In the seemingly-endless housing supply debate, there is often a divide between those favouring greater intensification, and those favouring a larger physical footprint for growing cities. My own policy view is squarely in the “it should be a matter of individual choice, provided the infrastructure etc costs of development are appropriately internalized, and the rights of existing property owners are protected” camp (and yes, I recognize that the definition of almost every word in that statement could be extensively debated). My practical prediction is that New Zealand is a society where most people – people in their child-raising years – will prefer to have a decent backyard (those living in Hastings or Timaru don’t flock to high rise apartment buildings or town houses with tiny sections), so long as regulatory restrictions don’t make that infeasible. It was quite possible 50 years ago, when New Zealand incomes were much lower. There is simply no reason, in a country with this much land, why it shouldn’t be now.
Apologists for the current disgraceful situation constantly cite Sydney, or Vancouver, or San Francisco or London, as if absurd regulatory restrictions in other places make it okay for us to mess up our housing/land supply market this badly. Others look to the experience across the huge range of US cities.
Someone drew my attention to the chart below, drawn from the Wall Street Journal’s economics blog, and on a day when the house is over-run with builders (and holidaying children), it seemed worth reproducing.
Cities with rapidly growing populations (those big blue circles in the bottom right) have seen little or no increase in real house prices over the period 1980 to 2010. They made it possible to build, relatively easily, and in turn made themselves attractive places for people to live.
I don’t know how large the increase in Auckland’s “developed residential area” has been over 1980 to 2010, or even how to go about trying to measure it, but I’d be astonished if it was anything close to even 100 per cent.
It is quite possible to accommodate rapid population growth without anything like the scandalous increases in real house prices we’ve seen in Auckland (or even, to a much lesser extent in many other urban areas in New Zealand). Political leaders, of both main parties, who have failed to make it possible, posing a near-impossible burden on younger people in Auckland who don’t come from advantaged backgrounds, should really be held to account. High house prices aren’t something to celebrate (NB Prime Minister) – and not even most existing home owners are better off, as they aren’t going anywhere – but should really be a source of shame to those who rigged the market (or let the market stay rigged) and made it happen.
croaking cassandra 
What is noticeable has been the 7 year silence of the “cognoscenti” as this has unfolded
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I’m an equal-opportunity blamer: the RMA was introduced by Labour and passed by National; the worst of the nationwide housing boom happened under Labour and then the Akld specific boom has been under National. Oh, and the population boom (the immigration bit) is a shared National and Labour responsibility
Both sides sort of recognize some of the issues – I actually think Phil Twyford, and Nick Smith and Bill English more or less have hearts in the right place to a greater or lesser extent. But nothing material happens, a failure of leadership on both sides (altho of course, the Nats are currently in office), and a curious failure of the public to “rebel” and demand change. Of course, that failure isn’t unique to NZ (see Australia, UK, California, etc)
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Thought experiment: the government does something to cause prices to drop by 70%. How many people would be pissed off? How many very happy? That’s essentially the metric the government uses. Yes, I know house value is purely nominal but people still see it as an asset and would revenge themselves on anyone who reduced its value.
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yes, once you have let things get into a mess it is very hard to get out (politically). First suggestion tho: liberalise to the point where at least things stop getting worse, and perhaps at least where nominal prices can be flat or slightly falling over time.
That sort of adjustment still can’t be managed precisely, of course,
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The UK is an object lesson: they have stayed the course for decades, and several economic cycles. The real cost of urban land just rises and rises and rises – crowding gets more and more intense, new housing units get so small they are smaller than Japan’s, yet nothing is “affordable”.
Reform that allowed a “reset” of urban LAND values to what they should be, is all the more of a prospective bloodbath the longer you persist with this socio-economic Hara-Kiri. Our urban land values are probably around 30 times as high as they should be – in London the factor is now 900 according to the Cheshire et al book last year.
I believe we really only have the chance of reform – painful as it is – about now. There will be a big bust eventually that will be more painful anyway. The next best thing would be reform at that point – an undertaking by the government that the “crash values” are the norm, not the bubble values that preceded them.
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I generally agree — let people build whatever, wherever. It’ll sort itself out. I do think that you have to make sure to price in the externalities created by sprawl, altho I’m not sure how to do that. While I agree that a house with a section is what most people dream of, I think that if we provide too much of that without pricing in the congestion, road maintenance etc that comes with it we can end up with a very substandard society for a lot of people. The American cities that have loads of land to grow are also pretty much parking lots, mostly cos there’s no pricing mechanism built in to roads.
