Wednesday, March 13, 2013

Persistent lying about housing land supply

_hugh-pavletich-smlGuest poster Hugh Pavletich asks why people such as Mayor Len Brown of Auckland are persistently lying about housing issues, and points out however you want to measure the amount of immediately available building land, the only true measure of scarcity or abundance is price.

Supplying affordable new homes today is a very formulaic business indeed – and has been since Bill and Alfred Levitt created the modern production housing construction industry soon after World War 2.

This was a remarkable entrepreneurial feat, as the Levitts and many others had tried for decades prior to emulate Henry Ford’s production methods with respect to automobiles – and failed.  Bill Levitt finally “cracked it” by splitting the housing production process into specialist components, at a stroke advancing home construction from the realm of the “jack of all trades” (and master of none) cottage-building culture, bringing it into the modern industrial world.

Importantly, with the sub-specialization he encouraged, this allowed low and semi-skilled workers into the residential construction industry.

1101500703_400The “Levitt methods” were rapidly emulated throughout the rest of the developed world at the time, helping trigger the “democratization of prosperity” following World War 2.

The Levitts supplied new 80 square metre homes on 700 square metre lots for $US8,000 – about $US100 per square metre all up (land and services included). They supplied these homes to families outside New York with an annual household income of $US3,800—a ratio of just 2.1 to 1! ( The median household income at the time in the United States was about $US2,500.)

Generally speaking, in a culture in which social pressure was on the male to financially provide for the family, these houses were bought by folk on a single annual household income, allowing the mother to focus on the care of the children and fulfil the role of “home executive. The male was socially considered a loser if he couldn’t financially provide for his family.

Rather “quaint” thinking in today’s world of course, where, rather amusingly, women have since become “liberated.” Liberated in reality to become “mortgage slaves” because of the grossly excessive costs of housing.

Following in the tradition of the Levitts who supplied new starter housing at $US100 per square metre all up (land and services included) today, some 60+ years later, new starter housing is being supplied on the fringes of the affordable United States housing markets for about $US600 through $US700 per square metre all up.  In contrast, here in New Zealand, due to gross political and urban planning incompetence and persistent lying, the productivity and pricing performance of our residential construction sector has been wrecked.

imageIt currently costs in excess of $NZ2,500 + all up per square metre for new starter  housing on the fringes of Christchurch—and a stratospheric $NZ3,500 + all up per square metre on the fringes of Auckland!

No wonder so many would-be first-home buyers are renting instead.

Year after year, the Annual Demographia International Housing Affordability Surveys  (there have been 9 to date) illustrates with the standard Median Multiple method, that median house prices in normal housing markets do not exceed 3 times annual household incomes. Yet in Auckland and Christchurch, median house prices are well over six times the median annual income! (Auckland has a Median Multiple of 6.7, Christchurch 6.6, Tauranga-Western Bay of Plenty 5.9, Wellington 5.4, and Dunedin 5.1.)

A “crystal clear” Definition of an Affordable Housing Market is incorporated within this year’s Survey and on the front page of this writer’s archival website Performance Urban Planning:

For metropolitan areas to rate as 'affordable' and ensure that housing bubbles are not triggered, housing prices should not exceed three times gross annual household earnings. To allow this to occur, new starter housing of an acceptable quality to the purchasers, with associated commercial and industrial development, must be allowed to be provided on the urban fringes at 2.5 times the gross annual median household income of that urban market (refer Demographia Survey Schedules for guidance).
    The critically important Development Ratio for this new fringe starter housing should be that the serviced sections cost about 17 - 23%  of the actual house construction.
     Ideally—to ensure maximum stability and optimal medium and long term performance of the residential construction sector—through a normal building cycle the Median Multiple should move from a Floor Multiple of 2.3, through a Swing Multiple of 2.5 to a Ceiling Multiple of 2.7...

