NEW ZEALAND LOCAL GOVERNMENT & HOUSING
OPEN LETTER TO DEP PM HON BILL ENGLISH

Hugh Pavletich
Performance Urban Planning
Christchurch
New Zealand

December 18, 2008

To: Hon Bill English, Deputy Prime Minister, New Zealand

From: Hugh Pavletich, Performance Urban Planning, Christchurch, New Zealand

Dear Bill,

LOCAL GOVERNMENT &HOUSING – THE URGENT NEED FOR BETTER PERFORMANCE

Further to your response email of Sunday December 7, 2008 with respect to housing / local government matters, where you stated “Let’s say we agree on the diagnosis, what is the tool to catalyze change in local government thinking?”– I have had time to ponder this important question and trust the following points are of some assistance.

I have also had time to read the Briefings to Incoming Ministers with respect to Infrastructure, Local Government, Building & Construction and Housing.

I have had some 30 years experience as a commercial property developer in the South Island, served as a President of the South Island Division of the Property Council for more than three years and am a fellow with the Urban Development Institute of Australia. During mid 2004, as a “market developer”, I shut down the development business, as profits (taxable of course) through inflating bubble conditions are illusory and losses are further incurred, when the bubbles burst and ones stock deflates in value. If the first doesn’t “get you” – the second will.

So as a long term industry practitioner, I felt I had a civic responsibility to attempt, as best I could, to do something about these artificially created regulatory housing market bubbles – and initiated with Wendell Cox of Illinois, USA (an international demographer and urban transport specialist) the Annual Demographia International Housing Affordability Survey. It is based on the Median Multiple (median house price divided by gross annual median household income) – as recommended by the United Nations and World Bank Urban Indicators Programmes.

The Annual Surveys cover the 227 major urban markets of the English speaking world – the United Kingdom, Republic of Ireland, United States, Canada, Australia and New Zealand. In population terms – New Zealand represents less than one percent of the countries surveyed – yet with Australia, it has the most unaffordable housing at 6.3 times household earnings overall (3rd Quarter 2007 data).

The 2009 5th Annual Edition Survey is due for international release Monday, January 26, 2009.

My writings with respect to these issues are collated at the website Performance Urban Planning and my March 2008 paper “Getting performance urban planning in place” sketches out the general approach in how these issues could be dealt with – as I see it. I take a pragmatic approach, as I am strongly of the view that “solutions” must mirror local political conditions.

In soundly governed markets, housing should not exceed three times gross annual household earnings. It could be fairly said that due to governance failure – Local Government in New Zealand effectively currently bans the construction of affordable housing. This in large measure explains why our residential construction sector monthly production is in persistent decline.

Contrary to the commentaries within the Briefings to Incoming Ministers (BIMs) – New Zealand’s grossly expensive housing and poor development / construction industry performance, have very little to do with “international circumstances” – but instead are the result of governance failure at both Central and Local level in New Zealand. You – and I trust your fellow Ministers – will note that none of these BIMs make any reference to the Annual Demographia Surveys –and in my view – the authors of these briefing papers fail in their public duty, in not informing Ministers of the affordable urban markets in North America – and most importantly – why they are affordable.

The officials who wrote these BIMs need to be instructed by all the Ministers involved, to explain in writing why the Texas and most middle North American (including Canadian) housing markets stayed at around 2.5 times gross annual household income and California “bubbled out” to in excess of 9.0 times gross annual household income – through the era of “easy money”. They should also be instructed to advise Ministers, which States in the United States are currently under severe fiscal stress and why. I trust the public will be fully informed of the responses.

I do not notice any reference within the BIMs to the land release programmes in the State of Victoria, Australia this year. You will be aware that enough land there has been released this year for approximately a further 250,000 sections / lots – enough for approximately a further 650,000 people. Currently starter housing is available on the fringes of Melbourne for between $A230,000 to $A260,000 and I would expect these prices to ease further with this increased land supply.

It is well known internationally that the California housing bubble collapsing was the “big trigger” that got the current Global Financial Crisis underway – something I have written extensively about. Within a recent article Discussing Global Deleveraging, I attempt to quantify “bubble value” globally. It is hoped that researchers with greater resources than I have, develop and refine this further.

The international research evidence is clear, irrefutable and overwhelming, in why these “housing bubbles” got underway in some urban markets and not others. Much of this international research is available at the Performance Urban Planning and Demographia websites.

You will note Figure 4, Page 14 Briefing for Incoming Housing Minister from Housing New Zealand Corporation, where residential consents peak at an annual level of 33,000, with 3,347 consents for the month of June 2004. Statistics New Zealand Novemer 08 Report for the month of October 2008 states that 1,173 consents were issued (annualized just 14,076 units) or 35% of the June 2004 peak.

Have the planning departments of Local Authorities shrunk to reflect the reduced workload?

This downward trend will continue until Local Authorities are required to release land on the urban fringes (the only supply / inflation vent of a growing urban market) and appropriately finance infrastructure, to allow affordable housing to be built. For urban markets to restore housing to affordable levels at or below 3.0 times household earnings over a reasonable and realistic time frame –acceptable fringe housing needs to be supplied at around 2.5 times household earnings for that particular market.

