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Ban foreign buyers?

Phil Twyford’s bill banning foreigners from buying existing New Zealand houses has been drawn from the ballot. I just have a hard time seeing the point.

Let’s work up from first principles. The price of houses depends on the supply and demand for houses, but the demand for houses is derived from the demand for housing. What do I mean? If houses didn’t supply housing services either to owners or to tenants, nobody would want the things.

Demand for housing depends on the number of people who want to live in an area. If a lot of people want to live in a place relative to the existing stock of houses, then the price of existing housing is bid up (rents) until it becomes economical to build new houses. The price of houses then derives from the expected flow of rental income that comes from them. And note that this can also be consistent with the current observations of rental costs not having jumped as much as house prices in Auckland: all we need are investor expectations that the relative supply of housing in Auckland will be tighter in the future. In other words, if the investors expect migration flows into Auckland to continue to outstrip construction, their expectation of future rent increases gets built into the current price of houses.

Ok. So what do we take from that? The price of houses fundamentally comes from expectations about how many people will want to live there relative to the existing stock of houses. Whenever expected increases in rents look strong enough to support it, new housing gets built: but, since rigid planning rules have capitalised most of that into the price of zoned land, building’s always going to be a bit marginal for developers.

As Seamus Hogan put it a couple years ago:

The price of housing depends on the supply of available houses and the number of people wanting to live in houses coupled with their willingness to pay for housing. The price of houses depends on the price of housing today and the expected price in the future. Policies that affect who owns houses and the incentive to purchase existing houses as an investment are sideshows unless they change the underlying stock or the underlying demand for housing.

Seamus worked through things a bit more thoroughly here.

The only conditions under which I can see this having an effect on house prices is where foreigners buying houses here are not buying them to earn a return on investment but are just trying to hide money and are happy to lose some in the process. In that set-up, forcing that money to go into new construction can yield more houses being built than would be justified by the fundamentals, with the minor losses falling on foreigners happy to take the cut in order to have a clean asset. But, if that’s the case, foreigners’ buying houses wouldn’t have any effect on rents and current New Zealand owners would be happy to sell to foreigners and rent the house back at a fairly low cost relative to what they got for the house. Further, even in that world, a policy forcing foreigners to build rather than buy only affects the number of new houses if foreign demand is very large: otherwise, we just displace domestic construction by foreign construction. And, wouldn’t the new rules about IRD numbers for foreign buyers have curbed any of that kind of activity anyway?

I really wish I knew Phil Twyford’s underlying model here of how he thinks banning foreigners from buying houses does anything to house prices. I like his proposals to have local government finance infrastructure by issuing bonds rather than loading it into developer charges and mortgages, and I like the talk about easing the zoning rules that prevent new construction. But this one leaves me scratching my head. I can understand how Reddell arguments about cutting back on migration would affect house prices: it affects demand for housing directly. This one, not so much.

And if it makes China think that New Zealand’s full of anti-Chinese xenophobes, that’s not helpful either.

About Eric Crampton (88 Articles)
I'm Head of Research with the New Zealand Initiative.

12 Comments on Ban foreign buyers?

  1. Stephen Hoskins // November 13, 2015 at 2:02 pm // Reply

    Rents and incomes are dragging house prices by so much that it would take wild increases in rents to bring yields back up to long term averages. Add in the additional supply that the unitary plan will unlock, and it starts looking to me more like a bubble than the capitalisation of expected rental increases.

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    • It’s possible; I sure couldn’t make the call either way. But if it is a bubble, isn’t it better for everybody in Auckland to sell the house to a foreign buyer, rent it back, wait for the crash, then buy it back?

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      • Stephen Hoskins // November 13, 2015 at 2:42 pm //

        Irrationality plagues the kiwi and the foreigner alike.

        I agree that Twyford’s bill is unlikely to provide much benefit above and beyond the new IRD rules, and crowding out of construction resources will likely reduce the extent to which foreign speculators are pushed towards increasing supply.

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      • Yes – absolutely. I think that’s John Key’s attitude as well.

        The Auckland market is so far gone now, that we should sell it off to China insofar as we can.

        And let the prices rise so high that (naive) young Auckland’s are blocked from an otherwise terrible investment.

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      • …It’s just that JK can’t actually say it, because he’ll spook foreign buyers and likewise prematurely pop the bubble.

        I think he’s hoping the rest of us will privately work it out.

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  2. Completely agree with the meaninglessness of differentiating between established and new houses, in terms buyer controls.

    They are the same product in the same market, so all you’ll do is play musical chairs with who buys what house (new or established). I can’t see the net positive effect.

    You should see a fractional increase in new-build prices for foreigners as foreigner new-build demand increases, and in turn a lot more Kiwi’s will respond by simply preferring (more so) to buy established houses. So no extra houses being built – you just change the builders.

    And yes we’re in a bubble, and it’s not going to be relieved by rent hikes. Because the rental market just doesn’t have the money to pay those ‘crazy’ bubble-relief rents. They will generally either leave Auckland or tolerate more overcrowding, and likewise balance the market that way.

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    • Stephen Hoskins // November 13, 2015 at 4:00 pm // Reply

      Agglomeration benefits on a household scale Andrew.

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    • Hmmm…….one thing. If it so happens that foreign buyers are *much* richer than domestic buyers, then that could keep the resale price down. Because if a foreigner has no choice but to frick their property off to “poor” New Zealanders, then that could suppress the inflation?

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  3. Boris the Frog // November 13, 2015 at 7:47 pm // Reply

    I think you really are overthinking it if you think Twyford has a ‘model’… Twyford is just running around looking for a hot button issue with which to get some traction against the Govt/National.

    My view is that people are not that stupid… Although Twyford clearly thinks they are.

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  4. The best (timely) way to solve housing supply (according to me):

    Declare free-to-build zones immediately outside the Auckland MUL’s (overrule Auckland council). Purchase land via compulsory acquisition, so we get it at approximately rural value.

    Focus on retirement villages, built at a large scale.

    Design them in New Zealand, build them China, assemble them in New Zealand. Modern kit-sets can be very affordable.

    Base the villages on driverless car technology, namely the ULTra system or similar (linked below). This leaves you with an atmosphere that is silent and leafy, and with minimal roading costs. Mostly narrow one-way roads is all that’s required. The ULTra system would later be replaced by driverless cars of the type being developed by Google. This approach should be very popular for old people – especially for if/when they can’t drive.

    Install compost toilets to eliminate (or reduce) the need for plumbing, and get people to catch their water off the roof. Hence, the infrastructure demands should be minimal.

    The Greens can’t complain about people taking longer commutes because it’s for retired people. They have no work to go to. And they can’t complain about paving over mother nature because if it’s done right, the developments will be overwhelmingly green.

    As they deliver an excellent service/lifestyle to the retired, they should be a very popular option to help induce downsizing. And of course every retired person who moves out of the big family home, leaves us with a family home for others to use.

    -I would bet you could get a spacious two-bedroom unit down to about $150,000…or something like that. With Chinese kit-sets – maybe much less.

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