The media are once again going off on the topic of housing affordability, after the release of the latest report by Demographia saying that Auckland is one of the most unaffordable cities in the world.
A survey of the median house prices around the world has revealed Auckland to be among the five least affordable cities to buy a house. The annual Demographia survey, released today, compares prices to incomes in 367 cities. Auckland is one of the worst in the world due to extremely high house prices coupled with moderate wages.
We’ve often talked about the issues with how Demographia produce their results. They take an overly simplistic view of the discussion, and exclude important factors. But while the scale of the issue is likely wrong, that doesn’t mean the general outcome – that housing affordability needs to be improved – isn’t correct.
We also disagree with their proposed solution of unfettered greenfield development. For Demographia, it seems that opening up greenfield land is always the solution, regardless of the question being asked. While land supply is an issue, they like to conveniently ignore the impact of planning regulations on existing urban land that prevents development across most of Auckland. They also like to ignore the cost to tax and ratepayers of providing the infrastructure needed to enable that greenfield development. For example, based on Auckland Transport’s figures it will cost about $67,000 per dwelling to provide the roads needed in the major new greenfield areas that are proposed.
Many people may want a home with a large backyard on the fringe of town, but many just want a home. A lot are prepared to forgo a large backyard for the added amenity of living closer to the city or other urban centres – but they are unable to do so, as so much development has been restricted.
This brings me to the main point of the post, the media (especially the Herald) who want to have it both ways.
While today they’re lamenting house prices, the Herald has spent much of the last few years championing opposition to one of the key tools that will help address housing supply, the Auckland Unitary Plan. From when the draft plan was released almost three years ago, they’ve given countless space to those opposing any change in Auckland. They’ve deliberately misled the public and recently they’ve even become so absurd as to call two-storey townhouses “Highrise” in their bid to whip up fear and anger over the plan.
Of course politicians of all stripes shouldn’t escape blame. Whether they’re also trying to whip up fear, generally oppose change or just have it happen in some other neighbourhood they are as much to blame. They also seem to me to have less desire to actually fix problems. After all, which of them are really going to stand up to house owning voters and say they’ll enact policies which could result in existing house prices falling or at best stagnating for many years as a result of changes.
Regardless of what you think the solutions are, it still feels like we’re some way off any real changes happening.
On a related note: I suspect we could see John Key include housing announcements in his announcement on Wednesday when he also announces support for the CRL to start in 2018. There have been suggestions the government have been talking to the council and CCOs like Watercare looking at what other big infrastructure projects could be brought forward to help speed up housing supply.
What’s the problem?
Housing is expensive in New Zealand, especially in Auckland, where median house prices have increased fivefold since the early 1990s (in nominal terms). Roughly half of this increase has occurred in the last four years, which is causing quite a bit of concern:
Housing markets are complex – prices are influenced by both demand-side and supply-side variables. As a result, it can be difficult to tell a single, simple story about why prices have gone up or down in any given year. Take the recent rise in Auckland house prices. Some people argue that it’s a financial bubble (a demand-side explanation); others blame high migration (demand) or distortionary tax policies (demand); and others cite inflexible planning rules (a supply-side explanation) or low construction productivity (supply).
Although short-term dynamics can be mysterious, elasticity of housing supply is the main long-term driver of housing market outcomes in a growing city. The easier it is to build new dwellings in the right places in response to increased demand, the less upward pressure there will be on prices.
The empirical evidence suggests that housing supply in Auckland is slightly inelastic – somewhere in the range of 0.7 to 0.9. This isn’t horrible, but nor is it sufficient to get housing supply in balance with demand.
Severe geographic constraints – Auckland’s harbours and steep hillsides – appear to be an underlying driver of the city’s inelastic housing supply. In this context, settling for average urban planning policies means getting a limited supply of housing and high prices. Consequently, we have to make it much easier to use scarce land efficiently. That means reforming our approach to planning regulations. In the past, we adopted land-hungry policies like minimum parking requirements or severe building height limits without thinking through their ill effects. That has costs, and we need to do better.
Auckland is not the only city coping with high housing prices and a lack of supply – you see similar problems in places like London, New York, San Francisco, and Sydney. However, I would bet that New Zealand will do a better job sorting out its housing affordability issues than other places. In fact, I am betting on it! I’m renting in Auckland, which means that I bear all of the downside and none of the upside of spiraling housing prices.
There are three reasons for my optimism:
1. Our proven track record of policy reform
Let’s start with a pat on the back. Having lived in New Zealand, the United States, and Nigeria, I’d say that Kiwis are, by and large, pretty reasonable when it comes to public policy. We’re not very corrupt, which removes one major source of inefficiency. We generally recognise that as a small, distant trade-exposed country we can’t afford to do things inefficiently. And, due to New Zealand’s small size, there’s usually no need to over-complicate things.
Policymaking anywhere will always be subject to cognitive and professional biases – people screw things up, and sometimes it takes a while to sort it out – but New Zealanders don’t seem want totally irrational or insane policies. Unlike the US, say:
Possibly as a consequence, New Zealand has a record of reforming policies that aren’t working, either incrementally or in one go. The classic example of this is in trade policy. From the 1930s to the 1980s, the New Zealand government oversaw an extensive set of import controls. Te Ara describes this policy:
Faced with declining export returns and a foreign exchange crisis, a Labour-led government introduced foreign exchange controls and import licensing regulations in 1938. The regulations prohibited the import of any goods except under licence or where exempted.
Importers had to apply to government for both an import licence and the foreign exchange needed for purchases. The quota – the amount that could be imported with a licence – was set on the basis of imports the previous year.
Just as restrictions on the efficient use of land produce windfall gains for landowners while foisting large costs on renters and new home-buyers, import licensing created fortunes for some manufacturers while making most consumers worse off. As a consequence, after experimenting with some liberalisation of trade policy in the 1970s and 1980s, the remaining import controls were swept away in the late 1980s.
Recent changes in transport policy also demonstrate our ability to reform bad policies. Over the last decade, there have been some important, although undoubtedly incremental, moves to reform our inefficient monomodal urban transport system.