So I don’t have a solution as such, and I do generally agree with you. Land usage laws are far too restrictive IMO, and they tend to act as a massive racket for existing landowners.
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Actually, you don’t need to buy the myth that US cities that have allowed sprawl, are “parking lots” – none of them are anywhere near as bad as Auckland. We now have authoritative GPS-based data from TomTom. The peak congestion delay of comparable cities like Indianapolis, Nashville and Salt Lake City is around ONE THIRD of Auckland. In fact if you want a correlation, it looks something like: 1/3 the density; 1/3 the house prices; 1/3 the congestion.
Los Angeles, the USA’s poster-child unaffordable, congested city, has similar density, house prices, and congestion to Auckland – of course it has 14 times as many people and covers 14 times as much land area. But Los Angeles, Auckland and Toronto (pop 6 million) are the Anglo New World’s 3 densest cities, on a par with many cities in Western Europe, and 3 times denser than Atlanta, Dallas, Boston, and the typical 1-million-pop US city. Los Angeles also has considerably less highway lane-miles per capita than the median-multiple-3 (affordable), low density, US cities.
It is also utter BS to argue as we constantly see the politicians and planners arguing, that spreading out more means longer and longer commutes. Employment has dispersed for decades slightly faster than residential living has dispersed, which acts as a factor towards reduced commute distances. It is even better than that, because centralisation is a factor that increases congestion; dispersion dilutes congestion because trips are in random patterns, with less convergence creating a crush on radial inbound main roads.
If employment is not dispersing, the reason will be deliberate “city centre first” planning policies. This is a problem in Auckland right now – the peripheries are being starved of land zoned “commercial” (the seeming generous amounts are actually nowhere near enough).
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That TomTom report is pretty meaningless: http://transportblog.co.nz/2016/03/22/tomtom-congestion-report-repost/
Spreading out doesn’t mean longer commutes if it’s allowed to happen completely organically, but if you accompany it with public investment in highways etc, then it absolutely does mean longer commutes as people are able to live further away and travel further for shopping, leisure etc etc without paying for it. The cities you cite all have very long commute times and loads of traffic.
I’d be fine with spreading cities out if the people who bought houses yonks away from the city centre had to pay to use the highway, but when you socialise the negative externalities like the US highway system does, you end up with a very inefficient city where people spend their lives in traffic.
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I agree with pricing of road travel, especially congestion pricing and premium-service lanes, on principle. But I would like to know what data shows low density, dispersed, affordable, highway-rich US cities to have long average commute times. In all the data I have seen, there is very little variance among most cities contained in the “Bell Curve” of such data – 22 minutes to 26 minutes average commute time covers most cities, including the USA’s low density. dispersed, affordable, highway-rich ones.
This is actually a remarkable achievement for cities growing at the rate that many of these US cities are growing – around double Auckland’s rate. Also, 2-parent household formation and child-bearing is higher in these cities because of the affordability of housing, meaning that more households need to compromise on location re two jobs, and schools, compared to many of the high density, unaffordable cities with more “singles” and childless households. The prima facie evidence is that some very efficient locational sorting and dispersion of congestion occurs in such cities.
All the outlier-long average commute cities in the data are high density, unaffordable cities like London and Hong Kong. It is obviously a myth that cramming people in in tighter proximity results in actual co-location efficiencies on the ground. This is a classic, classic lesson in Hayekian “unintended consequences”.
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I am not sure that everyone will want a big back yard. I absolutely hated growing up in suburbia, as did most of my friends, and all left for big cities. Everyone I know who lived in Houston hated it (my old employer had an office there). I think if you let the market decide you would see a lot of medium density development in Auckland – terraced houses and small block single family detached residence.
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I’m sure not everyone will – apart from anything, people have different interests/needs at different stages of life – so mine is really an on-balance prediction.
Not sure tho that the preferences of teenagers count much – all too often discontented about whatever their parents have chosen for them!
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You will be interested to know that in Houston currently, because of the relative freedom from prescriptive zoning, the “housing supply” that is an order of magnitude greater than that of every city with an affordability problem, is actually made up of 1/3 higher density infill development, and 2/3 suburban family homes. Because the overall supply is so high, Houston is actually building proportionally more higher density infill than over-planned dystopias like Portland and New York that are relying on this as their main means of “supply”.
