Arthur Grimes, the former chair of the Reserve Bank board, caused a stir with his proposal to crash Auckland house prices by 40% by building lots more housing:
My call for policies to drive a house price collapse is driven by my personal value judgement that it’s great for young families and families on lower incomes, to be able to afford to buy a house if they wish to do so. My concern is not for older, richer families, couples or individuals who already own their own (highly appreciated) house…
Research at Motu (accessible from www.motu.org.nz, and published in international scholarly journals) shows that (given current interest rates and incomes) a 1% increase in the number of dwellings relative to the population leads to a reduction in house prices of around 2.2%. Thus a 40% fall in house prices means that the number of dwellings in Auckland would have to expand by around 18% relative to the current dwelling stock. On top of that, the stock has to increase to reflect population growth. So with, 2% population growth per annum, the stock of dwellings in Auckland would have to increase by roughly 30% if prices were to fall by 40% over the next 6 years.
There are currently around 500,000 dwellings in Auckland. A 30% increase in dwelling numbers over 6 years translates into an extra 150,000 houses over that time – i.e. 25,000 extra houses per year for each of the next 6 years. This estimate contrasts with much smaller (and nonsensical) estimates of housing shortages that are often quoted. The reason is that those smaller estimates (e.g. 10,000 extra houses) would just leave prices where they are!
Now, I’m not quite as confident that the spillovers from a large drop in housing prices could be contained without significant effects on financial stability or the real economy. And there are definitely many challenges to technical feasibility, including zoning, infrastructure capacity, and availability of builders. But I fully agree with Arthur’s framework for thinking through supply and price dynamics.
It’s a welcome break from much of the usual commentary about the supply and demand balance in Auckland’s housing market. For example, it’s common to hear statements like, “Auckland’s population grew 22% between the 2001 and 2013 Censuses, while the number of dwellings in the city increased by 19%. Therefore we’re only 3% short.”
I’d describe this as the “quantity surveying” approach to market analysis – i.e. count up the number of people, count up the number of homes, and compare the difference. It’s not good economics, as it completely fails to consider:
- Desired outcomes from the housing market: As Arthur observes, an appropriate goal is for young people and low-income families to be able to access the housing market. We’re trying to achieve lower prices, not a certain ratio of dwellings to people.
- Underlying relationships between supply, demand, and prices: As Arthur points out, in order for prices to fall, the housing stock must be rising faster than population. Exactly how much faster depends upon the degree to which there is pent-up demand for housing that hasn’t been met in the past.
With that in mind, let’s take a closer look at Arthur’s figures. He argues that:
the stock of dwellings in Auckland would have to increase by roughly 30% if prices were to fall by 40% over the next 6 years… [which] translates into an extra 150,000 houses over that time – i.e. 25,000 extra houses per year for each of the next 6 years.
Why is an additional 30% increase in dwellings needed when Auckland’s population has only grown by around 30% over the last 15 years? Doesn’t that seem a bit too large?
From a quantity surveying perspective it does, but from an economic perspective, it’s totally sensible. To see why, we need to think about what rising housing prices mean. If the supply of a good – housing in this case – is constrained, prices must rise until some potential buyers give up and go elsewhere. In the Auckland housing market, that could mean:
- Moving elsewhere in New Zealand – surely a factor behind recent price rises in Hamilton, Tauranga, and beyond
- Moving overseas – a total loss of that person’s capabilities to the NZ economy
- Staying in Auckland and living in overcrowded or unsafe housing – which disadvantages them and costs the public health system and social agencies
- Living in a car or on the streets – it’s frankly appalling that I even have to mention this.
The fact that Auckland’s prices have been rising more rapidly than prices in the rest of the country (which are affected by the same bank lending conditions and macroeconomic trends as Auckland) is an indication that price-driven rationing is probably occurring. There is likely to be a significant amount of pent-up demand for Auckland housing – and if we figured out how to meet it, the city would get bigger. (Leading to, among other things, increased agglomeration economies.)
Finally, it’s worth discussing Arthur’s thoughts about where new housing should be constructed. He takes the SFBARF view: build absolutely everything everywhere:
So how can we get these extra houses and where can they go? Some people favour intensification and some favour expansion of the city’s footprint. The size of the task means that both are required.
Auckland is lucky that it has plenty of farmland around it and – contrary to popular myth – farmland is almost worthless in farming uses compared with residential use. Expansion is therefore required, but with a proviso. A change in the zoning of rural land to residential gives the existing landowner a massive uplift in value – i.e. a multi-million dollar gift from the community. To my mind, this value should accrue to the community that grants the zoning change. The Public Works Act could conceivably be used (or changed) to enable Council to buy rural land at a premium (say 50%) above the rural land value and then all extra value uplift would accrue to the Council to be used for infrastructure and services for the enlarged community.
