Wednesday, May 24, 2023

Don Brash: House prices are still outrageous - blame your local council and the Greens

A few days ago, I spoke in the Public Forum part of a Western Bay of Plenty District Council meeting. For me, this was a first – I had never spoken at a local body council meeting before. What prompted my short speech was seeing some absolutely outrageous data on house prices in Tauranga and the Western Bay of Plenty.

In Tauranga, according to Smart Growth – the body charged by the Tauranga City Council and the Western Bay of Plenty District Council with planning housing development in the Tauranga region – the median house price is almost 12 times the median household income; and in the Western Bay of Plenty, the median house prices is more than eight times the median household income.

The same paper from Smart Growth was happy to acknowledge that for houses to be “affordable”, the median house price in an area should be about three times the median household income in that area; and that if the median house price gets to about five times the median household income, they are “severely unaffordable”.

And to make matters worse, a great many of the houses in this area are not on quarter-acre sections – of 1000 square metres – but on pocket-handkerchief-sized sections of 400 square metres and less.

I pointed out that these data meant that unless somebody has a wealthy parent who can provide substantial financial help, most people living in the area haven’t a hope in hell of ever owning their own home, with all the social consequences of that.

I suggested that since the Western Bay of Plenty Council was strongly represented on Smart Growth, they had a major responsibility to do something about this appalling situation. I have absolutely no expectation that my short speech will provoke any change of policy.

The tragedy is that we have known for more than a decade what is causing extremely unaffordable housing in most of our major cities (Christchurch is a partial exception).

Shortly after the formation of the National-ACT coalition government in 2008, the Government established the Productivity Commission. The very first issue on which the Commission was asked to report was the price of housing, no doubt prompted by John Key’s campaign promise to make housing more affordable – at the time he made that promise, the median house price in Auckland was six times the median household income in Auckland (so already “severely unaffordable”).

The Commission found four main reasons why houses were severely unaffordable, and three of the four reasons were directly related to the behaviour of local governments.

First and most importantly, the Commission found that local governments had severely restricted the supply of land on which house building was allowed. This directly pushed up the price of land. Secondly, because of constrained land supply, home building was almost inevitably less efficient that it should have been – builders were unable to get decent sized blocks of land on which they could build hundreds of homes, and too often had to be content to acquire a number of small blocks of land spread over a considerable area. Third, too often local councils took many months, and often years, to make zoning decisions with consequentially serious effects on the costs incurred by developers. (The fourth factor, unrelated to the behaviour of local councils, was a relatively uncompetitive market for building materials, and the Government reduced some tariffs to make building materials cheaper.)

The National-ACT Government tried to put pressure on local authorities, especially in Auckland, to make more land available for development, but their efforts failed – indeed, by the time that Government lost office in 2017, the median house price in Auckland was nine times the median household income in that city.

The incoming Labour/New Zealand First Government tried again, and promised in their Speech from the Throne in late 2017 (setting out the programme for their three-year term in office) to completely abolish the Metropolitan Urban Limit around Auckland, thereby making an abundance of additional land available for housing. But for whatever reason, the Government failed to do that, and before her time was up Prime Minister Ardern specifically pledged not to remove that boundary.

So by late 2021, the median house price had risen to 11 times the median household income in Auckland, and the outrageous price of the land on which houses are built was the problem.

How can we be certain of that? About a year ago, Anne Gibson, the Property Editor of the New Zealand Herald, wrote a piece on the average price of the houses built by the seven largest home builders in Auckland. The firm which built the cheapest homes (and the smallest) charged an average of about $180,000 per home; the firm which built the most expensive houses (and the largest) charged an average of about $350,000. How can that be? Aren’t average house prices in Auckland close to, and in some areas well above, a million dollars? The prices in the Anne Gibson article didn’t include the price of the land on which the houses were built. And when developers can charge almost a million dollars for 400 square metres of bare land in Papakura (30 kilometres from downtown Auckland), it’s easy to see why house prices in New Zealand are outrageous.

The fact is that unless the boundary around Auckland (and other cities, like Tauranga) is freed up, New Zealanders will never enjoy affordable housing – with all the serious social consequences of that.

Writing for Newsroom on 9 May, Dr Eric Crampton of the New Zealand Initiative quoted figures from the Infrastructure Commission which showed that a square metre of urban-zoned land costs almost $1300 more than a square metre of rural-zoned land, even after accounting for the cost of making rural land fit for housing. And that zoning premium more than doubled between 2010 and 2020.

