Dickens takes aim, but the residential land fix is elusive

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.

, ,

One Response to Dickens takes aim, but the residential land fix is elusive

  1. John Polkinghorne Monday 19 November 2018 at 1.49pm #

    The Rodney’s Ravings report is quite short – just 900 words – so it’s not able to cover all the problems, causes and solutions of the section and housing markets.

    Rodney doesn’t mention structurally lower interest rates as being a key cause of section prices rising so much since the early ’90s, as Bob does in page two of this series. However, Rodney has written about them before, and Bob covered that Raving too at http://www.propbd.co.nz/dickens-says-shift-yield-cpi-link-holding-back-residential-rents.

    This isn’t to say that nothing can be done about high section prices, but there’s no silver bullet either. The SHAs and Unitary Plan are a good start towards trimming speculation, and the cost of raw land. More can be done, but I find it hard to see how a huge drop in section costs could be achieved.

    In the long term, I feel like bringing more brownfield/ intensification housing supply onstream is the best way to bring down home (or section!) prices…