And in Houston ALL the options are affordable – the McMansions are cheap and the apartments VERY cheap. When you have a median multiple problem and a housing price bubble problem, NOTHING is cheap. Even the dog box apartments are more expensive than traditional family homes were once.
Our own economics guru Arthur Grimes and his colleague Andrew Aitken pointed out in an very clever urban economics modelling paper in 2010 that supply collapses under these conditions “because rising land values impound all the profit potential in developments, reducing rather than increasing the incentives to actual development of actual buildings”. But when Arthur tries to put his arguments forward in the relevant forums, he is disgracefully insulted and belittled by the Auckland local political leadership and planning bureaucrats. These people are little more than crypto jackbooted totalitarians imposing what they want on society as if it is just so many lab rats.
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THanks for all these comments Phil – very useful. And in a sense the revealed preference counts: people keeping moving to (affordable) Houston, not away from it.
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I always have trouble with Houston as a comparative with Auckland. Houston–The Woodlands–Sugar Land is a nine-county metropolitan area and covers 10,000skm. Travelling distance from one end of The Woodlands to the other end of Texas City is 118skm
Compare that with Auckland that is made up of Auckland, Manukau, Waitakere, North Shore, Papakura, Rodney and Franklin covering 5,000skm. Travelling distance from Leigh in Rodney to Manukau is 129km.
I am never quite sure how these 2 cities are even comparable?
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Correction: 118km between The Woodlands and Texas City.
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What that data suggests to me, GetGreatStuff, is that Auckland with 1 million people, has far too much available land to plead “shortage” (other than artificially induced) as a reason for the bubble. Houston of course has 5.5 million people, after having had 4 million in 2000. And we think Auckland’s problem is “rapid growth”! Rapid growth can be opportunity, for economies of scale as well as agglomeration effects. Planning the way it is done in Auckland, foregoes much of both. There are not economies of scale in having to increase the capacity of infrastructure in already built-out locations on a piecemeal basis, with disruption costs and land acquisition costs also counting against it. There are massive economies of scale in doing whole new “edge cities” like “The Woodlands” on greenfields and planning them well.
Agglomeration economies are foregone, not maximised, by “compact city” planning. Most new clusters evolve in locations where there is space and affordability for potential new participants. The compact city ideology favours incumbents and prices out potential new participants, if there is even any spare space where they might have got started. It is a common saying among urban economists in the UK that “Silicon Valley could never have happened here”.
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There are now 150 Special Housing Areas(SHA) that Nick Smith has pushed ahead with Auckland Council. The SHA is actually the Unitary Plan brought forward. The problem with Nick Smith is that he would not be aware that Council Planners also sneaked in and brought forward pre-1944 demolition controls at the same time under Special Housing. It means that the old run down tin shed of heritage value taking up 20% building coverage of a property, leaving only 30% available building site on a property. This severely restricts the amount of building allowed.
The other side of the equation is infrastructure. We have built our largest city on the smallest stretch of dirt in NZ. We are a already a very elongated city due to geography. Len Brown needs $10 billion because in Auckland you do not just lay down train tracks, you also have to build many many bridges. Auckland is undulating, with hills and valleys and streams and rivers. Chuck in a 2nd harbour crossing bridge and thats another $5 billion, water, sewerage, carparks and you are faced with $20 billion in missing infrastructure. The government is borrowing to the tune of $15 to $20 billion for a Christchurch rebuild. You can safely bet they will make all the right noises but they would not be keen to try and convince the credit agencies that they would borrow another $20 billion for Auckland infrastructure.
There is a huge amount of building sites available within the Waitakere ranges. However removing hundreds of Kauri trees would have the local community up and armed with pitch forks.
With 57 sacred mounts and visual height limits to 4 level buildings, it is just not cost effective to build 4 level buildings.
In other words this supply equation is not going to be easily fixed. It is going to be a slow and painful grind to get supply up.
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As a very lay observer, SHAs seem something of a joke, There is one not 200 metres from where I’m writing, supposedly to accommodate 80 dwellings, and is there any sign of progress? No.
So, yes, I agree that dealing supply is going to be hard. Which is why I think the govt should do something about limiting the extent to which immigration policy keeps on boosting demand.
