Houses in Auckland. Photo: Getty Images

The foreign buyer ban is an abomination. Bad in principle, worse in practice

There is not a shred of evidence the prohibition on foreign property buyers will alleviate the housing crisis. It is populist, fear-based policy making, argues economist Eric Crampton.

One of the things that think tank chief economists get to do is have a yarn with travelling delegations from international organisations checking in on how things are going in New Zealand. One that we talked with this past month was puzzled about how New Zealand wound up with such an odd ban on foreign home buyers.

New Zealand is generally known for good policies and for free trade. But compared to other developed countries, its foreign investment regime is highly restrictive.

And even against the backdrop of a very restrictive foreign investment regime, the ban on foreign home buyers is odd.

This is what I told them.

How we wound up with a ban on foreign home buyers

When National took office in 2008, there was strong outflow of New Zealand citizens: more Kiwis were going abroad, and staying abroad, than were coming home. The net outflow had reached about 30,000 per year. Migrants from overseas prevented population decline.

Charts from “The New New Zealanders”, available at nzinitiative.org.nz/reports-and-media/reports/the-new-new-zealanders

It was a big enough issue that John Key made it an election promise: he would reverse the outflow of Kiwis. And the numbers did reverse. A stronger NZ economy, weaker economies overseas, and madness in the UK all seemed part of the reasons for it. By 2016, almost as many New Zealanders were coming home as were leaving each year. And so the net migration figures turned very strongly positive.

National did pursue more liberal immigration policies, but we overestimate the effect of that if we think that all the change was due to it. Looser immigration policy combined with a cyclical shift in New Zealand citizens’ migration decisions had an effect. It also looks like migrants became a bit ‘stickier’ – folks who previously would have gone back to their country of origin decided to stick around for a slightly longer period.

But we have to be careful there too. If a “Permanent Long-Term” migrant typically stays for three years before going back to their country of origin, a surge in PLT arrivals will be met by a surge in PLT departures – three years later. Current departures are the lagged effect of prior arrivals.

Media coverage was disappointing – and often plain misleading. The New Zealand Herald kept running headlines about the big net migration figures, ignoring that a lot of it was Kiwis coming back home (or not leaving in the first place), and that a substantial chunk of the “permanent and long term” migrants are folks who were expected to leave in a few years. It helped them run scare campaigns that sold papers and drove clicks through to their website, but it was terrible for the overall political climate.

The Herald did redeem itself somewhat by providing excellent coverage of the NZ Initiative’s 2017 report on immigration that covered these issues, but the tone for the election was already set.

Prior to that 2016 population surge, Auckland had problems with housing consents. The Resource Management Act doesn’t force councils to adopt bad district plans, but it does make it really hard to change bad district plans once they’re adopted – the consultation provisions for any change in land use and even just for building consents are a big pain.

Auckland’s amalgamation from several small cities into a Unitary Authority was supposed to help with that. And there are some theoretical reasons to expect that: when zoning decisions are at a higher level, it’s harder for NIMBYs to block things. But it took a very long time to get the new unitary plan, it went through an appeals process and a tribunal (which actually made it more liberal), then the Council backpedalled in implementation and made it a bit more restrictive again.

The plan now is more accommodating than it used to be, but we still have all kinds of nonsense in there. It is just too hard to build anything anywhere. If you’re putting up apartments, there are minimum apartment sizes and mandatory balconies and piles of other cost-increasing constraints – and height limits dictated by stupid things like whether your building would block the view of a mountain from one particular point on a motorway (I’m not kidding).

OK. So Auckland housing supply is stupidly constrained. There’s also some population pressure, a lot of which was driven by Kiwi migration decisions – people from outside of Auckland were moving to Auckland too – and all those Kiwis returning home. Bill Cochrane and Jacques Poot over at Waikato University did some work showing that the bulk of the housing pressures came from decisions made by New Zealand citizens rather than migrants.

But that didn’t matter. The housing market had gone nuts, and it was easy to blame foreigners.

European-origin New Zealanders would see Asian faces at house auctions and conclude that immigration was to blame. The newspapers made it easy for them to reach that conclusion.

Everybody yelled about foreigners buying houses and leaving them empty, but there wasn’t a shred of evidence of that. The 2013 Census showed that the vacancy rate in Auckland was actually lower than that at the 2008 Census – and nobody had data on the rate after the 2013 Census.

Even the progressive Green Party got stuck in, demanding numbers on foreign buyers – while couching it in “Oh, we just want people to know the real numbers” rhetoric. It’s debatable whether that was what was really going on, or whether they were playing to the populists.

And Labour was worse. From counting the number of Asian-sounding names in land transactions to tweeting about how minor upticks in the unemployment rate might be due to immigrants – despite job growth that exceeded population growth during the migration surge. Employment rates and labour force participation rates were at or near historic highs during the migration surge, but that was not what people wanted to hear.

So we were in the bizarre situation coming into the 2017 election. The left were running a near-Trumpian anti-immigration campaign, while the National Party right were running the far more open platform. But the nativists won.

And that’s why the foreign ownership ban came in. There was a strong popular perception, based on no data whatsoever, that there were big problems in foreign-based buyers speculating on New Zealand houses. The media fuelled it, and politicians were seeking votes.

The resulting legislation is an abomination. It’s bad in principle, and it’s worse in practice. The government drafted it in extreme haste as part of their 100-day plan and screwed it up utterly. The ban does not just hit ‘speculators’, as promised in the election. It hits any foreigner who wants to live here unless they’re on a residence-class visa. It also even hits foreign-owned telecommunications or lines companies that need to buy a bit of residential land to run a line through or to put up a cell tower.

And it will make it very hard for foreign developers to help us build our way out of the housing crisis.

I like to think that New Zealand is pretty good at avoiding doing particularly silly things in policy. In a lot of respects, New Zealand remains islands of sanity in a world growing increasingly mad. But when it comes to foreign investment and bans on foreign home buyers, our policies just do not make sense.

Dr Eric Crampton is Chief Economist with The New Zealand Initiative


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