful supply of land that you’re allowed to build upon?   
 
Some complain that houses are expensive because people expect such large homes. It is certainly true that homes are getting bigger, but so long as there is a shortage of land that will continue. If sections cost $700,000, then the people who would build $150,000 starter homes probably won’t afford them.
 
If we want to make housing affordable, then point number one is that we must change our urban planning laws.
 
At present we have the RMA governing councils’ planning. It is highly dysfunctional at 900 pages, having started out at a much healthier 400 pages. Those 900 pages contain the words “inappropriate subdivision” 156 times. There are 15 different ‘principles’ in section two, which sets the tone for the whole Act, and it is unclear which ones to prioritise. None of them promote the supply of housing, or even recognize property rights for home- and land-owners.    
 
One of the consequences of RMA ambiguity is that urban plans are too large to be published on paper. You cannot get a paper copy of the Auckland Unitary Plan because it is impractical to print.  Another consequence is that consenting takes forever. Developers often complain that it can take longer and sometimes even cost more to get consent for a project than it does to build the thing.
 
The central problem is that we regulate the urban environment like it is a natural environment. New Zealand has outstanding natural environments, such as Fiordland in the south and the Coromandel in the north.  The resource management laws set up to protect those environments can’t possibly be right for deciding whether a paddock with a horse in it can be turned into houses.
 
We need to take cities out of the RMA and introduce new supply–focused urban planning legislation in line with the recommendations of the Productivity Commission’s report Better Urban Planning. Such a regime should prioritise:  

  • Supplying land and infrastructure in response to demand, including automatic triggers to release land when prices reach a given level x Obligations to set out future infrastructure corridors
  • Less restrictive zoning, with fewer levels of zoning and restriction
  • Greater protection for existing property owners by allowing objections from those directly affected rather than third parties

The bottom line for ACT is that if we hold the balance of power after the next election, the Government must remove urban Councils, those with more than 100,000 people, from the jurisdiction of the RMA and introduce new legislation for that promotes an adequate supply of housing.  
 
Infrastructure
 
Part of the reason councils don’t like releasing new land for building is ideological. The capture of planning by ‘smart growth’ ideology is certainly real.  Part of it is the legislation that central government has given them, which creates a cosy home for the ideologues. However another incentive for councils to withhold land is that they can’t finance the infrastructure.
 
Oliver Hartwich from the New Zealand Initiative has shown how Switzerland and Germany produce much more affordable housing in part because the local governments that make planning decisions also get more revenue when people build in their territory. In New Zealand we have no such luck.
 
Central government has a wide variety of taxes to draw on. Income tax, company tax, GST, petrol tax, and sin taxes.  If the money it taxes isn’t enough, it has nearly infinite capacity to borrow money against taxes it plans to levy in the future. Altogether the central government spends $80 billion per year, or about $17,000 per person every year.  
 
By contrast, local government expenditure is under $10 billion, and over half of it is raised from property taxes which have to be struck at the same rate right across a city. Councils have strict borrowing caps, leaving them very short of cash.  
 
There’s an obvious transaction that could take place, that central government should share some of its various types of revenue with local governments if, and only if, they consent more development. One simple and elegant way would be to give a portion of the GST on construction activity to the council where the activity occurs. In 2015 there was $16 billion worth of construction activity, 15 per cent of that is $2.4 billion. Sharing half of it with councils would wipe out Auckland’s transport deficit.
 
There are good reasons why central government might want to do this for its own sake.  Remember the $2 billion per year spent on subsidizing people who can’t afford housing though Income Related Rents and the Accommodation Supplement, costs that continue ballooning.
 
Another thing central government could do to help councils fund infrastructure is allow them to apply a special targeted rate for a development. At present, new developments in Ranui hit hard in Remuera, because council rates depend on the value of your property, not the cost of your infrastructure. It is difficult to win a council election while promoting development under this arrangement. We should amend the Local Government Act so that councils can recoup infrastructure costs of new developments using a special targeted rate. Councils should be allowed to issue bonds against this Infrastructure Rate, without restriction of debt ceilings so long as the bonds are highly ranked amongst creditors to those properties.

