$1b housing help

July 4, 2016

The government has announced a $1 billion Housing Infrastructure Fund to accelerate the supply of new housing where it’s needed most, Finance Minister Bill English and Building and Housing Minister Dr Nick Smith say.

The contestable fund will be open to applications from councils in the highest growth areas – currently Christchurch, Queenstown, Tauranga, Hamilton and Auckland.

Mr English says the Housing Infrastructure Fund will help bring forward the new roads and water infrastructure needed for new housing where financing is a constraint.

“The Government will invest up front to ensure the infrastructure is in place. But councils will have to repay the investment or buy back the assets once houses have been built and development contributions paid.”

Dr Smith says the fund will be available only for substantial new infrastructure investments that support more new housing, not to replace existing infrastructure.

“To access the fund, local councils must outline how many new houses will be built, where they will be built and when they will be available. Ideally, they will have agreements with developers on these issues.

“Funding may also have other conditions attached, such as faster processing of resource consents. All of this will require close collaboration between central and local government.”

Mr English says infrastructure, and its financing in particular, is one of the three key constraints to building more houses – alongside land supply and consenting requirements.

“Councils have strict debt limits which means some lack the headroom to invest in infrastructure now and then wait for future development contributions to recover the costs. The fund will help provide more infrastructure sooner by aligning the cost to councils with the timing of revenue from development contributions.”

Depending on the number and timing of applications, it will require the Government to temporarily borrow up to $1 billion, which will increase net debt until it is repaid.

Dr Smith says the Government is also considering establishing Urban Development Authorities (UDAs) to help further speed up the supply of new housing.

UDAs have streamlined powers to override barriers to large-scale development, including potentially taking responsibility for planning and consenting and other powers.

“These changes are just the latest steps in the Government’s ongoing, comprehensive programme to increase the supply and affordability of housing,” Dr Smith says.

“They will complement the work of the Housing Accords and Special Housing Areas, our social housing build, our emergency housing programme, the expanded HomeStart Scheme for first home buyers, the development of surplus Crown land, the National Policy Statement, RMA reform and the extra tax measures we took last year.

“We are making good progress in facilitating increased investment in housing with a record $11.4 billion of residential building work underway this year. This initiative to support councils with infrastructure provision is the next logical step in this programme.”

The housing shortage is a result of supply outstripping demand.

It takes time to build new houses and it also requires new infrastructure. The costs for developing that is incurred long before councils start collecting enough in rates to fund it.

This new fund will enable councils to borrow the money needed for new infrastructure – roads, water and sewerage – and gives them 10 years to repay it by which the increased rate-take from the new houses will enable them to do.

It’s a good idea and while $1 billion is a very large amount of money, the cost to the taxpayer is the interest only because the fund is for loans not grants.


366 days of gratitude

June 3, 2016

For too long New Zealand houses weren’t built with insulation and double glazing.

The original bits of our home are more than 80 years old but several  alterations have made better use of the sun and provided better protection from the cold than the original building had.

The last involved fairly radical surgery with good insulation put under the floor, in the walls and roof. All new windows were double-glazed and the old ones retro-fitted.

Now that winter’s here I’m very grateful for all of that.


Move where the living is easier

May 24, 2016

The root of Auckland’s housing affordability problem is an imbalance between supply and demand.

Increasing supply takes time, reducing demand can happen faster, as fast as people move somewhere else where the living is easier as Liam Hehir has:

I am 30 years old, married and the father of two. Our family lives in a big villa on a large section in a quiet street.

Crime is low and the neighbours are nice. We are close enough to my office that the daily commute is rarely more than 20 minutes.

We’ve managed this despite not having wealthy parents, never winning Lotto and having sizeable student loans. And because I am the sole breadwinner, we actually earn less than the average household income.  

With a mortgage less than three times my annual salary, however, we are confident we can manage things on one income for a while. 

If you’ve read the papers lately, you might think this is quite the feat for a pair of millennials. As you will have heard (often and loudly), our cohort likes to think of itself as the hardest done by generation this side of the Black Death.  Some would go so far as to argue that the peasants of that era had a better shot at home ownership than we do.

What’s our secret? Well, it all comes down to one weird old tip: We choose not to live in Auckland. 