For example, last year I reviewed a 2010 research research report on deficiencies in NZ’s public transport planning and operations – and was surprised to find that almost all of its recommendations are being implemented in Auckland, Christchurch, and other places. Since 2010, Auckland has:
- Established a public agency (AT) that can plan and deliver a PT network and supporting infrastructure
- Developed and begun implementing a frequent, connected network that satisfies best practice network design principles
- Reformed bus contract models
- Implemented integrated ticketing (and soon, integrated fares)
- Started to build bus interchanges and bus lanes.
This is a big deal, but it’s hardly the only story in town. How about the fact that central and local governments are now coming to the party on urban cycleways? For the first time ever, significant investments are going towards one of New Zealand’s “missing modes”.
We now have an opportunity to take the same approach to urban planning – reform what isn’t working and get better outcomes.
2. The structure of our governments
The current structure of New Zealand’s governments makes it easier to implement reforms and make them stick. We have two key advantages in this area that offer a smoother path to policy reform.
First, New Zealand’s government has a unitary structure rather than a federal one. This means that most powers are concentrated in central government rather than distributed among multiple layers of government. Political centralisation certainly isn’t all good – in the past it’s often led to a perverse situation in which urban transport policy is being designed by rural politicians.
But in this case, it makes policy changes much easier. If central government were to, say, issue a National Policy Statement on urban development or rewrite sections of the Resource Management Act (which governs the development and implementation of urban planning rules), it would lead to changes in the way that local governments regulate. That option isn’t usually available in federal systems.
Because any proposal to liberalise planning rules inevitably creates controversy at local body election time, central government involvement can potentially assist in getting important changes over the line.
Second, the creation of the unified Auckland Council ensures that all growth tradeoffs – and the negative consequences of preventing growth – are internalised within a single council. Gone are the days when councils could simply refuse to zone for growth and assume that it would become someone else’s problem instead. Now a single council is responsible for sorting the region’s problems out.
You can see the results in the Unitary Plan – a document that’s not perfect (no plan is!) but which takes some important steps forward. For example, it removes MPRs from the centre zones, which are intended to accommodate a mix of business and residential uses, cuts back minimum lot sizes throughout much of the city, and creates some midrise residential zones.
Amalgamation does come at a potential cost to Tiebout competition, in which adjacent councils compete for growth. But I suspect that the benefits outweigh the drawbacks. As the San Francisco Bay Area shows, local government fragmentation doesn’t necessarily result in more housing supply – the Bay Area has 93 local governments but building permits have still been falling since the 1970s.
New Zealand’s unitary government structure and the creation of a consolidated Auckland Council create the potential for “virtuous cycles” in which local and central government egg each other on to improve urban planning regulations and processes. To date, this has led to things like the Special Housing Areas, which aims to ease consenting in selected areas, and the Unitary Plan hearings process, which is intended to review the plan and allow it to be implemented faster.
The hearings process, in particular, has encouraged Auckland Council to think carefully about its proposed zoning rules. For example, following instructions from the hearings panel, the council is considering rezoning some areas to enable more housing. This is an important step towards recovering from the ill effects of past down-zoning.
3. The political agenda
Lastly, housing affordability has hit the political radar at a national level. There is an increasing consensus that reforms to urban planning rules are a key part of the solution. The latest Productivity Commission report on using land for housing outlined some key policy changes, and politicians from several major parties have subsequently endorsed a number of these recommendations. For example:
In other words, there is likely to be cross-party support for sensible reforms to urban planning that build on the good work that’s already been done by central and local government.
Globally speaking, it’s somewhat unique – and fortuitous – to have so much attention placed on urban planning issues at both a local and central government level. For example, in the US, a few economists in the Obama administration are starting to talk about the drawbacks of overly restrictive planning regulations. But President Obama has very little ability to influence zoning in San Francisco or New York.
New Zealand is different. We are generally willing to reform policies that aren’t working for us, we’ve got government structures that can facilitate that reform, and our elected representatives are paying attention to the problems and potential solutions. Those seem like good reasons for optimism!
A year ago, I wrote that “Australia is currently in the middle of a major apartment boom“. Well, the boom is still going – in fact, it’s risen to even higher levels. On a ‘moving annual total’ basis, Australia has gone from approving 86,000 attached units a year to 113,000, an all-time record.* That’s helped push total dwelling approvals to 229,000, also an all-time record.
There are concerns in some quarters that there might be a looming oversupply of apartments in some areas, as noted by the Reserve Bank of Australia. I don’t know enough about the Aussie market to comment, but it’s certainly a reshaping of the market given the amount that’s being built. Speaking of reshaping, Patrick’s post the other day showed how the apartments will change the Melbourne CBD skyline (well, showed how one part will change, I’m not sure if it’s as drastic for other areas).
Back in New Zealand, building consents continue to rise, but not to the same extent. My view is that there’s a lot more growth to come, especially for attached dwellings,** and especially in Auckland. Keep an eye out for this over the next few months.
Lastly for today, here’s an update on the percentage of new dwellings which are attached, for both Australia (which has reached an all-time high, of 49.5%) and New Zealand.
As per last year, I’ll follow up soon with a post looking at the trends in different cities. But I think the trends above for Australia are pretty impressive in their own right.
*Technically, the Australian approvals are for “dwellings excluding houses”. That covers apartments, terraces and so on.
** Statistics New Zealand have changed their categories since last year. I’ve combined the categories for “apartments”, “townhouses, flats, units, and other dwellings”, and “retirement village units”. Note that some of the retirement villages will actually be detached homes, but they’re not split out in the data.
Last month, I took a look at the costs and benefits of publicly owned golf courses (Part 1, Part 2, Part 3). A few key findings from that analysis:
- Golf courses are different from public parks, as they can only be used by a small number of paying customers
- The benefit of redeveloping golf courses to offer a mix of new neighbourhoods and public parks could be as much as nine times higher than the benefit of the status quo to golfers
- Publicly owned golf courses don’t pay their fair share of rates, meaning that the rest of us have to pay higher taxes.
