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Rodney Dickens.

Property-focused economist Rodney Dickens took aim at the Government’s housing initiatives at the weekend.

Despite the valid criticisms, though, his harshest presentation of failure is aimed not at a single year’s performance by the present government but at 2 decades of failure by successive governments.

In doing so, Mr Dickens didn’t present a forward path.

His solution to escalating house prices is to fix section prices.

That in itself is not an answer. How do you fix? Who fixes? Where do you start?

This article comes in 3 parts:

1. Mr Dickens’s key points in his latest Rodney’s Ravings report – which will fill you with horror although you’ve known the truth of them for a long time
2. I will take you to some questions which I think need to be assessed, and
3. To close, I’ll look at potential ways forward.

Now to the Dickens report:

The Government should do the obvious to fix housing affordability, says Dickens

Economist Rodney Dickens, owner & chief researcher of Strategic Risk Analysis Ltd, produced graphs at the weekend which show how far out of kilter residential section prices have gone.

Mr Dickens wanted to throw the spotlight on the role rising section prices have played in driving up new & existing house prices in Auckland and the similar story in all major urban centres except Christchurch, where the 2010-11 earthquakes set it on a different path.

KiwiBuild, one of Housing & Urban Development Minister Phil Twyford’s solutions to the slow construction rate, has experienced some teething problems: “Some people aren’t happy that it isn’t delivering new housing affordable to low income earners, while the extension of the ballot for the first 10 of the 211 KiwiBuild dwellings planned for Wanaka over 2 years may be a sign it will face indigestion problems in towns.

“More teething problems will no doubt arise. But the real criticism should be aimed at the Government’s housing initiatives more generally because they aren’t aimed enough at fixing the largest obstacle to more affordable new housing: high section prices.”

Mr Dickens’s graphs illustrate, at least in part, the role rising section prices have played in driving up prices for new & existing houses in Auckland.

Ironically, he said, the housing accord & special housing areas the National-led Government put in place in Auckland “may be belatedly starting to drive a hint of downside in sections prices. But it is far too little. Much more needs to be done to get down the cost of developing sections; it would deliver a real solution to the housing affordability problem.”

True extent of escalation much higher

Even the research he has done doesn’t show the true extent of land price escalation, because Real Estate Institute figures on section prices don’t take into account the shrinking size of sections.

Over the last 25 years, the average construction cost/m² for a new home in Auckland, based on consent data, rose 212%. The median section price rose 903% over the same period, but Mr Dickens said that because sections had been shrinking in size, the price escalation/m² for sections could well exceed 1000%.

“Obviously the cost of sections feeds directly into the cost of new dwellings, but section prices are also an implicit part of existing dwelling prices.

“A link between Auckland section & existing dwelling prices is evident in the chart below that uses the Real Estate Institute median prices. The difference between the existing dwelling price & the section price is the effective market value of the improvements, that is linked to a moderate extent to building costs.

“Between January 1993 & October 2018, the median section price increased 903% while the median dwelling price increased 514%. In the 12 months ended January 1993, the median Auckland section price was 41% of the median dwelling price, while for the 12 months ended October 2018 the median section price was 67% of the median dwelling price.

“In a country with an extremely low population density, it is madness that it costs more on average for a section than for the house built on it, even in the largest region.

“These increases, and especially the increase in section prices, look horrific when compared to the 68% increase in prices in general over the same period based on the consumers price index, the 111% increase in hourly earnings over the average employees & the 89% increase in the national average rent based on the CPI rent component.

“The causes of sky-rocketing section prices have been discussed elsewhere, including by the Productivity Commission. Relevant factors include massive increases in development contributions, council policies that effectively gave oligopolistic pricing power to landowners, and a drawn-out & expensive process for getting new subdivisions approved.”