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The 2013 Unitary plan notified is due to be approved in September 2016 will allow for a secondary dwelling on all the mixed housing zones. Surprisingly this is was not allowed under SHA. The secondary dwelling replaces the minor dwelling concept. The proviso is that it must be attached to the main dwelling and that dwelling must exist when the Unitary Plan is activated in September 2016. Attached meaning it can be upstairs or downstairs or beside with a minimum size of 40sqm which means that you can have a 200sqm secondary dwelling. There is no requirement for carparks and no requirement for additional living space.
This does mean that rents can start to level off but it does not mean cheaper houses in the future because each Auckland property will allow a minimum of 2 rentals. Auckland Council will virtually double the residential housing stock overnight in September 2016 once the Unitary Plan activates. Pity they did not tell Nick Smith this tiny detail because the SHA zones also end on that same date so that the government could not chalk it up as a successful National housing initiative.
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When the Nimby group, Auckland 2040 says you can have high density without highrise, they know what they are talking about. They are clearly referencing the secondary dwelling concept and it gives all these old folks a nice rental income, by adding a separate rental to their existing home, if they want to stay in Auckland or 2 rental incomes for their retirement while they bask out in Tauranga in a lower cost property.
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How much of Auckland’s “5,000skm” is greenfields low value non urban land able to be converted by developers, to urban use?
Demographia’s Google Earth based data says Auckland’s built area is 544 skms. That leaves nearly 4500 available; if it were not for the growth boundary and the insistence on intensification, that would be plenty to keep Auckland affordable.
Houston’s built area covers 4644 skms and there are no limits on how much greenfields non-urban land may be converted to urban use. The available supply is not “X thousand skms” – it is “superabundant” – beyond the need to even quantify. Developers can build whole new mini-cities on land that cost them $10,000 per hectare if they want to. In Auckland, anywhere you can get permission to build anything, the land owner will gouge you $1,000,000 plus per hectare.
It is colossal economic ignorance to overlook the principles of monopoly, racketeering, quota schemes, etc in this context.
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The trouble is, when the overall land supply is rationed, you do not have “rural land values” disciplining the market by way of developments taking place on rural land without any land banker gouging. This is the magic ingredient in affordability as it was traditionally secured in Anglo New World countries and even Western Europe for several decades. Then the value of all sites is derived from a kind of “extractive”, gouging process, so that increasing allowed density boosts land prices, it does NOT reduce housing-unit prices. Houses get smaller even as the prices get ever higher, and the land values rise exponentially. The SHA’s merely had this effect, and while the land values are rising at bubble rates, every investor will choose to “hold” under their time-honoured formulas. NOT “sell” or “develop”. It is more “logical” to buy more sites than it is to build actual floor space – the returns on this investment of honest capital are pitiful.
The Poms have been trying for decades, ever more “extravagant” rezoning to allow for “supply” by means of intensification, and each time it is a dismal failure and they try more aggressive rezoning next time. But what happens in the actual market on the ground, is that rising land values correlate with reduced actual development. Unfortunately this seems to be a “too complex” matter for anyone to grasp apart from the cleverest tycoons in “big property” and its bedfellow, “big finance”. Good investigative journalism looking for connections between political funding and “smart growth” advocacy are long overdue.
The problem with Auckland 2040’s suggestion that more low-rise infill is the answer, is that Auckland already has an absolute plague of this kind of infill and already lacks “non built on” space by comparison with many of the world’s successful high density cities, which are all about HEIGHT, NOT about covering the surface as much as you can. The UN Habitat Report “Streets as Public Space and Drivers of Urban Prosperity” is an eye-opener; Auckland is an outlier in the first world, down with Moscow and St Petersburg for LACK of street space relative to “built on” space. This is why we choke on congestion so early in the process of intensification.
If a primary objective is making public transport more viable for more people, it is lunacy trying to do this by any means other than extreme nodal building “up” on the PT routes, especially nearer the city centre. But Auckland 2040 are right about the lunacy of massive swathes of added height allowance at locations that are too dispersed to support PT anyway. This is just the “planners” panicking and doing stupid things to try and “achieve their targets”.
