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.
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.