Next, Mr Dickens compared the median section price reported by the Real Estate Institute for Auckland with the average cost of building/m² based on the new dwelling consent data: “While the median section price increased 903% between January 1993 & October 2018, the average cost/m² for new dwellings in Auckland increased 212%. Building costs have increased much more than prices in general & average hourly earnings – this is in the context of average hourly earnings most likely understating overall income growth for a range of regions not discussed here. But the increase in building costs is dwarfed by the increase in section prices.

“The increase in section prices is even worse than it looks because, since 1993, the average section size has fallen significantly. The average price/m² for Auckland sections will have increased much more than suggested by the median prices reported by the Real Estate Institute. Unfortunately, data are not available on section prices/m², but the increase will be well over 1000%.

“If Auckland section prices had increased in line with building costs, the blue line in the chart below suggests what existing dwelling prices will have done relative to what they actually did.

“If Auckland section prices had increased since 1993 in line with the average cost/m² of building new dwellings in Auckland, the median section price would be around $180,000 now rather than $575,000.

“By implication, the median existing dwelling price would be around $460,000 rather than $854,000 (ie, $394,000 or 54% lower). So why isn’t the Government (and the Auckland Council & councils in all major urban areas) doing more to get down section prices? If the problem of high section prices was fixed, the market would fix the new housing affordability problem without the need for the contentious & bureaucratic KiwiBuild ‘solution’.

“Maybe the problem lies partly with the other parties that Labour relies on for support? But the problem runs deeper than this. National had every opportunity to fix this problem when it was in government, but didn’t.

“Ironically, the minor fall in the weighted average Auckland median section price since early-2017 may be a response to the boost in supply from the 154 special housing areas approved following National introducing special housing area legislation in 2013. The 154 special housing areas were expected to add over 60,000 new dwelling sites in Auckland. But if it is, it is far too little & way too late. The special housing areas didn’t stop a massive increase in section prices since the legislation was passed in 2013 (ie, 69% based on the weighted average median price for the Auckland region).”

Links (for all 3 pages of this report):
Rodney’s Ravings, 17 November 2018: The government should do the obvious to fix housing affordability
2017, National-led Government’s urban development authorities discussion document
Solly Angel + 5 other contributors, essay 5 July 2018: The new urban peripheries: Findings for a global sample of cities, 1990-2014
Solly Angel
NYU Stern urbanisation project
Stern urban expansion initiative

Earlier stories:
16 November 2018: 3-way partnership to fund infrastructure for next big subdivision at Wainui
13 September 2018: Transport agency sets out project list
20 April 2018: Council approves quest for $300 million of government housing infrastructure money
24 July 2017: Ministers explain infrastructure funding deal
24 July 2017: New Crown entity will advance housing infrastructure
12 July 2017: Council gets $300 million infrastructure package, balance sheet-beating deal to come next
28 April 2017: Joyce lifts infrastructure intentions and talks new operating mechanisms
6 March 2017: Property Council joins call for new infrastructure funding
8 January 2017: Housing infrastructure fund call for final proposals imminent, and panellists required
26 October 2016: Goff talks up growth along with cutting congestion and revising funding
5 October 2016: Infrastructure frailty puts US financial woes in perspective
3 July 2016: PM talks $1 billion infrastructure fund, English talks payback frame, Smith talks grabbing more power
6 September 2007: Curtis loses fight to remove “compact” from development framework
11 April 2007: Expect 4-5 centres to be earmarked in growth strategy review

Articles on Productivity Commission:
22 August 2016: Commission sees government change as essential for urban planning
22 August 2016: Commission says everything English wanted on planning
19 August 2016: Government says it’s already implementing land for housing recommendations
 5 October 2015: Commission sends land for housing report to Government
19 June 2015: Commission looks behind high land prices
19 June 2015: Key points from land for housing report
2 June 2015: Productivity Commission draft on land for housing out in fortnight
 7 November 2014: Productivity Commission launches land supply regulation inquiry
13 April 2012: Productivity Commission misses key affordability point – again
4 April 2011: First inquiry for Productivity Commission is housing affordability

Productivity Commission releases:
11 May 2018: New inquiry into local government funding announced
2 March 2018: Why can’t Auckland build enough homes?
29 March 2017: Urban planning – moving beyond the wheel spin

Pages in this report:
1: Dickens takes aim, but the residential land fix is elusive
2: Things to keep in minds while focusing on fringe land supply
3: Cutting the margin without breaking the market…

Attribution: Rodney Dickens, Solly Angel.