I do not believe anyway, that Auckland can evolve from status quo to “viable public transport” as an important mode share (reducing road congestion!) – this is Walter Mitty, cargo cult, “of course any city can be Hong Kong” idiocy. Auckland is 1 million people in “Kansas in the South Pacific”, a primary produce exporting, low value national economy. It already has a Walter-Mitty-like over-supply of central city tall-building floor space relative to the right comparable benchmark economies. This is all about rent-seeking and wealth transfers in property speculation, not the stuff of “real economies” and “clustering” and “agglomeration” that the idiot planners think can be reproduced just by replicating the built form by planning mandate! Look up the history of the term “cargo cult”, this is what this is.
The belief that PT can “reduce road congestion” is nonsense; higher PT mode shares always need some form of coercion, among which congestion is a major one. PT would be even more a victim of its own “success” if it really was that good, than what “induced traffic” from building more road capacity is alleged to be! The money wasted on “inducing traffic” would be far higher in the case of the PT than for the additional road space.
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I am unsure how Auckland spread over 5,000skm is considered to be land rationed? Travel distance is already 129km from one end of Auckland to the other end compared to Houston’s 118km.
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Oops, put a reply in the wrong place – see a bit further up above.
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Auckland Council has identified metropolitan fringe cities. New Lynn, Manukau, Albany for 18 level buildings. The problem is that these fringe cities are at least half an hours drive away, Manukau is 23 km from auckland city. Auckland harbour is high rise then we get almost immediately into low rise leafy suburbs protected by sacred visual height limits of Mt Eden, Mt Roskill, One Tree Hill, 3 Kings, Auckland war museum on the domain, Mt Albert etc. It is that big gap between fringe cities that is infrastructure prohibitive. I estimate around $20 billion to properly connect these fringe cities to ease traffic congestion. It is a chicken and egg situation. Without that infrastructure spend you can’t build large scale.
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Most of Mt Eden and Mt Roskill have been rezoned mixed housing single which is 8 metres height limits. Basically most of central auckland you can consider that the long term vision is a giant park. Even manukau harbour which is mainly mud beaches are slowly becoming sandy beaches, ie landscaped. I think the same intent for Onehunga with the cement factory being shut down and a new beautified harbour being delivered courtesy of Auckland planners.
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Actually the crucial thing is the intensity of second-grade “arterial” roads, when the evolutionary norm is for employment to keep dispersing and households to sort themselves into efficient locations relative to this. It is this thinking and planning for “concentration” that CAUSES congestion, especially when it is accompanied by high, spiky urban land prices and “pricing out” effects. Monocentric thinking is the worst, but polycentric is the next worst.
The point is not to enable travel “between high density nodes”, it is to enable travel “in random patterns”. Auckland’s problem, and it is even worse than Los Angeles for this, is simply that it does not have enough road space of ANY kind – highway, arterial, CBD street network, or even suburban street network. To be of any use in dispersing congestion and serving the natural dispersion of commute destinations, any highway network has to be more “ringroad” than “radial”. Some analysts now – eg Fred Small and colleagues – are “finding” that spending “road” budgets on cheap, surface, low-speed grid networks is far more effective than blowing it on monstrous elevated highways funnelling traffic towards the city centre. All that engineering for high speeds, the lane widths, the gentle radiused curves, etc is wasted when most trips are at an average speed of 30 km/h.
But as I have already pointed out, Auckland is unusually “built out” in terms of its surface space anyway, so there are no options that do not involve a lot of expensive property acquisition and demolitions of buildings. Our only hope is really “doing it right” with the ex-fringe growth – Alain Bertaud and colleagues; Shlomo Angel and colleagues; and Paul Romer and colleagues have all independently been arguing that the correct role for “urban planning” is to set aside rights of way well in advance of growth, for INTENSE road networks and whatever other public space (and access to trunk infrastructure) is rationally necessary.
Besides the disastrous lack of road space, Auckland’s utter failure to do the “right” planning (it has done and is doing plenty of the “wrong” planning) is also illustrated in the massive costs of property acquisition for the CRL – 15 years after the imposition of policies that have jacked the prices of urban land (how “Darwin Award” is THAT?); and worse, in the obscene sums being paid for new “parks”, the costs being socked in to developers by way of “contributions” for those parks – when planners 20 years ago could have drawn some lines and the parks would have been there for FREE ever since!
This whole thing stinks of a deliberate fraud by a property cabal with corrupted Council personnel as their stooges.
