Kiwibuild fails basic economics

Photoshopped image credit: Lushington Brady.

Professor Thomas Sowell?s excellent book Basic Economics is subtitled ?A common sense guide to the economy?. Phil Twyford?s common sense and grasp of basic economics are harder to spot than a Kiwibuild house.

Sowell?s book devotes an entire chapter to the effects of government meddling in the housing market. If only Jacinda Ardern and Twyford had read it. Quote:

Up to three quarters of what KiwiBuild adds to housing investment will be offset by lower investment by the private sector, the Reserve Bank warns. End of quote.

Sowell?s economics-for-dummies lesson deals mainly with rent controls ? naturally enough in the American context, where renting in large cities especially is relatively common ? but the principle is the same: the government interfering in the market. The lofty aim is also the same: making housing more affordable for the poor.

Unfortunately, the outcome is also the same. Quote:

On Thursday morning, Reserve Bank governor Adrian Orr told MPs that there was considerable pressure on the construction industry, which meant that where the government built houses, others which would have been built will be “crowded out” by a shortage of land or labour.

“If they were going to build 100 houses, that means that between 50 and 75 houses elsewhere aren’t built,” Orr told a select committee.

“The construction sector is currently facing capacity constraints, which means that KiwiBuild developments may crowd out other private developments, particularly in the near term,” the Reserve Bank said?the short term addition to the housing market would be virtually nothing. End of quote.

Economics, as Sowell says, is all about allocating scarce resources. A ?capacity constraint? is something that holds back an industry from producing more. In this case, only so many houses can be built in New Zealand in a given time. Kiwibuild isn?t going to add to the overall number of houses; it just means that more houses will be built on the taxpayer?s dime and then be subject to price controls. Such controls, as Sowell warns, have effects on supply as well as on demand. Nine years after the end of World War II, not a single new apartment building had been built in Melbourne, Australia, because of rent control laws there which made such buildings unprofitable?people stopped investing in apartment buildings. Quote:

In a statement, Housing and Urban Development Minister Phil Twyford said the Government was “working with builders and developers” to increase the capacity of the sector, as well as considering proposals to speed up consenting and simplify the building code.

“We are freeing up land and reforming the planning rules to allow our cities to make room for growth,” Twyford said.

“A lack of infrastructure financing is a massive constraint on freeing up more land for housing, so this year we will introduce legislation to reform infrastructure funding and financing.” End of quote.

Land availability and red tape are some of the capacity constraints on housing and loosening both would free up the private sector. But Twyford barely addresses that before swerving straight over to throwing more government money around. This is a government addicted to spending taxpayers’ cash and determined to just keep doing more of what?s already failing. There?s no point freeing up land if you?re just going to claim it for your mickey-mouse government scheme anyway. Quote:

National’s housing spokeswoman Judith Collins said the Reserve Bank analysis was logical based on the nature of KiwiBuild.

“While there is no increase in capacity ? all that’s going to happen is the cost of housing for people who are building a house themselves is going to go up,” Collins said. End of quote.

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As Sowell shows, government interference in the housing market invariably has the opposite effect to its noble intentions. If KiwiBuild is hogging the market, the private industry is crowded out. In short, a policy intended to make housing affordable for the poor has had the net effect of shifting resources toward the building of housing that is affordable only by the affluent or the rich.

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