NZ Government shows the way on housing policy

ScreenHunter_01 Sep. 27 08.04

I have said it before and I will say it again: New Zealand is leaving Australia for dead when it comes to housing policy.

Unlike the Reserve Bank of Australia (RBA) and the Australian Prudential Regulatory Authority (APRA), which continue to hose down concerns about risks building in the Australian housing market, New Zealand’s central bank and prudential regulator, the Reserve Bank of New Zealand (RBNZ), has taken the bold move of implementing macro-prudential curbs on riskier mortgage lending in a bid to cool house prices.

And whereas the RBA has been largely silent on the structural factors pushing-up Australian house prices, the RBNZ has issued numerous stern public warnings to policy makers that they must address housing affordability front-on via reforms to its constipated planning and land-use systems, which have made New Zealand housing supply unresponsive and helped to push-up prices, in the process increasing speculative activity and panic buying from those affraid of “missing-out”.

The pull-back in credit to higher risk borrowers (e.g. first home buyers) from the RBNZ’s macro-prudential curbs, as well as the ongoing “moral suasion” about the dire need for policy reform, has stung New Zealand’s politicians into action, with housing affordability now front-and-centre of the political process.

To explain, Demographia’s Wendell Cox has published an excellent article in New Geography summarising the New Zealand National Government’s policy reforms to housing, which he has kindly allowed me to re-publish below.

If you are an Australian reading Cox’s article, take a moment to compare New Zealand’s policy reforms against the do-nothing approach in Australia, and consider just how delinquent Australia’s policy makers are in addressing housing affordability, which is unnecessarily burdening younger Australians with cripling housing costs and debt, and is acting as a millstone on productivity via excessively high land prices.

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“Unblocking Constipated Planning” in New Zealand

By Wendell Cox

One of the National Party’s principal objectives since coming to power in New Zealand has been to address that nation’s terribly deteriorated housing affordability problem.  Deputy Prime Minister Bill English explained the problem in his Introduction to the 9th Annual Demographia International Housing Affordability Survey:

“It costs too much and takes too long to build a house in New Zealand. Land has been made artificially scarce by regulation that locks up land for development. This regulation has made land supply unresponsive to demand. When demand shocks occur, as they did in the mid-2000s in New Zealand and around the world, much of that shock translates to higher prices rather than more houses.”

In the largest markets (Auckland, Christchurch and Wellington), house prices had doubled relative to incomes over the past two decades, as land prices were driven up by urban containment land-use policies (Note), that severely restrict the supply of land available for new housing. Across New Zealand, this rationing of land has led to the destruction of the competitive supply of land the Brookings Institution economist Anthony Downs says is essential to maintaining housing affordability. The relationship between urban containment policy and higher house prices is documented in a large body of international research. Economists Richard Green and Stephen Malpezzi succinctly summarized the issue:

“When the supply of any commodity is restricted, the commodity’s price rises. To the extent that land – use, building codes, housing finance, or any other type of regulation is binding, it will worsen housing affordability.”

On September 5, the government took an important step toward improving housing affordability, with the enactment of ground-breaking land use regulation reform. In the Parliamentary debate, Housing Minister Dr. Nick Smith expressed the imperative for passage by describing the regulatory situation in Auckland, the nation’s largest city (metropolitan area):

Auckland has just 1,300 sections (lots) currently available for housing. That’s a third of what it had 10 years ago.

We need 13,000 each year just to keep up with population growth.

We’ve got a rigid Metropolitan Urban Limit (urban growth boundary) prohibiting any new housing developments beyond the artificial line drawn 15 years ago.

We’ve got a few lucky land owners sitting on the last few parcels of developable residential land holding prospective homebuyers to ransom.

Section (lot) prices have trebled and gone up by more than any other part of the housing cost equation.

We’ve got a convoluted RMA (Resource Management Act) planning system where it takes an average of seven years to get a plan changed by the time you get through all the consultation and appeal processes.

And even when you get a plan change, it takes an average of another three years to get a consent for a greenfields development and a year for a brownfields development.

We’ve got a constipated planning system blocking new residential construction and this bill is a laxative to get new houses flowing.