Instead, we have set up home in a small country village just outside of Palmerston North.

Don’t let too many people know about this, but there’s no law that says everyone has to live in Auckland.

You may be surprised to learn that Kiwis are pretty much free to live wherever they want. There’s actually nothing stopping young New Zealanders from buying houses in places like Palmerston North – or Invercargill, Whanganui, Timaru or Whangarei. . . 

People choose to live in or move to Auckland for many reasons, cheaper housing isn’t one of them. If they want a reasonable house for a reasonable price that’s not where they should be looking or living.

There are trade-offs. When you live in the provinces, you do not just go out for coffee at 10.30 on a Tuesday evening and expect places to be open. And while there are some very good bars and clubs, it is true that you don’t get the variation and choice on offer in the big city. 

But if you’re ready to be a homeowner, chances are that much of that is out of your system anyway.  . .

If you’ve mortgaged yourselves to the hilt you won’t have spare money for enjoying city attractions and life away from Auckland has other compensations. You won’t waste time and money on the stop-start crawl that is too-often part of driving there, for starters.

It also is true that if you buy in the provinces, your home is unlikely to appreciate in the manner of the inflationary Auckland market. But this is only a big problem if you see home ownership as an investment opportunity.

If you take the quaint view that a home is primarily a place to live (and that spending on it is consumption rather than speculation) then the slower market becomes less of a problem.

Here’s a second secret: there are forms of investment other than real estate. If you have a smaller mortgage, you can take the money you’ve saved and invest it in other things. And if you don’t know how to invest, you can ask a professional to do it. You can even get your bank to manage it for you.

There are even some people out there who say that a diverse set of investments is safer than pouring all your income into one property in the hopes that the market will continue to inflate forever and ever. 

Sounds crazy, right?

But what about work? If you’ve got a strong back, you should be able to find work in the provinces. 

Remember, these are the regions where farmers have literally have had to hire tens of thousands of migrants to fill jobs Kiwis don’t want to do. Of course, it might mean putting on hold your dreams of being a doghouse interior design consultant or owning a restaurant that specialises in artisan toast.

As the Discovery Channel’s Mike Rowe advises, “don’t pursue your passion, chase opportunity.”

Some of the jobs available out here in the regions might not always be pleasant or glamorous (I can attest from experience) but they are perfectly respectable. You might not start out on megabucks, but the cost of living is low. You have to start somewhere.

Some of those not so pleasant jobs pay well and there’s plenty of pleasant jobs in the provinces too.

Technology means you don’t necessarily have to live where your market is. Garrick Tremain, one of the country’s best cartoonists lives at the foot of Coronet Peak; a couple in rural North Otago make a very good living buying and selling furniture on-line; booming tourism has provided business opportunities in all sorts of formerly out-of-the-way places.

It’s not only small businesses that thrive out of Auckland. Toyota has its headquarters in Palmerston North and Ravensdown is based on the outskirts of Christchurch.

We are the descendants of enterprising people. In centuries past, our ancestors came to these islands by waka and sail, making sacrifices and taking risks along the way because they sensed the chance to make something for themselves in a new place. Many of their successors seem to be too timid or too entitled to venture south of the Bombay Hills. 

More fool them.

There is life, and very good living, out of our biggest city.

Those used to higher temperatures might find it a bit cool much further south, but they’ll be able to afford a warm, dry home and as much heating and as many layers of merino as they need with the money they’re not paying for an Auckland house.


Moving up, out and right out

May 19, 2016

At last, Labour appears to have caught up with National on one solution to Auckland’s housing problem:

The new position by the Labour opposition calling for an abolition of city limits has been welcomed by Building and Housing Minister Dr Nick Smith.

“This is a welcome repositioning by Labour. Tight city limits and not allowing intensification is at the core of Auckland’s housing problems. It is limiting new housing developments, driving up section and house prices and encouraging land banking.

“A broad political consensus that the policy around city limits needs to change is helpful to progressing the necessary reforms to increase housing supply and to make them more affordable.

“I was given the Housing portfolio in January 2013 and immediately identified Auckland Council’s metropolitan urban limits, set in 1993 when the population was half a million less than today, as a huge barrier to meeting housing needs both now and in the future. At that time Phil Twyford insisted having no boundaries ‘will mean uncontrolled sprawl from Pukekohe to Warkworth’.