A key concept running through this analysis is the idea of an “opportunity cost“. We often face mutually exclusive choices – i.e. if we choose one thing, we can’t have the other. In those situations, the “cost” of getting one thing is giving up the opportunity to have the other.
Calvin and Hobbes illustrate the concept of mutually exclusive choices quite nicely:
In the case of publicly owned golf courses, our choices are fairly simple: If we keep them open for golf, we give up the opportunity to have public parks, other sports fields, or housing on them. And if we convert them to other uses, we give up the opportunity to golf now, and the option to choose a different set of uses at some future date.
However, there are other ways to think about the opportunity cost of publicly owned golf courses. For example, what happens when a local government wants to sell down assets, e.g. to free up capital for new investments? If they refuse to consider selling the golf course, what else do they sell instead?
(This isn’t to say that asset sales are necessarily a good idea – that’s really an issue that must be assessed on a case-by-case basis. When politicians propose to sell assets, I think that it’s essential that they are specific about (a) exactly how a sale would lead to better outcomes in the affected market, (b) exactly why they need the money – no vague promises of wish-fulfilment slush funds please! – and (c) how they will avoid losing money on the sale through poor timing.)
In 2002 the former Auckland City Council decided to sell down some of its publicly-owned assets, including some of its shares in the Auckland Airport and its entire public housing stock. The proposed sale of the public housing, most of which housed elderly Aucklanders on low incomes, stirred up opposition. As a result, central government got involved, and purchased the properties through Housing New Zealand:
The Government has offered to buy Auckland City Council’s pensioner and residential property portfolio.
On Monday, 30 September 2002 Cabinet approved an agreement negotiated between Housing New Zealand Corporation and the council.
Housing New Zealand will pay a total of $83 million for the Council’s two portfolios:
1542 pensioner rental units, on 50 sites, with a book value of $101 million. 129 residential units, with a book value of $31 million.
This reflects the full market value for residential housing and a discount for pensioner housing – which takes into account the fact that these sites will always be retained for social housing and that Housing New Zealand Corporation is committed to a fast tracked redevelopment programme.
In short, Auckland City Council earned $83 million for the sale of 1671 public housing units. The deal didn’t increase the total amount of housing in the city, as it didn’t release any land for new development or more intensive redevelopment. Furthermore, although Housing New Zealand was able to keep the units available as social housing, it probably had a bit less money to build new social housing in Auckland that year.
However, as I found when I looked at the benefits of alternative options for Chamberlain Park, the Council could retain a third of the golf course as a new public park and still earn more from selling the land for housing development. Even accounting for the fact that house prices have approximately doubled since 2002, it’s not even close – the golf course is worth about 50% more than the council housing ($240m vs ~$160m).
In 2002, when Council decided to sell some assets, the “opportunity cost” of not considering selling a golf course was having to sell the council housing instead. But the same choice also applies in reverse in the present day. If Auckland Council wanted to get back into the social housing game, to alleviate the impact of the city’s current housing affordability challenges, perhaps it could fund it with the proceeds from golf course sales?
1600 council flats or a single golf course: which do you think has a greater social value?
K Road is changing. The city’s long-time boho heart is, in a way, sitting between a rock and a hard place. On the one side, there’s a city centre that’s bursting at the seams with university students and suit-clad professionals; on the other, post-gentrification Ponsonby.
A recent post on Public Address by Tina Plunkett took a look at the potential impact that some new developments on K Road might have on the area’s culture:
The shutting down of cultural institutions across Auckland to make way for towers of small, shoebox apartments is becoming almost epidemic – but at the same time we need growth of quality, spacious, inner-city living areas.
In the past year Karangahape Road has lost every single one of her original sex shops – but is this a bad thing? The landmark Las Vegas Girl is the last to succumb to closure. K Road is definitely in the throes of switching over.
But there are shimmers of hope popping up. In recent years we’ve had additions to this strip that are community focused, culturally aware and importantly, kind. Coco’s Cantina and Flying Out records are both prime examples of new businesses that are wholeheartedly embraced by our community, and by their own cultural communities. We need to support them. By supporting them, we keep our dream alive.
But what is next on the chopping block? The King’s Arms? Whammy Bar? The Old Folks Ass? Can they survive in a market of growing rents, amid the sound of the developers’ diggers?
This is an interesting and important issue. There isn’t necessarily a single right answer, but there is the possibility of a useful conversation.
Tina asks the following question about the trade-off between culture and growth:
We need to ask at what point we draw a line and stop sacrificing the culture for accommodation. The outer wings of our city highlight our relationship with heritage, history and culture. K Road has been a haven for ideas, community, music, arts, freedom and a shitload of fun for successive generations. Are we happy to toss that aside?
What’s worth more to us in Auckland? Our identity in our music, culture and arts – or six more flats?
This is a good question to ask, but I think we have to re-phrase it to get a meaningful answer.
In particular, I think it’s important to distinguish between two things that people often conflate:
- The buildings that exist (or no longer exist) in a place, and
- The social and economic function of a place, which is mainly about the people that use it.
There’s a relationship between built environment and social and economic functions, of course. Run-down warehouse space with high ceilings is famously amenable to starving artists in search of live/work space and punks in search of squats. But it’s not as direct a relationship as you might think.
That’s because buildings change uses over their lifetimes, and cycle through periods of high rents and low rents depending upon when they were built, vacated, depreciated, renovated, etc. Think of Ponsonby – twenty years ago, many of the pre-war wooden houses in the suburb were run-down and quite cheap. As a result, they provided housing for people on lower incomes.
Terraced houses on Ponsonby Road in the 1960s. (Source)
Today, the buildings are largely the same from the outside, as heritage preservation rules and changing aesthetic preferences have kept people from demolishing them. But they now serve a totally different social and economic function: housing rather well-off people at a premium price. In the process, the old Ponsonby society has been displaced – or simply melted into thin air.
The houses remain the same… but the place has changed. (Source)
Apply these lessons to K Road. What do they tell us?