The passage represents an important step in the campaign by Dr. Smith and the National Party government to improve New Zealand’s housing affordability.

According to Dr. Smith: “The increased land supply will help take the pressure off the over-heated Auckland housing market and help the economic recovery. It will enable tens of thousands of kiwi families to realise the dream of owning their own home.”

Housing Accords and Special Housing Areas Act

The new Housing Accords and Special Housing Areas Act permits the government to establish special housing districts that permit bypassing expensive planning regulations. Initially, the Act will be applied in Auckland, where an urban growth boundary (the “Metropolitan Urban Limit”) has been blamed for driving house prices to more than double their historic relationship to household incomes. Smith indicated that the Act would “over-ride Auckland’s Metropolitan Urban Limit” and that  ”…it would enable low-rise greenfield developments to be consented in six months, when they previously took three years, and low-rise brownfield developments to be consented in three months, when they previously took a year.”

Smith also noted that support for the act was based on advice from the New Zealand Productivity Commission, the Reserve Bank of New Zealand (the central bank), the Organization for Economic Cooperation and Development (OECD) and the International Monetary Fund (IMF), which have indicated that “increasing supply is crucial to addressing housing affordability.”

The government intends to move quickly, according to Minister Smith:

“The main initial focus of the new law would be to enact the Auckland Housing Accord through which it is planned to build 39,000 new houses in a three year period in the Auckland region. Housing Minister Nick Smith says he expects the Auckland Council to approve the accord next Tuesday and is talking about having special housing areas approved by Christmas that would be able to cater for 5000 houses.”

Housing Affordability in New Zealand

The housing affordability crisis problem is the most severe in Auckland. The most recent Demographia International Housing Affordability Survey reported that median house prices were 6.7 times median household incomes in 2012 (this is the “median multiple”). This price to income ratio has more than doubled since the early 1990s. This is a particular problem because housing cost is by far the largest element of household budgets in New Zealand (as well as in Australia, Canada and the United States).

The extent of the problem in Auckland is illustrated by the fact that across the urban growth boundary, values are one-tenth per acre for comparable land, according to research by Dr. Arthur Grimes, Chairman of the Board of Reserve Bank of New Zealand. In a competently governed market, there would be little difference.

The higher land prices of urban containment also encourages builder “up-market,” to achieve competitive returns on the required larger investments. This is illustrated in New Zealand Productivity Commission research by Guanyu Zheng for the New Zealand Productivity Commission found that the higher prices generated by Auckland’s urban growth boundary were more severe for lower cost housing: “…when the supply of land on the urban periphery is restricted, the price of available residential land rises and new builds tend to be larger and more expensive houses.”

High house prices are not limited to Auckland. Like in the United Kingdom, where exorbitant house prices occur from depressed Glasgow and Liverpool to dynamic London, house prices are high from the top of North Island to Invercargill in the South, irrespective of the economy.

The provisions of the Act will also be applied in other more expensive markets in New Zealand. The Minister said: “The Government is also having discussions with other councils in high cost housing areas on how the tools in this law can assist in addressing the housing supply and affordability issues in their communities.”

The Campaign

The extent of New Zealand’s housing affordability problem has been known for some time and has been cause for serious concern.

The long-time Governor of the Reserve Bank, Donald Brash wrote in 2008 that “the one clear factor that separates all of the” affordable and unaffordable housing markets “is the severity of the artificial restraints on the availability of land for residential building.” Later, Brash zeroed in on the cause., which he characterized as the extent to which urban containment policy “has pushed the price of residential land well beyond the reach of far too many New Zealanders.”

For the last decade, Christchurch’s Hugh Pavletich (co-author of the Demographia International Housing Affordability Surveys) has been drawing attention to the problem: “We are currently paying near double per square metre build costs because of this…”

More recently, Governor Graeme Wheeler of the Reserve Bank of New Zealand raised concerns about house price increases and implemented stronger loan qualification requirements to cool the market. Similar action was taken by the Bank of Canada last year, though monetary policy is severely limited in reigning in bubbles in the face of regional policies that drive up land prices.

