Monday, February 20, 2012

Unaffordable housing? No wonder!

_HickeyONCE AGAIN BERNARD HICKEY offers the insalubrious example of a commentator who knows something is wrong, yet knows nothing about how to fix it. Nothing that is beyond yelling “Something Must be Done!” And by “something he means “someone.” And by someone, he means the government.

First, the problem:

Auckland and Christchurch now have massive shortages of waterproof and undamaged homes that regular families can afford to own…
    The Department of Building and Housing forecast this month that New Zealand needs to build around 20,000 to 23,000 housing units a year over the next five years to keep pace with population growth. Meanwhile New Zealand has been building at a rate below 15,000 a year for the last three years…
    The crisis has intensified since 1999 with the introduction of the Metropolitan Urban Limit and the revelations that an entire generation of homes is leaky and will have to be either reclad or rebuilt…
    This crisis is playing out in a variety of ways.
    There is, of course, a rise in homeless numbers. But the more obvious increase is simply in the price of homes and rents. Both are rising quicker than the wider inflation rate and price rises outside of Auckland and Christchurch. There is an inevitable reaction to this, which is for young Auckland and Christchurch workers and families, those who are not property owners, to simply give up.

He is right that rents are rocketing and new homes are becoming less and less affordable.  The annual Demographia study has shown for years that even during this Great Recession house prices as a proportion of income in New Zealand’s cities are among the highest in the developed world—and increasing*. And the Productivity Commission (from whom Hickey got his figures) point out that “for younger people and those on lower incomes there is a missing step on the property ladder, particularly in Auckland. The chances of them ever purchasing their first home are decreasing.”

He is right, too, that while would-be home-owners burn, governments in Auckland and Wellington continue to fiddle—with train sets in Auckland, and with a pathetic, partial, poorly-done privatisation programme in Wellington.

The problem then is this: what is to be done? And the problem with Hickey is, he has no bloody idea.

So like every simple statist who Wants Something Done, he simply cries that Gummint Should Do Something!

“Government-owned land would need to be opened up and town planners overruled,” says Hickey, getting it half right, before heading down the route of statists immemorial in calling for “taxpayer money … to be invested and lots of it.” Presumably building those affordable houses that the government has made it unprofitable for private builders to build, using resources that will cost more than the sale price.

imageIt’s the same “solution” put forward by Fran O’Sullivan (left) a few months back when she called for private land to be nationalised—expropriated outright by the grey ones—newly stolen land on which the Gummint Should Do Something.

Like O’Sullivan, Hickey is a business columnist. Yet just like her he has no idea how business works.

And they both write and talk about politics. But neither apparently have any conception of how politicians have caused the very “market failure” they describe. Because while calling for government to fix the problem by doing more, they never even bothered to ask themselves this fundamental question: whether it is government activity itself that has largely caused the problem.

And it has.

IN A NUTSHELL, THE big problem is that government has gone beyond right: it has passed laws giving the Reserve Bank the power to print money, bureaucrats the power to prescribe the methods and materials by which houses are built, and  planners the power to control and restrict people’s land.

Let’s look at these one at a time.

In recent years, the new money printed by the Reserve Bank (i.e., monetary inflation) has spilled over into the housing market, producing one housing “bubble” and thousands of NZers deluded into thinking their wealth has increased.

Meanwhile, the Department of Building and Housing were given the power to tell builders how to build houses. Rather than deregulation, which never happened here, builders have endured a flood of new regulation: producing pages and pages of gold-plated building regulations and a rise in the cost to build a house that has out-paced even the rate of house price rises.

And while the printing presses were going overtime printing new regulations and new money, the town planners were busy strangling land-owners and ring-fencing cities under the new powers given them by the Resource Management: the power, essentially, to restrict development of  new, affordable housing while charging builders and developers more for the “privilege” of trying to build something on their own land.

THE NET RESULT OF this three-pronged attack on property was to pump up demand with all those freshly-printed dollars while restricting the supply of the stuff they wanted to spend them on.

No wonder we saw a housing bubble.

No wonder price inflation on housing (which is all those price really increases were) went through the roof.

No wonder so many people were deluded by the price inflation into thinking they were becoming rich-instead of just seeing their dollars devalued.

No wonder land prices now account for up to 60% of the cost of a house in Auckland.

No wonder new homes tend to be at the top-end of the market.

No wonder things began to become insane, with the cost to build a house beginning to outstrip even the cost people were prepared to pay for it—meaning the model for speculative housing** (which has for decades been building the means by the vast majority of new affordable homes was built) is now permanently broken.

And as a simple measure of when affordable housing will be built again, it will be when the model for speculative house building returns.

How do we do that?

Simple. We stop what should never have been started.

We get rid of fiat money; we get rid of zoning; we shut planners up and put a stake through the heart of their Resource Management Act; we stop fighting so-called “sprawl” with “Urban Walls” and instead leave people free to develop their own land according to demand.***

In short, we give power back to builders and property owners to do what they do best while taking power away from those who only get in their way.

Yes, government could do more. It could do a whole lot more by doing a whole heck of a lot less.

And Bernard Hickey could either write less, or learn more.

* * * * *

* As the Annual Demographia Surveys ( www.demographia.com ) clearly illustrate - households should not be paying any more than 3 times their annual household income to house themselves - with mortgage loads around 2.5 times.  Unfortunately in NZ’s major cities home-owners are now paying from 6 to 8 times their annual household income to house themselves , a figure that increases ever year.

