An analytical case study by Benjamin Haller.

New Zealand has the second highest rate of investment in housing as a percentage of total national investment in the OECD, behind only Canada.[1] On the surface, high housing investment could indicate spending on the construction of new houses and modifications of existing dwellings. However, New Zealand’s high level of housing investment has not produced enough supply to tame house prices. In fact, the house price-to-income ratio currently sits at 8.8 times the average household income, while a ratio around 3 is considered to be affordable.[2] High investment coupled with high prices is indicative of individuals and property investors exchanging a relatively diminishing supply of homes relative to demand at higher and higher prices—a process that does not stimulate the country’s productivity.

Reforms are being undertaken, such as the recent Resource Management (Enabling Housing Supply and Other Matters) Amendment Bill, that makes it easier to build denser housing developments in core urban neighbourhoods.[3] However, more will need to be done to bring property prices more in line with household incomes.

Housing investment levels and prices are important to analyse because rent and mortgages consume a large percentage of many individuals’ incomes. According to Stats NZ, 29.7 per cent of renters spend over 40 per cent of their disposable income on housing, and this figure is 20.6 per cent for those with mortgages. [4]

There is always an opportunity cost of investment when a country chooses to prioritise investment in one sector—housing, in this case—over another. In other words, if a country invests more in housing, then it will have less money to invest in other sectors like education or technology. This can have major impacts on a country’s overall productivity levels. New Zealand, notably, has quite low labour productivity, as measured by GDP per hour worked, compared to its peers in the OECD. The OECD average is $54USD per hour worked, while New Zealand sits at $42.[5] New Zealand’s productivity is closer to that of the former Eastern Bloc countries of Poland, Hungary, and the Czech Republic than it is to Australia and much of Western Europe.

Seeking to examine what relationship, if any, exists between New Zealand’s levels of investment in housing and its chronic low productivity levels, a quantitative analysis demonstrates that an increased tax on land values is suggested as a possible solution to increase land utilisation in cities and reduce speculative investment in the housing sector. Through a non-linear correlation test, it is determined that there is a significant, moderate to strong, negative association between housing share of investment and productivity growth (rho = -.501, p < .01) over the period 2015 to 2021 in OECD countries. This means that as housing’s proportion of total investment increases, it is expected that productivity growth would decline.

This has major implications for New Zealand’s current investment distribution. At present, New Zealand’s housing share of total investment is 33.8 per cent, while the average for the OECD is only 21.35 per cent.1 The findings of this analysis are corroborated by the productivity growth figures from the OECD. Between 2015 and 2020, New Zealand’s GDP per hour worked grew only by 2 per cent, as opposed to the OECD average of 8 per cent over the same period.

New Zealand has a strong base from which a more productive economy can be fostered. The country is business-friendly [6], possesses strong governmental institutions with an established rule of law, and has minimal corruption.[7] Allowing property investment to continue to occupy a third of total investment, while the tax and planning environment encourage low-density sprawl, is a recipe for property bubbles and decreased productivity.[8]

To counter this trend, New Zealand can implement a form of land value taxation that encourages the most efficient use of land. More efficient land use means denser housing in urban areas, ultimately lowering property prices. With the supply and demand of housing more aligned, there will be less incentive to speculate on property—a phenomenon observed in Estonia, which has a land value tax.[9]

Furthermore, land taxes are considered one of the most efficient forms of taxation and are difficult to evade.[10] Split-rate land taxes, where land and improvements are both taxed but the land is taxed at a higher rate, have demonstrated success in the United States—stimulating urban development and economic revival in underutilised regions.[11]

Nevertheless, while a land value taxation is a good start to addressing New Zealand’s high rate of property investment and subsequent low productivity levels, the implementation of such a tax must be accompanied by government efforts to direct revenue towards more productive uses. Funds raised from a land value tax must first address the housing shortage in many of New Zealand’s largest cities through public housing construction and development grants. Additional funds can then be used to invest more in education and research and development, which can make New Zealand more productive and competitive relative to its OECD peers.

Ben Haller is a Master of Public Policy student at the University of Auckland. Ben completed this analysis as part of the New Zealand Treasury and the University of Auckland’s Economic Society’s 2022 Student Economics Competition, taking second prize for this work.

References/ Notes

[1] OECD. (2022). Investment by asset (indicator) [Data set].

[2] Bell, M. (2022, February 18). ‘Drastic fall’ in NZ housing affordability takes it to worst level on record. Stuff.

[3] RNZ. (2021, October 19). Housing density to increase across New Zealand under rare bipartisan solution.

[4] Stats NZ. (2022). Household income and housing-cost statistics: Year ended June 2021.

[5] OECD. (2022). GDP per hour worked (indicator) [Data set].

[6] The World Bank. (2019). Ease of doing business rank [Data set].

[7] Transparency International. (2021). Corruption Perceptions Index [Data set].

[8] Case, K. E., & Shiller, R. J. (2003). Is there a bubble in the housing market? Brookings Papers on Economic Activity, (2), 299-342.

[9] Cocconcelli, Luca, & Medda, Francesca Romana. (2013). Boom and bust in the Estonian real estate market and the role of land tax as a buffer. Land Use Policy, 30(1), 392-400.

[10] Wilson, S. (2018, November 4). Land value tax: The least-bad tax. MoneyWeek.

[11] Bourassa, S. (2009). The U.S. Experience. In R. F. Dye & R. W. England, Land Value Taxation: Theory, Evidence, and Practice (pp. 11–26). Lincoln Institute of Land Policy.

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