I’m not usually much inclined to support the Green Party on anything – their interest in reforming the governance of the Reserve Bank being an admirable exception. And political courage on doing something about house prices – and being honest about what making house and urban land more affordable means – had seemed to be in really short supply from all across the political spectrum. I’m not sure even the current ACT leader has been willing to openly suggest that if prices in Auckland fell 70 per cent it would only bring them into line with the price to income ratio of around 3 that has been a typical benchmark of affordability (happy to be corrected if I’m wrong on that).
And so I can only commend the Green Party for being willing to say it: house prices should fall, especially those in Auckland, and the fall needs to be large.
On Wednesday Turei, the Greens co-leader, put her neck out politically calling for house prices to be slashed, particularly in Auckland, where the average is knocking on $1 million.
She’s considering policy that house prices drop to about three to four times the median household income.
As the Stuff story puts it
Her party’s approach is not dissimilar from former Reserve Bank chief economist Arthur Grimes and former National and ACT leader Don Brash, who are calling for a 40 per cent drop and as much as a 60 per cent fall respectively.
Don Brash would probably describe himself as being on the right of New Zealand politics, while Grimes has always struck me as being (non-partisan but) a denizen of the mild centre-left. This isn’t an ideological issue (at least on any traditional left-right spectrum) – but one about facing facts, and prioritizing people who currently have little hope of ever being able to afford a house. There is simply no excuse for that sort of systematic exclusion.
Turei says she’s doing work around what a policy would look like but she’s taking a lead from initiatives, such as Auckland Council chief economist Chris Parker’s report picked up by the council to aim for house prices five times the household income by 2030.“We are saying it like it is. Most people believe house prices are far too high, most people believe house prices need to come down.”
But Little says the solution is stabilising house prices by cracking down on speculators, building more houses and lifting wages – not crashing the market.
Turei says addressing the issue involves a capital gains tax, a state house building programme, both state houses being built and a state programme for building houses for sale, the unitary plan and supply.
Any approach to bringing down house prices needs to be done in a controlled way and over a long period of time, she said.
I think that is exactly the wrong approach – and the idea of “controlling” the pace of adjustment seems far-fetched. Turei’s comments remind me of a cartoon – which I might track down later in the day – from the 1980s contrasting the Roger Douglas and Jim Anderton approaches to economic reform. Dressed as surgeons, confronting a gangrenous limb, one advocates lopping off the entire limb in a single blow, while the other advocates removing tissue just a slither at a time.
The sooner house prices come down the easier the adjustment will be – politically and economically. The longer the current disaster goes on the larger the proportion of people who will have borrowed and entered the market on the basis of current high prices, and harder it will be, on both political and economic grounds, to secure the support for the necessary adjustments – the more there will simply be a push to wait out the problems and leave affordable housing as a dream for a couple of generations hence. That really would be a national failure (well, National and Labour).
A journalist asked me the other day for some comments on the housing market. They don’t seem to have been used, so I’ll reproduce them here
Do you think the Auckland housing bubble will burst and why/ why not?The best way to think about Auckland house prices is that they have reached their current outrageous levels because of the interaction of rapid population growth (mostly on account of immigration) and tight land use restrictions. Whether prices, or price to income ratios, ever fall back very sharply mostly depends on what, if anything, governments do about alleviating those pressures. Net immigration does ebb and flow, but around a very high annual target for the inflow of non-citizens. There doesn’t seem to be much political appetite to change that target, and there also seems to be only limited appetite for really freeing up land use restrictions. Allow any land within 100 kilometres of downtown Auckland to have even two storey houses built on it, and the price of urban land would quickly fall a very long way – owners of land on the margins of the city will be keen to utilize the land as soon as possible, not as slowly as possible. But far-reaching reform like that doesn’t seem that likely. So, sadly, while we might see house prices fall back 10 or even 20 per cent in the next recession – whenever that is – it is difficult to be optimistic that price to income ratios will drop back to around 3 (where they should be) any decade soon.If yes – any idea about when?Forecasting is a mug’s game. All that can really be said is “please, as soon as possible”. The longer the eventual adjustment is delayed the more people – owner-occupiers and investors – who will caught having borrowed hugely to pay today’s massively distorted prices. The longer prices stay at these, or even higher levels, the more difficult the economics and politics of ever making Auckland housing affordable again.