Auckland also has plenty of opportunities for intensification in areas where developers would wish to intensify and where people wish to live. For instance, Tamaki Drive is ready made for high-rise apartments where tens of thousands of people would no doubt wish to purchase apartments. Of course climate change may make development on Tamaki Drive a risk, but a few blocks back from the sea – on the ridges overlooking the harbour – would work just as well. Lift the restrictions on the heights of new developments, and I expect that we would see an utter transformation in the intensity of housing from Orakei through to Glendowie.
Why can’t we do it with sprawl alone? There are two answers. The technical answer, which we’ve extensively covered on the blog in the past, is that new infrastructure to greenfield areas is expensive and time-consuming to develop. The time lag to intensify sites that are already served with infrastructure can be smaller, provided that consenting is straightforward.
However, the economic answer is, to my mind, even more important. Research into the determinants of property prices in Auckland consistently finds that proximity to the coast and proximity to the centre are two of the most important attributes for buyers. People value the amenities that come with coastal living – that’s a significant part of the attraction of being in Auckland – and they value the consumer amenities and employment accessibility that are concentrated in the centre.
A sprawl-only plan may work from a quantity surveying perspective – it would raise the ratio of dwellings to people – but it would mean growing away from the coast and away from the centre. The next swathes of farmland to be developed – east of Flat Bush, west of Orewa, and north of Kumeu – are all a long way inland.
This will work for some people, but for many it will miss the point of living in Auckland. If we are to meet growing demand, we will also have to think hard about how new residents will access to the city’s man-made and natural amenities.
Let’s start with a quick pop quiz: you’ve got an existing town centre that you want to improve, making it more vibrant and successful. Do you
A) Encourage more people to live locally who will use the town centre
B) Encourage more people to live locally who will use the town centre
C) Encourage more people to live locally who will use the town centre
D) Oppose people living nearby and worry about the cars trying to drive through and past your town centre being ever so slightly hindered.
If you answered A, B or C then correct, have a gold star, but it seems far too often our local boards reach for option D. The latest such example was a few days ago out west were the Waitakere Ranges Local Board have appeared opposing housing in Glen Eden.
Ten-storey towers of mostly one-bedroom flats have been proposed for suburban west Auckland, prompting local fears they will turn into slums.
Developers have applied for non-notifiable resource consent to build blocks of apartments in the centre of Glen Eden, adjacent to the railway tracks and cemetery.
Smaller dwellings and apartments have been touted by many as the future for Auckland and as one solution to the city’s housing crisis.
If given the go-ahead, the apartment blocks would house 168 one- or two-bedroom units and townhouses along with carparking, retail space and some outdoor space for residents.
The Waitakere Ranges Local Board said it was a radical proposal.
The plan for twin ten-storey towers raised many concerns especially as the height would be more than what was allowed for in the Unitary Plan, the board said.
“With most apartments being one bedroom the development will favour young residents. We would prefer to see some three-bedroom apartments and a greater mix of apartment sizes so that all stages of life are covered and a more mixed population live in the area.”
Let’s just think about some of this for a second
Firstly the proposal is right next to a train station and the town centre. That’s pretty much perfect and if anything the local board should be celebrating that. Furthermore it sounds like the closest neighbours are the residents of the cemetery. For some reason I hardly think they’re going to complain about a 10-storey apartment building nearby.
One of the oddest comments is the local board trying to get more three-bedroom apartments. If this were a brand new area or even perhaps the city I might agree that would be good – not that it should be regulated for. But this isn’t the city and is surrounded by many dwellings have 3 or more bedrooms. In fact I took a look at some of the numbers from Stats NZ and as of the last census in the areas in and around Glen Eden there were 10,881 dwellings for which they have details on bedrooms. Below is the number of dwellings by the number of bedrooms they have.
As you can see almost three-quarters of dwellings in area have three or more bedrooms. That is quite different to the population distribution where 48% of dwellings house only one or two residents while 68% have three or less. The graph below shows the number dwellings based on the number of usual residents and the number of bedrooms. The biggest single group is for two people to be living in a three bedroom home.
