Urban Planning: It’s a Cultural Problem

Hugh Pavletich FDIA
Performance Urban Planning
Christchurch
New Zealand

March 23, 2010

Many New Zealanders are now aware that our cities need to deal with serious structural issues, but may not have a particularly clear understanding of the linkages of the major issues, and most importantly, the common cause.

Firstly – our poor housing affordability performance is illustrated year after year by the Annual Demographia International Housing Affordability Surveys , where currently our major cities housing is approximately 5.7 times annual gross household income. House prices should not exceed 3 times annual household income, with mortgage debt loads not exceeding 2.5 times annual household income.

On the Welcome Page of my website Performance Urban Planning, I spell out in the clearest terms possible, the characteristics of a normal affordable housing market –

“For metropolitan areas to rate as ‘affordable’ and ensure that housing bubbles are not triggered, housing should not exceed 3 times gross annual household incomes. 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. The fringe is the only supply or inflation vent for an urban market. The critically important Development Ratios for the 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.”

One would think something as simple as this would be easily understood.

In rough terms, New Zealand housing is artificially inflated to the tune of in excess of $250 billion and Kiwi households are likely carrying $60 billion of excessive household debt.

Most New Zealand households should not be taking on board mortgages exceeding $150,000. They have essentially been conned - or more likely conned themselves - in to the idea that mortgages of $250,000, $350,000 plus are good for them. In reality though, they are “mortgage slaves” and the only real beneficiaries of excessive mortgages is the banking community.

While I have had more than enough to say about economists in the past, thankfully increasing numbers of reputable ones internationally are clearly articulating the serious structural issues that need to be dealt with.

Secondly – as the Auckland architect Kevin Clarke within his recent New Zealand Herald article Govt can't escape leaky homes blame explained so ably “The leaky building epidemic did not happen by accident. It was primarily caused by government mismanagement over more than a decade”. John McCrone of The Press wrote at much the same time - “There’s a storm coming” of these issues as they relate to Christchurch, updated from his earlier article A rotten shame .

This problem involves near 90,000 homes nationally and anywhere from $11.3 billion, $20 billion or other figures north of it, you wish to pluck out of the sky at this stage.

It’s worth considering why we don’t have a “leaky boat” problem in New Zealand.

Thirdly – New Zealand’s leading business website interest co nz provides an updated list of Finance industry failures in New Zealand . By last count, there are 48 that have gone to the wall in the past few years, with $6.192 billion impaired, involving 187,519 deposits.

Now we are in to the “blame game”, with requests for government support from those who were more than happy to support the bubble pricing, load themselves up with excessive mortgages, buy houses on the strength of a bit of government paper and pile their life savings in to finance companies they didn’t have a clue about.

These same people need to be asked – how much concern did you show for the young, poor and disadvantaged denied the opportunity of affordable housing, while these housing bubbles were inflating?

Most seasoned property people could see all this playing out years ago and took the appropriate steps to protect themselves – and more importantly, their customers and those they deal with. In the writers case, I shut down the development business mid 2004, and to keep occupied in the meantime, have engaged in political advocacy work to deal with these problems. If nothing else, it’s a better idea than going broke as a “bubble bunny” developer.

The reality is that bubble property markets are simply lethal, and as a seasoned development practitioner, I will attempt to explain why.

There is a saying in the property game that “property is only worth the underlying income supporting it”. Forget that and you are a dead duck.

If the pricing moves outside the norm (price to income ratio – with the affordable housing market definition provided above), it is in to inflated price territory and these distortions have costs and consequences.

Experienced developers and builders know that while a bubble is inflating, they are likely losing money as their cash dries up. This is because as they are forced to pay higher land and construction costs for new projects and tax on their previous projects, before long, they run out of cash. In essence, the taxable profits on the previous project are an illusion. They are in reality going broke, developing poor quality stock and dragging their financiers and unwitting depositors in to the hole as well.

Those that do manage to “hold on” will then likely go broke as the bubble collapses and they and their financiers are left carrying inflated land and property stock.

Most importantly though, poorly governed and regulated property markets, (that artificially create land scarcities and inappropriately finance infrastructure) creating bubble conditions, degrade the whole culture of the industry. The good people exit, leaving the “bubble bunny’ developers, builders, financiers and consultants to wreck havoc.

What was once a disciplined commercial culture becomes a political cowboy culture.

As property prices are artificially inflating, land and building costs inflate and performance declines as I explained within an article two years ago How Urban Planning Degrades Housing Productivity. We are currently paying near double per square metre build costs because of this, the British, near four times as much as they should be. The British have had 60 years of poor quality land use governance and destructive prescriptive planning, while here in New Zealand, it has been going on for near 30 years.

In poorly governed and regulated markets, property development degenerates in to a political circus, to the extent it begins to feel to development practitioners like a criminal activity!

As a commercial property developer, I found that near 80% of my time was spent on political and regulatory matters. Of the 30 years I have been in the development business, I would estimate only some 5 to 6 years has been engaged on actual development work. The rest of the time has been spent “playing politics” and navigating ones way through the haze of unpredictable, unnecessarily time wasting and confused bureaucratic fog.

The first Demographia Housing Survey released early 2005 illustrated these problems (with constant annual repetition), but the Labour Government for near four years through to late 2008 chose to ignore these important Survey’s. After all, the bubble property markets were generating excess bubble revenues for the Government. To add insult to injury, the then Finance Minister Michael Cullen delighted in telling New Zealanders of his illusory financial management skills.

California was really the “Cullen model”.

It was in large measure thanks to the socially responsible New Zealand Planning Institute supporting the Demographia Survey (please note – not the New Zealand Bankers Association) back in early 2007, that stimulated the then National Party Opposition to take up these issues. The National Party’s Housing Spokesman Phil Heatley at the time completed an overseas Study Tour and initiated the Commerce Committee Housing Affordability Inquiry.

Soon after the new National led Coalition Government was formed November 2008 and the 5th Annual Demographia Housing Survey released late January 2009, the then Housing Minister Phil Heatley made it clear the new Government intended to deal with these issues.

Now - within a few weeks, the Environment Minister Nick Smiths Urban Technical Advisory Groups (writers comments) report is to be released. Hopefully, this report will provide the foundation for real progress to start on getting sound governance and responsible regulatory administration in place.

It is important to recognize however, that our Government and public bureaucracies at all levels are a reflection of us. If these serious problems are to be solved, it will require the active, informed and responsible participation of industry and professional groups in particular and each and every one of us as citizens.

ENDS

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