So …  the only question that needs to be asked, as this morning’s New Zealand Herald article illustrates, is why are people such as Mayor Len Brown of Auckland, persistently lying about housing issues:

imageMayor does U-Turn on available housing land
Auckland has 2000 new sections ready to build houses on, says Mayor Len Brown, who last month claimed there was enough land for 15,000 homes.
    As debate grows about housing and land supply in Auckland, Mr Brown is no longer claiming the city has enough new land to build 15,000 houses "right now"…
        Councillor Dick Quax said Mr Brown had proclaimed to all who would listen that Auckland had 15,000 sections ready for houses to be built on "right now."
    "The mayor is now having a big helping of humble pie as he acknowledges that there are just 2000 sections ready for construction to begin.”

Brown should know the “years of supply” measure is misleading as well. He has now conceded there are only an appallingly low 2,000 “construction ready” lots available on the fringes of Auckland.

The only true measure of scarcity or abundance is price.

The evidence is “staring us in the face” that if New Zealand had normal housing markets, new starter housing would be available on the fringes of our cities for at or below $NZ1,000 per square metre all up. This would allow young families to buy 150 square-metre new homes for about $NZ150,000 … 200 square metre new homes for $NZ200,000 … and so forth … with sensible mortgage loads too.

A pipe dream? Not at all.

While the persistent incompetence and lying by politicians and planners on housing issues is often amusing, it is past time they started to “wake up” to the serious social and economic consequences.

The solutions are simple and are clearly outlined within Section 4 of  Christchurch: The Way Forward (see below).

The lesson is the same for every New Zealand city.

* * * *

Christchurch: The Way Forward (excerpt)
To allow the belated recovery to finally start (some 21 months later), the following 5 steps must get underway as soon as possible…
Section 4: The urban land use and building regulatory environments have degenerated into a “sick joke” – creating massive social and economic harm.
    Local Authorities must not have any control of land supply, as it is an invitation for them to become incompetent and plunder the people they are paid to serve. Further to this, they must be required to finance infrastructure appropriately as well.
    With its small population of just 4.4 million, New Zealand has abundant land supply with just 0.70% of its land area urbanized. The land area in the United Kingdom is much the same with near 62 million people.
    There needs to be open fringe land supply with post development zoning and “no go” areas clearly identified for solid environmental and other robust reasons. Internally – flexi zoning is required where zones can expand or contract as required – provided property owners along a zone fringe obtain the consent of neighbours a further 50 metres out.
    This is particularly important for Christchurch, as it is endeavouring to move abruptly to the north, west and south – where there is abundant good quality land for construction.
    Artificially inflating land costs unnecessarily triggering housing bubbles and decimating the performance of the residential development / construction sectors must not be tolerated.
    Housing is a basic human need. A need that must be respected – particularly by public employees properly trained in public service ethics.
    With the smaller Community Council Units of Local Government, it will be possible to have their Regulatory Units led by engineers and sound and simple performance standards instilled in to the regulatory staff. If staff as individuals fail to process consents efficiently and/or lack enabling attitudes and the capacity to solve problems, they must be replaced.
    The current degenerate and infantile culture of impunity within the Local Government sector must be stamped out and replaced with a culture of consequences.
    It needs to be noted that working for Local Government is generally regarded as “default employment” for those who fail to secure employment in the private sector. It is therefore critically important the roles and requirements for those employed within the Local Government sector are simplified as much as possible.

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8 Comments:

Anonymous Anonymous said...

I really don't understand why nominally rational and right-wing people advocate chopping billions of dollars off NZ's housing equity.

I paid good money for my house in a good state school district, and sure as hell don't want to lose half my equity to some mad house-building scheme, whether from National, Labour, Greens, or ACT.

Home ownership is a privilege not a right. That something like 85% of Kiwis are in fact losers because they can't provide for their families - the same 85-90% who are non-nett taxpayers of course- is because they're useless bludgers. No reason to take equity from the 15% of Kiwis who are actually worth something to give "affordable" (= massively taxpayer/ratepayer subsidised) houses to people who don't deserve them.

- Homeowner and proud of it!

3/13/2013 11:03:00 am  
Blogger Peter Cresswell said...

@Anonymous:

Right wing? Who's right wing?

I think I'll file this screed of yours under 'rent-seekers.'

And 'Anonymous'? Of course. I'd be embarrassed too.

3/13/2013 11:36:00 am  
Anonymous Anonymous said...

