Property prices gone crazy: Island Bay edition

Michael Reddell Housing

Much of the media coverage of the housing market in recent months has been on prices having levelled off, or even fallen back a bit in some places.   Such things happen –  regulatory interventions have an affect for a time, elections create risks of new regulatory interventions, credit standards ebb and flow, as do restrictions on Chinese capital flows –  without necessarily signalling any more fundamental change in the market.    I noticed a Canadian article just the other day highlighting that in Vancouver house prices are already back up to the levels they were before the substantial tax on non-resident foreign buyers was imposed.  That shouldn’t be surprising.  The big trends in house prices are mostly about land use restrictions.  Neither in Vancouver nor in New Zealand have those restrictions been materially liberalised in ways that might foreshadow a significant structural fall in house prices.     And with the leaders of both our major political parties unwilling to suggest that lower house prices would be a good thing, it is difficult to be optimistic that that situation will change here, no matter which group of parties finally gets to form a government.

The situation in Auckland is, of course, far more serious than in the rest of the country.   Million dollar houses are two a penny there.   But the other day, I heard of a house sale in my own suburb, Island Bay, that left me pretty gobsmacked about the extent of the unjust redistributions of wealth that central and local governments have continued to enable and exact.

It was this house, 34 Derwent St

34 derwent st

It looks to have been very nicely restored (see the photos) but:

  • it is 113 sq metres only, with a single bathroom,
  • it is only 429 sq metres of land,
  • it has no views, and
  • as you see from the photo, it is in under a hill (on the west side, from whence would come the afternoon sun) and is very close to the house on the north.

And yet two months ago it sold for $1,047,000.

If you don’t value sun, it is quite conveniently located: there is a supermarket just around one corner, and a cinema just around another.  The bus stop is perhaps 100 metres away, and the primary school perhaps 200 metres away.

But it isn’t the most salubrious part of the street (nothing wrong with it, but they are mostly smaller workers’ cottages dating from around 1910), and did I mention the hill and the lack of sun?    Island Bay is a pleasant family spot, with a safe and swimmable beach (even if the water is not much above freezing even in February), but it is a typically a degree or two cooler than the inner city, let alone than seaside places a bit further north in greater Wellington.   It isn’t exactly Grey Lynn, even in proximity to the central city.

As a teenager, I lived a bit further down the same street, albeit in a somewhat sunnier spot (having come from Auckland, we bemoaned the lack of sun even there).  And my own first house was couple of hundred metres away.  That house was much the same size as 34 Derwent St –  although nowhere as nice as the newly-renovated interior – on a section that was almost 50 per cent larger.  It had limited morning sun, but at least got good afternon sun, and had a modicum of a view.  I sold that house in January 1995 for (in today’s dollars) $235000.    There has been some productivity (and real income) growth since then –  but real GDP per hour worked is up only 26 per cent.

How have we allowed the market to become so rigged and dysfunctional that 34 Derwent St now sells for $1,047,000?   Why do none of the main political parties appear to have the courage and vision to want to change this?    What, in their plans, would prevent the situation continuing to get worse –  wealth transferred from the young to the old, from those without to those with?

 

52 thoughts on “Property prices gone crazy: Island Bay edition”

  1. “” the extent of the unjust redistributions of wealth that central and local governments have continued to enable and exact””

    Those with a vested interest in high house prices have the money to finance our political parties. Similar to previous article about companies and individuals with apparent connections to the Communist party of China making political donations. Somehow we need a means of financing politics (and investigative journalism) so it is not hijacked by the wealthy.

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    • Sitting in Tokyo Disneyland and DisneySea, it is very clear our environmentalists and greens that prevent this scale of development meant from ever occurring in NZ. There is an entire man made Harbour and lake large enough to house a cruise liner, sailing vessels and also a submarine pen for the Nautilus. There is an artificial volcano which spews fire and is a large man made underground cavern with rail rides in the interior of the volcano, including massive large castles that dominate the landscape. Both facilities cater for tens of thousands a day. Money extracting machines.

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      • Owner of Tokyo Disneyland and Tokyo Disney Sea, Oriental Land, is set announce record profits of ￥74 billion ($677 million) despite a 4 percent drop in visitors to a little more than 30 million in the year to Mar. 31, according to a report in the Japanese business daily Nikkei.