There are of course many factors that go into housing choice and it’s not for us, or anyone, to say how people should live but what this does suggest is that if there’s an imbalance in housing in the area it’s not from a lack of 3 bedroom dwellings but from not enough smaller ones. Furthermore the suggestion that small dwellings are only suitable for young people is utterly divorced from reality. Many older people enjoy the opportunity to live in smaller dwellings where they have less maintenance to deal with and can remain close to friends, family and the communities they’ve lived much of their lives in.
Then of course there is the almost stock standard response we’ve come to expect from so many in housing discussions.
In its submissions to the council, the Waitakere Ranges Local Board voiced concerns on potential traffic generated by Glen Eden’s proposed towers in an already heavily congested intersection.
The developer has requested its application not be made public, to which the board has objected.
Some west Auckland residents are worried about the proposal, saying there is already too much demand for parking in the area and that one-bedroom flats next to a railway line would inevitably turn into slums.
All of this brings us to the point that if we want local board to stop trying to oppose developments with spurious arguments, we probably need some better people on them. Today nominations have opened for local body elections later this year so if you or someone you know have been thinking of standing, why not give it a go.
Yesterday the Government announced its latest policy on addressing the housing crisis in Auckland and increasingly in other centres, a $1 billion infrastructure fund to pay for the bulk infrastructure needed to support *some* of the new houses needed in greenfield areas.
The Prime Minister today announced a new $1 billion Housing Infrastructure Fund to accelerate the supply of new housing where it’s needed most, Finance Minister Bill English and Building and Housing Minister Dr Nick Smith say.
The contestable fund will be open to applications from councils in the highest growth areas – currently Christchurch, Queenstown, Tauranga, Hamilton and Auckland.
Mr English says the Housing Infrastructure Fund will help bring forward the new roads and water infrastructure needed for new housing where financing is a constraint.
“The Government will invest up front to ensure the infrastructure is in place. But councils will have to repay the investment or buy back the assets once houses have been built and development contributions paid.”
As we know Auckland is growing at rate faster than any other region in the country – there are a few districts growing faster, such as Selwyn following the Earthquakes but they are also off a much lower base. The Q&A suggests that the high growth areas are defined as the areas expected to see a 10% growth in the 10 years to 2023. In that time frame, Stats NZ predictions suggest that Auckland will see 58% of the country’s population growth. That figure is even higher if just comparing the five areas listed with Auckland taking around 70% of that growth. As such we can expect the lion’s share of that $1 billion to be used in Auckland. Auckland’s growth over the following years doesn’t slow down either and in the 30 years to 2043 over 60% of all growth in NZ is expected in Auckland.
One big issue right from the start is that for those other cities, a share of $1 billion would go a long way. But in Auckland with its infrastructure needs on another scale, it would be gulped down so fast it would barely touch the sides. The recent work that AT and the NZTA have been doing on Transport for Future Urban Growth suggests that over 30 years around $10 billion is needed in the greenfield just for transport infrastructure. On top of more funding is needed for other physical and social infrastructure that will be required to ensure these new developments have the level of amenity that will be expected/required such as parks, community facilities and much more.
There is of course a lot more infrastructure that’s needed in Auckland but seems that only the greenfield stuff counts for this funding.
Dr Smith says the fund will be available only for substantial new infrastructure investments that support more new housing, not to replace existing infrastructure.
“To access the fund, local councils must outline how many new houses will be built, where they will be built and when they will be available. Ideally, they will have agreements with developers on these issues.
“Funding may also have other conditions attached, such as faster processing of resource consents. All of this will require close collaboration between central and local government.”
Mr English says infrastructure, and its financing in particular, is one of the three key constraints to building more houses – alongside land supply and consenting requirements.
“Councils have strict debt limits which means some lack the headroom to invest in infrastructure now and then wait for future development contributions to recover the costs. The fund will help provide more infrastructure sooner by aligning the cost to councils with the timing of revenue from development contributions.”
Depending on the number and timing of applications, it will require the Government to temporarily borrow up to $1 billion, which will increase net debt until it is repaid.
Only funding new infrastructure is kind of understandable but it does raise some questions, such as just what constitutes new infrastructure. In many cases building new roads or pipes also requires upgrading existing infrastructure to cope with the demands of new areas. We know we can’t just build tens of thousands of dwellings on the edge of town and expect the motorways to work. We also know that there are plenty of areas within the existing urban area for which replacing existing infrastructure is likely to be needed to enable new development. One such example would be the NW Busway which enables growth in existing urban areas such as Te Atatu but also will be critical in enabling growth in the entire North West.
I guess that if councils can assume this fund will pay for some of the greenfield growth they would have otherwise needed to build, it enables them to re-prioritise budgets to focus their normal funding on improving existing infrastructure.