croaking cassandra 
This article reminds me of a legal case played out in Australia 20 years ago. Involved Intellectual Property rights. Two players, one was Deep Pockets Goliath the other was a minnow that owned the IP. They had a contractual relationship. The Goliath exercised its power in the courts for 5 years seeking to obtain the IP. Eventually goliath lost. The little guy eventually won. Goliath was the Australian Stock Exchange
The outcome of the story was the executive smarts of the little outfit had been totally consumed for 5 years in fighting a court case and defending their rights instead of getting on with business. When the dust settled, they got back to attending to business, they went broke. They had lost the edge they had enjoyed, the product had never developed over that 5 years. Recovery was impossible. The problems were insurmountable
The moral of the story, in a NZ context, is this problem has been left to fester for far too long, the damage has been done, in so many dimensions, no amount of tweaking and fiddling at the margins will ever correct it
In addition, there is a high probability that a Grimes “crash or crash through” solution would cause equally unforeseen problems
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Their courage would be far more courageous if they actually put up policy instruments that would have a significant impact on housing prices. They want to crash housing prices by 40 to 50% by tinkering with demand parameters
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Michael, you are misquoting Arthur Grimes as well. You are not reading beyond the dramatic headlines. He is calling on 18 to 50 level highrise to be built similar to the Goldcoast all along the Auckland coastline in order to crash the median price. Economies of scale delivers lower and more affordable properties.
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“I don’t think there’s any doubt. It doesn’t matter if it’s Freemans Bay, Parnell, Remuera, Kohimaramara, Ellerslie. We certainly need to intensify,” Grimes said.
“I can’t understand why that whole [area] from Orakei to St Heliers is not like the Gold Coast.
“Basically, in my experience of other cities, you would expect anywhere with those sorts of beaches close to Auckland … would have line-to-line skyscrapers all the way along there and that’s the kind of Auckland I would expect and I think young people would expect. The old people won’t and I’m inbetween,” he said.
http://m.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11667082
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No doubt Arthur has been to more cities than I have, but I’m trying to think of examples with such high rises ringing the waterfront. Of course, many cities have much the same regulatory problems we do, but – say – neither Sydney nor San Francisco has the sorts of patterns he writes about. In a NZ context, perhaps Oriental Bay is about the closest.
If he has in mind Hong Kong and Singapore then fine, but I can’t think of many traditional Western examples (even though the typical old European city is – unsurprisingly – denser than New World cities).
Recall, my issue is not that i’m opposed to high rises. I just think neighbourhoods have legimitate interests that should be recognized, and be able to be bought out – as would happen with say a covenant in a new subdivision. I also suspect that not that many NZers will want to live in tall apartment buildings – but that is just a prediction, on which I would stake nothing, and the market should sort it out.
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I just came back from Melbourne and there are 50 level high rise towers everywhere in central Melbourne. They may not have spread along the coastline like the Goldcoast but the basic idea is you need highrise if you want economies of scale. 2-3-4 levels is just not going to get cheaper housing. Insufficient scale. I was reading about the 6 m outlook rule which the Independent Hearings panel just brought in. Looks like they have just delivered a more difficult developmental constraint than even the Auckland Council envisaged for the higher density Urban and apartment dwellings.
There is a clear bias even amongst so called independent oldies not to get highrise into Auckland. We have paid these guys to do a really bad job. Disgraceful.
