Housing and productivity

By Paul Walker 01/08/2015 2

Up until now I have never really gotten the reason for people getting so excited about the effects of housing on productivity. When the Productivity Commission looked into the problems with housing in New Zealand it didn’t seem to me to be the obvious factor explaining New Zealand’s low productivity growth.

Well it turnouts I may have to rethink this issue. The Economist magazine has an article which explains How cheaper housing can boost productivity. They write,

To understand how cheap housing could boost productivity, consider the British economy. Inner London is by far the most productive region of the country, thanks to its clusters of finance, technology and nerds. More than one third of new jobs created in Britain since the recession have been based in the capital. London could create more still, but its lack of housing hems it in. The average house there now costs £370,000 ($577,000), nearly double the national average. Soaring demand has met stagnant supply. In the past decade the number of homes in London has grown by just 8%. The effect of high house prices is to push people out of London (or stop them moving in), and thus put them in less productive jobs. Others waste time on marathon commutes. From 2005 to 2014 the number of people commuting into London rose by 32%. One paper published in 2010 found that absenteeism among German workers would be 15-20% lower if they did not commute. If it were somehow possible to scrap commuting altogether, the British economy would see a productivity boost worth £12 billion a year, according to the Centre for Economics and Business Research, a think-tank.

Now if the effects of cheaper housing on productivity in New Zealand are of this order of magnitude then this is another big reason for doing something about freeing up the supply-side of the housing market. This makes reforming the local government regulation of building new homes or modifying existing ones look all that much more important. This is especially true of Auckland where the returns to reform will be the greatest since it has the greatest “clusters of finance, technology and nerds” in the country.

2 Responses to “Housing and productivity”

  • You are not the only one to have had problems understanding that an efficient built environment is the keystone of the economy of every nation, including New Zealand, whether the economy drivers are knowledge-based, tourist-based, land production-based, or whetever. Nor was the Productivity Commission the first to point this out. Studies in the 1990s at VUW, funded by BRANZ, showed that an improvement in the performance of the industries creating the NZ built environment resulted in an improved output in every other sector of the NZ economy[1]. It is to be hoped that the agreement by Cabinet to create a National Science Challenge related to a better built environment is an explicit signal that those who work in Government’s research funding corridors have actually started to realise this, despite it having been pointed out to them on many occasions over the past decades.

    [1] see eg Poot J, Nana G and Philpott B. 1998. “New estimates of the economic impact of efficiency improvements in building and construction.” RPEP paper 288, Victoria University of Wellington Research Project on Economic Planning, Wellington.

  • I’m surprised there is no mention of the distortions an inefficient housing market makes in investment. Currently NZers overly invest in housing and under-invest in productive sectors ie business.

    This is an issue of allocation (imo – economists should feel to correct this dangerous layman…). If my mortgage is large, my ability to invest in other assets is less, ergo, my mortgage is inhibiting business growth.

    This is all made worse when a subsidy is in place to underwrite the provision of rental housing. The existence of a housing subsidy pushes investment in rental housing and hence assists drive the kiwi love affair with rental housing over other investment classes. In short, housing subsidies are a subsidy to the property owner, not the occupier, and help drive up (or sustain) property prices.

    I suspect. Let me know if this is incorrect!