House prices in Auckland

elocal Magazine, ed. 170. 30 April 2015

Almost every time I pick up the Herald it seems to carry another story of rising house prices in Auckland.  It’s either a story of a happy home owner reflecting on how much they have “made” by buying a house a few years ago, or a story of a desperate young couple being beaten once again by a more affluent buyer at an auction.  Sometimes it’s a story of desperate families, two sometimes three families sharing a small house, usually in South Auckland, with the kids suffering from inadequate food, poor clothing, and often-poor health, a direct result of over-crowding and rents consuming half of an average wage.

“The government should be building more social housing”, some cry.  “The government should reduce the tax incentives for property investment”, others cry.  “Introduce a capital gains tax”, demand those on the left of the political spectrum.  “Stop all the foreigners [usually code for ‘Asians’] buying our homes”, demand others.

The Reserve Bank has introduced policies to restrict the amount which banks can lend on home mortgages to those who can’t muster up a deposit of at least 20% of the value of the home, and is contemplating measures to reduce the flow of bank credit to property investors.  These measures are designed to reduce some of the demand pressures which are driving the increase in house prices, but are being blamed for preventing first-home buyers from “getting onto the property ladder” (the implication being that once the first-home buyer gets onto the first rung of that ladder the increase in house prices will steadily enable them to buy bigger and better in due course).

Meantime, the Government eases access to KiwiSaver funds to help people buy their first home and negotiates Special Housing Accords with the Auckland Council (and with councils in some other parts of the country) to try to speed up the process of getting consent to build new homes.

Those on the left often see rising house prices as a direct result of the failure of “the free market”.  Those on the right, often property owners themselves, can’t see what all the fuss is about.  They note that they weren’t able to buy the home of their dreams when they first got married, so why should today’s newly-weds complain?

Both those on the left and those on the right are wrong. 

What too many of those on the right don’t recognise is that house prices have gone up enormously over the last two decades, not just in absolute dollar terms but also relative to incomes.  In the early nineties, the median house price in Auckland was not much more than three times the median household income.  Today, the median house price is some eight times the median household income.  So house prices have risen enormously relative to incomes.  The challenge people face in buying a home today – or in renting one – is vastly greater than the challenge which the baby boomer generation faced.

And that has serious social implications.  A great deal of the financial pressures facing many families throughout Auckland is a direct result of these grossly excessive house prices.  These pressures may be in the form of trying to service an obscenely large mortgage or they may be in the form of paying very high rent – not very high relative to the market price of the accommodation but very high relative to the income of the tenants.

People who are today over the age of 65 and are having to live on New Zealand Super don’t have much margin to come and go on, but they can usually just manage to cope because, in the majority of cases, they live in a debt-free home which they own.

The danger is that a great many of the next generation will reach 65 without owning a home of their own, or will own a home with a large mortgage on it still outstanding.  They will be in serious financial difficulty unless, somehow and against all the odds, they have been able to put aside some extra saving.

But if the smug home-owners on the right are wrong in grossly under-estimating the challenge facing the current generation of would-be home-owners, those on the left are equally wrong.  The housing crisis is not a “failure of the free market” but a direct consequence of local government policy.

When the Key Government agreed to establish the Productivity Commission as a direct result of its Confidence and Supply Agreement with the ACT Party after the 2008 election, the very first issue which they asked the Commission to look into was the high price of housing in New Zealand.

The Commission concluded that there were four reasons why houses are so expensive in New Zealand.  Building materials are a bit more expensive in New Zealand than in, say, Australia.   Getting a building consent from local governments takes too long and is too expensive.  The building industry is, for the most part, a “cottage industry” (forgive the pun) in New Zealand, with most builders building only a very small number of houses in a year (and for that reason often building them inefficiently).  And the price of the land on which houses are built is ridiculously over-priced, with this being the dominant factor in the price of “houses” in our major cities.  In other words, it is not “houses” which are too expensive in Auckland but the land on which they sit.

But how can the price of land be high in New Zealand, when we are one of the least densely populated countries on the planet – fewer than 5 million people in a country larger than the United Kingdom?  We are swimming in land, with less than 1% of our total area urbanised (compared with 9% in the UK and 15% in the Netherlands).

The answer lies in the zoning rules of the Auckland Council, rules which restrict residential development to an area determined by the so-called Rural Urban Boundary (RUB).  The Productivity Commission discovered that land two kilometres inside the RUB was some 10 times the price of land two kilometres outside that boundary. 

That boundary is overwhelmingly why accommodation costs in Auckland are ludicrously high, and why so many families on below-average, and even average, incomes are finding things desperately tough.  That boundary is also why some people have become millionaires from doing nothing more than sitting on land inside the boundary and waiting.

So don’t blame foreign buyers of property – there would be no reason to hoard Auckland property if supply were not constrained by the Council.  Don’t blame an absence of a capital gains tax – housing in Sydney is equally unaffordable, despite the Australian capital gains tax, and for exactly the same reason it is ridiculously expensive in Auckland – local government planning rules.

But surely we don’t want to pave over good horticultural land?  True, but there is none of that for miles north of the Bridge, and an awful lot of rather average land south of Karaka.

But what about energy efficiency and traffic congestion?  Forcing people into high rise apartment buildings involves a lot more energy than allowing people to live in a detached suburban bungalow – both in the construction of the apartment building and in living in it (think 24-hour lighting, elevators, clothes dryers, and air-conditioning).   And the evidence is overwhelming that traffic congestion is worse in high density cities than in “sprawling” cities.

In short, there is absolutely no merit in forcing people to live ever more closely together on ever more expensive pieces of land, and the social costs of forcing them to do so are enormous.

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Copyright © 2022 Don Brash.