HERE’S HOW TO FIX THE HOUSING AFFORDABILITY PROBLEM
An easy way to picture the housing market is as a pie chart. In New Zealand the biggest slice by far, ~96%, comprises market-priced homes. Within that 96% slice about 2/3 is owner-occupied homes and 1/3 is rental properties (mostly owned by small private investors). The balance slice of 4% comprises non-market-priced housing (i.e. state social housing plus a small amount of community housing owned by municipalities, community trusts, charities etc.). So our housing ecosystem can clearly be characterised as one where (nearly) all of the traded housing stock is transacted at full market prices.
With this market context in mind, efforts to improve housing affordability here have almost exclusively focused on increasing the supply of land on which to build more market-priced housing. The thinking is founded on the (erroneous) economic notion that by widening competition in the marketplace (i.e. with more supply) house prices will somehow magically fall. The political rhetoric over the past 25 years has mirrored this neo-liberal thinking with slogans like ‘we need to open up more land for development’ and ‘we need to build more houses’. As well as ignoring the long-term and steady surplus of dwellings over households since at least 1992, this dodgy economic and political ideology has accompanied some of the worst house price inflation in the OECD. Between 2000 and 2023 real house prices here increased ~209% compared to ~62% for all OECD countries, and ~37% for Euro area countries. Our ‘laissez-faire’ (leave it to the market) policies have spectacularly failed to improve housing outcomes or social equality and the Sixth National Government’s ‘going for housing grow’ policy seems just one more of the same ilk destined for the same fate.
It’s really not hard to understand why ‘the market’ is incapable of delivering affordable housing. Corporate developers and investors will typically seek a profit margin (EBIT) of 20%-30%. Those developing large-scale multi-year land projects will typically require a minimum pre-tax Internal Rate of Return (IRR) in the order of 20% to offset risk which (for say a 15-20 year staged project) implies and even bigger financial margin. There are profit margins built-in at every part of the project value-chain — land acquisition and re-zoning, land development and on-sale, materials supply, construction and sale. Market actors are never going to deliver an ‘affordable’ housing output when their prime objective is maximising profit, return on investment and shareholder wealth. They will seek the highest possible price and if the margins are not high enough the project very likely won’t happen. If we really want to achieve socially-diffuse and especially lasting housing affordability we need to get off this neo-liberal road to nowhere.
Our almost exclusive reliance on ‘for-profit’ market actors to deliver housing means that for the ~⅓ of households noted earlier who are currently renting, traditional home ownership at market pricing is out of reach. These people are the ‘missing middle’ in society. They earn too much to qualify for social housing and too little to get a loan from the bank and as such they’re stuck paying full market rents as their only current option — when there are much better alternatives. We should leave ‘the market’ to itself and instead focus on policies and systems that offer alternative equity, rental and hybrid housing options for the ‘missing middle’ not provided by ‘the market’.
Not-for-profit housing systems offer a compelling ideal alternative to ‘the market’ — housing provided at the lowest price possible and usually traded either at cost or based on some other non-market pricing formula. Highly successful ‘third sector’ housing systems can be found in many housing markets — those in Austria, Denmark, Sweden and Norway being notable exemplars. The share of all forms of not-for-profit housing in proportion to total housing stock is estimated at ~42% in Sweden (~67% in Stockholm), ~30% in Denmark (~49% in Copenhagen), ~24% in Austria (~42% in Vienna) and ~17% in Norway (~35% in Oslo).
Back to pie charts. Picture two housing markets. Market A comprising say 96% market-priced housing (as in New Zealand) and Market B comprising say 50% market-priced and 50% non-market priced housing. Obviously Market B will exhibit better housing affordability as it has a much higher proportion of housing priced outside of the open market (either at cost or near to it). As the proportion of non-market housing stock increases in relation to total housing stock the entire housing ecosystem becomes more affordable. Further, some research suggests that a healthy proportion of not-for-profit housing stock to total housing stock also has a beneficial dampening effect on market prices. Improving housing affordability can be as simple as increasing the non-market housing slice of the total housing pie. Most of the ‘not-for-profit’ housing referred to above is typically held by equity/rental cooperatives, municipal corporations, charitable trusts etc. and therefore independent from the state accounts (including associated loans and guarantees).
These not-for-profit housing systems provide socially-diffuse and improved housing outcomes and multi-stakeholder benefits that are not limited to only those with (or access to) capital. Anyone currently renting at full market prices would be better off in not-for-profit housing. The state would be better off because it diminishes the constituency (and financial) pressure to provide for those shut out of the traditional housing ownership market. Those currently paying full market prices for housing may also be better off through the price-moderating impact of a larger proportion of total housing stock priced non-market. Structural diversification would also improve market stability (i.e. lower price volatility and risk). Importantly, a third sector housing strategy would avoid the unrelenting pursuit of housing growth (a demonstrable failure in addressing housing affordability) and the dismantling of our spatial planning legislation (designed to mediate the interests of all stakeholders not just promote the financial interests of a selected few) which became a convenient ‘whipping boy’ for the failure of politicians to rein-in house price inflation.
The solution to our housing affordability problem is right there in plain sight in the form of many established and highly successful not-for-profit housing systems and communities. We can simply copy from the best exemplars. We just need the collective wisdom to make it happen. That will require a modus vivendi between the two major political parties that socially-diffuse access to affordable good quality housing is seen as a social ‘task’ enshrined in legislation that gives purpose to the necessary institutions and structural mechanisms to enable and support a thriving ‘not-for-profit’ housing sector. Essentially a ‘third sector’ that is private but non-market. Our continued and misguided reliance on ‘the market’ and an absence of any pan-political housing strategy directed at addressing housing affordability instead of housing growth are major obstacles. But if we truly believe in social equality and democracy we must start building our future housing environments for communities — not for profit.