Moreover, urban containment is a poor strategy for reducing greenhouse gas emissions, because of its exorbitant costs per ton and its meager results.

Getting Priorities Right

By these reforms, the New Zealand government has given priority to the quality of life of its households over the more peripheral issues of city form and how people travel. In an increasingly globalized and competitive world, this sends an important signal.

Leith van Onselen
Latest posts by Leith van Onselen (see all)

Comments

  1. People on here have been commenting that housing is being pushed by wealthy foreigners. How will macro prudential assist in this case? Isn’t this a case of closing the barn door after the horse has bolted? Won’t MP only serve to prevent locals from competing with foreign investors? Why shouldn’t risk takers be free to take silly risks on housing?

    • > Why shouldn’t risk takers be free to take silly risks on housing?

      That would be everyone’s opinion too, were it not for the fact that in the Moral Hazard has become so entrenched after governments of all colours and slants have stepped in with so much gusto to save said risk takers. … With no repercussions for said risk takers, even more disheartening – all turning into a reward-fest in the end

      As it stands right now – the life and death rules have been abrogated, and we all know that nothing short of a mass extinction of the current risk takers will suffice.

  2. It’s still not convincing to me that merely changing the development approvals process creates more land within a city. The fact is that if cities want a higher population density then the amount of land for each person to use will be less. Hence it’s natural that the price per m^2 per unit of income will increase.

    • A non sequitur, there is no shortage of building land in Australia (Sydney included). TPTB and their vested interest backers have rationed supply of permissions to build on whats freely available.

      A 1/4 acre plot with planning permission in Bunyip should not cost $250k when the surrounding agricultural land is $8-12k/acre.

      Reducing the price of all land on the edge will have consequent knock on effect on property prices all the through to the centre.

      • Are you talking about Bunyip outside of Melbourne? Surely that’s not counted as part of Melbourne for housing prices.

        What’s the argument for these “knock on effects”? Are you suggesting that land in Bunyip and land in South Melbourne are near perfect substitutes?

        Also, why can you say there is “no shortage of building land in Australia”? I know that where I live every block bar maybe one has been developed. Demolition and subdivisions into lots smaller than 400m^2 or building appartments is basically the only option to “create” land. But this just increases the intensity of utilisation, consistent with what I was getting at.

      • As has been detailed by UE, PhilBest and others ad nauseam over the years here on MB. The availability of edge land to immediately respond to development demand drives the price of everywhere else in the city.

        In locations where edge land is not drip fed rationed through regulation, the ‘premium’ CBD locations have much less of a price premium with consequent knock on densification effect.

        Bunyip, Wallan and other outlying towns 50+km outside the Melbourne UGB are spruiked as ‘commutable and affordable’ because of the artificial restrictions on the supply at Melbournes edge.

        The ultimate manifestation of UGB madness in Australia is Darwin.

      • Thanks, JoeBlow

        It is bog standard urban economics that the price of urban land is a trade off between the costs of transport and location.

        This results in a gradual curve on a graph out into the countryside until the cost of transport to and from the city is high enough that the land is worth nothing more than in rural use.

        The costs of transport are very competitive so the typical point on such a graph where the land cost is back to rural-only, can be tens of kilometers away from the existing fringe.

        This does not mean all the land will be developed; it merely represents an “option” that anchors the price able to be realised for more efficiently located land, in the true cost of transport “saved”.

        UGB’s always result in a massive oligopoly gain within the boundary because there is no “option” any longer of transport cost trade-offs in utilising land beyond it. In the LSE’s terminology, there is a “discontinuity” in the price, at the UGB. In parts of the UK, the factor of gain over and above rural values is as high as 300 times. Australia is not this bad yet.

        Real life actually follows the theory exactly; this is not some ivory tower fantasy. Land rent curves in affordable US cities are shallow and gradual.

  3. Eliminating growth boundaries should be an easy sell…but it isn’t, a lot of people don’t support it because they don’t want property prices to fall and they want to be able to drive through farmland every so often.

    I think it would be better sold to the liberals/nationals on the basis of economic growth, business opportunity, national pride of growing and a bit of anti-greens sentiment hinted at (just to rile them up).

