This past week has been an interesting one for The New Zealand Initiative, having taken what we think are the best housing affordability policies from abroad, and presenting them to policymakers and bureaucrats on both sides of the beltway.

They either agreed or disagreed with our recommendations depending on their ideological perspective, as you would expect, and for the most part the consultation was highly constructive (at least it was for us).

What did surprise us, given that these were off-the-record sessions where policy analysts and elected officials got the chance to grill us on the finer details of our recommendations, was the fact that hardly anyone quizzed us on incentives.

Economics may be better known as the dismal science, but in reality it is the study of incentives, and as we read the regulatory landscape, the policy inducements are decidedly stacked against the delivery of affordable housing.

As we have stressed repeatedly in the past, New Zealand has a housing supply problem - we simply do not build enough new homes to keep up with demand thanks to a growing population and falling household size among other factors.

The reason for this is that since the 1970s, when the government started withdrawing from the housing market as the economy entered into what would turn out to be a 20-year recession, local government has been saddled with the costs associated with new development (water connections, roading, etc.).

At the same time, these bodies were also excluded from getting a slice of the revenue that new housing brings, which has been (and still is) exclusively funnelled to central government in the form of general salary and sales taxes.

Looking at incentives from this perspective, it is perfectly clear why councils impose limits on the outward spread of urban regions; pass on the infrastructure cost to buyers; slow planning approvals to a crawl; and reluctantly release land for development.

This has been compounded by the attitudes of NIMBYs (Not In My Back Yard) and BANANAs (Build Absolutely Nothing Anywhere Near Anything), who have ultimately ended up footing the costs that new residents bring.

The government building thousands of houses might be a solution to salving the housing affordability crisis in the short-term, but if we want to fix the problem in the long-term, it is about realigning incentives.

Our overseas research has revealed three jurisdictions that have struck this balance.

In Switzerland and Germany, local government bodies are incentivised to be pro-development because they levy a tax on their residents or receive a capitation grant from central government.
  
The net effect is a housing supply that meets demand, and councils competing on service delivery to attract new residents to their areas because they represent additional revenue. More residents also mean greater efficiencies of scale and lower taxes, going some way to mollifying NIMBYs and BANANAs.

And, as residents have moved out of cities to the suburbs, so urban areas are forced to redevelop to attract people (and revenue) back, establishing a sort of equilibrium.

In Houston, Texas, they've taken the opposite approach on unzoned land. Using legal structures somewhat confusingly called MUDs (Municipal Utility Districts), private developers pay for and build the infrastructure that councils would normally supply.

This is funded using bond finance, meaning the costs are recovered over the lifetime of that house, as opposed to capitalising it in the upfront asking price.

The net effect of MUDs is a steady supply of affordable housing, while the attitude of existing residents and local government bodies is pro-new development because they don't have to pay for the additional water, roading, and electricity infrastructure.

Councils still control the MUD process by earmarking which portions of land are unsuitable for house building based on environmental or other considerations, thus preventing a construction free-for-all, but areas outside of this are assumed to be open for development.

We believe both approaches offer significant potential for New Zealand.

By giving councils a share in the proceeds that come from new residents, stripping them of some of the infrastructure provision costs, and creating an alternative development structure, we can achieve the goal of putting that first home within reach of everyday New Zealanders. 

Source: Incentives key to affordable housing