at the start of the week, we had this blog post from Susan Guthrie, and this
press release from Labour. Matt has commented expertly on these here and here,
and I don’t want to beat a dead horse. But in all the discussion about housing in the
blogsphere, a few basic principles keep being ignored, so I thought I would finish what has turned out to be housing week in the blogsphere by listing those prinicples in one place:
- The price of housing depends on the supply of available houses and the
number of people wanting to live in houses coupled with their willingness to
pay for housing. The price of houses depends on the price of housing today and the expected price in the future. Policies that affect who owns
houses and the incentive to purchase existing houses as an investment are
sideshows unless they change the underlying stock or the underlying demand for housing.
- Speculation works by buying assets when their price is expected to rise
and selling when the price is expected to fall, thus reducing price volatility.
Speculative investment that increases
volatility in house prices is investment that loses money. If such speculation
were coming from overseas, it would be a source of income to New Zealand.
- Speculation that leads to an increase in house prices and makes money,
is only profitable because underlying factors are operating to push prices up
even further in the future. Any policy that claims to be able to reduce
house-price inflation by restricting speculative investment, is a policy that
is an open admission of having no solution to the long-term problem.
- Policy can reduce the demand for housing or for houses by imposing taxes, but that can only lead to a reduction in the before-tax price not to the after-tax price and hence is not a route to making housing more affordable.
- More specifically, there is a tax advantages to owner-occupied housing
over renting. But to the extent that has any effect, it leads to too much
investment in creating houses and hence to lower
house prices than would otherwise be the case. There may be arguments for
eliminating the tax preference, but affordability is not one of them.
It would be nice if the main-stream media were to ask questions of politicians rather than just disseminating their press releases. Asking them to explain their policy proposals in light of these basic ECON-100 principles would be a good start.