    For the labour people I think it should be pitched on the basis of jobs for the union membership of construction trades, retail spending by tradesmen, homes for the kids and a bit of anti-greens sentiment (to rile them up as well).

    For the greens you throw them another carrot somewhere else, talk about energy efficiency ratings for new buildings and distract them with threatening to build a dam in tasmania and they’ll all disappear. (I do support the greens, I just think if they are on side its harder to sell it to the majority!).

    Get the HIA and REIA in on it with more work for their members (don’t mention the effect on prices, just talk about the boom and give them help to promote it)

    and all you need to do this is…well…money. And maybe that’s where you really need the HIA!

    • “distract them with threatening to build a dam in tasmania”
      LOL

      In all seriousness though you make some good points regarding how a political party could market it.

    • I say this in a comment posted on the New Geography article a few days ago:

      I think the NZ government has come to understand the complexities of the issue, including that the alleged benefits of growth containment are illusory anyway.

      NZ cities are already not low density, and road expenditure has been diverted to public transport for too long already; and one consequence of this is congestion delays that are the worst in the world for the given city size. TomTom included NZ cities in their data base last year, the first time the cover has been blown on how ridiculous NZ’s outcomes are.

      The reality is that this inefficiency is never ameliorated by the public transport mode share increase that the planners are seeking.

      Then there is the “pricing out” effect. The higher house prices go, the further away from existing city cores first home buyers are forced to locate to find something they can afford. In the USA RE sector, this is called “driving to qualify” (for a mortgage). Any young couple house hunting can tell any advocate or politician that there is no way they can save on transport expenses what they can save by buying a cheaper home further away. NZ society is full of anecdotal evidence of this effect, and Members of Parliament are aware of this.

      Then there are the numerous macroeconomic effects of growth containment and land price inflation. This includes reduced economic productivity, greater inequality, a higher (and less competitive) exchange rate, and higher local costs of doing business. Finance Minister Bill English has been publicly stating that “we are not going to let 20 urban planners wreck the NZ macroeconomy”, and he is absolutely right.

      The NZ government has got a good grasp of all this, which has helped them to gain the courage to tackle the issue. It also helps that public opinion surveys have shown that the majority opinion is now in favour of fairer house prices for young people, which is something NZ should be proud of. The “fair go” is an iconic New Zealand attitude.

      • I believe they have taken note of the research from the UK that shows the numerous negative results of urban growth containment there. Prof. Paul Cheshire from the LSE spent a few hours with a few key advisers a few months ago.

        And the great Alan W. Evans’ young protege Oliver Hartwich ended up in Wellington to add to the intellectual firepower being brought to bear on government over this.

        I think that winning this policy discussion comprehensively, has to include establishing that the benefits of urban growth containment are “oversold” anyway and the unintended consequences and downside costs far outweigh even the alleged but illusory benefits. People are far less ready to endorse a perceived loss of efficiency, perverse environmental indicators, and “runaway infrastructure costs” just so young people can get affordable housing. They need to be made to understand the real life options represented by “most UK cities” versus “most US cities” completely rebut these illusions.

        “Most European cities” fall somewhere between those of the UK and the US. Every city in France outside Paris, is a similar density to Houston or Salt Lake City, not Manchester or Liverpool. Half the cities in the rest of Europe are comparable in density to Auckland and Toronto and LA and Sydney, not to UK cities.

        The UK’s cities are comparable to Japan’s for density, far denser than almost everything in Europe. So the UK must have massive advantages against which their housing crisis must be balanced. WRONG…!

        I think the NZ government has come to understand all this.

  4. It is also time for governments to ask themselves the question – to what extent are Heritage and National Trust listings artificially and unncessarily restraining the use of land/property ideally suited to development. Heritage Councils operate like star chambers, and impose sometimes massive costs on private owners of land and property on the often spurious basis of maintaining a narrative of architectural history or social development. It’s time that these government agencies were forced to take ownership of the actual costs they are imposing on private owners of property, and the flow on effects to the broader community, all in the name of minority aesthetic and cultural concerns.

    • Most heritage overlays are a thinly disguised mechanism to keep the wrong ‘sort’ from buying locally.