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“..the wealth effect is likely to be larger if the availability of credit – backed by equity value – enables households to realise capital gains without selling thier assets”. BIS annual report 1991 – which is probably about when property became the investment asset of choice given distrust in equity markets post ’87. New supply is part of the problem but suuply from the existing stock is no doubt being reduced by the presence of property investors. A person/family trust/investment company with five houses under the belt is no doubt a better risk than a young couple trying to get a cash deposit together for that first house: the credit supply flows to the former to be serviced by the latter. Should there be a limit to the number of houses one can buy? Per the Tui campaign: yeah right!
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According to the Reserve Bank – rationale for its investor finance restrictions – your hypothetical five house borrower is riskier than the young couple.
You do sound a bit as tho you are making excuses for what is mostly the outcome of policy choices. When house prices go up because land prices are driven sky-high, fewer people can afford to buy to live, and they still have to live somewhere. Residential accommodation providers move to fill that gap.
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I think it is self-evident that the volatility of the ultimate bust will be far more powerfully influenced by the proportion of geared-up multi-property speculators there are exposed to a fall in values. Many of the mortgage-up first home buyers will at least try to keep up the payments, keep the home and stay out of bankruptcy. For this, they just need enough income. But the geared-up speculators do NOT HAVE the “income” to sustain their position, it is founded on Ponzi style leveraged capital gains.
Banks may well keep “Zombie” debt on their books as long as they like but the reality will be that there are gaping holes everywhere that cannot be papered over. The most sickening thing is that the poor B taxpayer will probably be shafted for a couple of generations for all the bailing-out that will be deemed “necessary”. It is so sad that the great majority of people would fall for the wrong political alternative (control, nationalisation, central planning, etc) rather than the right one (de-rig the urban property markets!)
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Income for multiple property owners come from rent collected from tenants and their regular wage. Banks apply a LVR risk calculator to first confirm income, then they factor in rental vacancy and apply a interest rate around 2% higher than the prevailing rate prior to approving a loan. These stringent lending risk assessment is applied by an army of credit risk managers.
What surprised me between the period 2004 to 2007 the banks got very aggressive with low documentation loans as interest rates rose to try and dampen inflation. Some might argue that banks got over exuberant together with a booming property market. The thing about professionals is that they are paid to do a job. Therefore I do not expect credit risk managers would be exuberant. They would have been instructed to stand down.
I would argue that the aggressive bank lending was driven by the RBNZ aggressive OCR increases. As interest rate rises lending slows down but savings deposits increase. To a bank, savings deposits are a liability and the interest paid is a cost. Rather than bank exuberance with a booming property market , I believe it is the pressure of maintains record profits and preserving banks net asset position that drove low documentation loans and access to easy credit. Rising interest rates are therefore a larger threat to bank stability than falling interest rates.
As inflation rises, RBNZ monetary response to raise interest rates is more a threat to bank stability risk. The problem that Wheeler faces at the moment is that NZ household savings has risen to a high of $152 billion compared to NZ household debt of $148 billion including credit card debt. Therefore bank liabilities are rising too fast and pressure is mounting for interest rates to fall.
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If NZ “household savings” have risen to a record high, I suggest the cause might be non-home owners who cannot afford to buy a house with their savings yet. South Korea has colossal savings rates because tight credit means people save literally 5 to 8 times their annual incomes before buying a house with a median multiple of 10 to 16 – LVR’s hovering around 50%.
Net household debt (net of savings) in NZ also is at record highs – we are digging ourselves into a deeper and deeper cleft stick here. The people with the debt and the people with the savings are two different cohorts, although there is a certain rate of transition from the “savers” group to the “up to the eyeballs in debt” group.
Probably a lot of the debt relates to investment properties.
This whole scenario could hardly be better devised by an agent of an enemy power, as a deliberate economy-sabotaging WMD. Even if you refuse to “blame” contemporary “save the planet” land rationing policies, it is an observable fact that this is a pre-condition for the existence of these problems, and also that it is possible for economies to be “proofed” against these problems by the existence of something still resembling a free market in “land” – allocating it to best use according to price signals. We are merely having to re-learn, in the context of urban planning, the lessons learned (or not) in central planning of entire economies in the 20th century.