The first thing is that we should be less concerned with the buildings on the street (and the ownership of the buildings) than we are about the social and economic function of the place. Old buildings can be important and interesting and there are valid arguments for their preservation.
But if the aim is to preserve K Road (or any other place in Auckland) as a place for culture and creativity, only focusing on the buildings will result in failure. The buildings may not be demolished, but if there’s demand for the space rents will rise, the spaces will be renovated with sleek Danish interiors, and culture will be priced out in the process.
So what can be done?
Tina’s post offers a few insights about what might work.
We need to start by recognising that some degree of change is inevitable and probably beneficial. New buildings will be constructed, and some old ones will be torn down in the process. This is good for several reasons.
First, as Tina notes, Auckland’s got a shortage of affordable living space at the moment, so more apartments would be helpful. More small, affordable dwellings will make it easier for the people who make K Road what it is to keep living in the area.
Second, although it would obviously be bad for K Road if it were all dynamited and rebuilt in one go, a steady trickle of new construction tends to support the ongoing cultural vibrancy of an area. It means that there will always be some buildings that are getting a bit shabby and thus providing a low-rent place for various creative endeavours.
In short, new buildings are probably alright. But, as Tina notes throughout her article, we need to ask whether they will function in a way that reinforces (or undermines) the existing culture.
The existing community can influence this process for the better by engaging with developers and new entrants to help them to understand what makes the place tick. This obviously works best when a place already has a strong community and identifiable values – as K Road does. It’s certainly encouraging to see examples of new businesses in the area that want to enhance K Road rather than replace it.
What do you think about what’s happening on K Road?
AUT’s Briefing Papers initiative has kindly allowed us to syndicate their recent series on housing. The second briefing paper is written by Motu Institute economist Arthur Grimes:
Housing affordability is a multi-faceted, complex issue. Concentration on just one aspect of the issue – be it housing supply, land supply, interest rates, construction costs or migration – will miss important aspects of why house prices vary in different locations at different times. In this briefing paper, we illustrate how differing facets of the housing market combine to produce diverse housing outcomes.
Common sense and observation of recent trends indicates that house prices reflect variables such as: population and migration, land availability (which is affected by both geographical and planning constraints), construction costs and financial factors (credit availability and interest rates). Government-funded rent and mortgage subsidies will also affect how much people can afford for housing and so will affect prices. These factors are included here in a simple framework, providing a systematic approach to understand house price outcomes. The approach is based on, and extends, published papers by the author as well as other influential papers on housing markets.
Four important relationships
The framework draws on four simple relationships that are at the core of determining housing market outcomes. These four key relationships combine to give outcomes (at the city level) for: house prices, population, land prices, and the housing stock (i.e. the number of dwellings in the city). These outcomes are driven by developments in other factors such as finance costs, construction costs and natural and civic amenities.
The first key relationship is for house prices. Theoretical and empirical work shows that house prices are determined primarily by the ratio of population to the housing stock and by finance costs. As the population rises relative to the available housing stock, house prices increase since people have to bid more to purchase (or rent) a dwelling. As interest rates (and other costs of servicing a mortgage) decline, people can afford to increase their expenditure on housing, so house prices rise. Another (often overlooked) feature of financing costs may also be very relevant for house prices. The greater are government-funded subsidies such as accommodation supplement, the greater is the amount that most renters and lower-income house buyers can afford to spend on housing, so rents and house prices will increase in price.
The second key relationship is for regional population. People are attracted to regions that have high wages, attractive natural amenities and attractive civic amenities. Their choice of location is also affected by the cost of housing (both rental and owner-occupied). If population is very responsive to housing costs then extra supply of dwellings may have little effect in dampening house prices since demand (through internal and external migration) will increase to fill the extra dwellings at near existing prices.
The third key relationship to consider is the responsiveness of new housing supply to changes in prices and costs. Over time, the supply of houses increases (or stagnates) until such time as the market price of houses equates to the sum of all costs of producing a new house. These costs include the price of land associated with the dwelling (i.e. the “lot price”), construction and other costs (including regulatory costs), plus a normal rate of return on capital. The sum of these costs ultimately equals the house price, with changes in the lot price being the most important factor in equating house prices to costs.
This brings us to the fourth key relationship, which is for lot prices. For a given city, the average lot price rises as the local population rises. As the population increases, the price of existing land close to the city centre (or to town centres) becomes more sought after so increases in price. While the lot price on the urban fringe may stay low – though this will be determined crucially by the strength of planning and geographic constraints – the increased price of land in existing parts of the city will increase the average lot price of the city.
The four relationships described above all relate to long term outcomes. While short term outcomes may diverge temporarily from the long term relationships (e.g. due to “fads” or to short term migration swings), an understanding of these four relationships enables us to trace through how economic shocks (e.g. a change in global interest rates) or policy shifts (e.g. a change in costs levied on developers) eventually affect house prices, land prices, population and the housing stock.
We demonstrate the inter-relationships within the housing market by adopting a systems approach that incorporates all four long term relationships just described. We can use this system to evaluate the effects of various developments on housing outcomes. We base our model on published estimates of the effects of the various factors on New Zealand housing market outcomes. Informed by recent Auckland experience, we allow the lot price to form half of the total house price (e.g. a $700,000 house comprises land worth $350,000 and a building worth $350,000). We do not have strong evidence on the effects of population increase on land prices, but assume initially that a 1% rise in population results in a 1% rise in average land values; we also assume that a 1% rise in house prices results in a 0.2% decline in population as people migrate out of the city.
These parameters give us a baseline estimate of responsiveness of the housing market to specific developments. The development that we will concentrate on here is an increase in the number of people wishing to move to Auckland. The assumed increase in population is equal to 10% of Auckland’s existing population holding all other factors constant (we term this a “population shock”). In fact, all other factors will not be constant and the adjustments to these other factors (such as house prices) will affect the final number of people who end up moving to the city.
