Housing Affordability and Short-Term Letting in a Tourism-Dependent District
The Queenstown Lakes district has a resident population of about 48,000 but around 30,000 visitor beds. Median house prices have risen to roughly $1.6 million, and the ratio of price to local median income exceeds 12. Around 28% of dwellings are used as short-term visitor accommodation for more than half the year. The district plan's urban growth boundary limits new greenfield land, and the council's own infrastructure modelling shows wastewater and road capacity in Frankton constrained until at least 2031. Construction sector capacity is stretched: consented dwellings have fallen for three consecutive years despite high prices, and average build costs have risen 35% since 2019. The council is consulting on two instruments: (a) a differential rates surcharge of 2.5% of capital value on dwellings not used as a primary residence for at least 183 days, and (b) a partial upzoning allowing medium-density housing within 800 metres of the town centres.
1. Using a supply-and-demand framework, explain the channels through which short-term accommodation conversion affects long-run housing affordability in this district, and evaluate the welfare effects of the proposed differential rates surcharge.
Read the worked answer
Framework. Treat the dwelling stock as fixed in the short run and split it between long-term residential use (LR) and short-term visitor use (SR). A transfer of a dwelling from LR to SR shifts the supply curve for long-term housing left, raising rent and price. The size of the price effect depends on the elasticity of long-term demand and on how many dwellings are marginal. With 28% of stock in SR use and a tight boundary, the leftward shift is material.
Why conversion happens. The relative return on SR versus LR use drives the allocation. If nightly revenue net of platform fees and cleaning exceeds annual rent net of tenancy costs and risk, owners convert. This is a portfolio choice, not a moral failing.
Welfare effects of the surcharge. The 2.5% capital-value surcharge raises the holding cost of SR use. Several effects follow:
- Conversion effect: some owners switch to LR, shifting supply right and lowering rents - a transfer from owners to renters, with a possible efficiency gain if the SR externality (neighbourhood amenity, pressure on infrastructure) is real.
- Capitalisation: a recurring tax on a fixed asset is capitalised into lower sale prices; the burden falls on current owners, not future buyers.
- Deadweight loss: if the tax is not matched to a genuine externality, it distorts the LR/SR margin, reducing the return to supplying visitor accommodation and possibly reducing investment in new dwellings.
- Incidence: if rental supply is inelastic, the tax may be passed to renters; if elastic, owners bear it.
Evaluation. The surcharge is best justified as a corrective tax for congestion and infrastructure costs, not as an affordability tool per se. Its effectiveness depends on the elasticity of conversion and on whether the revenue funds infrastructure that relaxes the binding constraint. Without complementary supply measures, it may improve rental availability modestly while reducing investment.
2. Evaluate whether the partial upzoning is likely to increase the quantity of housing consumed by residents within five years. Refer to elasticity, infrastructure constraints, and construction capacity.
Read the worked answer
Mechanism. Upzoning raises the development capacity of land within 800 m of town centres. In the long run, if developers respond, the supply of dwellings increases, shifting the supply curve right and lowering price relative to baseline. The key question is the five-year horizon.
Constraints.
- Infrastructure: wastewater and road capacity in Frankton are constrained until 2031. Without capacity, consents may be granted but occupancy delayed, so the effective supply response is deferred. Infrastructure is a complementary input; its fixity makes the short-run supply curve steep.
- Construction capacity: consented dwellings have fallen despite high prices, and build costs are up 35%. This suggests the binding constraint is not land but labour, materials and finance. Upzoning releases land but not builders. The elasticity of housing supply is low in the short run.
- Land values: upzoning capitalises into land prices. Existing landowners capture a windfall; developers' margins may not improve if land prices rise to absorb the uplift.
- Demand: if demand is also rising (tourism, migration), the net price effect is ambiguous.
Verdict. Five years is too short for upzoning alone to materially increase dwellings consumed by residents. A plausible outcome is more consents and some townhouse construction, but limited price relief. The policy is necessary but not sufficient; pairing it with infrastructure sequencing and construction-sector capacity measures (training, immigration settings, prefabrication) would raise the supply elasticity.
3. Assess the distributional consequences of the two instruments combined, and recommend which instrument should be prioritised if the council can fund only one.
Read the worked answer
Distributional map.
- Surcharge: the burden falls on owners of SR dwellings. If these are absentee or overseas owners, the incidence is relatively progressive from a resident perspective. If local families own a second home, it hits middle-income asset holders. Pass-through to renters depends on rental market tightness; with low vacancy, some pass-through is likely.
- Upzoning: windfall to landowners in the 800 m zone; benefits to future residents and developers; existing renters may face displacement if redevelopment occurs and low-cost stock is lost. Short-run distribution is regressive toward existing owners, progressive in the long run if supply expands.
- Revenue use: if surcharge revenue funds infrastructure or social housing, the net distribution can be progressive.
Prioritisation. If only one instrument can be funded, choose the one that relaxes the binding constraint. The evidence points to infrastructure and construction capacity as binding, not land supply per se. Upzoning is low fiscal cost and can be sequenced with infrastructure; the surcharge raises revenue but may not increase supply much if conversion elasticity is low. A combined approach - upzoning now, infrastructure funded from the surcharge - is better than either alone. If forced to choose, upzoning plus earmarked infrastructure investment dominates the surcharge alone, because it addresses the long-run supply constraint and avoids the risk of reduced investment.