“The Government’s housing programme has involved the systematic dismantling of Auckland’s metropolitan urban limit. I have used Special Housing Areas (SHAs) to override the limits in the short-term while fast-tracking with the independent hearings panel a new plan for Auckland with adequate housing supply.

“Both the laws for SHAs and the new Unitary Plan were opposed by Labour. The new Unitary Plan is only six weeks away from going to the council, and I’m confident it will provide a far more permissive approach to new housing because of the depth of analysis that has gone into the new plan.

“It would be counter-productive to ditch this work at this time with a simplistic approach of just abolishing city limits. We still need some rules to ensure new urban areas have appropriate infrastructure and services and that we make separate provision for industry from housing.

“We are making huge progress in growing supply. Only 10 new homes were being built each working day when National came to office but that has grown to 40. I will be keeping my foot hard on the accelerator until we achieve the needed rate of 50-60 per day.

“I welcome this change of tack by Labour on city limits because the next key step is gaining support for a more enabling plan for Auckland. I hope Mr Twyford and Labour will join me in encouraging the Auckland Council to support the new Unitary Plan in July, when the independent hearings panel reports back.”

Some political tragics might care whose idea it was to allow Auckland to move out but most other people just want the best solution to the imbalance between supply and demand – and that’s more houses.

Auckland has to move up and out and it would help if some people moved right out of the city to other regions where houses are far more affordable.

Strong family links and work will be keeping some people in Auckland but there are good livings and good living in other parts of the country.

All New Zealanders are either descended from immigrants or immigrates themselves. Many of our forbears made long and dangerous journeys to get a better life for themselves and their families; some came not just to a new land but a new language and culture, some new New Zealanders are still doing that.

What’s stopping at least some Aucklanders easing the housing problems in their city by making the much easier move to somewhere else in New Zealand?

 

 


Quote of the day

October 1, 2015

. . . A strong focus of our policy is to make sure our markets work.

And over the last 30 years New Zealand has done a reasonable job of this.

Over the last seven years our labour market has been tested.

It has accommodated a significant recession in 2008, and a pickup in demand particularly in Christchurch following the earthquakes.

The labour market was able to respond quickly to those shifts in supply and demand conditions.

Today New Zealand’s proportion of the working-age population in employment is among the highest in the OECD.

Another area that is now working well is the energy market.

For a long time, New Zealand energy markets were over-regulated and poorly-regulated.

Extensive government ownership further stunted price signals.

For instance, water management in the hydro-electricity system was, compared to today, very poor.

And advertising campaigns to urge the public to restrict their energy use were more frequent.

In the last few months there have been a number of decisions in the energy industry which indicate a working market.

We’re shutting down excess capacity, and excess capital is being withdrawn and returned to the owners of that capital.

After years of litigation and legal contest over the rules, the energy market is now starting to work.

Which brings me to the housing market.

This is probably the largest market in New Zealand where the rules need to be reshaped.

The most evident indication of a problem is Auckland house prices.

I’m yet to find a housing market anywhere in the world where prices go up at over 20 per cent a year without stopping and then starting to come down again.

It may be that we are unique – but that seems unlikely.

So we’re concerned about the housing market.

Because it’s a large asset on the New Zealand balance sheet, worth around $600 billion.

And because what happens in our housing markets has a profound effect on every household.

I want to go through a number of the reasons why the Government worries about housing, why it matters to the economy, and some of the key issues around the way that market is regulated.

We have a better understanding of the significance of the planning process than we did in the past.

The process probably looks unexciting to most people – something busy-bodies and councils do.

But actually it’s the process by which one of our largest and most significant markets is regulated. And therefore we need to understand it.

As a group of young people, it is critical for you as potential future home buyers that we get this right.

There are three reasons why the Government is focused on planning – and each of these matter for you.

The first is that a housing market that is not properly functioning can have a significant effect on the macro-economy.

Over the last five years, the Auckland housing market has been the single biggest imbalance in our macro-economic system.

It takes around eight years for the housing market to respond to a shock to demand.

In part that is because changes to council plans can take years, in some cases over a decade.