The first group of bars in the accompanying figure show the baseline estimate of the impact of a 10% flow of people to Auckland on house prices, land prices, actual population and the number of dwellings. Land prices rise (by an estimated 9.1%) in response to the influx of people and this land price rise pushes up house prices by 4.4%. The rise in house prices has two effects. It leads to greater house-building, though this is constrained somewhat by the higher land prices, so the number of dwellings increases by only 6.9%. Higher house prices also deter some people from moving to Auckland, so the population rises by around 9% rather than the full 10% of people initially wanting to move to Auckland. There are now more people per house than previously since the population rises faster than does the housing stock (i.e. crowding increases).
The second group of bars simulates the same population shock but now we assume that land prices are very responsive to the extra population (e.g. because planning laws are very restrictive in allowing extra land for housing). Now we find that land prices skyrocket by almost 25% in response to the same population pressures. This leads to an 11.6% rise in house prices. These house price rises curtail the population inflow, so that population increases by only 7.6% (rather than the 9.1% in the baseline simulation). The skyrocketing land price restricts new housing development so that the stock of dwellings now increases by only 2.4% and household crowding becomes much more severe than before.
Thirdly, we assume the same responsiveness of land prices to population as in the baseline simulation, but now change the responsiveness of population to house prices. We now assume that every 1% rise in house prices reduces population by 1% (rather than by just 0.2% in the previous two simulations). This yields the third set of bars in the figure, again in response to the initial 10% population shock. The rise in land and house prices following the initial population pressures now deters people from settling in Auckland so that the population increase is just 6.6%. The reduced population inflow means that there is less pressure on house prices which now increase by just over 3%. Crowding pressures are no longer as severe as in the other cases as the housing stock increases by 5%, just short of the population increase.
What do we learn from these examples?
These simulations tell us that each aspect of the housing market interacts with each other aspect as a system. One cannot look just at housing supply, or housing demand or immigration to judge its impact on housing outcomes. All these aspects must be considered together. The same shock (e.g. a sudden rise in the number of people wishing to settle in Auckland) can have very different housing outcomes depending on the responsiveness of some factors to others.
Two facets of responsiveness that we have concentrated on here are: (i) the response of population to house prices, and (ii) the response of land prices to population. If population is very responsive to house prices, then house and land price movements will be more muted than when the responsiveness is low. This factor essentially reflects one aspect of the demand for housing.
The second factor relates to the supply of housing. If land prices are very responsive to population size, then house and land prices will react strongly to an influx of population. That the same shock can lead to either a 6% rise or a 25% rise in land prices depending on just these two factors shows the importance of considering all responses in determining what happens to housing outcomes following economic shocks.
We may have little power to affect how people’s location choice responds to house prices, but we do have some ability to affect how responsive land prices are to population pressures. Planning laws that constrain the amount of greenfields land available for new housing or that limit the ability to intensify in existing areas (i.e. the ability to use less land per dwelling) increase the responsiveness of land prices to population inflows. The increased rise in land prices then induces a larger rise in house prices for the same population shock.
Thus while many demand and supply factors interact with each other to affect house prices, we are able to moderate their final impacts through policy choices. It then becomes a political economy question as to whether or not we wish to implement policies to counteract a situation whereby house prices have become so high as to price many ordinary New Zealanders (and almost all poorer New Zealanders) out of buying a house in Auckland. Our work shows that we do not need to accept this situation.
One avenue to help address it is to increase the availability of land (both through enabling intensification and opening up greenfields land) so as to bring land prices and house prices back down to more affordable levels. Even then, however, we have to consider how all the factors appearing in our four relationships interact with each other to understand the overall effects of such a policy change on the outcomes of policy interest. If population flows are rather unresponsive to house prices, freeing up the land supply should bring down house prices and have little effect on population levels. By contrast, if population flows are very responsive to house prices, then freeing up land supply will be reflected principally in an influx of population with only a secondary effect on land and house prices. The responsiveness of population is an empirical issue, but one that may be affected by some policy settings such as migration policy and housing assistance policies. For instance, if housing assistance does not rise with an increase in housing costs, then a house price or rent rise may deter significant numbers of people from living in Auckland. Again, it is a political economy issue as to how the populace and policy-makers wish to treat these various outcomes.
 Arthur Grimes & Andrew Aitken (2010) “Housing Supply, Land Costs and Price Adjustment”, Real Estate Economics, 38(2), 325-353; and Arthur Grimes & Sean Hyland (2015) “Housing Markets and the Global Financial Crisis: The Complex Dynamics of a Credit Shock”, Contemporary Economic Policy, 33(2), 315-333. An analysis of regulatory costs in relation to Auckland housing is reported in: Arthur Grimes & Ian Mitchell (2015) “Impacts of Planning Rules, Regulations, Uncertainty and Delay on Residential Property Development,” Motu Working Paper 15-02, www.motu.org.nz.
 For instance, based on Grimes and Hyland, op. cit., we assume that house prices rise by 2.2% if the population rises by 1% relative to the housing stock in a city.
 Specifically we now assume that a 1% rise in population induces a 3% rise in land prices.
In 2014, Auckland University of Technology started up a great initiative called “Briefing Papers“. The aim of the project is to contribute to a more informed conversation on major issues facing New Zealand society.
Since July, Briefing Papers has been running a series on housing. They’ve solicited input from almost a dozen researchers and commentators (including me!) to take a look at all angles of the issue.
Briefing Papers has kindly allowed us to syndicate them. The first paper is by Shamubeel and Selena Euqub, based on their book Generation Rent:
Home ownership is a defining characteristic of being a Kiwi. It had been an attainable aspiration for more in each generation, but it ended with the baby boomers. After rising for nearly a century, home ownership has been falling since 1991 and is now at the lowest level since 1951.
Home ownership has fallen because houses have become unaffordable. House prices have risen much faster than incomes. Even for double income families, buying a home can now mean massive sacrifices, including some parents leaving their young children in care for up to 11 hours a day and facing long commutes to work.
Unaffordability is extreme, but it is relatively recent and only in some places.