      As you rightly assert, there would be lot less heritage listing if the beneficiaries were required by law to wholly bear the costs.

    • Another question that should be asked
      to what extent are Heritage and National Trust listings artificially and unncessarily restraining the use of land/property ideally suited to development for the benefit of existing landholders over new landholders.
      If you have ever dealt with these types, they are somewhat holding everyone hostage to their ideals of aesthetics the problem is not that we shouldn’t have master plans and the like, but that they are a handbrake and basically amplify the whinging of someone if some person without 500 km does something they don’t agree with in the built environment. I think it is wrong to dictate how people should live to the degree it has happened recently, in what is meant to be a free and democratic state.

      • I do deal with the costs that are imposed by Heritage/Trust restrictions and the aloof technocrats who so relish their lofty positions of social/cultural power. Both the Heritage Acts that enable these agencies and their decisions, and the people delegated with decision making are out of balance. The reaction against the era of the white shoe bridgage and bulldozers at night has swung too far, and we now have these entrenched, unrepresentative bodies of erstwhile academics and elitist aesthetes dictating to private owners of land on the most feeble of subjective guidelines around architectural and cultural value. I don’t mean to hijack this thread, but these questions have to be part of the mix of how we increase the supply of land and housing – a big part of this is that the decision makers have no concept of and are indifferent to the costs they are imposing on society, all in pursuit of unsubstantiated, completely subjective, elitist minority views.

  5. UE you are surely correct that NZ is leading the way, but do not underestimate the forces of resistance to freeing up land(including just about every existing property owner) or the length of time it will take for these policy changes to work their way through to the point where they deliver more supply. My guess is 5 years.
    All the more reason for Australia to extract digit pronto.

      • I go in for the Green Card lottery. If it ever comes up, I’m off to Texas.

        Geoffrey Booth is an interesting example of an Australian who gave up on Australia ten years ago over the precise issue we are discussing, and got a position at Texas A&M University; when Howard killed his own cabinet’s proposed reforms (based on advice from Alan Moran and Chris Joye and others).

  6. News Flash:
    The processes constraining Australian Land, building approvals, construction materials and even construction labor are not by accident.

    Rather they are the result of very deliberate and intentional free market interference. Given the above I find it amazing that many here seem to believe that “discovering” the root cause of the problem will somehow lead to a solution.

    Amazing! No solution is possible until your average Western Sydney bogan develops a genuine and well founded fear of buying a house. They must associate buying a house with playing Russian Roulette, one wrong step will ruin their life, forever ruined. Only when this pre-condition is met will the market be ready for reform.

    • I would rather that banks are forced to eat the cost of their own risk. Let them develop a genuine and well founded fear of lending to the Western Sydney bogan at anything more than an LVR of 75%. This is the more important reform required. Stop implicity shifting the cost of private, corporate risk to the public balance sheet. The banks have already demonstrated that they will resort to finding new customers offshore once they have run out of local ones.

  7. In some respects the RBNZ is helping the RBA indirectly. If the NZ assets of the big 4 banks are considered less risky then that should flow through to the risk profile of the big 4 banks. NZ assets are @10% of total assets for the CBA.

  8. This is most encouraging. But we have seen such statements previously in Australia only to tot up the numbers a year or so later and find little has changed. Politicians need to recognise that they have imposed so many bulwarks to development that waving a magic wand is not sufficient.

    Moreover 13000 a year for a city with 1.5 million is not bad but not that great. Why not release land enough to build 50,000 houses a year? The killer will however be the price. We need to see developed lots selling at the underlying value (say $90,000 a pop) before we declare victory.

    • Yeah, it is possible to engineer abundant “supply” still at inflated prices. All that is needed is a “quota” system.

      Unfortunately this is getting too complex for the average politician to understand. Most of them will just accept the argument “elastic supply doesn’t solve the problem, look at Ireland and Spain”.

      NZ could end up with lots of new houses still at inflated prices if the government gets this wrong. Some ministers are still pussyfooting around talking about “10 year supply” plans, when this is actually an easily capturable (by vested interests) amount of land.