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.