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.
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.
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.