One aspect I do like is the idea of linking funding to developments, the last thing we want is the council or government spending precious funds building infrastructure to an area only for a developer not to build anything and then profit off the increased land value. That of course also raises the question of why the government doesn’t just build a heap of homes themselves.
Perhaps the biggest issue with this announcement is that it’s not going to have any real short term impact. Even if the funding tap was turned on tomorrow – and it seems the details are yet to be worked out – the types of infrastructure projects that this fund will help deliver are not quick things to enable. They normally take years of planning, consenting and construction before any house can be built and so it will be many years before any housing this fund enables will have any impact on our current crisis.
Overall the fund seems useful but not quite as useful as the government’s headline suggest. A lot of it is going to end up coming down to the details and rules put in place and those have yet to be worked out. Ultimately the whole thing just seems like a way of loaning money to councils in a way that sits on their books differently. It will also be critical to see just what projects get built with this funding. If it just results in trying to quickly build a pile of auto-dependant sprawl that would be a terrible outcome but if it also is focuses on good quality outcomes such as decent walking, cycling and PT facilities it could be quite useful.
In addition to the infrastructure fund, the government have also said they’re looking at setting up urban development authorities.
Dr Smith says the Government is also considering establishing Urban Development Authorities (UDAs) to help further speed up the supply of new housing.
UDAs have streamlined powers to override barriers to large-scale development, including potentially taking responsibility for planning and consenting and other powers.
In some form or another we already have a few of these with the likes of Panuku Development Auckland, the Tamaki Redevelopment Company and the Hobsonville Land Company. How will a government UDA be different from these, with the possible exception of having the power to compulsory acquire land. If they did allow for compulsory acquisition it would be interesting to see if they also extended that to at least Panuku.
People sometimes worry that investors (or foreigners) are buying up properties and leaving them empty, speculating on capital gains instead – but if this is happening at all, it seems to be on a very minor scale. In a post last year, I looked at unoccupied homes in Auckland and other NZ cities, using census data. Most of them, including Auckland, had similar percentages of unoccupied homes – roughly 5% to 8%.
In this post, I’ve dug deeper, looking at the unoccupied homes figures for each Auckland suburb. I’ve also put together an interactive map showing the percentage of unoccupied homes for each area:
Across the Auckland region, there were 33,201 unoccupied dwellings on census night 2013. This sounds like a lot, but as per my earlier post, the fraction of homes that are vacant is pretty similar to other NZ cities, and to the other ‘snapshots’ taken in the 2001 and 2006 censuses.
Unsurprisingly, there are plenty of vacant homes on some of our offshore islands – Kawau, Great Barrier, Waiheke, with around 2,500 between them. Most of these, of course, are used as baches.
Most of the other ‘ghost areas’ are also bach hotspots – the highest percentage of vacant homes are in places like Leigh, Omaha, Snells Beach, Waiwera and Point Wells. Around 2,700 vacant homes are in these northern holiday/ lifestyle areas.
Still, most vacant homes in the Auckland region are in the urban area. This is what we’d expect given that’s where most of Auckland’s 507,000 dwellings are.
Within the city, Hobsonville stands out as an area with a lot of empty homes, presumably because many of the homes have just been built and not yet occupied. In fact, the Hobsonville East area unit had 363 occupied dwellings, 120 unoccupied, and another 18 under construction. That construction figure seems implausibly low, so my guess is that many of the “unoccupied” homes hadn’t actually been completed and certified yet, even if they looked habitable.
Auckland Central has 2,200 unoccupied dwellings, according to the 2013 census. It’s quite common for CBDs to have lower occupancy rates, due to several different factors:
- With a ready market of people wanting to stay in the CBD for a night, a week or a month, apartments are more likely to be rented out as short-term accommodation than a house in the suburbs
- Some people can afford to keep a CBD apartment for weekday or occasional use, and spend the rest of the time in a house elsewhere in Auckland, or somewhere else in New Zealand, or even overseas.
- Although legally everyone is supposed to fill out a census form, not everyone does. The ‘response rate’ is likely to be lower in the CBD (language barriers, privacy desires, age cohort factors etc), plus it’s harder for the census collectors to tell whether an apartment is occupied or not, compared to a house. Some apartments will have been incorrectly tagged as ‘unoccupied’.
