Introduction

With 34% of New Zealand population living in Auckland, this city has been through both economic and social transformations and turned into a region with higher residential and employment density in the city centre while residential and employment density is comparatively lower in its extending area (McArthur, 2017). In this circumstance, the increase of housing prices in Aucklandbecomes an urgent problem to be taken under control.

It is illustrated by Greenaway-McGrevy and Phillips (2015) that the housing bubble in Auckland started in its metropolitan area since 2013. Moreover, the inequality of overall economic situation becomes more and more serious (Malva, 2016). This paper will evaluate the price change with potential government intervention measures, including the existing economic justification behind.

Evaluation of the change

Auckland’s average real house values have risen by 34% since 2007 while the rest of New Zealand average real house prices have declined by 6% (Insch, 2018). Under this special circumstance, there are several significant demand and supply shifters which are related to the change in housing price of Auckland. In terms of that, the first one to be discussed here is the consumer preference. As stated above, the spatial form of Auckland shows higher density in downtown area, which results in more obvious price increase in metropolitan area compared to the overall situation.

Secondly, buyer’s expectations, as a factor affecting the demand curve, may contribute to the price change in house rental market because more people would tend to delay their purchases based on the expectation of the decrease of housing price in the future. Thirdly, the components of population would also influence the change in price. As shown in Figure 1, it can be seen that international population growth has been a significant factor since 2012 among all the components. This might bring the instabilities to the Auckland housing market.

Figure 1: Population growth in Auckland (Statistics New Zealand, 2015)

In terms of significant supply shifters, the labor cost would be one factor affecting the housing market as well. For example, scarce labour resources, especially the specialists, would cause increase of cost in all related industries. The other one might be the land resources of Auckland as the city has been attracting more and more people for settlement over the past centuries due to its geographical advantages and this trend will also continue in the future (McAuthur, 2017). Due to this concern, the Auckland Council has made commitment to the provision of affordable housing through the Auckland Plan coming out in 2012, which identified 400,000 more dwellings will be provided by 2040 (Murphy, 2016).

Government intervention

Potential government interventions should be considered aiming to solve different types of failures or outcomes of housing bubbles, including homelessness, inequality, geographical immobility and social issues, such as increasing crimes (Lam, 2011). Meanwhile, Auckland Council is aimed to ensure the city will continue to be one of the most liveable cities by being adopted to a model of compact city (Insch, 2018). Thus, 4 potential types of government intervention would be implemented, including funding measures, tax policy, subsidies and legal regulations, such as intervention on interest rates, especially for mortgage.

These methods would be also able to correspond to the specific issues mentioned in last chapter by covering the issues regarding limited resources and business development. One demand intervention, for instance, more job opportunities seems to be generated in Auckland, which will become an effective support for low-income families (Insch, 2018). Auckland has been successful both regionally and internationally in business development and is promisingly in attracting more business investment and tourism with the evidence of contributing 37% of New Zealand’s GDP in 2015 (Statistics New Zealand, 2015). This provides a firm foundation for the implementation of the intervention.

On the other hand, one supply intervention could be that Auckland government starts to release more land resources, as illustrated in the Auckland Plan released in 2012, in order to relieve the pressure of the increase of housing price as the increase of supply would result in lower price of the good in the market. This intervention has been proved to be effective and cost efficient for the special housing area in the housing market (Murphy, 2016). Besides those, overseas buyers are believed to be the major driving factor in the trend of increasing house prices, which is also believed that overseas buying will be limited by the government in order to balance the demand and supply in Auckland housing market (Findsen, 2005).

Economic justification

Government intervention should be undertaken based on the necessity of the current situation. Considering Auckland’s real house values is rising while there is a decreasing trend for the rest of the country, it is important to analysis the specific situation and therefore clarify the direct goal in terms of recovering and booming the housing market. This leads to the following step, to determine the types of market failure in this situation using the economic theory of market failure. It is known that there will be market failure when the inefficient allocation of resources occurs in the free market (Pettinger, 2018).

Demand has been proved to be a key factor for the issue, as mentioned in part 2 of this paper. In other words, large amount of immigrants and returning Kiwis have settled in Auckland in 2014, which strongly boosted the demand for houses and furtherly increased the housing price (Dang, 2015). Also, decreasing interest rates led to high mortgage credit/lower mortgage cost. The last is the demand of investor has been growing and the imbalance between housing market and other industries in New Zealand is therefore worse.

For the real estate market, its market failure includes homelessness, homelessness, economic inequality, geographical immobility and social issues, possibly leading to the deterioration of the existing resource unbalance and economic inequality of Auckland. In addition, low-income workers may not be able to generate a thorough overview of the development of housing market. Therefore, it requires the government interventions as powerful methods with high efficiency and the economic justification behind government interventions are specified.

Based on the historical situation of New Zealand, which means, for example, enclosure in the past, private housing markets has been always a strong effect on the economic inequality for the country. Local enterprises would tent to increase the price of their products due to the increased production cost. The homelessness and debts issues may furtherly affect the overall development of the city.

People who can afford the higher housing prices will also suffer less influence on other areas in their lives, however, low-income members would face several serious problems, including homelessness and debts pressure. Low-income members of the society have been suffering monopoly rents under this situation (Malva, 2016). To prevent this issue from being worse, government interventions should be taken to correspond to the housing market failure starting from 2013.

On the other hand, to recover the housing market, serious and urgent issues generated from housing market failure requires assistance for people with difficulties on payments, as well as stimulus mechanisms for new purchases. One important tool for the government would be the adjusts on tax policies. For instance, labour income is taxed at 33% in New Zealand, however there is no housing capital gains tax. This could be a factor affecting households’ expectation of return from owning (Shi et al, 2014). Based on this consideration, the capital gains tax would be one of useful tools regarding to the housing bubble.

Another successful example for tax policies is that the US responded to its housing bubble with mortgage interest which is fully tax deductible and similarly, among most of EU countries, various levels of tax relief on interest payments has been provided in order to face the house market failure, by which hopefully certain mortgage products may appear more attractive to the consumers (Lam, 2011). This shows the efficiency and convenience of government intervention in certain economic situations.

Furthermore, legal regulation could also be a unique and effective tool for government, such as transparency rules (Pettinger, 2018). One example would be to require financial institutions to provide all relevant information to a customer before signing a contract for mortgage loan. The information should cover the annual cost of the mortgage, such as the interest charges and cost of enquiries, and state the total costs charged to the borrower, for example, in the condition of early repayment. It can be seen that legal regulation would be helpful in guiding the development of the housing market into the expected direction and therefore is necessary after the market failure.

In addition, policy rates and retail mortgage rates are pointed out by Shi et al. (2014) from the research of over 17 countries to be important factors affecting the real housing prices. Although decreases in policy rates in these countries were not the main reason for housing price inflation around 2000, the decreases in interest rates could explain 20% of increases in the real housing price. Besides that, fixed mortgage rates may conduct a stronger influence on house prices. Therefore, it is suggested that effective policies should be decided in this direction.

Conclusion

In conclusion, the housing bubble issue of Auckland staring from 2013 indicates both economic and social problems. In terms of both demand and supply shifters, change in price can be influenced by the components of population growth and the population density distribution of the city, etc., due to the instabilities and limited resources in the market. In this situation, the market failure is shown mainly as homelessness, inequality, geographical immobility and social issues.

In this way, it would require attention from government to minimize the negative outcomes arising from the market failure. Corresponding to the specific types of market failures, potential government interventions may consist of funding measures, tax policy, subsidies and securitization mechanisms based on not just existing historical problems, but also the overall consideration of Auckland’s city forecast.