Productivity Commission misses key affordability point – again

Published 13 April 2012

The Productivity Commission touched a few times on the most crucial element of housing unaffordability – easy credit – in its final report on the subject, out on Wednesday. Lines such as this one: “Lower interest rates also saw an adjustment in loan servicing capacity occur.”

But it failed to delve into the topic, neither expanding on how credit enabled the boom that ran from about 2002 until the global financial crisis ended the party in 2008, nor raising questions or suggesting solutions on how to climb down from the high-price plateau.

Those questions & solutions are plainly needed, which Quotable Value’s latest housing index highlighted the very next day: In Auckland, the index waved out the window at the November 2007 price peak as it drove hurriedly north to a new peak in January, then stepped on the gas to set another new mark in March.

Are these high prices – led by rises in the centre of the region, the old Auckland City – caused primarily by a failure to release land to build mid-price homes on the fringes, as the commission would have you believe, or by something else?

The ground has shifted since that 2007 peak. Auckland struggled to cope with an unexpected immigration bubble around 2003-04 – building the extra homes wasn’t going to happen overnight, and critics were right in saying councils had far too little land zoned & ready for building. Many of the region’s old councils were also still going through the processes of finalising various planning changes that would allow more urban development, when they were taken over by the new Auckland Council at the end of 2010.

The new council has put through some of those changes and has others pending. In addition, the new council had already acknowledged the need for more greenfields land as it went about writing a spatial plan based on intensification.

When the Productivity Commission issued its draft report on affordability in December, council work on the spatial plan (the Auckland Plan) was well advanced. Some advocates of dismantling Auckland’s metropolitan urban limit were pleased by the commission’s renewed attack on the urban limit this week, but Auckland deputy mayor Penny Hulse was scathing: "The Productivity Commission has ignored advice provided to them on these issues by the Auckland Council. They have clearly not read the Auckland Plan and, as a result, the findings are ideological nonsense.

“What the Auckland Plan actually plans for is 160,000 houses to be built outside the current urban limit. That is a city outside the existing boundaries bigger than Hamilton, Dunedin, Palmerston North & Hastings combined. How can anyone think that is not large enough?

“Aucklanders have told us they don’t want their city sprawling from Northland to Hamilton and we are looking at realistic solutions, supported by the Property Council, to develop 280,000 new dwellings within the existing urban boundaries.

“There is ample room to redevelop land that gives people the chance to live near to employment, educational or lifestyle opportunities. It is that demand, along with population growth, that is driving the market, not the cost of land at the boundaries.”

She’s right. Auckland’s councils have said they don’t want an ever-sprawling urban footprint and the Productivity Commission exercise should have been based on that view. While the commission has advocated opening up more greenfields land, it hasn’t properly analysed the ramifications of doing that either.

It has referred to a number of studies on the merits of both sprawl & intensification, mostly ending without a firm conclusion. On one, a 2008 study by Holcombe & Williams of 487 US municipalities with populations of 50,000 or more, the commission did reach a conclusion – but it was of no value in the search for solutions to unaffordability.

That study “found that increased population density had no statistically significant effect on government expenditures in cities with populations from 50,000 to 500,000, and higher population density is associated with higher government expenditures for cities larger than 500,000. Whatever the other merits of policies designed to increase population density, these results indicate that increases in population density will not lead to lower municipal per capita government expenditures.”

The Auckland Council, through the Auckland Plan, has proposed that 70% of new housing be inside the present urban limit (with possible slippage to 60%, after originally proposing 75%). It has also said that a lot of the city’s housing stock is inappropriate, digging further than the commission did into the fact that New Zealand homes have steadily got bigger, to an average now of about 220m².

While the commission might have examined – but didn’t – how to provide more affordable homes for first-home buyers by encouraging downsizing and by encouraging larger-percentage deposits, the council produced more up-to-date figures on house size and commented in the Auckland Plan: “Although the average household size has decreased, the average house size has actually increased. In the 1960s, 70% of homes had 3 bedrooms. Since 2000, new homes are more likely to be 4-bedroom and 10% of new homes are 5-bedroom or more.

“Over two-thirds of Auckland’s current housing stock has 3 bedrooms or more, although nearly half of all households now consist of only one or 2 people. Larger homes also reflect changing social trends such as the need for space within homes for technology, flexibility to work from home and storage.”

The housing chapter of the Auckland Plan said neighbourhoods should cater for people in different stages of their lives through a mix of housing, but didn’t stretch so far as to suggest how that might be achieved.

The commission didn’t look at how those factors – fixing the mismatch, providing for a neighbourhood mix, changing credit expectations and thereby reducing demand by first-home buyers to have everything on day 1 – to see how they would affect affordability.