This is page 2 of a 3-page article based on economist Rodney Dickens’s weekend report, The Government should do the obvious to fix housing affordability.

In this section, I’ve raised other factors that need to be considered.

Things in the wider picture to keep in mind:

• Keep in mind that a syndrome featuring in the Auckland & New Zealand pictures also happens to have featured worldwide: Housing prices have been escalating in many countries, not just New Zealand, which ought to raise the suspicion that there’s at least one element of common cause.

The common features internationally:

• Unheard-of low interest rates, which lift asset values
• Rising US public debt, now truly out of control, an influence on values exported worldwide because of the reserve status of the $US
• Sharp & prolonged increases in immigration.

Near-term international influences which will make it harder to bring specific economic policies of countries & for sectors such as housing under control:

• The US desire for control, seen at the moment through President Donald Trump’s trade war with China, pressure on Iran & increase in military spending
• Likely for/against positioning regarding the South China Sea, Pacific islands (including New Zealand) support, various treaties & international agreements (particularly those involving Asia), ad African development

Those might seem like far distant influences with little likelihood of interfering in domestic issues down here, but look at them this way: When, as a country, you’re forced to take sides (and this will happen all too soon), your trade routes & relations can be seriously upset.

There’s also one issue peculiar to Australia & New Zealand, and another which both countries can start to rectify:

• The peculiar local issue concerns the flow of migrants across the Tasman Sea, thataway when times are tougher here & expanding there, the reverse when jobs are harder to find in Australia and Kiwis come home.

New Zealand came out of the global financial crisis of 2007-12 (the years of greatest impact here) very well, courtesy of a leap in immigration. Australia has encouraged even more immigration than our previous government did, though as a lower percentage of total population, but other factors have reduced the boost there. The most notable factor is the price of mined commodities, combined with some uncertainty in the biggest market, China.

Reduced immigration by both countries would at least stabilise the pressure on housing, but would also reduce economic growth.

Auckland’s 2 key issues: land availability & price

The 2 key issues for housing in Auckland are land availability & land price. Less of an issue (although they’re still big) are construction costs & regulation. Infrastructure funding is also less of an issue than the certainty of providing it quickly in the right place.

Housing & Urban Development Minister Phil Twyford addressed infrastructure funding this week in a way which looks positive, but in reality shifts the cost burden from today’s buyer down the track as a fixed-in-place (& spreading everywhere in short time if it’s accepted) cost for all homeowners.

Why do I regard it as a “targeted” cost for all homeowners? Targeted rates have spread from a city-centre rate to local rates for services such as sewerage to a fuel tax. Development contributions paid (and factored into land pricing) by developers to local councils were seen as a short-term solution to infrastructure expense and will remain in place, but are increasing in Auckland. The new targeted rate will be an extra.

The division of rates into general & specific is turning up more specifics. At the moment, buyers in new subdivisions pay development contributions, and you will see that kind of cost spread to specific charging for replacing infrastructure in older suburbs.

In the short term, the Government’s infrastructure funding support measure, via Government-sourced loans (as a long-term depository for Accident Compensation Corp income) plus targeted rates on specified homeowners, gives more certainty to the supply of utility networks & roading. It will spread infrastructure costs from immediate into years hence – an addition to the mortgage.

Is the rural:urban boundary the real bogey?

There has been a campaign for several years for Auckland Council (& the regional council & regional growth forum before it) to abandon set rural:urban boundaries (the RUB) to free more land for subdivision and, through competitive pricing, thereby reducing land costs.

