Housing affordability: Learning from experience

There have been a number of significant developments in Auckland’s housing market in recent months, so it is worthwhile assessing the progress made to address the housing crisis. This report deliberately focuses on the dispassionate politics and economics of housing in Auckland. For the wider discussion of the societal implications of decent housing becoming ever more difficult to attain, there are many articles of that nature here.

In August, after six years of arguing how Rodney Hide’s Supercity was going to merge the various urban plans of the amalgamating councils, a Unitary Plan was finally agreed on. Due to the significance of finally agreeing on something, this milestone received a lot of positive attention, although for most people outside of Auckland the twists and turns of the debate was a complete turnoff. The second development was Housing Minister Nick Smith announcing his National Policy Statement on Urban Development Capacity. This received very little attention, perhaps because it is difficult to understand and bureaucratic in nature.

Both the UP and NPS-UDC assume that if Auckland increases its build rate to a long term average of 13,000 p.a. and in the short term, for the next 7 years, to increase it to 18,000 p.a, this will fix the housing crisis. How this build rate will be achieved given Auckland is currently building under 10,000 houses a year is less clear.

In my opinion it is too simplistic to have just the quantity metric, as a target or goal. These sort of market affordability problems are usually conceptually considered using supply and demand, which have two metrics -quantity and price. Implicitly there is also a quality aspect too. Surely our building industry and the relevant governing institutions should be targeting these multiple metrics? We should at least have a target of reducing the cost of new builds, as well as one to increase quantity supplied.

From the Oregon office of Economic Analysis.

An internationally accepted housing affordability measure is median house prices divided by median household income. Demographia surveys show many large and successful cities can get this figure down to a ratio of 3 or 4. Currently Auckland is heading towards a ratio exceeding 10. As the accompanying chart shows, cities have multiple trade-offs, but currently the New Zealand public is most concerned about affordability -the housing crisis. Although quality of life in the form of good amenities, such as good public transport, is a close second and for some groups may be the highest priority.

With regard to the housing crisis, the contention, that a moderate increase in the build rate is enough to halt house price rises and return the market to affordability, is not what Auckland has experienced in the past. In the early 2000’s under the previous Labour government the build rate increased to over 12,000 and this was not enough to stop the then house price boom. If we rely on just supply mechanisms, I think it would take the full 18,000+ build rate and a drop in the price of new builds, to stop house price inflation. Back in the 2000’s, it took floating mortgage interest rates ratcheting up to over 10% and a massive external economic shock, the 2008 global financial crisis to stop the house price boom.

Past evidence from Auckland shows that the previous housing boom required dramatic reductions in demand before there was a market correction. This resulted in a minor dent in house prices and a more significant collapse in the building rate.

Given the current absence of these sort of demand reducing factors, in fact demand has ramped up not down, in the form of an immigration boom, a really large increase in supply would be required to put a dent in the housing market. The current ‘mini-boom’ in Auckland house building, from a low immediately after the GFC of 3000+ housing units a year, to 9000+ now, is not enough to have an impact on the housing crisis.

Reining in housing affordability is difficult when only a small percentage of newly built homes in Auckland are anywhere near affordable. Data from Corelogic shows only 7% of new housing over the past 6 months was valued at less than $500,000.

The bottom end of the new build market is becoming ever more difficult to buy into. For example, the cost of new apartments is rising rapidly. The average apartment consent value, is currently $400,000, whereas in 2015 it was $240,000 and in 2013 it was $175,000. Despite this the Prime Minister has repeatedly advised young New Zealanders to buy apartments, as recently as in September, John Key said apartments, “is the reality of a first home for a young couple.”

Rapidly rising costs for new builds, is almost certainly contributing to the housing boom, by raising expectations on the value of existing homes.

Apartments by New Market station, Auckland

At current levels of house construction, which is only half the level hoped for from the Unitary Plan, the building industry is already complaining of hitting supply constraints. New Zealand’s Reserve Bank believes we need international construction firms to come into marketplace, as local players lack the size and resources to provide the needed supply, especially for intensification.