The commission went to a 23-year-old US study (Frank, 2009), which concluded that the key elements of urban form that influence costs are “density & lot size or width, contiguity of development, distance to central facilities and size of urban area”. The commission could have seen how that had worked out in places like Takanini & Flat Bush, and whether the proposal to reconfigure the area around the Mangere town centre would help affordability.

While the commission was working towards its final report, it had available the Auckland Council’s proposals for 2 satellite centres at Wellsford & Pukekohe, proposals to prioritise several other centres around the region, figures on how much land the council envisaged could be released for development and how it proposed releasing that land in stages ahead of demand.

All of those proposals will affect affordability, but the commission focused on the cost of land 2km either side of the urban limit. If the council ideas of releasing land in stages, growing satellites & other centres, fixing the household/housing mismatch and – most importantly, rezoning to enable intensification – work as hoped, the commission’s focus will be irrelevant.

In other areas of its report, the commission harped endlessly about costs of local government input into the housing process – consents, land planning, development contributions for infrastructure – but acknowledged some of these might be necessary for safety & amenity.

It said the Government should consider reviewing planning-related legislation to reduce the cost, complexity & uncertainty associated with the interaction of the Local Government Act, the Resource Management Act and the Land Transport Management Act, said it should update the 2003 best practice guidelines on development contributions.

Among its recommendations on regulation, the commission said the Department of Building & Housing should publish, for every building consent authority, the total time taken between receiving applications and finally granting consents, and the number of occasions where each consent authority has used the ‘stop-the-clock’ provision. It said the department should also audit the ‘stop-the-clock’ information from a sample of authorities.

In other words, fight bureaucracy with more bureaucracy. The only reason this is an issue is because builders have complained about it, and filing a report every year on how bad councils are would justify the complaint. Instead, though, the commission should have focused more precisely than it did on measures to improve regulation, removing the desire to complain and removing the need for the extra bureaucracy.

The commission said land prices constituted a large & increasing share of the value of a dwelling, particularly in Auckland, creating the incentive to build high-spec houses so as not to under-capitalise the value of the land – “Who is going to put a $150,000 home on a $300,000 section?” Anecdotal evidence suggested the margins available to builders on low-cost homes were typically lower than on high-priced homes, and changing demographics might also play a role in encouraging investment into high-spec housing.

What to do? Given that intensification is on the long-term agenda for Auckland, the commission might have looked at how costs of developing & building multi-unit residential developments could be lowered. An important factor in that is the high level of upfront council costs, which the commission looked at generally without reaching firm conclusions on a way forward.

From there – assuming someone moves on to produce a serious affordability analysis – it makes sense to examine building productivity & materials costs far more closely than the commission did.

The commission conclusions: “Building materials are more expensive in New Zealand than they are in Australia. In part, this can be explained by the small size of the New Zealand market and the small scale of major material manufacturers. It is unclear whether additional competition in the materials industry would reduce the costs. The Commerce Commission has investigated concerns about the behaviour of material suppliers and has found no breaches of the Commerce Act.”

New Zealand’s markets for everything have always been smaller than Australia’s. The questions now are, ‘Why have prices shot up?’ and ‘How can we get them down again?’ When the commission issued its December draft I noted a graph showing there was a large group of builders in both countries (50% here, 54% there) constructing 1-5 homes/year. I wrote then: “From that, it would be reasonable to expect a comparison between small builders in both countries – say, suburban Auckland with suburban Melbourne & Sydney. And, for a second comparison, a Universal Homes development in Auckland with a Mirvac masterplanned development in Australia.

“But the commission didn’t do that. It talked about the scale of the New Zealand construction industry being small, then went on to discuss the scale efficiencies that volume builders could make.”

Although the commission sees volume builders as a cheaper future for house buyers, small builders will remain a large source of house supply. The question then is, not how do you take their jobs away from them or push them into becoming employees, but: ‘How do you get knowledge of better building methods down to individual contractors other than through one-off architectural designs?’

I mentioned someone having a third shot at affordability analysis because, plainly, this Productivity Commission exercise has been a failure. On the way to that third shot, one of my questions concerns pricing by bespoke versus group builders: “Do group builders provide cheaper homes or make more profit?”

Student loans have many impacts on the market but haven’t been discussed adequately. For example, an ex-student repaying a student loan is not easily going to be able to raise the money for a home deposit. Those ex-students will buy their first home later in life, their expectations by then will be different, when they do buy their income level will be higher than that of a traditional first-home buyer – all factors affecting perceptions of affordability.

