Do first home buyers cause housing shortages?

From a story by Eva Corlett at Radio NZ

Property Investors Federation’s executive officer Sharon Cullwick argued while property investors may not be helping the housing supply problem, they aren’t hindering it.

But she said first home buyers are, when it comes to purchasing rentals off the market.

“If a first home buyer purchases a property that was a rental property, then you’ll need another house to house the extra people living in that rental house.”

“So every time a first home buyer buys a house even though it’s great they are getting into the market – it actually makes the housing crisis worse,” she said.

This is obviously a convenient thing for the Property Investors Federation to believe, so it’s worth looking at the evidence.  It’s true that property investors, as investors, aren’t reducing the housing supply (just the housing for sale and perhaps its affordability).  But are first home buyers?

Clearly^{[citation needed]}  rental houses don’t just disappear, like those mysterious shops selling magical artefacts, when the renters move out and buy a house.  For every rental house that we lose, an owner-occupied house is created; to first order, nothing changes.

The claim being made is more subtle. We know that owner-occupied homes have fewer people living in them, on average, than rented homes.   If that difference is directly caused by being owner-occupied, then having more home owners would cause a reduction in average household size. While it wouldn’t cause a decrease in housing supply, it would increase the gap between demand and supply.

We can assume for the sake of argument that this isn’t primarily due to different sorts of homes being rented vs owner-occupied and say that, on average, a given home will have more people (or, at least, more adults) living in it if it is being rented than if it is being occupied by the owner.  Even stipulating all that doesn’t actually settle the question.

What we’re talking about here is the process of household formation. In the traditional Hallmark/Disney version, people start off living with their parents, they proceed through a stage of living with friends (or at least with flatmates), and then end up living in couples who eventually have 2.3 kids.   The number of adults per household tends to decrease as you go from the flatting stage to the couple stage, and also there i traditionally a progression from renting to owning your home. Because these transitions both happen over broadly the same age range, there’s an automatic tendency for them to be correlated. At 20, people are more likely  to be both renting and living in large households than at 40.

Here, though, we have a stronger claim, that buying a house is, in Auckland, the immediate cause of smaller households, or the even stronger claim that this is necessarily true.  The strongest version is clearly wrong: it is quite possible for people to form small, stable adult households while living in rental accomodation or, conversely, to buy a house but still have flatmates to help pay the bills. Data on household sizes are not what you’d need to settle the intermediate claim. It could be true, but it could also be false.

But suppose, again for the sake of argument, that the Property Investors Federation was correct: that there is a genuine causal connection and that buying (rather than renting) real estate is an unavoidable step in household formation for many people. To the extent that buying a house is inextricably linked to household formation, blaming first-home buyers is as inappropriate as blaming babies or immigrants or people moving from the rest of NZ or people with home offices. The housing crisis is the problem: it’s impeding adult household formation, and preventing families with kids getting enough space, making it harder to work from home, and making it harder for people to move to Auckland from the rest of NZ or the rest of the world.

Auckland has a housing crisis because there aren’t enough homes. This has not largely been due to changes in ownership distribution: we used to have more young homeowners, not fewer. Rules and procedures designed to impede building new homes have been a bigger contributor.