NZPC hits the mark on housing supply

The New Zealand Productivity Commission (PC) on Friday released its draft report on housing affordability. Below is a video discussing the PC’s draft findings (via Interest.co.nz).

The PC report correctly identifies regulatory constraints on land/housing supply as the key impediment to affordable housing. Below are some key extracts from the report discussing the supply-side of the New Zealand housing market (my emphasis):

The extent to which new housing construction responds to changes in demand is perhaps the most important factor for the effective functioning of the housing market. This reflects a collection of determinants, including the time taken to acquire land and complete construction. As such, the responsiveness of housing supply depends not only on geographic and urban characteristics, but also on policies – such as land use and planning regulations – that directly impact on housing supply.

The supply responsiveness of the housing market influences the extent to which an increase in housing demand leads to more housing construction or to higher house prices. As such, it is a key determinant of housing affordability. The international evidence indicates that if the supply of housing is constrained in some way, then increased demand will tend to feed into higher house prices, rather than an expansion in housing supply… Conversely, if housing supply is relatively responsive, then the impact of demand shocks will tend to show up as changes in housing investment…

These supply-side rigidities are apparent in relative price pressures for the various inputs into the house building process inNew Zealand… Section prices have grown more quickly than house prices over the last 20 years, indicating that land supply has become less responsive to increases in housing demand. As a result, appreciating land prices have been a key driver of house price inflation inNew Zealand over recent years…

Land price pressures have been particularly acute in Auckland where… section prices have increased by significantly more than in the rest of New Zealand. Land now accounts for around 60% and 40% of the cost of a new dwelling in Auckland and the rest of New Zealand respectively. Although comparable international data is scarce, the share of land in the value of a dwelling may be around 20% or less in theUnited States… Land price increases in New Zealand have been particularly pronounced since 2003, which may be related to the introduction of development levies by territorial authorities…

Much of New Zealand’s land area is unsuitable for residential development. However, a very low population density suggests that raw land is potentially relatively abundant… This suggests that policy and planning practices may be constraining the supply of residential land. For example, strong land price pressures in Auckland raises questions about the impact of policies aimed at increasing density – such as the metropolitan urban limit and other planning restrictions – on housing affordability. Going forward, the challenge is to improve land release and planning approval processes so that affordability considerations are taken into consideration…

Some of the regulations that influence the supply side of the housing market are administered by local councils. As such, the extent to which housing supply responds to changes in demand, and the associated price dynamics, may vary across the country to some extent. In areas where council policies and practices allow for rapid expansions in new house construction, house prices should be less volatile than in areas where new supply is more constrained. This type of dynamic has been detected across cities in the United States. For instance, Green et al. (2005) find that housing supply is highly-responsive to demand pressures in cities with ‘pro-development’ regulatory environments and readily available land. In contrast, supply responsiveness is low in cities with high regulatory barriers to expansion and cities with declining populations…

There is also tentative evidence that in areas of the country where housing supply is more responsive, an increase in housing demand results in relatively more houses and smaller increases in real house prices, with potentially beneficial implications for housing affordability… Although difficult to show conclusively, differences in supply responsiveness at the TA [Territorial Authority] level may, in part, reflect the efficiency with which local councils implement and enforce regulations governing the land development and building sectors…

A WAY FORWARD:

The evidence considered by the Commission provides a strong prima facie case that the urban planning principles prevailing inNew Zealand’s growing urban areas, particularly in Auckland, have a significant influence on the prices of both new and existing housing. The Commission is concerned about the negative impact of urban planning on affordability…

Constraints imposed on the release of residential land, especially greenfield land, are increasing section prices as a result of scarcity, thereby influencing new home costs, and contributing to higher prices among existing homes. This effect is as significant when incomes are growing as when they are not…

Significant transaction and compliance costs, including delay-related costs, are [also] likely to be reflected in prices, and increase risk which may deter new development…