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Here is what is not mentioned – but critical
What is our capacity to build new houses in the short run
It appears that our present capacity to physically build houses (without taking into account land release and approvals and development) is less than the number of migrants arriving in-country
Logically, that means that 100% of all new-builds are being taken over by new-comers (not necessarily directly) who buy existing houses which in turn implies the locals move elsewhere in a domino effect, either upgrading or downsizing or relocating to another region
Auckland alone is falling behind in short-fall of new housing. All very well waving a magic wand and releasing vast areas of land. If there is not the capacity to simultaneously build new houses, new schools, new hospitals, new utilities, new roads etc it is just an academic exercise
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Yes, one can’t solve the whole thing overnight. But markets work on expectations. A radical freeing on land supply would quickly be reflected in llower land prices, and land prices are the biggest component in Akld house+land prices. Additional building would, no doubt, take time. And it isn’t totally clear how many more houses are needed – it is not as if rents have gone sky-high (as an accommodation shortage would suggest. But land prices have shot up, and they could be reversed relatively quickly.
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Rents have a bit of flex because you can have more people living in the same residence. Council occupancy rules allow for a maximum of 8 people per household before it becomes a commercial boarding house and subject to a different regulatory regime. Currently that number is closer to 3 which means still a lot of people per household to go.Some of the building activity that I am seeing are massive 7 room houses being built in Mt Roskill and in Otahuhu which do not look like your traditional rich persons household. I think these are intended for rentals or for a number of families or in anticipation of the secondary dwelling concept offered by the Unitary plan.
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eg, I have a property currently split into 2 separate tenancies, I get $700 per week from that one property but because it is managed as 2 separate rentals the rent per family is recorded as $350 per week. Therefore actual rent received is double what is actually perceived for statistical purposes.
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Yes, overcrowding in rental accommodation is the dirty secret to how many cities famous for their increased density, have actually achieved this. If you Google articles on “Generation Rent” relating to the UK, you will find some modern Dickensian horror stories about rental accommodation conditions. Of course Shamubeel Eaqub named his book that too, but the term was already in common use in the UK. Nevertheless, it can be revealing just how much “rental property operating losses” are being offset against other income for tax purposes. I would love to see this data for NZ.
The UK is an example of a “mature” planned “compact city” experiment. We are just in the early, speculative-mania phase. Once two or three cycles have been through, it is just a systematic, institutionalized “gouge”; chronic undersupply of all housing steadily gets worse and worse, so there is no longer the likelihood that rents will be “low” by comparison to other indicators. This is the difference between a speculative bubble; and simple chronic undersupply and de facto usury. Stewart (2002) estimated that the rate of replacement of housing stock in the UK was so low, houses would be needing to last 1800 years on average. In the USA the figure is 70 years and in most of the first world it is less than 100.
Why is it so hard for the compact city planning faddists to pay attention to the world’s longest-running experiment and learn from the evidence just what a socio-economic crime they are embarking on?
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There are growing numbers who are doubling up with relatives and friends because they can’t afford even to rent independently. Almost one in seven Aucklanders (13.3 per cent) live in households with two or more families or other relatives, up from 9.3 per cent in 2001, compared with an increase in the rest of the country from 4.1 per cent to 5.9 per cent.
Some double up by choice, especially in non-European ethnic groups where multi-generational households are the norm.
West Auckland grandmother Lee Hickey is moving out of her house to make room for her daughter, son-in-law and their two children by building a separate sleepout.
http://m.nzherald.co.nz/property/news/article.cfm?c_id=8&objectid=11627203
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The other problem with using rents as a measure is that it does not factor in that Property investors have 4 major categories, 30 year plus veterans, 20 year plus veterans, 10 year plus veterans and newbies. Rents are measured against the current value but ignores that rents are driven not by newby investors but by the 20 year to 30 year plus veterans who have purchased at significantly lower values. They choose the timing of raising rents very carefully.
The other part of the rent equation is the impact of Special Housing Areas and the Unitary Plan. You could call it the Xero effect, ie how does a company generating losses and trading at a loss with only $120 million turnover be worth $2.4 billion? It is the anticipation of future income and for property investors, future rentals.
Throughout Auckland, the rental potential for existing property could double overnight in September 2016 as a base minimum, and In 10 metropolitan cities, you get multi unit and multi level rental potential up to 18 levels. All the big boys, Fletcher Building, Todd developments are buying up as many housing sites as they can in anticipation of future development opportunities.