Through all that campaign, nobody has ever said how that open-slather approach would be applied. In particular, how infrastructure would be provided.

One method could be to impose regulations on urban-fringe land sales to control prices of sale & onsale – authoritarian, roughly applying the model brought in by National Prime Minister Rob Muldoon in 1982 to freeze wages, prices, interest rates & dividends, which lasted until he lost office to Labour in 1984.

Lifting of that freeze had the most telling impact on interest rates – first mortgage rates flew quickly as high as 30% – but also loosened the reins on mortgage lending.

Unitary plan changed the equation

Auckland Council’s unitary plan, mostly operative since October 2016, has done 2 things to encourage new housing. One is to make zoning through much of suburbia less restrictive, opening the way to more brownfields development through many existing suburbs, resulting in a wider spread of intensification.

The other is to ensure a supply of potential greenfield residential land is made available through rezoning, starting as land zoned initially as future urban, mainly on the fringes, and progressing to long-term zonings.

Despite the aim of the National-led Government’s special housing areas legislation to free more land for housing – pretty much anywhere – somebody had to supply infrastructure, and that was in the hands of the council, which was approaching debt ratio limits.

Through last week’s 3-way government-council-developer infrastructure funding agreement for the Wainui area west of the Hibiscus Coast in Auckland’s north-east, Government loan support in September for Auckland Council via the Housing Infrastructure Fund to get further development underway at Redhills & Whenuapai in the north-west, and the legislation to establish a national urban development authority (that’s been sitting on the rack since National introduced it in early 2017), funding uncertainty appears resolved.

Pages in this report:
1: Dickens takes aim, but the residential land fix is elusive
2: Things to keep in minds while focusing on fringe land supply
3: Cutting the margin without breaking the market…

Attribution: Rodney Dickens.

This is page 3 of a 3-page article based on economist Rodney Dickens’s weekend report, The Government should do the obvious to fix housing affordability.

In this section, I look at market answers, and ways to achieve change without destruction.

The central housing issue in Auckland, as economist Rodney Dickens presented it in his weekend Rodney’s Ravings, is the leap in house prices resulting from excessive land prices.

The market answers have been:

• Shrink section sizes
• Build 2-storey houses to keep their size up to expectations of 200m²-plus homes
• Supply some smaller homes, cheaper, but still more expensive than they would have been if section prices had been held down.

Mr Dickens wrote: “If Auckland section prices had increased since 1993 in line with the average cost/m² of building new dwellings in Auckland, the median section price would be around $180,000 now rather than $575,000.

“By implication, the median existing dwelling price would be around $460,000 rather than $854,000 (ie, $394,000 or 54% lower).”

Politicians keep looking for ways to get the prices of new houses down, and KiwiBuild is part of that hope.

But is it realistic?

And if new housing does take a price cut, how does that affect existing housing?

The first requirement is to increase supply so there is no longer an acute shortage.

Small builders’ assessment of prospects a critical aspect

The Government can force the issue by using Crown land for subdivisions but, long-term, the country’s thousands of small private sector builders need assurance that prices aren’t going to plummet. That, as we know from experience, destroys small businesses, the country loses experienced tradesmen to Australia and New Zealand goes through the painful task of rebuilding expertise again.

Buyers also need assurance. Like the builders, buyers will have negative equity if prices plummet after they’ve signed up for their purchase.

Alternatively, all other costs rise to meet the already-escalated land & house prices – inflation, but somehow excluding housing. That would include rises in fixed incomes, such as pensions & income derived from interest. Interest rates would have to rise.

Oh, and the banks. They’ve just reported massive profits, but that doesn’t mean they’re ready for a house price shakeout.

For all these entrenched & vested interests, a sharp drop in prices would be destructive. A general rise in non-housing costs & prices is possible, alongside a steady housing market. But who’s going to build if house prices don’t rise along with the rest of the economy?

Take a quantum leap

One answer to that question is to do something very different.