Until the early 1990s house prices were around 3 times annual household incomes. Today, it is over 6 times. There are differences in interest rates, inflation and other policy settings when comparing generational experiences, but the end result is lower affordability and fewer homeowners.
Unaffordability is uneven across the country. While house prices are very cheap in places like Southland (around 2 times annual incomes), they are exorbitant in Auckland, at over 10 times.
In Auckland, the average house price is nearly $840,000. The average income for a family is around $80,000 a year. At current historically low interest rates, this equates to mortgage payments of nearly 60% of income. If interest rates rose to historical norms, mortgage payments would be two-thirds of a family’s income. The average family cannot buy the average house.
Too often we hear that house prices would be lower only if:
- we just stop foreigners from buying; and
- we just stop immigration.
Besides, there is no problem, all global cities are expensive. Right?
If we look at these claims in turn we find some truth in them, but they do not explain the situation in full. Data on foreign ownership is sketchy, but we estimate non-New Zealanders purchase fewer than 10% of homes. Foreign investors are the most prominent of this group. Immigration has certainly added about 20% to housing demand; most of the housing demand growth results from natural population growth and smaller families. In terms of the inevitability of expensive housing if Auckland is to be a truly global city, housing in Auckland is less affordable than housing in Sydney: Auckland’s population is a third of Sydney’s, and while house prices are similar, incomes are a third lower in Auckland.
There are some legitimate concerns:
- poor tax policies (negative gearing rules are a form of reverse welfare for the rich);
- a preferential bias to housing in our banking rules (its cheaper and easier for banks to lend to residential mortgages than businesses);
- and a complete mess in supply of housing, which encompasses planning rules, funding and provision of infrastructure, NIMBYs and an immature construction/development sector.
The drivers of unaffordable housing are political, cultural and regulatory.
Unaffordable housing is locking Kiwis out of a critical part of our culture. But also a critical requirement for many other things, including getting capital to start a business or being able to retire on national superannuation, which is only possible with a fully paid off home.
Rising house prices have been a boon for property owners. But with falling home ownership, the benefits are accruing to fewer and fewer people. For future generations, there is an increasing risk that only those with help or bequest from their parents will own homes. The egalitarian dream of equal access to opportunities, including the opportunity to buy a home, will be a lie. New Zealand is well down the path of a hereditary system of wealth and success, like the ‘old country’. The new landed gentry will do everything they can to preserve their wealth and influence. Generation rent is fragmented and as yet voiceless.
Yet, generation rent is a pretty large and increasing segment of society. In the 2013 Census, 52% of over 15 year olds lived in a rental property (and 57% in Auckland). Renters are typically young (under 40) but people of every age are increasingly more likely to rent. Even though majority of adults rent, renting is a raw deal. Compared to our peers, New Zealand has some of the most restrictive rental policies in the world. Renting is a precarious existence, characterised by low quality buildings, short terms, and often few rights to small alterations or even owning pets.
Unaffordable housing is also pushing the poor further away, risking the kind of ghettoization that is the hallmark of unenviable places like Johannesburg. Being poor is getting more expensive, as gentrification pushes the poor to the least desirable locations with few resources like public transport and amenities.
Houses have become unaffordable over a long period, which is why home ownership has been falling for over two decades. Poor tax policy and easing financial settings have encouraged and abetted housing investment, which has driven out younger first-home buyers. Slow housing supply, encompassing density, height, ‘greenfields’ and all the infrastructure that goes with it, has been the main factor. A small and shallow construction sector cannot respond fast enough to rapid changes in demand from net migration and interest rates.
We propose a number of solutions in our book, Generation Rent. We think some immediate palliative care can be provided, by fixing the rental market (improving security of tenure and making a rental more like a home) and a shift in attitudes towards renting and property investments would stop alienating half of New Zealanders who rent. But the real deal are structural policy changes that are hard. We need to increase the supply of housing (change planning rules, deal effectively with NIMBYs, sustainable and equitable funding model for infrastructure). We need to fix banking sector biases to housing – current rules are inflating the property market and misallocating credit away from productive businesses. Fix tax rules on capital gains on investment property and investigate negative gearing to remove the tax bias to investing in housing. This needs to be hand in hand with improving financial literacy – so that people can invest wisely, not just in housing.
The housing market is broken as a result of broken policies of many decades. Fixing them will take time but we know what needs to happen. What is needed now is leadership from our politicians and policy designers – and intense pressure from the public to make these changes, which are unpopular with a small but powerful vested interest group.
House prices in Auckland are high and rising, which is causing concern in many quarters. But do we know what sort of effects high house prices may have on New Zealand society, now and in the future?
Politicians and commentators from all quarters have argued that they are undermining the equity of New Zealand society by making it harder for young people to buy houses and squeezing household budgets. Here, for example, are some recent comments from Finance Minister Bill English:
The Finance Minister agrees rising house prices in Auckland are making inequality worse by shutting low and middle-income earners out of the property market.
Opposition parties say rising inequality is not only hurting those who cannot afford to buy a home, but is also bad for the economy.
Bill English said house prices were making life tougher for low and middle income earners in Auckland and said inequality was a problem.
“We’ve been concerned about that for some time, that there’s parts of Auckland where there’s been really no new supply of lower value houses that low and middle-income families can afford.”
I’ve seen Minister English making similar comments elsewhere – saying that limited housing supply is worsening poverty and inequality. How true is this?
First, here’s a graph showing indexed house prices, rents, and consumer price levels over the last two decades. While housing prices have been rising faster than the CPI throughout this period, house prices have really only taken off dramatically since 2002. Meanwhile, rents have risen at a more consistent pace:
Keep that timing in mind. Most of the increase in Auckland’s house prices has occurred between 2002 and 2008, and again since 2012.
So now, let’s take a look at what’s been happening to inequality over the same time period. Here’s a useful chart from a Stuff article on the topic. It looks at the 80-20 ratio – i.e. the ratio of incomes for a household near the top of the earning distribution (80th percentile) to one near the bottom (20th percentile). While it’s not a perfect measure, as it misses outcomes at the upper and lower tails, it does seem to track with the Gini coefficient, another common measure.