Mathew Paetz was rather surprised with the retention of the six metre Outlook Space rule because although well intentioned, it will pose a significant potential barrier to feasible medium density site redevelopment and therefore housing supply.
http://www.interest.co.nz/opinion/82825/self-proclaimed-urban-planning-tragic-matthew-paetz-looks-key-rules-intensification
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Getgreatstuff:
“…the basic idea is you need highrise if you want economies of scale. 2-3-4 levels is just not going to get cheaper housing. Insufficient scale…”
And in Melbourne, your example, what evidence is there that the highrise boom has in fact lowered the average or median housing unit price at all? Are ANY of these apartments “affordable” in spite of the stacking up of them en mass?
If we look at an extremely mature example of this kind of urban development, Hong Kong, we see a median multiple of 16.
Ironically, if we want to see the “rule” actually working, that building “up” provides affordable accommodation to people who would otherwise be priced out of efficient locations, we need to look at median-multiple-3 cities, which have a significant majority of housing in medium to low density suburbs. In every such city, where a suburban McMansion is 1/3 the real price of Auckland’s inferior “equivalents”, inner city apartments are ALSO 1/3 the price of inferior “equivalents” in Auckland, or Melbourne, or Vancouver, or any UK city.
There is something clearly at work in urban land markets, that makes “orders of magnitude” differences in the whole thing, according to whether “the free market” is free to allocate super-abundant non-urban land to conversion to urban use, or not. The “rule” assumed by you and many others, about the “economy” of building “up”, is actually supplanted by a new rule of the extractive power of land rent. You can basically force most people in such an urban economy, to pay the maximum they can possibly stand, for the absolute minimum standard of “housing” that regulatory setting allow to be supplied. The living space and the standards and especially the “footprint”, can go down; the average prices per housing unit do not. You still pay just as much “more” than you should, for as much “less” as the suppliers of housing can get away with.
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Phil, you might not be aware but Melbourne apartments prices are falling. They are simply building too many. There is a big oversupply coming up. In my short trip in Melbourne, I was offered immediately 10% discounts on brand new apartments coming up for completion. These are 2 bedroom, 1 bathrooms, plus carpark & storage around offered around $600k. There were 2 apartment blocks offered when I just popped by a property developers stand. Since returning to Auckland, I was offered another 3 separate developments with 10% discounts off the original sales prices.
But my problem is that equivalent second hand apartments are available in central Melbourne for around $500k. This is what you would expect of normal production products. Brand new is more expensive and second hand cheaper like cars. Therefore no expectation of capital gains just a nice place to live and pay the new price with expectation of falling values as the property depreciates.
Initially I was keen to buy a Melbourne apartment because they are cheap for the quality and size and location but will not proceed because of the lack of future capital gains.
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Getgreatstuff: Glad to get into the full complexities of this issue. I stand by what I am saying about the TREND. A forced trend (due to planning) towards increased population intensity, will always raise rather than lower, average housing costs, even as the average size might be falling. Besides this trend, VOLATILITY is also increased.
Cities freely growing at the fringe, at the density at which most people want to live (or even forced lower density, which is harmless to land prices), will always have a house price median multiple of around 3, AND during property cycles in which cities like LA and SF are bubbling up to 12 and crashing to 4.5, they will, in contrast, remain within a range of 3.5 and 2.5. (despite identical credit and monetary conditions said to be responsible for the bubble).
In the case of cities like the UK’s, where shortages and undersupply is chronic, due to their planning system, the volatility is not as great but the TREND in real urban land prices is a scandal (or should be). However, where you get speculative oversupply, the more building “up” and tighter there has been, the greater the volatility on the downside. This happened in parts of Spain and it will happen in Melbourne. This is NOT “achieving affordable housing as an outcome of intelligent planning”. It is “achieving affordable housing by way of the unintended consequence – of urban planning – of destroying the macroeconomy”.
Systemically affordable cities, in which there is no volatility and no adverse trend, are always associated with an absence of deliberately FORCED reductions in land consumption per person. “Forced” includes stack-and-pack as a utopian proportion of “planned housing supply” just as much as the blunt “anti-sprawl” boundary that shuts off superabundant rural land from the urban economy’s “supply”. .