        Profits grew by three percent due to higher ticket prices and spending per visitor at souvenir and concession stands, pushing sales up 1 percent to $4.3 billion. Ticket prices rose by $4.50 last year, the third consecutive hike, while the fall in visitor numbers was the first in four years.

        http://www.hollywoodreporter.com/news/tokyo-disneyland-rings-up-record-881659

        2 theme parks generate US$4.3 billion in sales. They employ an army of cleaners and retail staff. No one complains about the lack of productivity from these parks. Our free air and free scenery approach to tourism is extremely low productivity because we have to employ an army of cleaners as well but with no associated revenue.

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      • Perhaps I omitted the hundreds of limited function robots in the Japan Disney theme parks that have replaced humans in the more skilled repetitive tasks such as singing and acting. There was also an entire water jungle safari with robot monkeys, robot human like warriors, robot elephants, robot zebras, crocodiles etc. People have been relegated to the unskilled cleaning and retail assistant jobs. I saw a Coca Cola Cup spill. They were in immediate attendance 3 security guards and 2 cleanup persons involved in a spilled cup of coke.

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  2. Why are house prices going crazy

    This is a true story about family and housing in Auckland. It’s about a bloke who I worked with, called Joe. The era from memory was around the 1970’s. Joes was a Samoan who had a good job paying high money, long hours, plenty of overtime. He bought a house in Kingsland not too many kilometres from the Auckland CBD, in New North Rd. After establishing himself he brought his wife out from Samoa. Then he sponsored his brother out from Samoa who lived with Joe and his wife. When the phone bill came in Joe gave it to his brother. When the rates bill came in Joe gave it to his brother. Then together they brought out their other brother from Samoa. When the Insurance bill came in the second brother got that plus a contribution towards the mortgage payments. Then Joe and his 2 brothers brought out their parents and they bought another house in Kingsland for the parents. Then they bought another house in Kingsland for one of the brothers. That brother repeated the process all over again with cousins. Within a short number of years they had the whole extended family in Auckland and owned a good few houses.

    Look at the population of Samoa and the population of people in Auckland who self identify as Samoans. Be surprised.

    Moving along to a more recent time, 2005, was staying in West Auckland in Lincoln with a friend. Often the conversation turned to the price of property and immigration and ethnic crowding. In the time I was there we attended a couple of auctions in the same street as I was staying. Each of the auctions were knocked down to twin non-pakeha couples, multiple families. One group were Pacifika, the other Asian. Apparently non-new zealand. You could see the disappointment on the faces of the young single-unit local native born couples trying to compete against multi-unit families.

    The moral of the story is ethnicities whose culture accepts multiple families in a single dwelling can afford to, and will, and do out-bid single-unit families for a single family dwelling.

    That’s just one of the “real” money-up-front pressures on housing
    You never see it discussed in the housing debate or immigration debate

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    • You forget that a kiwi sells and gains from the higher prices, 70% of sales in the market is by kiwis who already own houses which means that price is not a factor when you are buying and selling in the same market.

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  3. Thanks Michael.

    You may have noticed a “wealth tax” (I gather this is a reasonable approximation of what it was) being proposed at this election by one fledgling political party. It was something along the lines of a 1.5% annual levy on equity with proceeds to be redistributed via tax cuts to salary & wage earners. That party claimed this approach – if to applied to abruptly – might be powerful enough to crash the market, but if eased in more carefully could effectively arrest house price inflation. Actually they claimed this has been demonstrated elsewhere. To this amateur it was all fairly convincing.

    I did note that that party – obviously enough in respect of their policy proposal I guess – claimed that the rampant house price inflation we are experiencing is a symptom of a demand side problem, not a supply side problem. Perhaps you disagree.

    Hoped you might be willing to offer a critique of their policy proposal & if in your opinion it could deliver the outcomes they suggest?

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    • As it happens, I wrote about the TOP policy when it was released late last year
      https://croakingcassandra.com/2016/12/16/gareth-morgans-tax-policy/

      Any price is an interaction of supply and demand pressures/factors but (among other things) I often point out that we’ve never had Gareth’s tax policy and until 30 years ago had affordable house prices, even in the face of intense population pressures. We know that land use restrictions have become much more extensive/binding – not just here but in places like Australia, Canada, the UK, and the (mostly) coastal areas of the US.