Worse, he quoted the proposed Future Growth Strategy for Auckland, which not only suggests no easing of current restrictions on land availability but even tighter restrictions on building at Auckland’s fringes:

There will be less reliance on expansion into future urban areas and what growth there is will be phased over a longer timeframe. Growth in rural areas will be minimal to retain the rural environment and rural productivity.

In other words, we don’t give a damn about the fact that a large fraction of Auckland’s population will never get to own their own home, and that rents will continue to reflect that very high price of housing. Let’s be quite clear that that is what the Council’s proposed Future Growth Strategy means, and nobody seems to care.

But what about the desirability of protecting high quality rural land, as in the area around Pukekohe for example? Surely it is desirable to protect such soils? Dr Crampton demolishes that argument completely by pointing out that that land in a very high value crop might conceivably generate $5 of value per square metre annually, making it worth say $100 per square metre at a 5% yield rate. But land just inside the urban boundary is worth roughly 13 times that value.

As Dr Crampton notes, food security and other values are worth something, but it beggars belief that they have more than 10 times the value of an estimate of the value of even a very high value crop in the area.

And of course, as Aucklanders know, there is an abundance of low-quality land in many parts of Auckland, perhaps especially on the clay soils of the North Shore.

Yes, the cost of providing infrastructure for additional housing on the fringe of our cities – roads, water supply, waste water systems, and so on – is considerable (though that cost is not negligible even for adding additional houses in already developed areas). And it is unreasonable to expect existing ratepayers to cover the cost of that additional infrastructure. But since that infrastructure will presumably be around for three or four decades, there is absolutely no good reason why it should not be funded by long-term debt, secured over an annual charge over the newly developed housing.

But what about the greenhouse gas emissions inevitably generated by building houses on the urban perimeter? It is easy to exaggerate the difference between the emissions generated by suburban housing on the fringes of our cities and those generated by people living in relatively dense housing nearer the city centre. Yes, living on the urban fringe might involve more carbon-intensive travel, but chances are high that the house built of wood in the suburbs is less carbon-intensive than the high-rise apartment made of concrete and steel in the urban centre, with the latter necessitating 24-hour lighting, elevators, and electric clothes dryers.

What seems beyond doubt is that New Zealanders are incurring a huge social cost as a result of our outrageously unaffordable housing, and that the blame lies firmly with local government planning rules and the crazy notion that suburban houses built on the fringe of our cities are in some way environmentally undesirable. Unless we change, the social costs will continue to escalate and no amount of support for Habitat for Humanity or the Salvation Army will make more than a tiny difference.

Dr Don Brash, Former Governor of the Reserve Bank and Leader of the New Zealand National Party from 2003 to 2006 and ACT in 2011.


Anonymous said...

Your are correct, Don. And much of the land surrounding the likes of Auckland and Wellington isn't highly productive farm land in any event.

Aside from the land issue, the costs of construction are also high and, apart from the likes of the monopoly held by Fletchers on materials, there is a lot of needless cost associated with compliance and regulation. Much of that could surely be circumvented by increasing levels of prefabrication and pre-approval, which would also present considerable savings on other fronts.

Other hidden costs are those that are more social/wellbeing oriented, and the creation of future ghettos seems very likely, more especially with the currently mandated, no requirement for carparks in our main centres. Our public transport infrastructures and lifestyles do not align with that policy construct and more especially where family living is concerned, and nor do those other polices that foster high-rise intensification, especially in those locations that have high natural risks of earthquake, tsunami and other inundation.

On balance, while you are correct, I don't see things changing anytime soon.
You would have thought with the 'housing crisis' these would have been addressed but, no. Even more shockingly our two main political parties seem to have 'joined hands' on this current nonsense.

Not only do we need to address these issues, but also what kind of development and lifestyle do we really want to aspire to? Do we really wish to live like those in Singapore or Shanghai?

Anonymous said...

Just bueracrates protecting their jobs by playing the "cant let good land be used for housing" card so if any developer tries to do the right thing all these so called rules keep the council staff shuffling paper for another forever. In regards Chch you are also correct but the reason chch has a lower price is two fold, one Gerry Brownley as Earthquake Minister pushed through emergency zoning of new areas for development and good on him and the other reason is people with guts and initiatiave turned the quake damaged homes into modern warm beautiful homes.

Anonymous said...

Nothing to do with central government and/or banks? Politicians/banksters immune from being the biggest problem in we the peoples lives.