Housing: Mr Key – Get on the Programme

If kicking the can down the road and avoiding at all costs dealing with issues head on is an art form, then Prime Minister John Key is a master of the art.

We have seen this on graphic display this past month or so over housing issues, from the time of the announcement late October by Deputy Prime Minister Bill English.

Key was standing beside English at this announcement, looking decidedly uncomfortable.

The announcement by English was very clear with a sound and appropriate focus on land supply, infrastructure financing, process and construction costs.

This “focus” is essential in addressing these serious issues effectively.

It followed the release of the Productivity Commission Report March and extensive internal and external Government discussion. In turn, this was preceded by near eight years of public conversation of these issues, since the time of the release of the first Annual Demographia International Housing Affordability Survey back early 2005.

The NZ Planning Institute publicly stated early 2007 it supported the Demographia Surveys. Through 2007 and 2008, the National Party, then in Opposition, strongly supported the need to deal with housing issues. Phil Heatley completed a Study Tour to the USA and UK and Gerry Brownlee headed up Parliaments Commerce Committee Housing Inquiry.

The National Party campaigned on this issue (and others of course) in the lead up to the 2008 election – and won.

There was a widespread expectation the new National led Government would pragmatically start on the path of dealing with these issues.

So there has been a long history to this issue.

By mid 2009 the new Prime Minister John Key had scuttled the idea – out of the media and public spotlight. The current behaviour by Key on housing issues is very much a replay – but this time, in the public spotlight.

It is not a pretty sight.

This followed a Cabinet meeting earlier in the month, where the collective decision of Cabinet was clearly supportive of English’s proposals. The convention of “collective responsibility” is that once a decision is made, all Cabinet members (including the Prime Minister of course) are duty bound to support the decision.

Failing to do this is a very serious matter – and particularly so for a Prime Minister. He must of course be seen, both within Government and outside of it, as a “team player”, so that trust and confidence of his colleagues – and most importantly his fellow citizens - is maintained.

It is important for the Government to send a clear message the “housing bubble days” are over – and that the Government across the board is determined to deal with supply impediments.

And further to this, that over a reasonable and realistic time frame, New Zealand housing returns to normal affordable levels. Indeed where they had been for previous generations of New Zealanders.

It was also very important the Local Government people got the “clear message” they (in the main the larger ones) need to start on the path of better controlling their costs, so they are in a position to once again, meet their infrastructure responsibilities to their communities.

The housing issue at its core is very much a Local Government costs out of control problem.

Getting the housing market properly sorted out is going to be a long haul exercise – likely 10 years or more – because the industry pricing and performance is so degraded.

To best illustrate this, new starter housing on the fringes of the affordable US housing markets is in the order of $US 600 through $US 700 per square metre all up. In contrast here in New Zealand it is anything between $NZ 2.500 (Christchurch) through $US 4,000 per square metre all up (Auckland). What is considered executive standard housing in New Zealand is starter quality housing in the United States.

The stress on Christchurch households is the same as the stress on Auckland households because of the much lower median household incomes in Christchurch ($56,000 in comparison with approximately $72,000 for Auckland).

So fringe new stock is being put in place in both cities for a stratospheric 10 to 11 times median household incomes ( it should be about 2.5 Median Multiple – refer Definition). It is not generally the younger first home buyers purchasing this new stock, but older “propertied” buyers, leveraging off their bubble equity.

The Median Multiples for both cities are similar – with Auckland at 6.4 and Christchurch at 6.3 (Demographia Survey – data 3rd Quarter 2011).

Therefore Prime Minister John Key is being deliberately misleading on these issues, by stating this is an “Auckland problem”. It is not – it is country wide.

The fringes of a City are its only sufficiently responsive supply / inflation vent. A Definition of an Affordable Housing Market is clearly set out on the Performance Urban Planning ( www.PerformanceUrbanPlanning.org ) website ...

DEFINITION OF AN AFFORDABLE HOUSING MARKET

For metropolitan areas to rate as 'affordable' and ensure that housing bubbles are not triggered, housing prices should not exceed three times gross annual household earnings. To allow this to occur, new starter housing of an acceptable quality to the purchasers, with associated commercial and industrial development, must be allowed to be provided on the urban fringes at 2.5 times the gross annual median household income of that urban market (refer Demographia Survey Schedules for guidance).

The critically important Development Ratios for this new fringe starter housing, should be 17 - 23% serviced lot / section cost - the balance the actual housing construction.

Ideally through a normal building cycle, the Median Multiple should move from a Floor Multiple of 2.3, through a Swing Multiple of 2.5 to a Ceiling Multiple of 2.7 - to ensure maximum stability and optimal medium and long term performance of the residential construction sector.

Building affordable housing today is a very ho hum and formulaic business. There is nothing confusing about it – unless one is a politician or bureaucrat, it would appear.

So with the Median Multiples of Christchurch and Auckland in the mid 6.0’s (and climbing) and new fringe stock going in at approximately 10 / 11 Median Multiple (when it should be 2.5), it is not too difficult to understand why Deputy Prime Minister Bill English is so deeply concerned.

With increased demand (and persistent constraints on new supply), there is enormous scope to pump the Multiples trough to 8.0 and 10.0. Veteran property investor Olly Newlands is of the view that the stage is set to double the prices over the next few years. These figures suggest he may well be right.

Already – the total value of our generally poor quality housing stock is about 3.0 times GDP (it should not exceed 1.5 times – and the USA and Houston are currently 1.1 times approximately). Rather amusingly, the total value of New Zealand’s housing stock is more than that of Houston with its 6.1 million people and an economy of $US384 billion (ours about $US125 in GDP PPP terms) growing at about 8.5% per year.

It is remarkable how Mr Key does not appear to recognise how dangerous this is – while Deputy Prime Minister Bill English with the majority of his Cabinet colleagues appear to.

The Labour solutions are so “off the wall” they are best ignored.

Labour seems committed to take pride in being complete economic illiterates. After all – their incompetence triggered the 2002 through 2007 inflating housing bubble. They should be grateful to the current Government for at least endeavouring to sort out Labour’s housing mess.

One would expect John Key to understand the housing market better than Labour politicians – but alas, he is struggling.

It needs to be explained to Mr Key the fringe Multiples are so elevated above where they should be, that it is going to be a very long haul exercise indeed, bringing them back to where they should be.

The numbers speak for themselves. It is too dangerous to delay decisive action any longer – and indeed most unfortunate we didn’t start on this path following the 2008 election.

ENDS

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