Resource consents on a housing development regularly take 18 months, including pre-application times excluded from the official statistics.

When combined, those very real delays can exceed the length of the house price cycle.

The point is that when the supply of housing is relatively fixed, shocks to demand – like migration flows increasing sharply as they have recently – are absorbed through higher prices rather than the supply of more houses.

Long lead times in the planning process tend to drive prices higher in the upswing of the housing cycle.

And those lead times increase the risk that eight years later, when additional supply arrives, the demand shock that spurred the additional supply has reversed.

The resulting excess supply could produce a price crash.

This has been borne out by extensive studies in the United States following the Global Financial Crisis.

What they’ve found is that, across different markets subject to rules which vary by state, more-intense regulation of urban development is associated with higher house price volatility.

That is, the steepest price increases and the sharpest falls are in areas where regulation is strongest. 

The effects of planning rules can extend to the macro-economy.

Cities are one of the extraordinary inventions of the human race.

Studies have shown that cities are an engine room of growth. Incomes in cities are higher than elsewhere. That is one explanation for high rates of urbanisation.

Research indicates that when planning rules prevent workers shifting to higher-productivity locations, then there is a cost in terms of foregone GDP.

It’s only relatively recently that economists and politicians have understood the scale of those effects.

So when we’re talking about something as apparently dry as the Auckland Unitary Plan, we’re talking about a set of rules that will have a major impact on the city, on current and future residents – but also on the wider economy.

The second reason we focus on planning and its consequences is that poor planning drives inequality.

In my view, poor urban planning is one of the significant drivers of inequality.

Poor regulation of housing has the largest proportionate effect on the lowest quartile of housing costs and rents.

So when we’re having the debate about whether there is sufficient land available, we have to recognise that the people who lose the most from getting that decision wrong – and who stand the most to gain from fixing those decisions – are those on the lowest incomes.

Income inequality in New Zealand has been flat for 20 years, but the gap between incomes measured before housing costs and after housing costs is growing.

Housing costs are becoming a larger proportion of incomes – and that matters the most at the bottom end of incomes among people who have few choices.

And there are other measures of the effects on low-income households.

Twenty-five years ago, around 30 per cent of new homes coming into the market were priced in the lowest quartile. Another 30 per cent of new homes were priced in the upper quartile.

Today, only 5 per cent of new homes are priced in the lowest quartile. Nearly 60 per cent of new homes are priced in the upper quartile.

The new supply of lower-priced, affordable housing has dried up.

There are parts of Auckland where no new houses are entering the market priced at the affordable end of the market.

It is not surprising to see prices and rents rising disproportionately at the bottom end given this lack of supply.

Planning is often seen a public good activity that must address the needs of those who are most-vulnerable and have the lowest income.

In fact there is a strong argument to say it does exactly the opposite.

Poor planning favours “insiders” – homeowners – on high incomes and who have relatively high wealth.

Developers have told me that in Auckland they need to build a house worth $600,000 to make a development commercially viable.

That’s because it is difficult to build cheap housing on expensive land – particularly in view of the planning rules.

Those rules include urban limits, minimum lot sizes which prevent subdivision below a certain size, and maximum site coverage rules which prevent a house covering more than a certain proportion of the lot.

Working in combination, these rules reduce opportunities to develop affordable homes.

Now that planners are recognising these consequences, they are now creating even more rules to offset these effects; for example by requiring some developments to include up to 20 per cent affordable housing.

That is implicit recognition that planning rules have driven the costs up so much that another rule is required to offset it.

The impact of these rules on inequality, and on household incomes, leads to a third reason for why the Government is focused on the housing market.

That is the fiscal cost to Government.

As households have the proportion of their income spent on housing grow, the political pressure goes on governments to fill the gaps.

Today we spend $2 billion each year on accommodation subsidies. 60 per cent of all rentals in New Zealand are subsidised by the Government.

The state owns around $21 billion worth of houses.

One house in every 16 in Auckland is a Housing New Zealand property.

Many of these are three bedroom houses on quarter-acre sections only a few kilometres from the CBD – a massive misuse of scarce land. And all at the taxpayer’s expense.

So these are the reasons why the Government pays attention to the housing market and issues stemming from poor planning. . . 