First, infill housing – intensification of existing suburbs as townhouses replace standalones – can reduce the heat in the greenfields market. It’s starting to happen, and an increase in available land supply should curb price expectations.

Second, brownfield development can go right to the heart. Those upstairs flats above shopping strips, in recent decades turned over to storage or the occasional office? Modern apartment blocks now have shops at ground level, and you will soon see apartments being developed above shopping centres.

They will need to offer a mix of the small & the family-sized. They will also need to be accompanied by far more town centre amenities. They can come without attached parking – given enough residential development in a centre, more travel can be by public transport and rental vehicles can replace the private car.

Generally, apartment developers wouldn’t expect to build to the same height in the suburbs as they would in the city centre – and generally, stipulated maximum heights would prevent it.

At the moment, only a handful of apartment blocks have been erected in old city centres or suburban centres. I see the increasing development of standalone apartment blocks, with retail at ground, becoming acceptable in suburban centres. And if shopping centres can have housing built on them elsewhere in the world, the same can happen here.

That would lead to 2 fundamental changes in New Zealand urban living:

• Day & night populations in those centres, bringing a different vitality, and
• A move to larger apartments to accommodate families (which is also achieved elsewhere in the world).

It could also lead to a further decline in home ownership, the arrival of largescale residential investors, and the growth of residential ownership by small investors. That, in turn, would create new requirements for investment education, and changed pension expectations as pensioners switch from mortgage-free owners to lifelong renters.

All of that is a long way round uncontrolled escalation of fringe land values. It needs to be accompanied by less inflationary population growth; continued advances in public transport systems; and more careful relation of dormitory suburbs to suburban centres, jobs & amenities.

Urbanism expert Solly Angel presents an action plan

New York professor Solly Angel.

For an outside view, New York urbanism specialist Shlomo (Solly) Angel + contributors wrote in the concluding section of a 29-page essay on the new urban peripheries, a shortlist of takes to prepare future urban peripheries: “Emphasis on complex master plans that rely on strong compliance must give way to simpler interventions that can utilise the limited available capacities for making significant changes on the ground.

“Finally, the quality of the urban fabric in new urban peripheries can be enhanced with a simple 4-point action programme:

1. Estimating the amount of land needed for expansion in the next 30 years, identifying the area needed for expansion, and obtaining planning jurisdiction over the entire area
2. Preparing an arterial road grid throughout the expansion area
3. Identifying & securing a hierarchy of public open spaces that need to be protected from development, and
4. Improving land subdivision practices on the urban periphery.”

Shlomo (Solly) Angel is an adjunct professor at New York University & senior research scholar at the New York University Stern urbanisation project, where he leads the urban expansion initiative. Professor Angel is an expert on urban development policy, having advised the United Nations, the World Bank & and the Inter-American Development Bank.

It sounds fine, except: We are not good at predicting (or acting promptly on our predictions), which is why we have bottlenecks, congestion, land & house price escalation well beyond reasonable.

Local body infrastructure providers in New Zealand have always been wary of developing too much infrastructure ahead of time, in case the economy slumps, needs change, somewhere else becomes more popular – in short, taking away the excitement of unpredictability.

Influences not covered

Others have noted that New Zealand has no capital gains tax or stamp duty, and Auckland uses capital value to set council rates rather than land value.

Seemingly irrational buying by a surge of foreign investors appeared to have the intention of shifting money out of their homeland, mainly China, as quickly as possible rather than being a carefully priced asset investment. That door has closed.

The above is a handful of ideas on how to gradually overcome an imbalance that’s been grown over a quarter century, without sudden destructive impacts.

You may think those ideas are impractical, or you may have better ideas to share. Comments are welcomed.

Pages in this report:
1: Dickens takes aim, but the residential land fix is elusive
2: Things to keep in minds while focusing on fringe land supply
3: Cutting the margin without breaking the market…

Attribution: Rodney Dickens, Solly Angel.