Essentially, what this measure is telling us is that income inequality rose during the late 1980s and early 1990s, during NZ’s painful economic restructuring, flattened, and then trended down slightly since the mid-2000s. Importantly, the same basic trends hold true even after taking housing costs into account, which suggests that rising Auckland house prices haven’t altered the underlying dynamics of income inequality:
In other words, recent increases in Auckland house prices have not coincided with rising income inequality. Minister English is well aware of this. For example, in May 2014 he answered a few questions on inequality in Parliament:
Hon BILL ENGLISH: Well, the facts as laid out in the annual report issued by the Government agency initiated by the previous Labour Government, and now backed up by the OECD, show that income inequality in New Zealand has been flat to falling in recent years, and, on average, it has remained unchanged for the last 15 years.
This does not necessarily mean that we can be sanguine about the impact of housing costs on New Zealand society. For one thing, statistics published in the Ministry of Social Development’s most recent (2014) Household Incomes in New Zealand report suggest that the share of households paying more than 30% of their income for housing has risen since the early 2000s. These changes seem to have affected households across all five quintiles of income, albeit to varying degrees. However, from an equity perspective they’re dwarfed by the impact of early-1990s changes to social welfare and housing policy:
Another issue is that rising house prices may be causing inequality of wealth to increase. The distribution of household wealth has received more attention in recent years, e.g. in Thomas Piketty’s Capital in the 21st Century, which analysed trends in wealth and income distributions over the past two centuries.
There are reasons to believe that higher house prices may increase wealth inequality. For example, 2013 Census data shows that upper-income households are much more likely to own, partly own, or hold in a family trust their primary residence. 80% of households earning over $100,000 per annum own their houses, compared with only 52% of households earning less than $30,000.
However, we simply don’t have enough recent data to form robust conclusions about the impact of rising house prices on wealth inequality. During the 2000s, the Survey of Family, Income, and Employment (SoFIE) did collect some data on household wealth. An analysis of the 2003/2004 data showed that wealth was much more unevenly distributed than income – 51.8% of all net wealth was held by the richest 10% of New Zealanders.
As SoFIE was discontinued in 2010, we have no way of knowing whether or not wealth inequality has increased during the most recent run-up in Auckland house prices. Consequently, I’d say that a hypothesised link between house prices and wealth inequality is potentially concerning, but unproven. If the Finance Minister is concerned about that issue, I’d recommend that he re-start SoFIE so we can get a better idea of whether rising house prices have coincided with rising wealth inequality.
Finally, commentators should note that this post isn’t arguing for or against any particular policy directed at inequality or the housing market. It’s just taking a look at the data (or lack of data) on the topic. With that in mind, what’s your perspective on the link between housing and inequality?
The Productivity Commission has released a draft report called Using Land for Housing which looks at options for how more land can be made available for development. At first blush that may sound like code for “open up lots of greenfield land for development” however the report appears to actually look at many of the issues in a holistic way giving a fairly balanced outcome. On a first skim through I agree with most of the changes the commission has suggested.
Before I go into the recommendations I think it’s useful to highlight that the commission start off by showing a good understanding of why cities are important. This is from a short summary document however there is a more detailed discussion in the draft paper. I think this is important as far too often if feels like many see and treat cities – particularly Auckland – like some kind of unnatural aberration sucking the value out of the rural areas.
Cities are national assets. They provide a wide range of jobs, higher incomes, generate higher productivity and raise the prosperity of surrounding regions. Cities also offer access to amenities not available elsewhere, such as specialised health and education services. Allowing cities to grow and accommodate new residents can help improve the wellbeing not just of the people who live there, but also those elsewhere in the country.
The main recommendations revolve around a few key categories, namely: planning/regulation, infrastructure and overcoming existing barriers/behaviour.
The recommendation that’s probably gained probably the most attention so far falls into that last category and is the suggestion of setting up Urban Development Authorities (UDA) – much like Auckland Council is already doing by merging Waterfront Auckland and their property CCO. They say a UDA could assemble, rezone and prepare for development large parcels of greenfield or brownfield and then partnering with private developers to build at scale. This seems pretty much identical to what’s being going on at Wynyard Quarter.
What’s gaining attention though is a suggestion that these UDAs could have powers of compulsory acquisition which would help in assembling suitable land and address issues such as land banking. It’s worth noting that compulsory acquisition was possible in the past and I believe is partly how the former Waitakere City Council was able to buy up large amounts of the town centre – although the government has currently removed the ability to do so in future.
They also suggest these UDA’s could help capture some of the increased value that occurs from the development. Overall I think the idea of a UDA is a good one although I can certainly understand the concerns about giving so much power to them.
Looking at the other parts of the report, they say that one of the current issues is that existing homeowners have a disproportionate influence on local political processes as they are the ones who benefit the most from restricting supply in their area – thereby inflating the value of their own property/s. This then gives those homeowners greater incentive to be more politically active and push for regulations that restrict development opportunities. This is of course exactly what we saw happen in the Unitary Plan discussions.
To counter this the commission suggest that councils engage in more sophisticated consultation processes and giving the government more say in planning processes. I do agree with the first point but the second I’m not so sure about given the past comments from the likes of Nick Smith.
The commission specifically call out a number of planning regulations that have been imposed – often by the processes above – that have made it much more difficult and costly to develop urban land thereby reducing density. They make the following recommendations in this regard saying we should:
- remove District Plan balcony / private open space requirements for apartments;
- review minimum apartment size rules in their District Plans, with a view to removing them (once the MBIE has completed planned work on updating Building Code rules and guidance related to air quality, lighting, acoustics and access in multi-unit dwellings);
- remove District Plan minimum parking requirements and make more use of techniques for managing traffic demand;
- lift current building height limits where it cannot be demonstrated that the benefits outweigh the costs; and
- undertake robust cost-benefit analyses before considering the introduction of building height limits.
We have addressed all of these points in the past, especially the minimum parking requirement issue so it’s great to see the commission pick up on these points.