A more balanced approach is required in the interests of housing affordability. The alternative would be to demonstrate that the efficiency and equity costs of diminished affordability are justified by the magnitude of gains to the physical environment from the continued implementation of Smart Growth principles…

The Commission believes that an immediate increase in land for development would help address affordability by redressing the current housing shortage. This could be achieved by a combination of bringing significant tracts of greenfield and brownfield land to the market in Auckland and Christchurch (where it is underway as part of the response to the earthquakes) and exploring the options for doing so in other high growth centres…

The aim would be to identify, assemble, and develop substantial parcels of land for housing and associated uses of such a scale that it leads to a rapid easing of current supply constraints and consequently a reduction in price pressures. The Commission considers that such a move is likely to require a significant institutional response. It may require collaboration between central and local government, private sector and third sector…

In the case of Auckland, the task is to identify land that could be immediately released, then identify significant tracts of land with the potential for (say) 50 years development, with at least 20 years’ worth under preparation for development. This should cover brownfield and greenfield sites in and around different sectors of Auckland to provide diversity, to ensure competition, and spread risk…

In addition, land made available for modest infill development could be widely distributed throughout urban areas to take advantage of existing suburban infrastructure and amenities, and help balance the interests of existing residents with the preferences of particular demand segments, such as baby-boomers seeking to downscale housing locally…

The long delays associated with bringing both brownfield and greenfield land to the market suggest that a fifteen or even twenty-year pipeline written into plans is likely to be inadequate in practice, particularly if subject to short-term constraints through plan-based staging of land release. When supply is over-regulated in this way land banking becomes a rational commercial response, further undermining the calculation of future capacity and promoting high land and housing prices.

Sufficient competition in the supply of land for development will assist in placing downward pressure on land prices. Therefore, developers are competing with each other with respect to the sale of construction ready sections, thereby helping ensure that land is offered at affordable prices. Where competition amongst developers is limited by land availability constraints, this can lead to high land and house prices.

The effect of adopting these policies will be to substantially reduce the opportunity for speculative investments by individual land owners and developers. While it may take some time to implement, commitment to a less constrained planning environment could have an early positive impact on housing in Auckland, for example, to the extent that it discourages land banking.

Bravo. I couldn’t have said it better myself.

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Unconventional Economist

Comments

  1. But this report is going…into the bin ( don’t they all?!). Our PM, ex-banker John Key, stated this morning that he sees no need to make any significant changes to the investment property market, for fear of ‘rents rising’. What does he think is going to happen if landlords leave the market? Does he think they’ll burn their propeties down as they leave…

  2. It is good to see that the truth is finally getting out.
    It is a simple concept that supply needs to be responsive to increased demand.
    In theory choked supply will respond to increased demand with higher prices and shortage.
    1) Understand the theory
    2) Notice high prices
    3) Identify how supply is choked
    4) Understand the situation

  3. I still tend to think of housing supply constraints as the symptom, and the easy credit as the cause of the affordability problem. Does anyone think we would have housing affordability problems if credit issuing growth was still at the levels prior to the explosion of easy credit in the last 2 decades?

    • Sydney’s housing was expensive in the early 1980s – i.e. Median Multiple of 5 times – long before ‘easy credit’ was alive and well. Not surprisingly, Sydney’s housing market has also been supply-constrained for decades, first through physical barriers (e.g. state parks, the sea, mountains) and later through increasingly restrictive regulations.

    • Al, It would be just lovely if we all could obtain great housing merely by choking the supply of credit.
      Sadly the provision of good housing requires good planning, sensible immigration levels, building of infrastructure, creation of new cities, and abundant “release” of new land for housing.
      The truth is that house prices are a symptom of the scarcity of decent housing. Choking credit would merely mask the high prices. The same number of families would still miss-out!

      • It would still be better than the situation we have now, expensive but not a bubble. Not great, but you wouldn’t be so hopelessly priced out.

        I think it was the flood of easy credit that created the bidding war of investors against owner occupiers, much to the benefit of the FIRE sector who have profited immensly from the higher interest payments and fees that have come out of all this.