In my previous post, I quoted North & South magazine, who give “Mt Albert and Mt Eden, Grey Lynn and Herne Bay” as examples of suburbs where ‘ghost houses’ are apparently common. But the census data doesn’t show that at all. Most of these suburbs are spectacularly normal. They have vacancy rates at very typical levels, in line with the averages for Auckland and other NZ cities. Herne Bay is slightly high at 9.1%, but it was 9.3% in 2006 and 7.9% in 2001. And those ‘higher’ rates seem to be typical for the wealthiest suburbs – Remuera is similar.
I initially thought that wealthier suburbs might be more likely to have unoccupied homes – since people living there might have more mobility, travelling overseas for example. However, there’s no evidence of this in the data. I’ve done a few really basic regressions, all of which fail to show a relationship between incomes and the percentage of unoccupied homes. Here’s one example:
Finally, I’m open to the idea that the number of empty homes has crept up since the 2013 census – that this is becoming an emerging issue – but it doesn’t seem likely. We’re not building enough homes, and there’s plenty of demand from people looking for places for to live (giving rise to issues like overcrowding). If anything, there’s more incentive to rent out an empty house now than there was in 2013. My two cents is that we need to put our energies elsewhere if we want to get the housing market into better shape.
New Zealand isn’t the only place to be concerned about empty homes. This article from Sydney uses 2011 census data for the city, similar to what I’ve done here. And this article from Melbourne uses a methodology I quite like – they’ve estimated the number of empty homes, based on homes with abnormally low water usage.
It’s been a little while since I wrote a “Development Update” post, and a lot has happened since then:
- The final batch of Special Housing Areas was approved.
- Downtown Shopping Centre has closed, and is about to be demolished. Tunnels for the City Rail Link will be built underneath, and the site will be redeveloped as Commercial Bay, an office tower and shopping centre.
- Speaking of the City Rail Link, it’s is now officially under construction.
- My count of homes which are currently “under construction” keeps edging up – it’s now up to 6,000, and that’s just for Auckland apartments and terraces.
- Several major buildings have been completed, including Urba Residences (144 apartments just off K Road), Unilodge on Whitaker (300 student apartments) and VXV Three (offices in Wynyard Quarter). Vinegar Lane keeps ticking away, with Countdown also open as of today.
- A number of new homes are now being marketed, such as NXN Apartments, Nugent Rise, The Eight, Eden Green and The International.
So, quite a bit then, and it’s all in the RCG Development Tracker, along with a host of other information on 700-odd projects.
It all adds up to a pretty big ‘pipeline’ of homes which are recently completed, under construction or being sold off the plans.
The tricky part is that, as I’ve written previously, the construction sector is getting really stretched. That’s worth a post of its own, which will happen in the next week. In the meantime, the government keeps finding it politically convenient to blame the Council for all of Auckland’s problems. Convenient it may be, but it’s not particularly helpful for Aucklanders.
Unfortunately, based on “building consent” numbers, Auckland has actually gone backwards in the last couple of months, in terms of the number of homes approved for building.
9,353 homes were consented in the year to April 2016, down from 9,534 in the year to February. The main reason is that apartment consents are volatile, and have had a couple of bad months. It’s a different picture than the top graph shows – that’s more of a “leading” indicator in a sense, so consents should come back up again.
None of it is enough, though, and if you want a bit more evidence:
- The Auckland Plan target is for the city to build 13,000 homes a year over the next 30 years.
- That includes an average of 10,000 homes a year in the first decade, which started in 2012 so we’re already playing catchup on that. Plus, as per the graph above, Auckland has only ever achieved 10,000 homes a year a few times, and that was when we were building far more apartments than we are currently.
- I’ve recently done some calculations that Auckland needs to build 14,000 homes a year to meet current demand (with immigration at its current high levels).
- We’d need at least 16,000 homes a year if not for the fact that Aucklanders have also been moving to other parts of New Zealand, which partly balances out the immigration from overseas.
- Most economic commentators think Auckland already has a shortage of 20,000 to 50,000 homes, which will take many years to address.
This is a huge challenge, although it probably looks pretty good if you’re a builder!
Housing issues in Auckland have become a fairly constant news piece in recent years and the affordability issue has become louder and louder. And it’s not just people wanting to buy a house either but also for renters as rental prices rise too, something that is particularly tough for those on low incomes.
We know that one of the key tools to helping unlock development in Auckland is of course the Unitary Plan – depending on what final form it takes. It reached a new milestone last Friday as the Independent Hearings Panel held its final hearing on it. The amount of work the panel has undertaken has been significant. There were 9443 submissions and 3951 further submissions. The hearings began in September 2014 and there have been 242 days of hearings and there were more than 10,000 pieces of evidence.
