It usually begins with the RMA – fewer warm, dry homes as an unintended consequence of regulatory restrictions on land supply

The Government admits that its proposed insulation and smoke alarm standards for rental properties could push up rents by more than $3 a week. Under legislation to be introduced in October, social housing would have to be retrofitted with ceiling and underfloor insulation by next July, and all other rental homes by July 2019.

An important driver of lower quality housing in New Zealand is the restrictions on land supply. The costs of those restrictions, land makes up 60% of the cost of new houses rather than 40%. Land prices have doubled and tripled in a number of cities. As the Ministry of Business, Innovation and Employment has said:

The median price of sections has increased from $94,000 in 2003 to over $190,000 today (compared with $NZ 100,000 per section in the US), ranging from Southland ($82,000) to Auckland ($308,000)…

Section costs in Auckland account for around 60% of the cost of a new dwelling, compared with 40% in the rest of New Zealand.

The RMA is the Resource Management Act and was passed just before New Zealand housing prices started to rise rapidly.

housing prices and RMA

Source: Dallas Fed; Housing prices deflated by personal consumption expenditure (PCE) deflator.

Higher land prices for new houses spill into the prices of existing houses, which are now much more expensive than they need to be but for the RMA inspired land supply restrictions in Auckland and elsewhere in New Zealand.

One way in which homeowners and landlords can keep costs down when buying a house either for their own use or as an investment property is not to invest in insulation and smoke alarms. Deposits are less, mortgages are less and rents are less. It all adds up.

$3 is not much for some but it is enough that some parents cannot find $3 or so per week to feed their children breakfast. Joe Trinder, the Mana News editor blogged about the great expense of feeding the kids for ordinary families.

image

Put simply, you cannot argue that a few dollars is a lot of money to people on low incomes but ignore the consequences for their welfare of a $3 per week increase in their rents.

If tenants were willing to pay for insulation, landlords would provide well-insulated rental properties to service that demand. Walter Block wrote an excellent defence of slumlords in his 1971 book Defending the Undefendable:

The owner of ghetto housing differs little from any other purveyor of low-cost merchandise. In fact, he is no different from any purveyor of any kind of merchandise. They all charge as much as they can.

First consider the purveyors of cheap, inferior, and second-hand merchandise as a class. One thing above all else stands out about merchandise they buy and sell: it is cheaply built, inferior in quality, or second-hand.

A rational person would not expect high quality, exquisite workmanship, or superior new merchandise at bargain rate prices; he would not feel outraged and cheated if bargain rate merchandise proved to have only bargain rate qualities.

Our expectations from margarine are not those of butter. We are satisfied with lesser qualities from a used car than from a new car.

However, when it comes to housing, especially in the urban setting, people expect, even insist upon, quality housing at bargain prices.

Richard Posner discussed housing habitability laws in his Economic Analysis of the Law. The subsection was titled wealth distribution through liability rules. Posner concluded that habitability laws will lead to abandonment of rental property by landlords and increased rents for poor tenants.

What do-gooder would want to know that a warranty of habitability for rental housing will lead to scarcer, more expensive housing for the poor! Surprisingly few interventions in the housing market work to the advantage of the poor.

Certainly, there will be less rental housing of a habitability standard below that demanded by do-gooders in the new New Zealand legislation. In the Encyclopaedia of Law and Economics entry on renting, Werner Hirsch said:

It would be a mistake, however, to look upon a decline in substandard rental housing as an unmitigated gain.

In fact, in the absence of substandard housing, options for indigent tenants are reduced. Some tenants are likely to end up in over-crowded standard units, or even homeless.

The straightforward way to increase the quality of housing in New Zealand without increasing poverty is to increase the supply of land.

As land prices fall, both homebuyers and tenants will be able to pay for better quality fixtures and fittings because less of their limited income is paying for buying or renting the land.

Excuse of the year – Newman would be proud

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Housing habitability laws

Minimum standards for rental housing is back in the news in New Zealand. After some deaths in some rather nasty fires in rental houses without fire alarms, there are demands that landlords must put fire alarms in place and maintain those fire alarms. About a dozen people or so die in fires in New Zealand every year.

The fact that in the proposed regulation, landlords are also required to maintain those fire alarms – ensure they have batteries in them – is a microcosm of the economics of rental housing habitability laws.

Even when landlords put in fire alarms, low income tenants prefer to spend their money on something other than replacement batteries for those alarms. These tenants are presumed to be competent to vote and drive cars, but not manage the risk of fires in the houses in which they live.

Maybe the reason for the lack of interest of low income tenants in putting batteries and fire alarms is domestic household fires are relatively rare these days. Fire is buried in the green area of the diagram below and is similar to drowning and falls.

The American data below suggests that your chances of dying by fire are about the same as dying from choking and a little worse from dying from post surgery complications.

Rather than in need of nudging, your average low income tenants seems to have it pretty right regarding the risks of dying in a fire.

When I went looking for some economics of housing habitability laws, Google was a bit of a disappointment. There are some empirical work done in the 1970s and early 1980s and then it fell away.

My suspicion is there is not so much empirical work on the economics of housing habitability laws because proving the obvious is not a good investment in Ph.D. topics or tenure track economic research.

Walter Block wrote an excellent defence of slumlords in his 1971 book Defending the Undefendable:

The owner of ghetto housing differs little from any other purveyor of low-cost merchandise. In fact, he is no different from any purveyor of any kind of merchandise. They all charge as much as they can.

First consider the purveyors of cheap, inferior, and second-hand merchandise as a class. One thing above all else stands out about merchandise they buy and sell: it is cheaply built, inferior in quality, or second-hand.

A rational person would not expect high quality, exquisite workmanship, or superior new merchandise at bargain rate prices; he would not feel outraged and cheated if bargain rate merchandise proved to have only bargain rate qualities.

Our expectations from margarine are not those of butter. We are satisfied with lesser qualities from a used car than from a new car. However, when it comes to housing, especially in the urban setting, people expect, even insist upon, quality housing at bargain prices.

Richard Posner discussed housing habitability laws in his Economic Analysis of the Law. The subsection was titled wealth distribution through liability rules. Posner concluded that habitability laws will lead to abandonment of rental property by landlords and increased rents for poor tenants.

posner habitability

What do-gooder would want to know that a warranty of habitability for rental housing will lead to scarcer, more expensive housing for the poor! Surprisingly few interventions in the housing market work to the advantage of the poor.

Certainly, there will be less rental housing of a habitability standard below that demanded by do-gooders. In the Encyclopaedia of Law and Economics entry on renting, Werner Hirsch said:

It would be a mistake, however, to look upon a decline in substandard rental housing as an unmitigated gain. In fact, in the absence of substandard housing, options for indigent tenants are reduced. Some tenants are likely to end up in over-crowded standard units, or even homeless.

Roger Pielke Jr.

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