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I’m not misquoting him. I disagree with his “how” (especially where it involves trampling over existing rights/interests – which he explicitly, as a value judgement, says he doesn’t care about), but totally endorse – if anything think too modest – the price outcome he is seeking. I’ve read his whole piece a couple of times, and commend it to others.
http://thespinoff.co.nz/politics-media/04-07-2016/how-to-fix-a-broken-auckland-add-150000-homes-to-crash-prices-by-40/
But in the end Arthur puts more weight on the state as solver of problems, while in areas like this I see them mostly as the source of problems.
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One of the problems with major intensification, that almost no-one in NZ is up to speed with, not even Arthur Grimes (I suspect), is that Auckland’s street network is inadequate on the outlier-low side (in global data). Refer to the UN Habitat Program Report, “Streets as Public Space and Drivers of Urban Prosperity”.
And it is also an eye-opener to look on Google Earth, at the Gold Coast’s beachside apartment blocks, and note just how many wide arterial roads there are in parallel to them, not just immediately adjacent, but extending several blocks. Where in Auckland is there that kind of capacity?
Decades of cross-leasing and subdividing has already lifted Auckland’s density to close to that of Amsterdam, only Auckland has 60% less of its surface area on average, devoted to “streets”. Of course Amsterdam can have space for cyclists – but for a city like Auckland to “repurpose” street space for anything, means further strangling the already outlier-inadequate space for car flow.
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“Turei says addressing the issue involves a capital gains tax, a state house building programme, both state houses being built and a state programme for building houses for sale, the unitary plan and supply.”
Turei clearly is not too bright. The government brought in the Bright Line Test to test what a CGT would do under pressure from the RBNZ. It was a litmus test and it proves a CGT will not lower prices as it acts as a barrier against selling.
She has a complete memory lapse because the government was very enthusiastic about building on the $10 billion of state owned land. Bill English was so sure that he could get something done and he put up his hand to be appointed as the Housing NZ minister. He even said he will personally ensure houses are built but guess what, the problem is some old person has been living on that $10 billion of state land for the last 40 to 50 years and it is a political suicide to shift old people out of those homes in their hundreds.
John Key had a bright idea, he decided to palm it all to the community groups, ie the Salvation army. They initially was keen and spent a million on feasibility but then came the problem, how can the Salvation army be assocciated with shifting old folk out of their homes. They made up some excuse and walked away.
Therefore the government tried really hard. Nick Smith even looked at spare land zoned for schools and golf courses but it is not easy, there is always someone vested in that land.
Turei is all talk but when it comes to action she would be running for cover because the solution is to put people onto streets or compulsory acquisition.
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I saw an opinion piece in the Herald yesterday from an academic named Toby Moore, literally arguing that there would be too much harm done by falling house prices now, so we should accept the current levels as a new norm, and besides, the “wealth effects” are good!
This epitomises the kind of thinking of vested rentier interests along the lines, aha, our plan has worked well and we now have everyone over a barrel, they can’t undo our dastardly scheme now because it would be too immediately painful. So we can ratchet the “cost of space” screws down on every generation henceforth and forever.
It is like a hostage stand-off where we have constantly appeased the terrorists by giving them more hostages (in this case, more financially-extended first home buyers). NOW we are starting to think about “the number of lives that might be lost if we actually did the RIGHT thing”?
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If we accept that Government policies are responsible for much of the rapid rise in property prices, then clearly changing such policies can result in property price declines. My question is; if such declines would be especially harmful to recent FHB, could there be policies that could “save” such FHB in the event of policy-driven price correction? Property investors shouldn’t care about a price drop because, just like a farmer, their property is being used to produce an income irrespective of its rise or fall in value, therefore we don’t have to “save” them.
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I guess i look at the other way round: so long as the FHBs don’t lose their job and so can still service the mortgage, the loss isn’t catastrophic (with a lifetime approach to buying and paying off a house). The investors are much more vulnerable, esp as rental yields are typically below interest rates in Akld. But they are just in a business, took a risk, and for a while it paid off (in spades) and if house prices fall sharply it could turn very bad for them.
