Two! Two! Two bad policy ideas in One!

By Eric Crampton 02/04/2014


No, sir, I don’t like it.

The Government should be intervening in Christchurch’s housing market by making low-interest loans available to developers so the cost of building homes is reduced.

That is the view of Christchurch City Council finance committee chairman Cr Raf Manji, who is worried that simply adding more sections to the market will not stimulate enough building activity to generate the 10,000-plus new homes that Christchurch needs.

”The main issue for developers is not so much the demand, as that is clearly there. The problem is affordability. Section costs are too high, building costs are too high, consent costs are too high and, with interest rates rising, funding costs are too high. Put that altogether and the risk-profile rises, so the smart approach for a developer is to wait until demand is at an elevated level and then build. By that time it’s too late,” Manji said.

”We need some kind of government intervention. The Government cannot afford to wait around and see a severe housing market squeeze, with inflated prices and major shortage of stock.”

Manji believed the Government should be accessing cheap funding from the Reserve Bank and using it to fund a large-scale house building programme in Christchurch.

The main problem in Christchurch is a consenting and zoning-related near-vertical supply curve. Where Council has made a couple moves to ease things up, like allowing the building of secondary suites in homes, I’ve heard they’re charging extortionate development contributions on those – it’s implausible that a second flat built inside an existing home really places that much burden on the infrastructure. If we have a near-vertical supply curve, low-interest loans that push out the demand curve doesn’t much help.

And while Manji wishes to loan the money to developers rather than to buyers, that doesn’t really fundamentally change things. Why? Rents accrue to the factor in fixed supply. If supply of zoned sections is limited, measures reducing the borrowing costs of developing a new section will just mean that developers can afford to bid more for existing zoned sections: the increase in the cost of sections offsets the reduced borrowing costs on developers. While Manji’s right about costs being too high, the solution has to start with easing the section supply restrictions. That brings down section costs and allows economies of scale in development that bring down construction costs.

But perhaps more pernicious is the idea that there’s a free lunch to be had by borrowing from the RBNZ instead of issuing normal government bonds. I don’t know if the social credit fallacy is underlying things here or some other form of monetary crankery, but it’s not good. I had thought that Robert Muldoon’s propensity for seeking financing from the RBNZ was one of the things that helped lead to central bank independence in the post-Muldoon era; directing the RBNZ to provide cut-rate loans to developers would be very much in the really really bad ideas category.

The RBNZ probably needs to put out a primer entitled “Why the RBNZ is not a lending bank.” It could be targeted at high school students, and would be useful for them, but perhaps would also have a broader readership.