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      • Most of that land released is owned by private owners. Most people are not developers and therefore may sit in their homes quite comfortable before a developer comes along and offers them a price that they can’t refuse.

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    • When you increase the tax on cigarette sales the price of cigarettes go up. Why would anyone expect price on property to fall due to more taxes?

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      • I would be more inclined to believe TOP is sincere if it’s principal Garth Morgan practices what he preaches.

        1. He needs to donate to IRD $100 million on his $300 million profit from his unearned capital gains profit
        2. He needs to pay to IRD the unearned capital gains from his 5 investment properties around $3 million from his $8 million unearned capital profits over the last 5 years.

        All talk and no action is a disgrace to TOP policies.

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      • Also the capital profits on his own home likely $1 million in taxes that he also owes to IRD. He is an embarrassment to TOP polices and principles.

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  4. You don’t think the Auckland’s Unitary Plan released enough land supply to bring house prices down in the long term?

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    • I’m open to the evidence to the contrary, but I’m not aware of any evidence that (eg) land on the periphery is collapsing in value. That would be the canary in the coalmine if enough had been done. The problem is that expected population growth is still strong so probably what has happened is that the unitary plan will stop things getting much worse for a time.

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      • That’s exactly right. The AUP freed up land for around 137K dwellings. Take off ~20K for existing shortfall, 115K available to meet growth. At ~14K new demand per year, we’d be chokka again in ~8 years. And that’s on the optimistic assumption it all gets developed: it comes with a $20bn infrastructure bill that nobody seems to be too keen to put their hands up for.

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      • GreaterAuckland reports that the Unitary Plan–as notified–added an estimated 422,000 dwellings in Feasible Enabled Residential Capacity, as compared to a projected demand of 400,000 new homes to 2041. So, we have 23 years to come up with a new plan when those homes run out. The unitary plan seemed to take 5-10 years from initial conception to notification, so depending on the politics of 2041, I think we are fine until somewhere until then. I would have liked to see more than “just enough”, and it would be nice if the next government liberalises things further, but it seems like there is plenty of genuine growth enabled.

        https://www.greaterauckland.org.nz/2016/08/31/zoning-reform-is-the-unitary-plan-any-good-2-of-n/

        But a more important question might be: can the building industry scale up to build all that housing?

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      • Zzzzquerty that depends on the economic modelling -I think it is flawed. There is an awful lot of land banking in Auckland and as Michael says this doesn’t appear to be unwinding. Much of the Unitary Plan’s estimated 400,000+ new residential units is based on intensification in a few locations where high rise apartments are enabled.

        This has two problems wrt affordable intensification supply, without even considering affordable housing supply coming from freeing up access to greenfield sites from outside of the existing built environment.

        Firstly, those landowners with the fortunate locations where they have permission to develop have monopolistic pricing power for their land, because as I have explained there is not widespread right (competition) in whole suburbs of the existing city space, like in Tokyo, Montreal etc, where every landowner can do significant amounts of intensification if they want to.

        The second problem is that high rise apartments are inherently more expensive per sqm than low rise intensification -the so called missing middle -of walkup apartments, townhouses, duplexes, row houses etc.

        So the new supply enabled by the Unitary Plan in Auckland will not be as affordable as it could be. In Wellington there hasn’t even been a Unitary Plan process -so what is there stopping Island Bay working man cottages being sold for over $1 million?

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      • @brendonharre, if you take a look at the third graph in the linked article I posted above, you’ll see that of the 422,000, only 85,000 is “centers/mixed use”. 138,000 is new urban areas (granted, much of that isn’t being developed all at once) and 146,000 is intensification of existing residential zones.

        I’d have liked to see a greater focus on high rise apartments myself, because I worry that that medium density housing is the worst of both worlds (too intensified to have space for cars and gardens, but not enough to create really vibrant public living environments).