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Dave, I am 100% with you – reform is urgently needed, and to make it palateable, there must be provision for at the very least, major tax write-offs against repayments of mortgages on first homes bought since 2010. The simpler the scheme, the better.
Speculators can just lose their shirts as far as I am concerned.
if “bailouts” turn out to be needed, the money must go out as rescue packages to anyone BUT the actual mortgage lending sector. Bailing out “the banks” has not done a thing for actual economic recovery everywhere it has been done; households and participants in the real economy are still suffering pain, negative equity is still exerting its full drag-down effect, and the banks have not played any useful restorative role for all the fact of the free money they have been given.
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Dave, as a property investor I want property values to crash so I can buy more distressed properties. I only ever buy after a market correction.
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Phil, Auckland stretches from Leigh up north to Pukekohe down South a travel distance of 129km. Auckland has a land mass of 5000skm compared to Houston with a land mass of 10,000skm with 6.2 million people. it is not a land issue.
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The issue is NOT existing urban footprint, it is “superabundant supply of land on which new development is allowed” – Yes or no? Houston, yes, Auckland, no.
Auckland’s actual built-up area is 544 square kms. Houston’s is 4,644 square kms. I don’t know how your figures are derived – mine are from the authoritative Demographia World Urban Areas data set.
Auckland Super City may well have some sort of municipal boundary that incorporates 5000 sq kms, but there is NO WAY that this is “allowed supply of land for development”. That is the issue, and you either don’t understand much about this, or you are trying smokescreen tactics.
Houston may also have some kind of municipal boundaries that incorporate 10,000 sq kms but even this is NOT “the limit” on the quantity of land allowed to be developed! Inside the MUNICIPAL boundary, outside it – same difference in Texas; you are still allowed to build a whole new city somewhere on the superabundant ranch land if you can raise the finance yourself. And the markets for such finance are mature and deep.
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Phil, don’t belief all that so called official demographia stats. They don’t know what they are measuring. It is a simple Google exercise. Houston stretches from the Woodlands up north to Texas city down south travel distance is 118km. It is a semi circular city covering 10,000skm. Auckland is an elongated city stretching 129km covering 500o skm. The problem we have is our highrise core is only 544 skm compared to Houston highrise core of 4000 skm. That’s how they get 6.2 million people into twice the land mass.
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544 skm only covers Auckland CBD around the Harbour. If you include Manukau, Taka puna, Albany, New Lynn, Slavia Park you would get around 1600skm
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it was a very odd piece from Moore – interestingly, when I looked him up he did seem to have written a thesis on the political economy of housing busts.
I saw your letter in response in today’s Herald. THe other key point I’d add about Ireland and Spain is that being part of the euro meant they got a German interest rates in economies that needed something more like NZ interest rates. Such dramatic departures of interest rates from neutral ones sit up the preconditions for a credit fuelled exuberant boom across the whole economy and all asset classes, not just housing.
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Yes, but there is a similar “problem” in the USA, whose States actually have disparate local policy settings in some matters, that diverge even more greatly than EU member states. Foremost in these, is the difference in housing supply. Low, “stimulating” interest rates, in some cities and States in the USA, actually enable more than ever of the same, anchored-price houses to be supplied; existing mortgages to be refinanced and paid off quicker; discretionary spending to increase; household formation to be increased; in-migration to increase along with benefits such as diversity and economies of scale (and minimal dis-benefits); and generally, “real” capital investment and enterpreneurial activity to not be crowded out by the magnet of get-rich-quick property investing.
It is like a secret-weapon resilience in the US economy, that rebalancing between States can mitigate the effects that in national (or Federated) economies with less diversity in land use regulation, are wholly negative. The “onshoring” or “reshoring” phenomenon is disproportionately represented in the southern and heartland States of the USA for good reasons; and there is just as much of a shift going on within the USA itself, “from” the coastal, utopian and unaffordable cities, “to” the south and the heartland. Population is being sustained in the famous but expensive coastal cities, by immigration from countries where people are used to overcrowding, and hence overcrowding is a natural mechanism by which they “get in” to such cities, even while the native-born are getting out.
