The Q & A show on TVNZ yesterday morning looked at the vexed issue of housing affordability. Guests Bernard Hickey and Murray Sherwin agreed wholeheartedly that something needs to be done. That’s no surprise really – you have to be living under a rock to not know that housing affordability is a significant problem for Auckland. In recent months we’ve seen the affordability problem spread from home-buying into rentals – with rental prices of inner areas going particularly ballistic.
Of course, when it comes down to the question of “what can we do to improve housing affordability?” things start to get muddied a bit. There are so many questions:
- Do we allow more land to be developed as greenfields – or does that just mean sprawl and excessively high transport costs for both the people living there and infrastructure costs for Council and the government?
- Do we make intensification easier – but how can we do that in a way that works better than what has been done in the past (leaky buildings and chicken coop apartments)?
- What about where people actually want to live – do they want apartments or the “quarter acre dream”?
- If house prices are so high, then how come the market isn’t building more houses?
- How much of the debate is about land cost compared to construction costs?
- Why is it that most new housing built is at the high end of the market, and will building more McMansions in Flat Bush really make a difference to affordability in places where prices are increasing the fastest – like the inner suburbs?
The commentators on this morning’s show suggested a few options:
Speaking on TV ONE’s Q A this morning, business commentator Bernard Hickey and Productivity Commission chair Murray Sherwin said councils and central Government need to take urgent action to bring costs down, whether that be introducing land taxes or opening up more land for development…
…Hickey said the Government needs to consider the “political hot potato” of taxes to reduce the value of land.
“If you really want to come from left field and actually make a difference to land prices, that’s one of the things you could do,” he said.
“Something needs to be done from a central and local government point of view to improve affordability, particularly in Auckland. Otherwise it’s going to continue to be a structural weakness in our economy and the cause of, frankly, social strife.”
Sherwin said councils need to work with developers to make more land available and build low cost houses.
“That can come about by more greenfields development, so more urban expansion, if you like, or intensification within existing limits. I’m perfectly relaxed about which way it goes, but whatever we do, we need to be able to provide affordable houses, so that means lower-cost houses than we’re doing now,” he said.
And then some ideas from Labour’s Annette King:
Labour’s housing spokesperson Annette King has said the Government should be thinking about big building schemes with public-private partnerships.
Sherwin said that is an idea worth considering, with research showing there are few New Zealand companies that build houses on a large scale.
“The analysis we had showed, I think, five companies in New Zealand that build more than 100 houses a year, and about 4600 building companies that do more than 1 house a year mostly. It’s in that sort of order. So we just don’t get the economies of scale,” he said.
“We don’t do large developments, and there are very few entities, very few companies that have the balance sheet that will withstand the costs involved in putting up a large subdivision of the sort that you see in Australia, the US, UK, Europe and elsewhere.”
I’m more interested in the land cost part of the debate (rather than construction costs), because it generally relates quite strongly to questions of whether Auckland should grow through intensification or sprawl – discussion which has a huge transport impact. As I noted in this previous post, within the land-cost side of the debate there are two lines of argument – both of which have some merit:
- Increase the supply of housing across the board, because increasing supply should bring prices down. As most new housing tends to be at the top end of the market this is likely to mean building more high-value housing (unless a compelling effort is made to change this) in the hope that the increase in supply will lower prices across the board.
- Specifically focus on increasing the supply of affordable housing. As most new housing constructed is not “affordable” a concerted effort is likely to be needed to ensure the market provides this particular type of housing.
I tend to think that if we are wanting to make a difference to affordability in the short term, then the focus needs to be on the second option as outlined above. More housing in a particular price range needs to be provided. Of course the inevitable next question is “where?” And this is where things get interesting and we inevitably find ourselves in the sprawl versus intensification debate. Greenfield development is arguably quicker and easier than intensification, banks seem to be more willing to lend money to the construction of single detached housing than for brownfield redevelopment and the development industry is more comfortable building this typology because it’s what they’ve always done. Furthermore, in terms of construction cost it’s actually much cheaper than building apartments – on a per square metre basis you can build a luxury home cheaper than a fairly basic apartment building. Unless the developer can sell the apartment they’re building for a price that probably pushes it beyond being “affordable” then they’re going to make a loss on the project – so it won’t happen.
On the flip side, greenfield development inevitably means higher transport costs for those living in these peripheral areas – as well as significantly higher costs in providing infrastructure to service them. My previous post noted the massive additional infrastructure cost of serving peripheral areas – where should that cost lie?
If the developer has to wear this cost, then they’ll pass it on in the sale price and likely push it beyond being “affordable”. If the Council needs to wear the cost, then basically it’s just a giant subsidy for sprawl. Furthermore, there’s always the question of whether people really want to live out in the back of beyond. Melbourne’s new peripheral housing developments don’t seem particularly popular:
MELBOURNE’S urban fringe has been swamped with 35,000 unsold homes, prompting warnings the glut could trigger a further slump in property values, and fuelling criticism of the Baillieu government’s ”crazy” decision to expand the city’s boundary.
The stockpile of unwanted housing in many of Melbourne’s newest suburbs has led to warnings by some planning experts that ”suburban ghettos” could emerge on the city’s fringe, creating a social divide.
Of the record 55,290 unsold homes in Melbourne in June – the highest number of any capital city in Australia – most were concentrated in about 50 suburbs on Melbourne’s periphery, where more than 60 per cent of all unsold homes in Victoria are located, according to data from SQM Research.
As demand has fallen over the past year, the number of outer suburban homes with ”For Sale” signs has jumped by almost 40 per cent.
Factors thought to be driving the surge in home listings include mortgage stress, poor infrastructure and transport services in outer-lying areas and limited local job opportunities.
I don’t think it’s particularly difficult to imagine Flat Bush, Karaka, Silverdale North and other recent peripheral areas ending up in a similar position if a heap of land is opened up for greenfield development.
Perhaps what this all actually means is that there is no silver bullet for improving housing affordability. We obviously need to make intensification a bit easier, but maybe more at a low-scale (which is why it’s so heartening to hear that the Council is thinking about getting rid of density limits in residential areas to enable the splitting of existing houses) than just thinking we’re going to end up with a whole pile of apartment buildings to save the day. Also, it seems like the problem isn’t going to solve itself without some sort of public-body intervention – either in the form of subsidising infrastructure to service peripheral areas of sprawl, or to make up the difference so that apartment/terraced house building in the inner areas can make financial sense for developers. Or for the government and/or council to get more directly involved in development, with the financial risk that brings.
And that will really be the crunch issue. How much are we really concerned about housing affordability? Enough to spend some serious public money on making a difference – or not?