** What is speculative house building? It’s when Joe Builder buys a site, builds a house on it, and sells it to Mr and Mrs New-Home-Owner for more than he’s shelled out—giving him a small profit which he can use to build his next one. This is how “spec” houses have been built since Adam was a lad—but now can’t be.

** The Productivity Commission in its recent report on affordable housing is only half-way there with its own solution, which would at least be a start. The Commission’s key recommendations include:

  • The urgent need for more land to be opened up for housing, especially in urban areas, because sections now average about 40% to 60% of the cost of a house.

  • Reconsideration of Auckland’s draft spatial plan. Auckland faces significant housing affordability challenges and the Commission found its current plan, with a target of accommodating 75% of new homes within existing urban boundaries, will be difficult to reconcile with affordable housing.

  • Improved processes for consenting, to speed up the service and lower costs.

  • Improving how local council development charges for infrastructure are calculated and applied, including making them reviewable. The Commission found the current model has too much regional variation and is not transparent. 

Perhaps Mr Hickey and Ms O’Sullivan could read them?

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9 Comments:

Anonymous Mark Hubbard said...

Great piece Peter.

Some more points, made quickly:

Remember Kim Jong Hickey and Jesus Morgan were hyperventilating for years, putting pressure on the government to attack private sector property investors via the tax system, which they did by denying building depreciation deductions and eliminating LAQC's. There's a lot of misunderstanding about the LAQC's - particularly from the one's attacking them, and then the politicians - but certainly the depreciation measures, and the idiot bias the bureaucrats and politicians took against domestic rental investment is now evident in a lessening of the rental stock, and thus contributing to the upward squeeze on rents. Result, more pressure on the housing crisis, and demands for more state houses (jeez).

And that aside, the denial of depreciation deductions for commercial property - quite a different issue to residential rental, plus foolhardy and the stuff of insanity - will, in my opinion, permanently slow or halt the rebuild of Christchurch's commercial sector (no matter where it is built). It's a major disincentive to invest in that sector.

Finally, a builder client sent me this horrific link about the upcoming demands of the new builders licensing system: he is seriously trying to get out of the industry, and I bet he's not alone; so yet again more pressure on the housing crisis.

Hickey's contradictory scatter-gun approach is crazy: he doesn't seem to have any ability to think any of his thoughts past 5.00pm of the day he makes them.

And by the way, for the poor sods who are left to actually build some houses, they had better not make any innocent typos on their tax returns as the State has thought up a whole new way to make money: fraud, in everything but the enabling legislation.

2/20/2012 12:12:00 pm  
Blogger Kiwiwit said...

I think I have figured out what Hickey, successive governments and local bodies want to achieve, and it is this.

2/20/2012 05:48:00 pm  
Blogger Joel said...

What Auckland needs is a damn sight more high-rises. As a city, it cannot afford to grow outwards any further - that's what's making housing unaffordable. We may have more expensive accommodations when related to incomes, but that is because most kiwis still expect to live on a quarter-acre section in a quiet suburban street. That dream is not realistic for many, at least not as a first home.

Auckland is already the 7th largest city in the world by land area, by some accounts. That's absurd.

If people want to be able to afford suburban living, they will have to move to the provinces. I know people think apartments are bad places to raise kids, but we must be realistic about our main cities. More people will have to live in high rises, or else Auckland will be a huge, transport-congested, air-polluted, house-expensive mass of sprawl. That will be bad for the economy, and for the planet.

2/20/2012 09:35:00 pm  
Blogger Nick K said...

Excellent piece, PC. Auckland needs you on its council next year.

2/20/2012 10:03:00 pm  
Blogger Nick K said...

Joel, bad for the planet? Nothing Auckland does will have an ounce, nay, a millionth of an ounce, of difference to the "planet".

2/20/2012 10:05:00 pm  
Blogger libertyscott said...

Joel. If people wanted highrise in Auckland it would have happened, as the Councils have been embracing the agenda of intensification for some time.

It has nothing to do with transport congestion. The planners like to claim it does because they are clueless as to the key reason for traffic congestion, poor investment of revenue collected from road users, and poorer pricing of transport.

2/20/2012 10:31:00 pm  
Blogger Joel said...

Nick, I know. But the urban sprawl is not efficient. The way to sell that to people is to call it "Green" ;)

Libertyscott, I know people don't want it. So they must stop whinging about the cost of housing. The types of population density they want are not at world levels, so the cost of housing can not be compared to world levels either.

2/20/2012 10:36:00 pm  
Blogger Dinther said...

Joel, people are moving to the province. Kumeu, Albany, Bombay hills.

Planned high-rises fail in just about any city you care to mention. Nobody wants to live there so it attracts those that have no choice.

What do you mean with: "As a city we can not afford..."

That sounds like a bullshit sentence to me. People choose to live somewhere or they don't. If the land is cheaper and the commute not too bad they go for it.

Just leave it alone and let people decide for themselves what is best.

Whangaporoa is a classic example. Lots of development. Lots of people moved in and not it is a commuters traffic trap where nobody wants to go. These things sort themselves out.

THAT CAPTHA THING IS IMPOSSIBLE TO READ DAMMIT!

2/21/2012 02:13:00 pm  
Anonymous the drunken watchman said...

seriousy ....

are the recent stockmarket highs (DOW etc) merely a Zimbabwean wet dream?

2/21/2012 02:17:00 pm  

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