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  5. Beautifully staged – look at the grand piano – the mystery is the chromium plated vintage seagull-outboard motor sitting in the corner of the living room
    http://rwwellingtoncity.co.nz/properties/sold-residential/wellington-city/island-bay-6023/house/1721661

    The exterior shot does not demonstrate the full extent of the size of the land of 429 square metres
    The main photo gives an appearance of a house occupying the entire section with a footprint of 80% whereas the actual footprint is 25%
    The interior shots give a better feel for the size of the house
    Wonder why the agents photos didn’t show anything of the rear of the property

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    • A lot -if the site Michael’s article discusses was in Tokyo -it would be built up at least 3 stories -creating an extra 220sqm of residential space on the existing building footprint, but with better land-use regulations this could easily be improved upon. In my opinion this sort of site would be ideal to build right across the entire width of the plot -I have written about that and there has been an amendment to the RMA in October making that option more feasible if both neighbours agree.

      If the entire suburb had the opportunity to intensify through loosening land-use restrictions it would create a fantastic ‘fine-grain’ mixed residential/commercial urban environment.
      See here for a description of fine grain urban environments.
      https://marketurbanismreport.com/the-need-for-granularity-in-urban-design/

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      • From my 25th floor perch in Shinjuku a fringe suburb of Tokyo, similar to Pukekohe to Auckland perhaps, there is very few buildings as far as my 270mm telephoto lens can see, that is less than 5 level buildings.

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      • Why muck around

        Crikey – lets be bold – you put a bulldozer right through the whole suburb of island Bay and rebuild the entire lot with 5 to 10 story apartment buildings – why not – why muck around

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      • GetGreatStuff, Tokyo metropolitan area has built up in a very incremental way based on the decisions of millions of individual landowners. I describe this process here https://medium.com/land-buildings-identity-and-values/what-is-the-secret-to-tokyos-affordable-housing-266283531012

        Tokyo Precinct has increased its population from 10 to 1.3 million in the last 50-60 years and in the same period residential space per person has increased from 16sqm to over 30sqm. This shows how good their elasticity supply of residential built space in Tokyo city in the upwards direction is.

        I think it is politically and economically feasible (not currently, but possibly in the future) for NZ cities in places like Island Bay to embark on a similar process to what Tokyo and Montreal have done (especially if at the same time we take a balanced/pragmatic attitude to building our cities outwards too).

        I don’t think it is feasible to usurp 1000’s of property owners rights in Island Bay by just bulldozing the entire suburb in one go. Iconoclast I think that might cause a few complaints……..

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      • Landbanking? Or the price of individual rights to a quarter acre section and a sun drenched BBQ patch?

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      • Brendon – re bulldozing the lot …

        I was being extreme – have spent 30 minutes cruising up and down Derwent Street on Google Maps Street view – nice street with older style single-level period homes on small sections almost cheek-by-jowl in many places – but – looking carefully there is one 2 level house at 113 Derwent Street which occupies the full width of the section and blocks the amenity on both sides of the house – the north and the south – so much so it devalues both of the neighbours property significantly – the day multi-level apartment buildings start being developed on that street it will be the death of it – the direction of the street is north-south and with the high hillsides on the eastern side in part and much of the western side the orientation of the sun leave little sunlight hours to be enjoyed and multi-level apartments would not enhance the minimal sunlight that is currently obtained. Hobsons Choice. With the domino or ripple effect in play once it starts it will be down-hill as far as a lifestyle is concerned. If you just wanted 30 sqm bolt-hole cage-style apartments – no problems – but the existing community will leave

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      • As it happens, I used to leave right next to 113, on the north side. That place was originally a flat on top of a garage, and part of a larger complex of housing for a large Italian family. I can’t say we found the place really adversely affecting our amenity value, but generally I take – and agree with – your points.

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    • Re: How much vacant land is there in Island Bay?

      In Tokyo Precinct in 1963 there was 10 million people and now there is 13.29 million. In 1963 Tokyo Precinct residents had 15sqm residential space per person and now they have about 32sqm.

      That means the residential built environment in Tokyo Precinct in 1963 was 150m sqm and now it is 425m sqm. An increase of 284%.

      I would guess that Island Bay is not as built up as Tokyo was in 1963 so if Wellington adopted the Japanese planning rules, building code and culture towards intensification then there is plenty of space in Island Bay for new residential development.

