Thursday, October 12, 2006

High and higher regulation. High and higher house prices.

Think house prices are high? Owen McShane points out two reasons below. Reason One: land supply is being strangled by regulation, specifically by artificial city boundaries imposed by regional governments such as the Auckland Regional Council (ARC). Reason Two: a rise in construction costs for new houses brought about by new "gold-plated" building regulation is already feeding through to the prices of existing houses.

Explains Owen:
The data [in 1996] showed that the cost of actually building a house had been falling over the previous few years because of a deregulated market which reduced material and equipment costs. Furthermore the cost of "constructing" residential subdivisions had fallen too, in spite of increased environmental standards. The competitive electricity supply market [for example] had dramatically reduced the price of supplying cables to sections compared to the old monopoly days.

However, recent data now reveals that house building prices have been rising for some years mainly because the restraints on land supply mean that all our house builders are now "Cottage builders". Our home builders can no longer access long term supplies of land. One surveyor took me to look at a major development outside of Wellington and pointed out that "Everyone of those trucks distributed around the development is a cottage builder's head office." This has a major impact on bulk purchasing and management of supply, and overall efficiency.

Then of course the addiction to Smart Growth density has led to a wave of leaky buildings which has now generated a new wave of "gold plated" building codes. And everyone seems to believe we can promote "sustainability" (whatever that means) by adding up front costs with proposals for more insulation, solar water heating and double glazing and anything else which seems like a good idea at the time.

The impact of the building codes hits earlier than you might think. Real Estate agents are now of the view that the existing housing stock is undervalued because existing houses cost so much more to replace. Hence even as land prices fall the price of the total package may hold up for a while.

This will be described as "a strong housing market" rather than the last gasp of a dreadful set of policies which have done, and will continue to do, extraordinary damage to the economy and those struggling to make ends meet.
And oddly enough, the problem with strangulation of land supply has been recognised even by the Environment Court. Included in the recent decision to allow Living Earth to build a composting plant outside the 'Metropolitan Urban Limit' imposed by the ARC was this comment:
In cross-examination, Mr Walker [for the ARC] agreed that in the Auckland region there is a shortage of industrial land generally available, with the effect that prices are pushed up because of scarcity, and that many of the sites he had identified are outside the metropolitan urban limits.
As Owen summarises, "This decision acknowledges the connection between land scarcity, inflated land prices and (by general inference) the impact of the Metropolitan Urban Limit in creating this scarcity."

LINK: Court decision rubbishes council - NZ Herald

RELATED: Urban Design, Auckland

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