        Interesting that they focus on the responsiveness of supply being critical. It might explain why Sydney has quite large areas zoned for housing, but getting them to the stage where you can actually build on them is a different matter. Same deal for re-development, getting it through council can be tortuous.

        • There is a counter example to this; South Korea from the late 1970’s onwards, after enacting Green Belt policies.

          Mortgage credit was almost non existent, young Koreans worked hard and saved hard and paid cash for their first home, with top-up informal finance from family and friends.

          For several years, marriage and birth rates dropped and national savings ballooned as young Koreans saved towards a rising target that was always just out of reach of most of them. This is how any rationing scheme WILL work, regardless of credit.

          Median multiples went to around 14.0. Accompanied by increased national savings, not increased national debt/credit. Go figure.

      • The Claw, I would like ‘easy credit’ choked, not all credit. By easy credit I mean low-doc, low deposit credit sometimes stimulated by governments using things like First Home Buyers grants which we now know (thanks to great blogs like this one) have done completely opposite to making housing affordable.

        Yes, land availability constraints will drive prices higher but demand for property (especially investment property) would be significantly lower if not for easy credit.

        • Why? How do “market” rationing schemes ration anything, if not via price signals and income levels?

          • Why? Because most of easy credit is never going to be paid off. And this would have been obvious to the issuer. But let’s issue it anyway to drive asset prices up, gamble on these prices and if we get the timing right get out in time, or maybe even short the market before all shebang goes up in flames.

    • Al, maybe a better way of thinking about it is the easy credit exposes or high lights any supply restrictions we have.

      • I tend to agree with Al.

        Easy credit has meant that we have fewer people are living in a house these days.(per sq metre).

        I agree that that there are land scarcity issues but if the banks did not lend so much it would be impossible for people to pay so much.

        So if there is land scarcity and the banks dont lend so much then the result would be homelesness.

        Right on Al

        • Ps: homeless people here in Oz is not because of housing shortages, its a choice. (of course there are exceptions to the rule- im talking about the majority of homeless)

        • Vortex-“Easy credit has meant that we have fewer people are living in a house these days.”
          That’s a new one! I hadn’t heard that before. Are you aware that the people per house ratio was falling for many decades before easy credit came along?

          • The Claw- love the name. Yes but easy credit has been easy for decades. Im no expert but I reckon banks have been loose for a hundred years now. Since 1913 to be exact. Anyway Im open to being learned. Thats why im here.

        • I’m thinking more unresponsive land supply being smouldering kindling, and easy credit – along with NG & halved CGT – as a can of petrol.

          Everyone seems to be bogged down thinking it’s an either-or situation, but it really looks like it’s a synergistic combination of supply side restrictions with easy money from the banks that has caused the bubble. By themselves they don’t seem to do too much damage, but the combination looks to be disastrous.

          • Definitely true. Why spend time arguing which chopstick is lifting more noodles. Both are involved!
            Government has caused the problem by:
            1) Choking supply
            2) Poking demand
            of decent housing.

          • Besides what I say above, re how rationing in a “market” drives prices up regardless of credit, I want someone to explain what banks are supposed to do under conditions of urban land rationing. Do they collude to withhold credit? Good luck with that.
            Do they shut up shop and lay their staff off? Because they happen to be operating in a competitive market that will only have the results we have already seen if they do not simply shut down; even then their competitors will continue to play the game.

          • Phil, you would have to re-regulate or nationalise the banking sector to do it. Something like a 20% deposit, and payments at 30% of income would be a good start. It was the de-restriction that naturally led to the rush to lowest common denominator lending standards, as the lenders fell over each other chasing market share and short term results.

  4. unhealthyskeptic

    One of the points that the NZPR did not touch upon is the effect of council mergers may have had on Auckland land availability. Auckland city was merged with 8 smaller local area bodies to form a super council covering the Auckland region. Hardly a surprise that the CBD centric entity wants a focus on growth containment. A single local government entity curtails the competitive tension for development.