21 January 2013
Deputy Prime Minister Bill English warned today that New Zealand may be seeing the start of another housing demand shock that occurred a decade ago, and it’s still not in a position to match that demand with adequate supply.
In the introduction to the annual Demographia survey of housing costs internationally, out today, he also took a pot shot at environmentalism, saying this concern was misguided: “Cities are environmentally friendly places if the alternative to city living is high-footprint lifestyle in the country.”
What Mr English didn’t do was to offer a string of instant solutions – the Government has been working on those through a number of changes to the Resource Management Act & local government management.
In his introduction to the Demographia survey he wrote: “In 1980, the ratio of the median house cost to median income was around 2. By 1990 it was around 3 and today Demographia shows the median house in New Zealand costs 5.3 times median income.
“Housing affordability is complex in the detail – governments intervene in many ways – but is conceptually simple. 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. It simply takes too long to make new land available for development.
“We may be seeing the beginning of a repeat of the mid-2000s demand shock. As interest rates stay below historic norms, expectations are shifting that these rates are here to stay. As a result, demand for real assets has increased, observed in booming equities markets in 2012. Demand for real estate is also increasing, with the median house price in Auckland recently exceeding the highs of 2007.
“Costs of other housing inputs contribute to New Zealand’s affordability problem. Building materials cost more in New Zealand than neighbouring Australia. The structure of infrastructure financing, and the timing levies are to be paid, raises the market price for housing. Appeals under the Resource Management Act, New Zealand’s land use regulation, can hold up developments & city planning for a decade or more in some cases. Time is money because development is risky.
“New Zealand’s residential build volumes are small, and the construction sector is highly fragmented. Only 5 firms in the country built more than 100 homes in 2011. The vast majority of builders build only one house each year. New Zealand is a late adopter of prefabrication & use of standardised materials. In New Zealand, if a window is to be added into a house, it will usually be measured & built by hand. Construction industry productivity has stagnated in the past 30 years and is now below where it was in 1978. Industry regulation favours single-person operations. New Zealand has inadvertently created a cottage industry to supply one of our most important asset classes.
“Low build rates produce downstream problems. Shortages are absorbed through household composition and there is some evidence of overcrowding. New Zealand’s housing stock is ageing and appears to be of relatively low quality, which has consequences for health & well-being. The large boom & bust cycles of the New Zealand industry discourage fixed investment in employees & systems, weakening productivity.
“From the Government’s perspective, worsening housing affordability creates a number of problems. Fiscal pressures increase because financial assistance for housing is tied to its market price. Home ownership provides financial security & a form of savings and lowers dependence on public assistance later in life.
“Worsening affordability increases demands for direct intervention through rent controls & public housing. We are aware of the results of these sorts of interventions overseas and must avoid them.
“New Zealand is not alone in its housing affordability problem and there seems to be increasing awareness around the world that the planning pendulum may have swung too far. Land use regulations & intrusive development
rules have consequences. The Conservative government in the UK has recently taken first tentative steps to, as David Cameron put it, ‘[get] the planners off our backs’ by increasing permitted activities by residents. New York is considering relaxing minimum size rules on apartments.
“This Government’s strategy is to address the varied causes of housing affordability and avoiding ‘magic bullet’ solutions that paper over causes & create more problems downstream.
“In New Zealand an important political driver of urban controls is environmentalism, but this concern is misguided. Cities are environmentally friendly places if the alternative to city living is high-footprint lifestyle in the country. New Zealand has seen a proliferation of ‘lifestyle blocks’ outside cities in the last 15 years, which may in part be an unintended consequence of raising the cost of urban living.
“New Zealand has an opportunity to get on to a path towards real improvement in housing affordability. There is political consensus that housing affordability is a serious problem, although as always diverging views on what to do about it.”