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
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:
- 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
- Preparing an arterial road grid throughout the expansion area
- Identifying & securing a hierarchy of public open spaces that need to be protected from development, and
- 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.
Attribution: Rodney Dickens, Solly Angel.