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Another very revealing statistic about the role of rents, if you can get it for NZ, would be the level, by year, of “rental operating losses offset against other income”. There have been some pretty impressive presentations of this re Australia – it has absolutely blown out over recent years, suggesting that speculators are madly chasing capital gains. I would expect the data for NZ to look similar.
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There has been an interesting hiccup in Houston’s situation from around 2012-2015. The property development sector has had difficulty obtaining finance (for the first time – some quite serious minds suspect that there is malice on the part of “Wall Street” involved in this) and actual building of houses has lagged demand for a change. What has happened? New houses have inflated in price, but land values across the urban area have not; existing housing stock has not shown any knock-on effect. A widening “spread” between the prices of new houses and existing housing stock has been noted.
I believe this shows that a liberal “land supply” regime will keep land values disciplined even when there is not the capacity to actually build “enough new houses”. The fact is that people can find ways to get something cheaper if they want to – even if developers are charging a bit more for new houses because there is a “shortage” relative to demand for new houses, there is still the option open for many, of simply buying still-cheap land, building a home for themselves, getting a prefab unit, or just waiting until builders are more available.
“Applause Homes” here in NZ is importing kitset Canadian houses of good quality and value in anticipation that the local “building” sector is so incapable. It has been “bludgeoned back to the stone age era of cottage industry scale building” in Hugh Pavletich’s assessment. As recently as the 1980’s NZ had several builders doing more than 1000 units per year. Now there is just one, and what are regarded as exemplars of the “production builder” sector are doing 200 – 300. Some of our prefab innovators should have been exporting by now, like the Canadians are doing. They get massive orders from Japan every time a natural disaster happens there. NZ has blown this kind of opportunity by abolishing subdivisional construction “at scale”.
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New Zealand set a new annual migration record for a 20th month in March, as more people moved across the Tasman from Australia.
New Zealand had net migration of 67,600 in the 12 months through March 31, Statistics New Zealand said. Migrant arrivals rose 9 per cent to 124,100 while departures slid 2 per cent to 56,400. Net migration from Australia was a gain of 1,900, the highest since August 1991 and the sixth straight month of annual gains.
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11626329
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22/04/2016 Construction of 34 townhouses at the proposed Mt Richmond Mews in Atkinson Ave, Otahuhu, was about to start when, last month, the company behind the development pulled out, as it was contractually allowed.
“[The developer] has reluctantly advised that due to the time and other complexities required to finalise all construction documentation and consents the development will not proceed,”
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11626617
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A right-to-build law would be very high up the list of things that could be done to increase productivity in this country.
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One of the factors that is increasing the likelihood of projects being abandoned in this way, is the cost of the site relative to the completed project. This has of course, steadily risen, making development a higher-risk activity. As Grimes and Aitken (2010) pointed out (but nobody was listening), the “impounding” of profits in rising property values, in the value of the SITES, reduces the likelihood of housing “supply” increasing in normal market response.
Also worth noting: from 2007 to 2009 (at the end of the last cycle) “house prices” in real terms fell by around 15% – but this represents SITE values falling by more like 50%. Hence the waves of bankruptcies among developers and finance companies who were backing them. This is to be expected at each cycle end from now on, going by the UK experience long since. Not only is the building sector a shadow of what it should be, it is concentrated in the hands of a smaller number of clever “survivor” operators. Having good connections and smart lawyers to negotiate the minefields of planning processes is of prime importance, another dead-weight, non value added cost to the economy.
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I enjoyed this response to Tyler Cowen’s recent criticism of market urbanism:
http://marketurbanism.com/2016/04/22/market-urbanism-is-underrated/
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Yes, a nice piece. When I first read the Cowen commentary I thought he had misfired, but didn’t devote the time to working out why/how. Having stayed in a surprisingly affordable Maryland suburb of Washington last year (houses cheaper than Wgtn, altho incomes much higher), I was particularly impressed by the Washington-area story.
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Alan McCulloch, former mayor of Auckland’s East Coast Bays and these days on the local Grey Power committee, has a simple piece of advice for people considering apartment living.
“Don’t buy anything that’s built after 1992,” he says bluntly.
McCulloch has been supporting owners in the Bay Palms complex at Browns Bay which, like so many other buildings of its era, is leaky.
http://i.stuff.co.nz/business/money/79131043/How-to-navigate-the-minefield-of-buying-apartments-and-townhouses
Perhaps our building industry do not know how to build high density housing?
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