While I was making my way through the Productivity Commission’s report, the Department of Building & Housing issued its regular building cost estimates, where it commented: “The costs for houses are provided for one-off speculative houses. These costs do not reflect the economies that may be gained by builders of group houses, or reflect the additional costs normally associated with architecturally designed houses. To differentiate, group houses have been assessed as being, on average, 21% cheaper than speculative houses, while architecturally designed houses are assessed as being 20% more expensive.”

Are those costs reasonable? If so, what other factors need to change to make a house affordable? If they’re not reasonable, how can they be changed without destroying jobs?

Standing in an auction room yesterday, I noted to an agent that apartment prices had risen since last year after falling in the global financial crisis, that rents had also risen – but would they reach equilibrium (the long-term ratio of rent:capital value)? No, they wouldn’t, he said. Why not? “Wages.”

Large employers are intent on cutting labour costs, which means holding wages down or making staff redundant, or both. That flows through to rent, to the return on capital invested in rental homes, to the bankability of residential investment property. The figures don’t add up (but the commission hasn’t done this exercise).

Builders who have found a project to work on during the last 3 years have had their margin squeezed because so little work has been available and consents for new homes are still at a 30-year low. The council has proposed opening up more land to development, rezoning to encourage intensification and developing highly intensive precincts around new cbd railway stations. These developments could all start occurring around the same time, creating the competition the Productivity Commission would like to see between developments, but builders’ margins would rise.

In its section on social housing, the commission saw potential unintended consequences and made these key points: “Starting the reforms by making changes to state housing without addressing external demand pressures and building sufficient options to ‘move on’ generates a risk that those who are reviewed out of state housing will have to accept inadequate housing alternatives, or are placed in a situation that leaves them vulnerable. This creates a future risk for the tenant and the state….

“There is limited financial capacity in the community housing sector, and current funding appears insufficient to expand the community sector to meet the Government’s objectives. If the community sector is not funded properly for this transition, there is a risk that community housing organisations will be seen to fail in the eyes of their clients, undermining their ability to provide services.”

On the long-vexed issue of building on Maori land, the commission made a positive contribution with these key points: “Te Puni Kokiri, working with the Maori Land Court and private finance institutions, should develop options to adapt existing lending policies & precedents for private finance institutions to lend for building homes on Maori land.

“To start the conversation, the commission has reviewed 3 models to see whether they could provide the necessary security for banks to lend: trust guarantees, a financial options system & mutual insurance schemes. Under the right circumstances, each of these shows some promise. As well, the commission has reviewed 2 models of housing where there is an element of common ownership. These are licences to occupy (as used by retirement villages) & unit titles, under the Unit Titles Act 2010. Each of these models could form robust ways to manage housing on Maori land.”

The Productivity Commission sent its final report on housing affordability to the Government at the end of March and it was released on Wednesday. It came in several forms – a press release, a 4-page summary, a summary version, a full version and a focus on Maori issues.

The report discusses alternative solutions (in relation to the building code), but I haven’t discussed them in this story. However, I’ve provided a link below to that, and another to the Department of Building & Housing’s cost estimates.

Links:

Productivity Commission

Affordability report, summary version

Affordability report, full version

Alternative solutions

DBH building costs

 

Earlier stories:

4 April 2012: Spatial plan far more than aspiration – it turns traditional rules of play on their head

30 March 2012: Auckland Plan adopted

15 March 2012: The deal on compact v sprawl: council settles for 70:40 ratio

6 March 2012: Council acknowledges role in lifting housing cost, enters partnership to raise productivity, has plans to fix housing stock mismatch, slated for soft policy on rental underclass

20 March 2012: RP Data sees no end to high Australia-NZ house prices, Unconventional economist shows they’re out of kilter

9 February 2012: Council presents the garbled nonsense response on housing affordability

23 January 2012: NZ cities stay among least affordable on Demographia list

23 January 2012: Demographia authors maintain fringe land focus, ignore practicalities in getting prices down

19 December 2011: Housing affordability report an exercise in missing the target

19 December 2011: Selwood says intensification has to address transport infrastructure

19 December 2011: Auckland Council counters cost criticism with economic reasons for compact city

Tracking ideas, week to 18 December 2011, Affordability – Australian insight

23 November 2011: Todd Property says aspiration’s fine but apartment costs prohibitive, wants urban investigation for Okura, says stage 3 deferral bad for Flat Bush

3 February 2010: Canadian researcher fires broadside at Demographia affordability report

 

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Attribution: Productivity Commission, deputy mayor, Department of Building & Housing, auction conversation, story written by Bob Dey for the Bob Dey Property Report.

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