Sunday, September 7, 2014

Frank Newman: Affordable housing

The latest issue of ANZ Property Focus included a feature on the 2013 census. This comment about housing was particularly interesting.
"Rising prices for residential land have made the quarter acre dream unattainable for many NZ households. The proportion of standalone houses has fallen from just over 80% of the private dwelling stock in 1991 to just over 75% by 2013. Despite this, the average consent for a new residential dwelling averaged 198 square metres in the March 2013 quarter, as compared to just 174 square metres in early 2001 and 138 in the early 1990s. 

"In line with this, despite the Census confirming a continued drift down in the number of persons per dwelling (to 2.77 in 2013 versus 2.80 in 2006), it showed there were proportionately more houses with more bedrooms. So while New Zealand might bemoan housing shortages and affordability issues, it no doubt partly reflects super-charged expectations on what the modern day house needs to be like! (Though we do note that with the price of sections and developments costs it is simply not economic in some instances to place smaller units on the land)."

Their comment highlights some of the problems when making assumptions about housing affordability. What we do know is people are now living in bigger houses than at any time previously - in the 1930s depression the average new home was about 120m2.

To say a big house is less affordable than a small house is stating the obvious, a little like comparing the price of a large apple against a smaller one and concluding apple prices have increased.  To account for the change in house sizes, a better measure may be to compare the average per metre cost of housing over time, against the average gross income of a household (or a price per kg to continue the apple analogy).

Clearly people ARE paying more for housing because they ARE living in bigger homes. That may simply reflect that more of their disposable income is available to spend on housing - because they are spending less on other things like cars and appliances which now (in income terms) cost a lot less than they did say 40 years ago.

Housing affordability appears to come down to three factors. House size is one. A recent article appearing in the Christchurch Press made this point quite well, even though the example was a little on the extreme side.

The story was about a University of Canterbury student who built his own home. It said, "The building cost $22,000...most of the materials were salvaged from demolition sites, which helped keep costs down... The house measures 8 metres by 2.45m and is 4.1m high. It was built on top of a custom-built trailer so it could be moved and did not require a building consent."  That works out at a cost of $1,120 a square metre.

The second factor is council fees. In Whangarei for example, council fees for someone building a home would be in the region of $30k, plus many thousands of dollars for the plans and engineer reports required for the consent application. Those fees are more than the total costs of the "mini" house in Christchurch.

The third factor is the Resource Management Act. The reality is the RMA has created a complex web of rules and regulations involving councils, planners, commissioners, lawyers, judges, iwi and hapu, activist organisations, an endless queue of experts writing voluminous reports on largely immaterial issues, and others. Each is extracting a pint of blood, a pound of flesh, or advancing their cause at the expense of those brave or foolish enough to propose a development.

The truth is doing anything that involves the RMA is costly and uncertain. A rational business person faced with those risks will only proceed with a project when the returns are high enough to justify those speculative risks. Few developments pass that hurdle. That limits the supply of new sections - and what is created comes at a price that includes the developer’s risk premium and recovery of the excessive consent costs. Add to that the long delays that add to the holding costs, and its not hard to see why land prices are twice the price they should be.


Brian said...
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Good Information thanks Frank.
But how is this for an idea. Firstly with the huge backlog it is highly unlikely that our local building industry has the capability of satisfying this demand for houses in the next ten years. We have just not got the manpower or the skills needed.

So contract out to Asian countries the ability to design prefabricated houses to our building standards using wood (ie NZ Pine??) to any number of designs. These then can be then shipped over and constructed on site, again using cheap Asian labour (No NZ Union interference), assembled and completed to occupation.

Wow! the Union noise is deafening, as will be the complaints that we should use NZ labour, RMA etc etc. Forgetting the phrase "Made in NZ by NZers at a price no NZers can afford"

I thought the objective was, to house people at the lowest possible cost. Sorry if I was wrong.

RAYMONDO said...
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I was surprised that an official from a building authority, whose name escapes me right now, was saying the industry could do what Labour has proposed. What I suspect is the case is that land will not be made available in the right areas for Labour's plan to work, nor will Labour/Greens and Internet/Mana and Winston First be able to work together efficiently on anything much. So the time will run away with them and after 3 years not much will get done.

Anonymous said...
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Well here is an idea. Build your home an a huge trailer, add lattice work round the bottom to disguise it like the Queensland homes. Build you septic tank system on a trailer, and generate your own power on a trailer. I wonder if the would invent some rules to rip us off with this idea as well.

Anonymous said...
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I'm told that Australian and New Zealand houses are (on average) the largest houses in the world. There have been suggestions that we should build more apartments, but when you look at floor space, a 2-bedroom apartment is usually around 80 sq m, which is a bit restrictive for family occupation. However, this space is perfectly adequate for older retired people, but such people don't usually want to live close to the centre of cities - and that's where so many apartments tend to be situated. And a number of even newer apartments still seem to have serious construction faults that cause them to leak. I have friends in exactly that same situation, and they're having to take matters to court to get them resolved, which is expensive, and a number of tenants in their building cannot afford the legal costs. I think we need some serious discussion on such housing - where they should go, the demographics and their suitability for residents (close to amenities/transport etc). And then we need to look at how disputes can be more easily (and inexpensively) resolved in cases where building quality is in question.

PhilBest said...
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"Clearly people ARE paying more for housing because they ARE living in bigger homes."

How does that explain that the section has shrunk so much and gone up so much in price at the same time, while the larger house is bugger-all responsible for the price inflation?

Note also that overall building of houses has slumped, and it is the small-house end of the market that is now non-existent; it is not that we "build bigger houses than we used to", we still build around the same number of big ones, but don't build the significant numbers we used to of small ones any more. Hence a larger "average". The reason for this is the land price inflation. You can't build "affordable housing" on land that costs 2 million bucks and acre and it is a waste of time to try.

If you put quotas on Jap Import cars, only the high value models would be imported. Same principle, only with housing, the quota is in land.

Also, note that dilapidated old cottages in central Auckland that used to be $200,000 are now over $1,000,000; which is further proof that the problem is all in land prices.

Apartments in Auckland are also a ridiculously high price, which is everything to do with a completely distorted urban land rent curve.

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