The outrageous price of housing in Auckland – and to a lesser extent in other New Zealand cities – is arguably the most serious issue facing the country as we enter 2016. At the moment, the median price of a house in Auckland is some nine times median household income in the city. The international survey conducted annually by Demographia rates that as being “severely unaffordable”, with “affordable housing” being where the median price is just three times median household income. By that criterion, housing in Auckland costs roughly three times what it should do.
The direct consequences of this situation are blindingly obvious, with hundreds of thousands of Aucklanders unable to buy their own homes and forced to pay rents which eat up 50% and more of their monthly income, with those who do manage to buy homes with the help of enormous mortgages sentenced to decades of scrimping to service those mortgages. The indirect consequences are almost equally obvious, with growing inequality in wealth (almost certainly much more serious in New Zealand than increases in inequality in income), insufficient money left after paying rent or servicing the mortgage to buy adequate food and clothing, and over-crowding with the serious health consequences of that.
And the long-term social consequences are equally serious. I would hate to keep body and soul together trying to live on New Zealand Super if I had no savings even with a debt-free home. But if I were still paying rent, or servicing a mortgage, it would be totally impossible.
The economic consequences of the situation are also serious. The banking system now has a large part of its total assets tied up in the housing market, leaving it somewhat vulnerable to any price correction, while because the demand for mortgage money greatly exceeds banks’ ability to attract local deposits, the banks are forced to borrow hundreds of millions of dollars overseas. All in all a disastrous situation.
At least at central government level, the solutions are now well understood – actually on both sides of the political aisle. The very first report which Bill English demanded of the Productivity Commission was one on housing affordability. The Commission concluded that there were four main causes of the problem, with three of the four a direct or indirect consequence of local government behaviour.
First, and overwhelmingly the main cause of the problem, local governments have ring-fenced their urban areas, thus constraining the supply of land for residential development and giving a strong incentive to those who do own land within that ring-fence to hold onto it and wait while the pressures of demand push up the price still further. The Commission found that land two kilometres inside the Auckland Metropolitan Urban Limit was priced at some eight times the price of land two kilometres outside that Limit. And of course, if a builder has to pay $400,000 for a tiny plot of land, he is not going to build a $100,000 home on it, and even if he did, $500,000 is still an outrageous price relative to incomes in Auckland and can in no way be described as “affordable”.
Secondly, the Commission found that the costs and delays in getting the various consents – resource consents and building consents – from local governments add greatly to the cost of housing in Auckland. There are some horror stories of major developers taking more than a decade to get approval to undertake large scale residential developments, and even getting routine approval to build a home in an area already zoned for residential development can take months. A few months ago, the Auckland Council boasted that they were now approving 15% of resource consents within 10 working days – which implies that 85% are taking longer than 10 working days, and this for plain vanilla consents in areas already zoned for residential development. This is surely a scandal.
Thirdly, the Commission noted that productivity in the building sector in New Zealand is rather poor, and has not been improving as one might expect in a modern economy. The great majority of building firms build just one or two houses a year. And that too is a direct consequence of local government policy of constraining the land supply: if builders can only buy tiny plots of land, it is hardly surprising that they build one or two homes at a time, with no scope for economies of scale.
And fourthly, the Commission noted that the price of some building materials is higher in New Zealand than overseas. The Government acted quite quickly on this one by reducing some tariffs on imported building materials.
The Government has tried to ease the situation in other ways also, partly by working on the demand side of the housing equation (by changing the tax rules applying to those who sell homes within a short time of buying them and other measures) and partly by working on the supply side with local government, to create Special Housing Areas. There is some evidence that these measures are, painfully slowly, beginning to take some of the heat out of the Auckland market.
What is perhaps even more encouraging is that there seems to be a growing consensus across the political divide about how to fix this problem, exemplified by a remarkable article written jointly by the Labour Party spokesman on housing, Phil Twyford, and the executive director of the right-leaning New Zealand Initiative, Oliver Hartwich, and published in the New Zealand Herald at the end of November. That article noted that, whereas in the 1960s and 1970s the number of homes consented each year ranged between eight and 13 per thousand population, since 2000 the average has been just over five per thousand. This is clearly an extraordinary situation.
In their note, Twyford and Hartwich focused on the need to relax the constraint on land supply by dealing to the Metropolitan Urban Limit and removing some of the constraints on “densification”. But they made an important additional point. They noted that, in granting consent to a developer to convert bare land into residential sections, local governments typically require those developers to cover the cost of drainage, roads and power in the new subdivision, as well as contributing to the cost of connecting the new infrastructure to existing urban infrastructure. That sounds fair enough, but of course the developer doesn’t himself pay that cost – he adds it to the cost of each section. And by pushing up the price of the new sections, the price of all the existing land in the city is also pushed up.
Certainly, those who buy sections in a new subdivision should be expected to pay for the cost of the necessary infrastructure: the cost should not simply be added to the rates burden of other residents. But supposing that instead of having to pay the cost of the infrastructure in the initial price of the section, the cost of the infrastructure was covered by borrowing secured by rates on the new subdivision, paid off over the life of the infrastructure, as happens in some of the major cities in Texas? There would be no front-loading of the cost of the infrastructure into the price of a section, and there would be no consequential upward pressure on the price of other land in the city.
A 2014 study by McKinsey, cited in a recent Productivity Commission report, suggested that “in the world’s least affordable cities (including Auckland), unlocking land supply could help to reduce the cost of housing by between 31% and 47%. Productivity improvements in construction, by taking advantages of scale or taking an industrial approach to construction, could help to reduce the cost of housing by a further 12% - 16%.”
And what effect might that have on the economy? The Productivity Commission cites another US study, done in 2015, which estimated that “lowering regulatory constraints on land supply in three high-productivity US cities – New York, San Francisco and San Jose – to that of the median level of restrictiveness in the US would increase GDP by 9.5%. A productivity bonus anywhere near this level would be of major significance to the New Zealand economy. Indeed, it is difficult to think of many other policies that would yield such an improvement in the nation’s economy”. Or, indeed, such an improvement in the social well-being of hundreds of thousands of our citizens.
So as we listen to the pre-election pitch of the various people standing for the Auckland Council, and for the mayoralty, make sure to ask them to state unambiguously where they stand on this land supply issue. I don’t pretend that I’ve heard the policy platform of more than a fraction of those standing for election in Auckland, but the only ones that I have heard make an explicit promise to free up land supply are Ngapuhi leader David Rankin and mayoral aspirant Stephen Berry.
Copyright © 2024 Don Brash.