Between now and July they’ll be working on their final recommendations to the plan which will be voted on by the council. With elections coming up it’s anyone’s guess as to which way councillors will vote. One thing that does seem clear though is that pressure is increasing on them from the government, in particular Housing Minister Nick Smith.
On the weekend he told by both TVNZ’s Q&A and Newshub’s The Nation that he will be imminently releasing a National Policy Statement (NPS) under the RMA which will put pressure on the growing councils like Auckland to open up land.
“Next month I will be producing a national policy directive under the [Resource Management Act] that will put far tougher requirements on growing councils to ensure they are freeing up long-term the land that is required so that we don’t get into the sort of juggernaut that has been at the core of the unaffordable housing problems in Auckland.”
At first blush that sounds similar to the “throw open the gates” type statements he made when he was made housing minister however since that time he seems to have moderated some of his comments and gained a better understanding of some of the finer issues such as density restrictions that prevent intensification. As such I am hopeful that the NPS he’s developing will also address these constraints too.
I also hope the government consider the impacts on infrastructure as part of any policy. Just throwing open the land might sound like the immediate solution but that land also needs infrastructure to support it and that isn’t cheap. The Council, Auckland Transport and NZTA have been working on the Transport for Future Urban Growth which is planning for about 110,000 dwellings on greenfield land and just the major infrastructure is likely to cost around $8 billion.
Yesterday Smith also became a bit more personal calling Councillor Mike Lee a NIMBY, a hypocrite and part of the problem for opposing intensification in Herne Bay.
“Mike Lee is guilty of Nimbyism,” said Dr Smith.
The Government has designated the site of the old Gables pub a “special housing area”. That allows for fast-tracked development, with between four to seven of the apartments “affordable housing”. It’s about getting more housing into inner-Auckland’s “urban intensification”.
But neighbours don’t like it, and, local councillor Mr Lee is on their side. Mr Lee wrote earlier this year, saying the development was “overriding the civil rights of neighbouring property owners”.
Dr Smith responded, saying he found Mr Lee’s position “ironic”, “odd” and “part of the problem”.
“We cannot have that sort of Nimbyism. That’s at the core of where Auckland has gone wrong. That’s why I’ve politely written back to Mr Lee and said ‘actually, you are being a hypocrite’.”
Unfortunately, in many ways Nick Smith is right, over the last few years Mike Lee has fairly consistently voted against rules that would enable more housing, especially in the in inner suburbs.
John Key is also threatening the council and at his weekly press conference yesterday said:
The Prime Minister also warned that the Government would not be able to “sit back” if Auckland councillors did not deliver enough houses in the city.
Asked to elaborate, Mr Key said ministers would make announcements in this area soon.
Could the government ultimately force the Unitary Plan through if the councillors don’t approve it or worse could they install commissioners?
While I don’t agree with everything they’ve said, one positive is that the government have made some better noises around some housing issues. In saying that they also remain very quick to blame the council for the current issues when they need to take a share of the blame too. The reality is the Unitary Plan process is one the government created and more so, some of the ideas like an NPS could have been pushed years ago. Other tools that they’ve implemented such as the Special Housing Areas have resulted in at least some developers using it as a tool for to increase the value of their land-banking.
The bad news is that even if the government and council’s all do their bits well, our housing issues are something that could take decades to resolve. We’ll now have to await with interest to see what comes out of the budget and out of the NPS the government are preparing.
Through my employer RCG, I’ve just put out a research piece giving 2017 as the first time that Auckland will build more attached homes (apartments, terraces) than detached houses.* This is one milestone, but really it’s just one of the ways in which Auckland is changing to become more city-shaped, as Patrick puts it. While the number and percentage of attached homes will bounce around, I believe that they’re increasingly important for Auckland’s growth, and in the long term they’ll make up at least 50% of the new homes we build.
That doesn’t mean that leafy suburbs will be razed wholesale, or that we’ll stop building detached houses, or that everyone will be forced to live in an apartment. According to the 2013 census, Auckland has:
- 332,000 detached houses
- 50,000 units in buildings with 1 storey
- 43,000 units in buildings with 2-3 storeys
- 16,000 apartments in buildings with 4+ storeys
Clearly, detached houses aren’t going anywhere – it’s just that they’ll be joined by more flats, terraces and apartments too. That means more housing choice.