As we get more information about what actually happens, often we find planning doesn’t achieve what people think it is achieving.

Planners and councils have a very difficult job in planning our urban areas.

Cities are incredibly complex systems. They are the product of millions of individual choices.

The idea that a small group of people could understand what choices we’re making is asking too much of them.

Not because they are in any way incapable. But because the task is overwhelming.

The Auckland Unitary Plan is 3,000 pages long.

It’s trying to regulate everything from the size of bedrooms to biodiversity in the Waitakere Ranges. No one person could possibly understand all the trade-offs in that plan.

Which means many of its effects will be certainly be unintended.

Planners can’t know everything – so of course they can’t be perfect in making trade-offs on our behalf.

Successful planning requires an understanding of its own limitations.

One of the things that needs to change is extra accountability and transparency.

Your prospects of being able to buy a house are directly related to the decisions made by planning officials about the availability of land, the environmental standards they apply to building, and the way infrastructure is allocated.

It’s very difficult to understand how planners do that, even though the consequences for the community and the economy are significant.

Central government has had the opportunity to sit alongside councils to understand how they make their decisions.

Some of those decisions appear quite arbitrary.

They can be driven by the tastes of individuals who have the power to make decisions.

Some decisions are contradictory within one planning system. Decisions might not fit together. Urban designers, for example, don’t always see things the same way as a council’s engineers.

First home buyers will be subject to rules which are not transparent and cannot be known in advance.

One of the areas this is most apparent is infrastructure.

Like central government, councils have historically made decisions on substantial long-term infrastructure projects with a minimal understanding of costs and benefits, and how the infrastructure will be supported over time.

Like central government, councils do not always know a lot about their infrastructure. And therefore they don’t know how to price it.

Pricing infrastructure is difficult. The nature of the asset makes it difficult to price. How do you price a stormwater system?

But that pricing matters. One of the big issues for getting a more-flexible supply of land is connecting the financing of the next piece of infrastructure with the value of the land it services.

Land is made more valuable when it is serviced by infrastructure. Infrastructure financing may sound a rather dry topic – but it is fundamental to allowing a city to grow.

Because if planners believe infrastructure supporting growth is too expensive, they’ll be too reluctant to release land for development – up or out.

That’s not a criticism – it’s an observation.

The funding base for councils is increasingly people on low fixed incomes. That is a product of an ageing population.

So you can understand why councils are under pressure not to expand if they think an expanding city is going to push up rates for existing ratepayers.

Councils need clear funding models so that development worth having can occur and future homeowners and current renters who might want to buy are taken into account.

So that’s a brief overview of how important it is that housing is regulated in a way that enables flexible supply, and I hope some indication of the progress we’re making.

That progress is necessarily slow, because these issues are complex.

If we better understand the economics of what is happening we can make better choices about housing regulation.

And that depends on one of the most important parts of public policy, which is the institutional arrangements by which those decisions are made.

That means looking at the incentives confronting an individual sitting in a council when making a decision about whether to allow a new subdivision.

We need to understand the incentives councils are reacting to. 

Next month the Productivity Commission will produce a further report on the regulation of land supply. It will be another input into further, ongoing improvements in this area.

And we are seeing new thinking on a range of issues affecting housing, including from councils.

Often politicians are accused of being focused on the short term. That’s one of the reasons this issue has never been dealt with properly in the past.

The Government is taking a long term view.

All of the things I’ve talked about today will take 10 to 15 years to sort out.

So it’s important that a broad group of people understand our single-biggest asset class – the most-important asset most of us will own – how is valued, how it is regulated, and how it can contribute to our general welfare.Bill English


Quote of the day

August 5, 2015

New Zealand National Party's photo.

We have always been more ambitious for our youth. Ensuring they have a roof over their heads means we can more effectively dig in and ensure they’re getting access to education, employment and wer are supporting them back to independence. – Paula Bennett

She was announcing more housing support for vulnerable young people.


Quote of the day

July 22, 2015

. . . One of the reasons why you probably haven’t had a significant correction is because over the last 45 years there’s probably been a general view that houses are not overvalued relative to a whole lot of different factors. My point is that the market, in the end, assesses when housing is massively overvalued compared to fundamentals, not politicians.John Key


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