There is quite an extensive amount of discussion on the issue of the provision of infrastructure and how it is funded. In short they suggest funding constraints – often from the political processes mentioned earlier – makes it difficult for core infrastructure such as water and roads to be built in advance so it is done piecemeal which adds extra costs to the process.
They suggest that councils need additional tools to both help manage demand on existing infrastructure and to help fund new infrastructure that supports growth. They particularly point out that the government need to allow for road pricing on existing roads where it can be justified.
They also want to see more variable pricing in things like water connections. The example of Watercare is used which charges a flat fee for any new connection however they say that distorts costs and reduces transparency. Instead they think the charge should be influenced by local conditions i.e. if connecting a new dwelling an area has excess capacity in the network then that could be cheaper to connect to the network than a house on the edge of town in a new subdivision that needs new pipes installed.
Interestingly the specifically call out as not practical a few finance methods often suggested by those pushing greenfield growth such as Tax increment financing (TIF) and Municipal utility districts (MUDs). They do call for greater use of targeted rates to pay for local infrastructure though, for example the costs of the core infrastructure to new developments mentioned above could perhaps be paid off by a targeted rate levied against that area so it doesn’t impact on the rates of the rest of the city.
A few other recommendations around rates are made. This includes that council rates should be based on land values not capital values as it would encourage “land to flow to its highest value use”. It also suggests that the government should pay rates on core crown land including hospitals and schools. This is for the same reason as having rates based on land values, to encourage the best use of it. It’s one recommendation that I’m sure won’t be implemented. I would like to see rates paid by other organisations too such as churches. An example I highlighted the other day on twitter was this one up around Oteha with huge amounts of land dedicated to parking that pays almost nothing in rates due to being a church. Note: this is not a debate about or an attack on religion.
There are a number of other recommendations and in the interests of space and time I won’t cover them all. All up it seems like a fairly well balanced report that importantly recognises that cities and density are important. If you want to make a submission, you need to do so by 4 August.
I was a bit surprised to hear the Property Institute of New Zealand warn of an “apartment bubble” in Auckland earlier this week. I was even more surprised when I read their press release. The CEO, Ashley Church, is predicting a bubble as a response to 1) banks being likely to decrease their deposit thresholds on apartments from 20% to 15%, and 2) the Reserve Bank potentially bringing in “loan-to-income restrictions”, where mortgagees would then only be able to borrow X times their income.
The press release then gives a hypothetical chain of events:
1. The Reserve Bank restricts mortgage loans to a percentage of household income – effectively making the purchase of freestanding residential homes almost impossible to all but the very wealthy.
2. With median household incomes of just $76,500 – home buyers flock to the apartment market to find properties which comply with the new rules.
3. The relaxed deposit rules, by the major banks, allow buyers to borrow a little more if the apartment is new – (on average, a little over $400,000 if we adopt the Brit formula) – and this combination fuels a new wave of apartment building and streamlined marketing programs designed to entice buyers.
4. Property Investors – many of whom have also been caught by the new rules – also start buying apartments in large numbers.
5. The combined effect of this new wave of buyers quickly pushes up the price of apartments – fuelling an ‘apartment bubble’.
6. Perversely – the quality of new apartments suffers as developers focus on the ‘low-end’ of the market so as to appeal to as wide a range of potential buyers, within the Reserve Bank rules, as possible.
7. Meanwhile, the cost of renting free-standing homes in Auckland also increases as demand outstrips supply due to the absence of traditional property investors buying these types of properties.
8. Within 7 to 10 years Auckland becomes a highly ‘intensified’ city with large numbers of low quality apartments dotting the landscape and free-standing residential homes becoming the preserve of the well-off and wealthy renters.
However, this chain of events misses out half of what defines a bubble. He’s postulated a rise in prices, sure. But where does the subsequent decrease happen? To me, this sounds like a recipe for a one-off, permanent increase in apartment prices. A permanent shift in the demand curve, as it were. I’m not making any predictions on apartment prices, I’m just pointing out that the chain of events here doesn’t actually include a drop in prices, and therefore isn’t a bubble.
Moving on from that (rather important) point, there are a lot of other strange things in this press release. Firstly, it seems a bit far-fetched that the Reserve Bank would impose harsh restrictions to the extent that only “the very wealthy” could afford freestanding homes, and the press release also ignores the price response (i.e. prices would drop, and many people would still end up in those homes – there aren’t enough “very wealthy” people to fill them all up).
Secondly, if the Reserve Bank is going to clamp down on Auckland home loans, it’ll be because they’re worried about a city-wide bubble. I’d say this is a much bigger concern than an apartment bubble – it’d affect a lot more people.
Point 7 is one I’ve been reading a few variations of recently, which doesn’t follow from economic intuition. If landlords drop out of the market, do rents to rise? Given that each landlord dropping out of the market means there’s an owner-occupier there instead – and therefore a smaller rental market on both sides – the effect on rents might go either way.
Points 6 and 8 in the chain of events are odd too, essentially scaremongering about large numbers of low-quality apartments. The press release continues in a similar vein:
Mr Church says that he is aware that a focus on ‘intensification’ through building more apartments is consistent with the Auckland Unitary Plan and that some might see this outcome as a good thing – but he notes that this provision is also strongly rejected by a large number of Aucklanders and shouldn’t be forced on the city by the Reserve Bank.
“The drive for Intensification is based on a political ideology and is rejected by a large number of Aucklanders. It should only happen if Aucklanders want it”.
It’s a strangely political statement itself, coming from an organisation which began as the professional body for valuers. The PINZ’s statement in March that “the Reserve Bank Governor needs to “stop chasing shadows and stick to his knitting” seems a bit ironic.
As an aside, I think it’s great that the banks reviewing their lending policies on apartments; after all, it’s a more established market now than it was ten years ago, and there’s (hopefully) a lot less speculation going in that market than there was in the mid-2000s boom-bust. The banks will still be cautious about lending for leaky or leasehold buildings, and perhaps shoeboxes, and once those are taken out of the equation the apartments that are left should have a manageable level of risk.