      NB: I have been told that Japan has a back-up building code -the Canadian one -which they can use post disaster to import housing.

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  7. In my opinion the strongest argument for improving the supply of developable land to improve housing affordability is Edward Glaeser’ (author of Triumph of the City) economic research.

    Michael, I like you practice of engaging with the strongest arguments of people/groups who take opposing policy positions as the best way to illuminate an issue and eventually moving forward. I think in housing we should be considering the likes of Glaeser.

    Here is an excerpt from Edward Glaeser -Wikipedia, summarising Glaeser’s economic research on housing.

    “During the 2000s, Glaeser’s empirical research has offered a distinctive explanation for the increase in housing prices in many parts of the United States over the past several decades. Unlike many pundits and commentators, who attribute skyrocketing housing prices to a housing bubble created by Alan Greenspan’s monetary policies, Glaeser pointed out that the increase in housing prices was not uniform throughout the country (Glaeser and Gyourko 2002).
    Glaeser and Gyourko (2002) argued that while the price of housing was significantly higher than construction costs in Boston, Massachusetts and San Francisco and California, in most of the United States, the price of housing remained “close to the marginal, physical costs of new construction.” They argued that dramatic differences in price of housing versus construction costs occurred in places where permits for new buildings had become difficult to obtain (since the 1970s). Compounded with strict zoning laws the supply of new housing in these cities was seriously disrupted. Real estate markets were thus unable to accommodate increases in demand, and housing prices skyrocketed. Glaeser also points to the experience of states such as Arizona and Texas, which experienced tremendous growth in demand for real estate during the same period but, because of looser regulations and the comparative ease of obtaining new building permits, did not witness abnormal increases in housing prices.
    Glaeser and Gyourko (2008) observed that in spite of the mortgage meltdown and the ensuing drop in housing prices, Americans continue to face housing affordability challenges. Housing policy makers, however, need to recognize that housing affordability differs from region to region and affects classes differently. Public policies should reflect those differences.”

    Edward Glaeser’s approach has influenced NZ policy makers -Steven Joyce commissioned a report, called -“Quantifying the impact of land use regulation: Evidence from New Zealand” published in July 2017, which almost exclusively used Edward Glaeser’s techniques to show that the cost of new housing in many urban areas of New Zealand, had deviated above its marginal cost due to land use restrictions.
    http://www.interest.co.nz/property/88883/government-says-land-use-regulation-blame-56%C2%A0-cost-average-house-auckland

    Note, land use restrictions are not just zoning which prevents the outward expansion of a city, it is also restrictions, such as, height, setback, shade planes, heritage, view shafts, minimum car parking requirements etc, which limit the upward expansion of a city.

    Auckland’s house building restrictions were assessed as being the worst of any urban centre in New Zealand -56% of the final cost of an average home being estimated to be land-use regulations. In Wellington it is 48% of the cost is land-use regulations.

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  8. There is a very good report from a North-West policy institute, which is worth a read, it describes the various policy choices of how to increase the supply of house building to achieve affordable housing.

    It looks at the pro-automobile dependent sprawl -the Houston model.

    It looks at the Tokyo and Montreal models of being very relaxed about intensification.

    It looks at traditional zoning -not being too dissimilar to NZ but with a pro-development culture using Chicago as an example.

    Finally it looks at cities where the state has taken the lead in providing housing supply -Singapore and Vienna.

    It then looks at examples in the North-West like San Francisco where none of these options are chosen (a bit like NZ….)

    http://www.sightline.org/2017/09/21/yes-you-can-build-your-way-to-affordable-housing/

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  9. Somewhat related but with respect to Auckland, in today’s Herald regarding teacher shortages – one educator comments;

    “In the long term this will damage the reputation of Auckland in terms of international students. If secondary schools, and even primaries, lose those, we’ll be in real trouble.”

    Does anyone else find this (apparent) need for FDI in our primary/secondary schools unbelievable? Are we that poor as a country such that we rely on importing fee paying children as a means to provide one of the most basic of public goods (i.e., free primary/secondary education)? Are we most worried about ‘keeping up appearances’ to address the needs of the parents of wealthy children from offshore?

