Shearer's building plan has merit

David Shearer.

Labour leader David Shearer has painted a bold vision. His KiwiBuild announcement is big picture stuff. He has announced Labour's intention to build 100,000 affordable houses for first-home buyers over the next decade in a public-private arrangement.

My main reservation is where is the land coming from?

This appears to be the main problem of housing affordability in certain areas at present.

The reason I like the announcement is that average houses in New Zealand are way overvalued. Our houses are generally nothing spectacular as dwellings but we are paying premium dollars for them.

This is an aspect of our economy which we have control over. We can't control international oil or dairy prices and the productivity of our farms is limited by technology. We do have the ability to control the prices we pay for our houses, if we choose to exercise it as a nation.

The purchase of a house is the main financial decision in most peoples' lives, so we should be doing everything to ensure affordability. The current situation of using debt to bid up our existing house prices while average incomes stagnate invites disaster.

In tough times, firms seek to cut costs to maintain profitability.

Countries generally do the same, which is why we have a government that is pruning its spending. The irony is that while the Government is slashing its spending, the Reserve Bank is keeping interest rates low, to try to stimulate the economy. This is fuelling the housing boom, which is driving up living costs, making us less competitive internationally. The profits generated by this process are mainly heading offshore to bank shareholders. If we can get housing affordability under control, we can move on to creating a competitive economy. If we don't, we are going nowhere.

Forget blaming greedy landlords or evil property speculators, the issue comes down to supply and demand in the housing market. Currently, this equation is out of kilter in certain areas.

But the main problem is the cost of land. Mr Shearer has pointed to the big advantage a government-sponsored building programme has.

It is economics of scale. This should ensure a fall in construction costs for first homes but it doesn't overcome the issue of land costs in key areas.

Developers are not prepared to build cheap housing on expensive land.

There is a mixture of government and market failure that is causing the current housing crisis. There is also a psychological factor in the self-fulfilling belief that house prices can only rise. In the years following the global financial meltdown, housing inflation was not an issue because the banks were wary of lending. They are resuming their past practices and the boom is back on. On the supply side, new construction of affordable housing has slumped in the past few years due to a lack of development finance and the cost of land.

I applaud Mr Shearer's big picture approach. He has identified the major area of our economy over which we have control if we choose to exercise it. He will be criticised by market zealots who abhor any form of government intervention. He also needs to confront the land affordability issue.

But as an avenue to economic prosperity the plan has merit. It will create jobs and skills and reduce the price of the main financial transaction in most peoples' lives. It is far superior to relying on monetary policy and low interest rates, which serves to further inflate house prices and indebtedness. Unless we solve this housing affordability issue we will continue our economic stagnation and relative decline. We can fix it if we choose to.

• Peter Lyons teaches economics at Saint Peter's College in Epsom, Auckland, and has written several texts on economics.