I don’t think it is acceptable that Local Authorities should have the power to seriously degrade the performance of the construction industry and deny people the right to the opportunity of affordable housing. There is an abundance of land in New Zealand with approximately just 0.70% of our land area urbanized. We couldn’t urbanize a further 0.50% of our land area of the next fifty years if we tried.

The mathematics are extremely simple – too simple it would appear, if the Briefings for Incoming Ministers are any guide.

If the gross annual household income for a particular urban market is $50,000, the median house price for that particular urban market, should be at or below $150,000 and acceptable new fringe starter homes should be in the order of $125,000. If the median household income is $60,000, the median house price should not exceed $180,000, the fringe $150,000. May I suggest you check out the latest Monthly Report from the Houston Association of Realtors (current median single family home price $US137,500) and compare it with the latest Monthly Report of the Real Estate Institute of New Zealand (current median home price $NZ337,500).

Some have “hang ups” about Houston – and I suspect much of this has to do with their misunderstandings about the place. As an international researcher on these issues, I think it is an interesting “case study” –being in population terms, a fast growing (in excess of 2% a year) urban market of 5.6 million people, with a mix of zoning, no zoning and deed restrictions. The Houston economy is in excess of three times the size of the New Zealand economy. Its current Mayor Bill White is a Democrat, as was his predecessor, the highly respected Bob Lanier, now well in his 80’s. I had the honour of speaking at an event in Houston mid May, where Bob Lanier spoke as well. I wish I had this great and caring mans energy. No b…s… with Bob – and they love him for it!

The reality is that the Houstonians (and others through most middle North American urban markets) are producing house and land packages on the fringes for around $US140,000. For this price they can expect a 235 square metre home with double garage, four bedrooms, separate dining area, well fitted out kitchens and bathrooms and ducted air conditioning on a lot / section of 700 square metres. Factory built housing of 160 square metres on large lots are available at $US73,000.

My wife and I spent May / June this year studying housing in the United States – and I was kindly asked to write a couple of articles for United States publications (here and here – the latter 19 reprints nationally) on our return to New Zealand.

They “killed us with kindness” in Texas and we left the place exhausted! We were particularly impressed with the lack of tension and helpfulness of the people in Houston (there are over 90 languages spoken there). I suggested to them that there was a real need for policy and property people in Australia and New Zealand to get over there for a Study Tour of say a week or so, to learn how they get new affordable fringe housing in place and the infrastructure financing vehicles (referred to as Municipal Utility Districts or MUDs) they employ, in assisting in achieving this.

All that has to happen is for me to organize myself – with the support of people in Australia and New Zealand. The New Zealand Property Council and the Queensland Urban Development Institute of Australia people are keen – and I do hope the New Zealand Government people and others too will assist and participate in this regard as well.

This idea is something like what the Japanese automakers did after the Second World War – when they toured the Detroit automobile manufacturing plants, to learn better ways of making cars. It would appear they have been very good students – and I can’t see why Kiwis can’t be just as smart at building houses as the Japanese are at building cars. One only has to consider for a moment, the reputation Kiwis have with Australian and British employers. We must stop crucifying our own talented people and driving them offshore.

You made the brief statement to me in the recent response email “…….what is the tool to catalyze change in Local Government thinking?”

I would not think of it in terms of “a tool” – but as a “journey of improvement” where as Kiwis we all work together to explore better ways of doing things – particularly those with the responsibility of serving the public at Central and Local Government level.”Serving the public” is a term we need to hear more often from these quarters I think. It is very important too – that people who are affected by changes that are found to be necessary, are treated with the utmost decency and consideration as individuals.

Many within the public service at both Central and Local Government level, know as well as I do, that over the past few years, it has been pretty much a “bureaucratic feast”.

I would like to think that the Annual Demographia Survey and the work I and many others have done over these past four years, has assisted in generating constructive public discussion of the issues on this “journey of improvement”. It needs to be borne in mind that significant progress was made in early 2007, when the New Zealand Planning Institute publicly supported the Annual Demographia Surveys and I responded soon after.

This was followed by Hon Phil Heatley, the new Housing Minister, initiating the previous Governments Commerce Committee Housing Affordability Inquiry and doing an intensive housing study tour to the United States and United Kingdom. During August of that year - Hon John Key spoke on these issues to the New Zealand Contractors Federation and National Party, to which I commented later in the year, on my return from Asia. He also spoke to the Local Government people around April this year.

The Briefings for Incoming Ministers (hyperlinks provided above) are a torturous read (the language reminds one of the “managed decline” the British civil service engaged in during the 1970’s) and provide sufficient evidence in my view, why the communication channels between Central and Local Government are a failure.

At Central Government level - it is simply a convoluted bureaucratic mess - Parkinsons Law on Prozac if you like.

There is obviously massive scope to think through streamlined performance based agencies to link Central Government with Local Government – that better reflect the size of our population and economy.

May I suggest that my paper “Getting performance urban planning in place” be used as a “basis for discussion” – and that under your direction, a group is formed early in the New Year, to discuss and develop these ideas further. I must stress that I most certainly do not have a monopoly on good ideas. I do earnestly hope other New Zealanders will play their part too, by considering these issues carefully over the Christmas break and in getting their ideas to you and other Ministers dealing with these issues.

ENDS

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