Sunday, August 29, 2010

Owen McShane: The Disappearance of the Next Middle Class

Every week we read that yet another major housing project has been turned down by the Courts here in New Zealand because of the need to protect "rural character" or "natural landscapes". This may well have profound short and long-term consequences for the future of our middle class, as it does for the same class in countries around the advanced world.

Every week a multitude of smaller developers abandon their projects because Councils’ compliance costs and development contributions make the projects unviable – even if the land were free. And it’s not.

The New Zealand Institute of Economic Research says the ten-year norm for New Zealand is 26,000 new dwellings built per year. Statistics New Zealand reported only 16,000 dwelling consents issued in 2009. The NZ Property Investors Federation says we are building only 7,000 dwellings a year.

Some say the Property Investors Federation figures are too low given that Statistics New Zealand’s figures for the year to date suggest we shall issue between 13,000 and 11,000 consents this year, and that the “slippage” between consents and finished dwellings cannot be that great.

However, this is rather like wondering whether you are driving towards a concrete wall at 100 mph or only 80 mph.

Any current year estimates confirm we are on a slippery slope to catastrophe.

Unemployment, especially among young unskilled males is on the rise. Given these dreadful build-rates, should we be surprised, since these workers depend on construction for economic opportunity?

And why don’t we recognize the cause and do something about it?

First let’s look at the statistics. A Google search under “construction multipliers” turns up statements such as “building 1,000 houses generates 2,300 permanent full time jobs”. Another will say “Every dollar spent in the sector has a multiplier effect between 2.1 and 2.8.” These “low multiplier” statistics seldom spell out what is meant by “the construction sector”, and most are annual figures, and focus on “permanent full time jobs”. But the construction sector generates a multitude of short-term contracts that presumably slip through the net.

These low “construction” multipliers are reinforced by a post-modernist ideology that tries to persuade us that housing is an unproductive activity that takes productive rural land out of production and hence undermines the economy. This is the old “primary” industry myth, further reinforced by the quaint animist notion that subdivision causes “death by a thousand cuts”. The surveyors are out there wielding their long knives and watching the Earth Mother bleed to death.

Smart Growth planners claim the “urban sprawl” that grew around our cities during the post-war decades was the terrible price paid for housing the baby boomers and must be replaced with Smart Growth (or perhaps more accurately, Dense Thinking).

We have lost sight of the fact that those prosperous decades were actually in large part the result of those large-scale suburban developments.

US economists generally explain the post-war boom as being driven by the work force switching from weapons to washing machines.

In New Zealand we used to attribute those golden years to micro-management of the economy, and to import licensing in particular. In reality, our real genius was probably introducing the capitalized family benefit which led to our own “Levittown builders” such as Fletcher Construction and Neil Housing.

Back in the late sixties, while reading for my thesis in urban development economics, I read a report on the drivers of the post-war boom in America, during the twenty years from 1945 – 1965. Wildavsky’s Oakland Project focused on behavioural analysis rather than econometrics.

The authors concluded that the suburban development boom laid the foundations for the long-term development of the post-war American middle class.

An equivalent thought experiment would now read something like this:

• We begin with a clean greenfields site, presumably being farmed, or just open space of some kind.

• A developer decides the land is well located for a new 1,000 lot residential development and hires consultants or staff to prepare an application. The process alone takes five to six years and provides unproductive employment for a host of highly paid professionals.

• The project is then killed off by either the Council or the Courts.

In a sensible world, as prevailed in the post war years, the project would move on to the next stage:

• The land development teams move onto the site and start the final surveys, road-building, drainage and stormwater schemes, landscaping, and street-crossings, all required before the builders drive their first profile-pegs into the ground.

• Then teams of contractors start building the houses, which will have been designed by architects, draughtsmen or architectural designers, and then processed through a simple consenting procedure.

• The teams of carpenters, glaziers, plumbers, painters, roofers, stoppers, electricians and plumbers all move in to finish the houses ready for occupancy. A gang of maybe ten drain-layers could lay the drains for the 1,000 houses over a five year sales-and-build period – say 20 contracts a year.

