Housing Affordability Crisis

A weekly opinion piece from Dr Muriel Newman of the New Zealand Centre for Political Research, www.nzcpr.com 

Housing affordability is set to become a key election issue. Ill advised policies from local and central government are turning the Kiwi dream of home ownership into a fantasy.

According to the 2008 Demographia Survey, New Zealand now has the least affordable houses in the world: “Overall – New Zealand and Australian urban markets have the worst housing affordability at 6.3 time’s annual household earnings, followed by the United Kingdom at 5.5 time’s, Ireland 4.7, the United States 3.6 times and Canada 3.1 times annual household earnings. When interest costs on mortgages are added – New Zealanders are in the worst position. Based on local interest rates, a 100% 30 year mortgage to illustrate a consistent example – a New Zealand household can expect 18.6 years of income to go towards house cost and mortgage interest (excluding rates, taxes, maintenance and other costs); Australians 17.9 years, the British 14.1 years: the Irish 9.6 years; the Americans 8.3 years and the Canadians 7.9 years”.

The co-author of the Demographia Survey, Hugh Pavletich, this week’s NZCPR Guest Commentator, puts it this way: “The sad reality is that due to ignorance and inadequate management skills – our local authorities are deliberately starving and inflating the price of land on the urban fringes and denying too many people the opportunity of affordable housing. Currently in New Zealand – the sections cost more – and often much more – than what a completed house and land package should cost”.

Hugh goes on to issue a challenge: “The problem – and the solutions are not at all complex. The only “ingredient” required – is the will and commitment to restore housing to affordable levels. As New Zealanders - we owe it to ourselves to start on this path – now”. (Hugh’s opinion piece can be seen at www.nzcpr.com)

So what has caused this housing affordability crisis and what can be done about it?

There are a number of reasons, but prime amongst them is the dramatic surge in net migration - caused to some extent by the government’s mismanagement of the immigration portfolio - the early 2000s. From having a net loss of 11,000 long term residents in 2000, within two years the situation had turned right around with a net migration inflow of 38,000, followed by 35,000 the next year. This put considerable pressure on hospitals, schools and of course, housing.

Under the law of supply and demand, the building industry should have been able to meet the demand for additional housing. To some extent it did: while 19,000 new dwelling consents were issued in 2001, by 2004 that had risen to 33,000, dropping back to 26,500 last year. But the sheer size of the migration inflow meant that the supply of housing could not keep up with demand. This created a critical supply shortage that put upward pressure on house prices and was the catalyst for house price rises across the country. According to the Reserve Bank, a net migration inflow of 1 percent of the population causes house price rises of around 10 percent.

But while immigration created the demand for new housing the real culprit in constraining supply is government.

In many areas - including the key Auckland housing market - land supply has been limited through local government’s adoption of urban boundaries. These boundaries have been designed by environmentalists to contain residential housing within municipal limits in order to prevent urban sprawl. But this policy has created a critical shortage of land for the building of new homes in some areas, forcing section prices through the roof.

The Registered Master Builders Federation has researched the key drivers of New Zealand’s housing affordability crisis in the period from 2002 to 2007. They have  identified four main factors: the escalation in land costs have contributed 50 percent of the cost increase over the last five years, excessive council fees and levies are responsible for 15 percent, the increase in government compliance costs is also 15 percent, and the rise in labour and material costs have contributed 20 percent.

First and foremost, the Federation have identified that land costs have had the single biggest impact on the un-affordability of housing by effectively doubling the cost of a section over the last five years. In their submission to the Commerce Committee’s Housing Affordability Inquiry, they state, “In many cases availability of land is not necessarily the issue - it's the constraints the relevant local authority has imposed that are driving up land cost. For example, Auckland has a self-imposed growth limitation policy [with the intention of 'building up' rather than 'building out'], and Wellington has recently imposed in-fill constraints. Both these measures have resulted/will continue to result in artificial lifts in land cost. We suspect that in most cases, decision makers will not be fully aware of the consequential effects of the policies that they have adopted on land availability and cost”. 

The Federation has established that the rise in local council infrastructure levies and fees has created the single largest percentage increase in the growth of housing costs, escalating by an astonishing 900 percent over the last five years: “local authorities are using Infrastructure Fees and Development Levies in ways that are unreasonable and inappropriate, as they try to avoid raising general rates to fund their general infrastructure requirements”.

They go on to state: “We surmise that many local authorities, looking to avoid increases in general rates, have loaded infrastructure/development costs onto the construction of new houses via infrastructure/development levies. Avoidance of [for example] a 1-2% rise in general rates across all ratepayers has resulted in a ~$10,000 impact on new homeowners - with the consequential across-the-board impacts on home affordability.”

Another major cost driver is the rise in compliance costs across the building and construction industry. According to the Federation, many of the demands of the new Building Act 2004 are seen as excessive. In particular, whereas 9-10 pages of plans used to be sufficient to obtain a building consent, 30 pages of detail are now required, more than doubling the design time needed to produce the plans. Consent delays have also soared with the standard three month consenting period having blown out to six to nine months in many areas. Such delays have a serious impact on cash flows - builders must allow for it, and clients are forced to carry the costs of construction and renting for far longer than they should.

The Federation also notes that “in too many cases Resource Management Act consents are being required for minor building site works and/or the RMA consenting process is not being conducted in optimal tandem with the Building Act consenting process.” They explain that the delays in the building consent process are largely caused by the “uncertain and inconsistent” treatment of consent applications, noting that “for some two years the particular standard to be achieved was unclear and variable” as a result of a lack of leadership from the government.

They conclude: “We are extremely concerned that the building and construction industry will become far too ham-strung by undue rules, regulations and requirements, such that we have a significant compliance ‘bureaucracy’ effect which in turn significantly impacts on housing affordability.”

In its submission to the Housing Affordability Inquiry the Reserve Bank urges the government to take a cautious approach to schemes that increase demand for affordable housing: “The Reserve Bank is of the view that government policies should focus on increasing the responsiveness of housing supply to changes in demand rather than schemes which increase demand… A review of planning practices may be required, with a view to possibly relaxing ‘urban fences’ and encouraging medium density redevelopment in existing urban areas”.

The problem is that rather than addressing some of the legitimate concerns that identify government as a key contributor to New Zealand’s housing affordability crisis, Labour is in denial. Instead of dealing with the crucial issues of constraints on the supply of land and the excessive cost of bureaucracy, the government has introduced a Housing Affordability Bill that completely ignores them. Labour’s Bill encourages local authorities to adopt a policy regime that will require property developers to allocate a proportion of their development for “affordable housing” - which the council will then administer. By essentially confiscating property rights, this new Bill would make Karl Marx proud.

The housing affordability crisis has occurred under Labour’s watch: a dramatic surge in net migration created an unprecedented demand for new housing, but rather than freeing up market mechanisms to respond to the increased demand, they effectively did the opposite. Not only did they fail to address government regulations that were strangling the supply of new land, but they introduced legislation that slowed-down housing construction. In fact, Labour’s record in this area brings to mind the words of economist Thomas Sowell: “Socialism in general has a record of failure so blatant that only an intellectual could ignore or evade it”.

The poll this week asks whether you believe government policy has been a major factor behind the decline in home affordability – to vote visit www.nzcpr.com.

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