Also an issue is that skilled construction workers do not want to migrate to Auckland due to the cost of living. The construction building industry is characterised by being fragmented into many small ‘tradie’ companies which lack the size and resources to take on big projects. This is unfortunate as apartment building makes up 40% of potential supply from the new Unitary Plan. Apartments are planned to be the main form of intensification for Auckland. Terrace housing which would be easier to manage by smaller players make up less than 5% of the allowable supply.

In contrast to the construction industry, the building material supply industry is characterised by its concentrated business structure. Industry players with experience of overseas markets have called New Zealand construction costs “astronomical”. The world’s largest plaster board manufacturer -Knauf could not break into the New Zealand market due to anti-competitive behaviour. Yet nothing has been done to make the building supply market more competitive, despite opposition MP Phil Twyford calling for greater building competition two years ago.

There has been well publicised discussions on how to address land banking, which is the main factor driving up the cost of building new homes. Also discussed has been alternative solutions to encourage a greater range of housing in the built environment (terraces, three storey walk up apartments, duplexes etc) to meet the demand for more affordable housing in well-located parts of the city.

I think transport economist David Lupton and myself made a pretty good effort with our proposals to address these two issues, in an article titled -Brendon Harre and David Lupton set out the case for more, and more variety of intensive housing options in New Zealand’s urban areas which was published back in August.

The reciprocal intensification property right proposal to provide a greater range of housing options has received some positive feedback. Transportblog was interested enough in this concept that they asked for a more concise version. The economist Eric Crampton, wrote a short entry on his blog-site saying that it formalises neighbours’ Coasean bargains.

Mike Greer who owns one of New Zealand’s biggest house building companies, which has prefabrication factories in Christchurch, at the September Master Builders’ Constructive Industry Forum reinforced the points about the problem of housing supply, being about inflated land prices, saying, “the cat’s out of the bag with the price of land” and that Auckland’s challenge is to double its build rate from current levels.

Mike Greer called on the government to assist with a big build programme and to legislate to allow MUDs (Municipal Utility Districts), which are privately-initiated housing communities used in Texas and other US states as ways to fund infrastructure in new districts by issuing municipal bonds, that are repaid by ratepayers from within the new district (note David Lupton also discussed MUDs in our joint article). Mike Greer believes, “it brings houses to the market a lot quicker and there’s less cost associated with putting civils in the ground and leaving them there until people turn up and build.”

For those of you who want to read more about MUDs, here is a good link describing the way they work in the US from a MUD bond insurers perspective. MUDs are a specific type of targeted rate funded development system, where the new development pays the full cost of the needed infrastructure. Targeted rates to recoup the full infrastructure cost for new housing areas is Labour party policy.

US towns and cities on average have lower density and are more sprawling than New Zealand cities, which typically means they are more dependent on stand alone housing and private motor vehicles. But there are example of different types of US privately initiated housing communities, which might be more compatible to what kiwis value in the urban environment. Rio Tinto helped build Daybreak in Utah, for example. It is designed around good transport links through Salt Lake Valley -rapid transit (Red line light rail) and easy access to a local motorway. Daybreak itself is walking and biking friendly, all its housing is only 5 minutes by these active modes to at least one important amenity -shops, lake, park…

Daybreak, Utah

Our government in October has taken up one of the suggested proposals from these public discussions –being the government initiated build programme. This being a proposal for the government to build 30,000 medium density houses in Auckland on Crown owned land (Housing New Zealand properties) that has been recently rezoned for intensification by the Unitary Plan. This is a proposal similar to the Labour Party’s proposed KiwiBuild solution of building 100,000 homes over 10 years, but much smaller in magnitude and with no price target for some or all of the houses to be in an affordable range.

The government so far has not removed the other logjams in housing supply or taken up other proposed solutions.

These logjams and the lack of political will to remove them, illustrates the difficulty in supplying new homes in greater quantities for lower prices. Given the apparent difficulty in increasing supply, then New Zealand will have to turn to demand reducing solutions, such as cutting back on immigration, taxing the capital gains of property investors, removing non-resident buyers or limiting credit with Reserve Bank macro-prudential tools -such as mortgage lending being limited by strict debt to income ratios. If these are not forcefully applied or are inadequate as I suspect will be the case, house prices will continue to inflate. Inevitably, at some point the business cycle will turn, there will be some sort of economic crisis and like the post GFC period, this will cause a housing market correction.

Trying to optimise amenity and affordability values for urban areas

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