• These teams use products and materials cut from forests, mined from quarries, processed in mills, or produced in factories, or recycled products, all requiring employed labour.

So after a few years the 1,000 homes may be built and occupied. The analysts in the sixties suggested the 1,000 houses would generate say 5,000 direct contract-jobs over those early years.

However, they recognized that the real economic activity would continue for another fifteen years or more. The same happens today.

• As the families move into the houses they buy kitchen equipment, drapes and light fittings, bookshelves, plasma TVs, computers, artworks and wine cellars and so on.

• The owners lay paving, build decks, plant gardens, and landscape the property.

• The gardens require lawn mowers, chain saws, hedge trimmers, nursery plants, and barbecues.

• Then up go the Gazebos, the dog kennels, the play houses, the extra rooms, and so on.

• And then come the swimming pools, spa pools, home offices, sleep-outs, and solar heaters.

Many of these improvements are produced by the “sweat-equity” of the DIY owners and are a major means of increasing household wealth and well-being. They arealso a potent form of saving, provided the owners are investing in tangible improvements and not over-priced land.

These suburban on-site improvements go on forever. Consequently, even today there are about 80,000 certified “alterations” a year in New Zealand – and many more that don’t get near a permit.

All these activities create jobs for the people who make the spa pools, the plasma TVs, the gardening tools, the cars, and the Gazebos.

After several years from start up the properties are likely to require a gardener once a week, and maybe a housekeeper one or two days a week, and baby sitters, and whatever else the modern family needs to manage its work-life balance. These are the on-site ‘jobs’, but the families also need teachers, doctors, day-care providers, retail staff and so on and so on.

The sixties report concluded that every 1000 houses would generate a total of 40,000 contracts and jobs. Which seems outrageous until you divide the 40,000 by the fifteen to twenty years, which comes back to the multipliers of 2.0 to 2.6.

The sixties thought-experiment reminds us that by driving our residential build-rate from 24,000 a year to a no more than 13,000 a year, and probably much fewer, we are turning off the boiler that regenerates our middle class.

It also explains why an economy with a low “build-rate” is unlikely to enjoy full employment.

Those suburbs were not “a sad price to pay for our post war housing” but were the economic driver of “the long summer of content” so well described by Bill Bryson in “The Thunderbird Kid.”

So why are we allowing our institutions to destroy the ability to regenerate our own suburban middle class?

Whatever happened to genuine sustainable development? Sustainable for middle class people and families too.

Owen McShane is Director of the Centre for Resource Management Studies. This article was first published by New Geography.


Mike Butler said...

Excellent analysis. The National-led government's moves against the housing sector shows that Key, English, Foss, and colleagues, failed to understand the role housing plays in GDP, therefore have unwittingly extended a period of low economic activity.

Anonymous said...

Well said Owen....we seem to have a death wish economically in NZ.
Its like a maze with no escape...except to Aussie.
Whichever way we turn, there's a barrier... when will we wake up?
I was elated when Helen and co were iced but we aren't much better off fact in some ways its worse.

Anonymous said...

thats why I believe the only way out for the USA is for Obama to flattern hundreds of thousands if not millions of empty houses ....upgrade the poor in to the next bracket then flattern the rest...this would under pin the house values,this would then under pin the banks etc..we have done the same here in NZ with grape vines.
Then if new houses were required employment would start from the bottom up.
As it is it will take years to fill the stock sitting around.

Anonymous said...

Ezactly Owen, I could see it in my minds eye but not articulate it as well as you.

Anonymous said...

You have explained what is happening but not given any reasons for these policies.
Those "in charge" surely must have some long term idea behind their actions.
I would like to hear what you think the plan is.
Myself I speculate that eventually the majority end up living in huts on communal farms, mines, fishing villages etc. with little education healthcare and no mobility.
Basically back to the brutal religious dark ages.
The other 1% "get it all" (eg. +250yr lifespans) The technology in the pipeline will consume a lot of resources and neither of these are to be shared with the majority of mankind. (excepting surveillance tech and gods/idols that actually do talk)
Call me crazy, but it's a good scifi plot at least.