The mainstream economics profession may wake up one day, to the affordable, cyclically more stable, “real growth” cities in the USA, opening up a lead on “the rest” (of the first world) in a number of important performance indicators. Thus far, what we mostly get is sneering from the elites about what awful proletarian places they are. Ironically, the same elites claim to hate “exclusionary” suburbs, yet they celebrate whole cities whose “success” is based on excluding (pricing out) anyone other than “the successful”. They don’t say “urban planning should force the form of large-lot suburbs on everyone because successful people and large-lot suburbs go together”; but they do this with “whole cities”.
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***why a party that is concerned about the impact of people on the environment is so opposed to adjustments in immigration policy being part of the mix.***
The Australian Greens are the same and a party called Sustainable Australia was set up in 2010 to fill that niche. The same phenomenon has been seen in the US, with the Sierra Club opposing population growth up until the 1990’s. Professor Ben Zuckerman commented in 2002:
“What really motivates the club leadership, Zuckerman says, is fear. Fear of being called racist. Fear of losing minority-group members and fear of forfeiting financial support from big business and foundations.
Pro-immigration forces–including Latino politicians, the AFL-CIO and corporations, which covet both cheap labor and more consumers–are quick to swing the racism bludgeon. Zuckerman, a lifelong liberal and civil rights advocate, has borne such accusations painfully. “But the average person is overwhelmingly in favor of reduced legal immigration and an end to illegal immigration, and this cuts across every racial line,” he says. “How can it be racist to agree with a majority of every ethnic and racial group in the country?”
The Sierra Club’s timidity on the issue muddies its integrity. (How, he asks, can the club rail against polluters for breaking environmental laws but keep silent about immigrants who break immigration laws?) To save itself, he says, it must refocus on protecting the American environment and opposing growth for growth’s sake, which he calls “the ideology of a cancer cell.”
http://articles.latimes.com/2002/jun/09/magazine/tm-45400
btw. Have you read the editorial in this week’s Listener? It is quite critical of the Government’s refusal to consider tweaking the inward migration target.
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yes, I was pleasantly surprised by that Listener editorial
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Tweaking the immigration target equates to reducing international student numbers from the current 120k a year target which means reducing the $3 billion contribution by these students to the economy. Tweaking the foreign workers already here contributing and paying NZ taxes for the last 3 to 5 years means to send them packing after they have are enormous sacrifices to work and live in NZ.
When we are bringing in 3.2 million tourists a year and targeting 4 million a year, tweaking 14k actual migrant arrivals a year is not going to make much of a difference.
The government aims for 50k just to keep population growing at the rate of natural birth because with international students our population and therefore career growth is severely limited. THERE IS A HIGH CHURN RATE.. They stay for no more than 3 to 5 years before leaving for greater career prospects offered by larger cities.
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Great post. Re intensification, it’s important to note that, in the main, high rises are not what is proposed to increase housing supply in Aukckland. In fact the most significant rule changes are about allowing more dwellings per unit area in suburban areas. In the case of the predominant suburban zones, what it means is no (or little) change to the size or height of structures that can be built on a property. It simply means those structures can house more dwellings. So where you might previuosly have been able to build a 300m2 mini mansion, now you can build 3x100m2 townhouses. I see no legitimate external effects associated with this type of change and therefore no reason to vest it as a property right as per your proposal. Otherwise I would be happy with your proposal as long as the rights only extend to rules controlling real effects (height to boundary being the main one).
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If you include 6 metre outlooks on 15 metre width sites and overlays of 57 volcanic viewshafts and heritage cone contour on most of central Auckland, you would be lucky if anything gets built.
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[…] mentioned this morning that talk of slow and controlled adjustment down in house prices reminded me of a cartoon from the […]
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