Building Costs
 
Besides land and infrastructure, housing requires houses. Here too we face serious deficiencies in New Zealand that are not faced elsewhere.  
 
The building industry is ridiculously fragmented. In 2011, 4,604 firms built just one house, while only five firms built more than 100 houses each.  The way we build homes is as if each person buys their car in parts then pays a mechanic for three months to assemble it in their drive way.  It’s insane.
 
As I’ve said, it is hard to have an efficient home construction industry at a large scale when there is a massive artificial shortage of land.   Another reason house prices are high is a lack of competition in the materials market. Builders will tell you that they can’t get materials for anything like American, or even Australian prices, and when new entrants come to market, they get driven out.  
 
Part of the problem is the challenge of getting new materials certified. I have had people come to my constituency office and say, ‘we’d like to get this material on the market, it is certified overseas, but we cannot sell it here because of regulatory problems.’  We need access to more affordable building products.
 
Yet another reason is the constant delays in building consents. In Auckland, the Council claims that 98.5 per cent of consents are processed within the 20-day statutory requirement.  But 70 per cent of consents have delays while the council ‘stops the clock’ and one-in-five take more than 40 working days to consent.
 
It is not surprising that councils are so reluctant to consent buildings, last time something went wrong they ended up carrying truly enormous liabilities in the leaky buildings saga, which has made them extremely cautious, to say the least. As with funding infrastructure, the councils find themselves with every incentive to say “no” to development.
 
As with land supply and infrastructure, we need a circuit breaker for councils’ reluctance to consent new buildings and government’s failure to allow new materials. Here is a simple suggestion.  The government should get out of regulating building standards in return for requiring that any builder put up a bond equivalent to the value of the building, valid for 25 years and certified by international ratings agencies before a building can be handed over to the new owner.
 
Of course, few builders would have that sort of money on hand.  They really be buying the promise off an insurer. The insurers’ incentive would be to find the most reliable builders and building supplies to insure. The builder’s incentive would be to find the lowest premiums and the fastest service.
 
This is the kind of thinking we need if we want to have a high performing housing market.

Conclusion
 
For 30 years, practically everything New Zealanders consume has got better and more affordable thanks to markets and competition. The one glaring exception is housing, which has gotten vastly more expensive by any measure.
 
The social and economic consequences for New Zealand are enormous, and entirely negative, but it doesn’t have to be like this.
 
I want a New Zealand where a couple, say a teacher married to a cop, earning $120,000 together, can buy a home that they can be proud of, connected to their jobs, children’s education, and every other opportunity that cities are supposed to offer, for three times their income.  We know this is possible because some of the fastest growing cities in North America have achieved it.  Actually, we know it is possible because we achieved it here in New Zealand just 30 years ago.
 
The reality is that we’re so far gone it may take 20 years for inflation and wage growth to catch up to that level.  On the other hand, president Trump may start a trade war with China, triggering interest rate rises and a mortgage collapse in New Zealand, getting us there a lot sooner. Nobody knows what will happen to house prices next year but we certainly need to build more homes.  4.7 million New Zealanders with superior technology should build at least as many as 3 million did in the 1970s.
 
For that to happen Parliament must, as John Key liked to say, if not do, “get some guts.”
 
We can’t just tinker and pretend while quietly hoping our efforts won’t succeed, we need to act. A liberal party like ACT is vital for demonstrating that the purpose of being in politics is not just to be in politics but to deliver better public policy for all New Zealanders.
 
If ACT holds the balance of power after this year’s election, we’ll be ensuring that the Government accepts the housing market is dysfunctional and reforms the fundamentals that have made it dysfunctional.
 
That means:
 
1. Taking cities out of the RMA and introducing new urban planning legislation for urban councils with a population greater than 100,000.
2. Sharing central government revenue with councils if they allow development and allowing councils to raise development specific bonds supported by targeted rates on the development in question.
3. Replacing the council building inspection process with a requirement of mandatory private insurance.
 
That is an agenda to fundamentally reform the housing market. Our great country deserves nothing less from its politicians, and if we politicians want to keep what confidence people have in us, we better get to it.
 
ENDS

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