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      • Unlikely. Parents seeking an offshore education in NZ, I assume do so because they think educators from whatever their own country-of-origin are not the people who they want teaching their children?

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      • GGS – you are obsessed with high rise residential building – preferably 25 levels or more, many more migrants, bulldozing Auckland’s sacred cones and slaughtering the dairy herd and now imported teachers to solve a problem caused by too many imports – like “Killing the Goose That Lays the Golden Eggs”

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      • Just pointing out the cause and effect. Want more international students the nyou need more teachers, more cleaners, more retail shop attendants, and the result less available accomodation.

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      • There is no reason why we cannot adopt a more UK based migrant policy as has been preserved in the Treaty of Waitangi. The Treaty of Waitangi is a dual edged sword and a bi Party agreement between the British Crown and Maori and UK migrants should be in preference over any other countries. I recently rented my 45sqm apartment to 3 UK migrants. All of whom were quite comfortable in smaller type accomodation and sleeping a minimal activity when you are young and adventurous.

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  11. I was wonder why people overlook the main reason for high asset prices. Yes high asset prices and not just house prices; Bond, Sharemarket and Houses.
    Some government bonds have the lowest interest rates recorded in the last 5000 years. The US sharemarket has valuations approaching the last highest peak of the dotcom bust era.

    Unconventional monetary policy and its consequences are to blame. Cheap money and access to credit is inflating asset prices. Those assets with a modicum of attractiveness are bid up. Money from US/Europe/China/Japan are looking for assets with yield and NZ with relative high yields have been attractive.
    Is’nt curious that the NZ is one of the most heavily traded currencies relative to its size?

    Moreover, the Chinese are prodigous savers, and excess of savings looking for a home. I suspect this cultural and also a reflection on their inadequate social net.

    We need some aspect of quasi-capital controls. Or rules in place, so when an inevitable credit crunch occurs, it’s the foreign capital that is shafted and not the NZ economy.

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  12. Michael I see in your Island Bay story that you first moved to the suburb as a child with your parents. Then as an adult you were able to buy your own home in the suburb. Given the current state of the Island Bay housing market do you think your children, when they become adults will be able to live in Island Bay if they want to? And will it be easier or harder than what found?

    If it is harder and many ‘children of Island Bay’ choose to move elsewhere, have you thought about the loss of ‘connectedness’ this creates in the suburb? Social connections are a fascinating topic. They fit somewhere between individualistic theories of classical economics and whole of society theories of Marxism, sociology etc.

    Here is a good talk from an academic in the field explaining the hidden influence of social connections.

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      • Nice piece by Ryan. I’m not persuaded that housing affordability is the biggest issue: after all, the NZers who leave go overwhelmingly to Aus, where the housing situation is no better, and secondarily to the UK (largely ditto). Of course, perhaps with a more sensible housing policy we’d keep more people even though the salary differentials would still be very large.

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      • I think Brisbane is the best city in Australaisia for its combination of largish size, population, employment and business opportunities versus housing affordability (prices similiar to Christchurch) and quality of its transport system/ability to quickly access the bulk of the city (much, much better than Auckland).

        Certainly Brisbane is better than any NZ city on these metrics.

        I think from memory that Queensland is the State with the most kiwi residents.

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  13. The 34 Derwent Street example reminded me of another story from another era – barefaced – but a true story nonetheless of where there is a business opportunity the astute and the inscrutables will be right in there and you won’t even know its happening

    The brother of a friend was a real estate agent – young – a bit reckless – but there you go – he purchased (on deposit not outright) an old block of run down flats in of all places Parnell – brick and tile, single level – 6 in the row. He renovated the front unit, spent a fortune doing it up, put a colourful custom-made canvas awning over the front door, cleaned up the front of the property and had a nurseryman lay instant turf and install rented pot plants all around.

    Then he held an open day. People came from everywhere. Touring the staged front unit and readily purchasing the other 5 dilapidated units – sold the lot in the one day – selling the sizzle and not the steak – sold the potential of what could be done without doing it himself

    That house at 34 Derwent Street – you would need to know if the renovator-builder also owned the properties either side of number 34 – because the value of those properties also went up – considerably

    That’s business – folks

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