Housing choice is a good thing, but to bring it back to transport: Auckland needs better public and active transport so that it can handle more people, living closer together, without just getting more and more congested. The city needs transport choice as well as housing choice. We’ve often talked about Flat Bush as an area which has denser housing – including plenty of terraces and low-rise apartments – but which has very poor provision for public transport. That’s a recipe for traffic jams, long commutes and worse outcomes across the board. The new growth nodes in the future – Hobsonville, Massey, Takanini, Silverdale – need to avoid these mistakes.
The (Very) Big Picture
I try to get a bit ‘big picture’ with these posts, but I want to zoom out even further right now: let’s look at the overall New Zealand construction sector. At the moment, it’s as busy as it’s ever been. Statistics New Zealand measures the amount of “building work put in place” each quarter, showing how much construction is occurring. They say:
“For the December 2015 quarter compared with the September 2015 quarter, after price changes and seasonal variations are removed… total building activity rose 2.5 percent… the trend for all building work grew 1.8 percent, and is at its highest level since the series began in late 1989”.
There are regional differences – Canterbury construction will be tapering off in the next few years as the earthquake rebuild continues, and Auckland construction is booming. On the whole, though, the construction sector is pretty much flat out. Forecasts like the National Construction Pipeline Report, and the latest information on building consents, suggest that the outlook for the next few years is very busy too.
Growing industries are meant to be a “good news” story, and they are, and this means more jobs and more economic activity and all the rest. But it’s not without issues, because the construction industry relies on having a trained workforce, and it’s hard to keep growing the industry at 5% or 10% or 15% a year when construction is already a pretty big part of the economy and most of the people who know how to swing a hammer are already swinging.**
The graph below, from the Household Labour Force Survey, shows the number of people employed in construction at an all-time high:
Many builders are running at capacity already, and there are probably some specialist areas where it’s almost impossible to find builders to take on new projects – or at least, without paying through the nose. Peter’s looked at these issues in road construction previously, and I’ve heard that some Auckland apartment developers are struggling to find builders as well.
So, one issue with a very busy construction industry is that prices go up. Another worry is that there’s less focus on quality control, potentially resulting in buildings which aren’t up to scratch. It’s certainly something the industry, councils and government need to keep a close eye on.
Phew. So that’s the very big picture. It’s a good time to be a builder, but it’s going to be hard to find all the construction workers, tradesmen, consultants and other workers needed in the next few years, and hopefully the quality of the build isn’t compromised.
* Technically, we’re predicting 2017 to be the first year that more attached homes get building consent than detached houses. It will probably be 2018 or 2019 before Auckland completes more attached homes than detached houses.
** A hammer, that is.
Auckland’s population keeps on growing, with a hearty mix of migration and wee bairns. And with that comes demand for development of all kinds. Residential gets most of the attention, and fair enough too: we’re still struggling to build enough homes for everyone who wants to live here.
The Auckland Housing Accord between the government and council is into its third year. I’m eagerly awaiting the release of Auckland Housing Accord Monitoring report #9, hopefully by the end of this month. Will it be a riveting read like Auckland Housing Accord Monitoring report #8, or prescription medication for insomniacs like Auckland Housing Accord Monitoring report #5? Find out right here on TransportBlog.
Seriously, though, getting new homes built is a pressing issue for many reasons. And one of the main tools in the Housing Accord is identifying “Special Housing Areas” where approval processes can be streamlined and new zoning can be used.
The latest ‘tranche’ of SHAs was announced earlier this month, and as with all the other tranches, the urban/ infill/ apartment/ terrace ones have been mapped in the RCG Development Tracker, along with another 600-odd developments in many sectors.
The council has closed off requests for new SHAs, so that they can focus on the requests they already have. With the legislation set to expire in September, there’ll probably be just one more tranche to come.
Building consents are the best measure of how many homes are being built, or about to be built.
In Auckland, 9,251 homes were given building consent in 2015, up 21% from 2014 (7,632 homes). This is progress, but those numbers need to keep growing – to at least 13,000 a year, or even higher to start chipping away at the undersupply.
Down in Canterbury, home building activity is tailing off. Christchurch is still a little way off replacing all the homes lost in the earthquakes, but it’s getting there. The number of building consents peaked in 2014 at almost 6,700 homes were given building consent in 2014, and that’s fallen back to 5,800 for 2015. Many construction workers will look to move up to Auckland where there’s still plenty of demand for new housing.
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 week, I introduced the concept of elasticity of supply with respect to price as a useful measure of housing market dynamics. Supply elasticities measure how responsive builders are to an increase in demand. In other words, when people turn up wanting dwellings, how quickly do the tradies start building more?
Supply elasticity can in turn have a big, long-run effect on prices. If the building sector is consistently slow to respond, it creates the condition for an ongoing shortfall in supply, which means that people will bid up prices more.
My post last week took a look at some of the (limited) international comparisons of planning regulations, which seem to indicate that New Zealand is not an especially poor performer. For example, consent processing time is relatively fast and efficient compared with other OECD countries.
However, regulations are only part of the picture. For example, Patrick wrote a good post a while back looking at Auckland’s geographic constraints:
Intuitively, we’d expect Auckland’s limited supply of developable land to have an effect on housing supply dynamics. But how much of an effect should we expect?
The empirical literature provides us with a reasonable estimate. A 2010 paper by MIT economist Albert Saiz (Massachusetts, not Manukau) measures constraints on land availability in large US cities and uses them to estimate the effect on housing supply.
Saiz finds that there are large differences in land availability between different cities. For example, “flatland” cities like Atlanta or Houston have very little area constrained by lakes, rivers, oceans, or steep slopes. Over 90% of the area around these cities is available for development. Coastal cities like San Francisco, San Diego, or Miami, on the other hand, might be able to develop less than 1/3 of the surrounding area.
Saiz concludes that:
Quantitatively, a movement across the interquartile range in geographic land availability in an average-regulated metropolitan area of 1 million is associated with shifting from a housing supply elasticity of approximately 2.45 to one of 1.25. Moving to the ninetieth percentile of land constraints (as in San Diego, where 60% of the area within its 50-km radius is not developable) pushes average housing supply elasticities down further to 0.91.
Translated from economese, this means that cities with less developable land have housing markets that respond more slowly to increased demand. (Or, as non-economists might say, duh.) For context, an elasticity of 0.91 indicates that a 10% increase in house prices is met by a 9.1% increase in housing supply. Even if regulations are held constant, a “flatland” city is expected to have a more responsive housing market than a coastal city with lots of hills.
In other words, when people compare Houston’s house prices with San Francisco’s or New York’s, they’re not comparing like with like. Geography matters quite a lot!
So what does Auckland’s geography look like? A 2014 NZIER paper modelled the effect of geographic and regulatory barriers on the city’s house prices. The authors conclude that: “relative to even Australian cities Auckland’s twin harbours severely restrict the availability of well-located land close to the city centre.” Overall, they estimate that less than one-third of the area around Auckland is available for development – most of the rest is water:
In other words, Auckland has very severe geographic constraints. In terms of the availability of developable land, it’s similar to hilly coastal cities like San Diego. Saiz estimated that a city of around Auckland’s size with an average level of planning regulations would have a supply elasticity of 0.91. So: does Auckland perform better or worse than this in practice?
A 2010 study by Arthur Grimes and Andrew Aitken provides some relevant data. Using data at a district council level, they looked at how quickly new dwellings were built in response to “shocks” in demand such as increases in net migration. Their key conclusion was that housing supply in New Zealand’s urban areas tends to be a little bit more responsive than supply in rural areas:
If we divide regions into urban and rural, we find faster adjustment in urban areas (average γ1i = 0.0093) than in rural areas (average γ1i = 0.0064). This result is consistent with an active development industry, based principally in cities, facilitating new construction.
In other words, the authors estimate a supply elasticity of around 0.93 for NZ’s urban areas (principally Auckland). This is almost exactly what we would predict based on Auckland’s geography. The implication of this is that Auckland’s housing market functions more or less as expected given its geography – we don’t have to assume unusually restrictive planning regulations to explain the observed outcomes.
There are a couple lessons we can draw from this.
First, Auckland’s geography is a primary driver of the city’s housing supply dynamics. If we have higher house prices than we’d like, it’s partly because we have less land for housing. As I’ve written before, some analyses of Auckland’s high house prices fall prey to omitted variable bias – i.e. ignoring important causal variables and thus over-estimating the impact of specific policies. This can result in flawed policy recommendations.
Second, we shouldn’t compound constrained geography with bad policy. Because Auckland doesn’t have much developable land, there is an even stronger incentive to use land efficiently. (A fact with implications for transport policy, planning policy, tax policy, and publicly-owned land.) Land-hungry policies might not be too bad in a land-abundant place like Houston, but requiring Auckland to follow a similar pattern is economically calamitous.
As most New Zealand cities are also heavily constrained by geography, this challenge isn’t unique to Auckland. But it’s also not all bad: the interplay of mountains, volcanoes, harbours, and oceans is what makes New Zealand such a beautiful place to live. Let’s build cities that enable us to get the best out of it.