The 3 december TV One Colmar Brunton Poll found that 62% of all and 75% of young New Zealanders now demand the Government allow affordable housing to be built.

There was nothing "right wing" about the Levitts, the founders of the modern housing production industry. they were staunch Democrats.

The GI Bill enacted during the Democratic Truman Administration, was enormously helpful as well. The Levitts were very clear they could not have got underway without it...loosening up the mortgage market.

And when politicians and planners got in the road of getting developments underway, the Levitts didnt hesitate to pull in the Veterans Association to lean uon them!

Clearly ....ananymous has a lot of history to learn.

Hugh Pavletich

3/13/2013 02:34:00 pm  
Blogger libertyscott said...

Anonymous, as long as the state gets the hell out of the way, then you no more deserve protection for your "investment" that people buying commodities, art or any other assets that rise and fall according to demand and supply.

It's like a dairy farmer saying the government should stop farms converting from sheep to dairy, because he paid good money for dairy and if others can't afford to buy the static number of farms, they are bludgers.

Grow up, accept the risk that speculating on a state controlled supply is not one anyone else should be forced to bear.

3/13/2013 09:52:00 pm  
Anonymous Anonymous said...

Libertyscott ... very good comment indeed.

Isnt it remarkable how many on the so called right, such as Ananymous above, support what is in essense "reverse welfare" - forcing the young to take on excessive mortgages ... and provide Anonymous with money he hasnt earned himself.

Sir Roger Douglas refers to this thinking as "fiscal child abuse". I have utter contempt for the Anonymous's of this world.

Hugh Pavletich

3/13/2013 11:08:00 pm  
Blogger Mark said...

It's a shame that Hugh and his disciples continue to over-cook the goose on this topic. In doing it means many who would otherwise be sympathetic to his message tend to switch off.

To build the civil infrastructure alone for a greenfield subdivision in Canterbury now costs about $80k + GST per section - let's say $90k inclusive. About $10-15k of that is development contributions - so this is not so major a factor (it's much higher if subdividing in an existing residential area).

When I say cost, I mean direct cost; what you have to pay the consultants and contractors to design and build the roads, sewer, water, stormwater, etc - without any margin for the developer. It also assumes the land is already zoned residential. It excludes the purchase of the land itself, finance costs, marketing costs, and a margin for the developer - and we're already nearly double the oft-quoted $50k a section. Or another way to look at it; it leaves you $110k to pay for all these things and build a 200 m2 house that is quoted above. I'm sorry but that's impossible, even under the most optimistic scenario.

Does land zoning and other gov't regulation drive up the pricing of housing?: Undoubtedly yes.

Would the removal of all restrictions on residential development see $50k sections (or $200k 200 m2 houses in NZ) - No way.

I can't explain why they can build a 200m2 house including land for $200k in Houston but not in NZ - but suspect it has more to do with the size/economies of scale in the US economy compared to ours.

In cities like Christchurch, the effect of limiting land supply is actually not overly signficant. Since the earthquake there's actually been a relaxation of this area and there's a hell of a lot of developments coming onto the market. I agree in Auckland it's a much bigger factor.

There's a lot of other gov't imposed factors that drive up cost; I could probably make a list of about 100 - but it's a complex area and not easy to clearly identify the direct cost of each.

To gain some political traction on this subject, I believe an incremental approach would be better. Focus on one key thing the gov't could do to make some gain - eg: allow residential development on all of the rural land supplying Auckland - show what the saving would be from that one change alone - and most importantly be realistic in your figures so it's believable. Then move onto something else.

The broader approach of comparing house prices here to Houston doesn't achieve much in my view.

3/15/2013 09:20:00 am  
Blogger Peter Cresswell said...

Just so you know, a Bloomberg/Businessweek survey has just ranked Houston as the 22nd best American city in which to live.

3/18/2013 10:08:00 am  
Anonymous Anonymous said...

Mark . the figures are by no means "overcooked" - but simply illustrate the degradation that has occurred of the residential development / construction industry over recent decades. Thanks to the bureaucratic bludgeoning of the industry.

As Dep PM Bill English made clear within the Introduction to this years Demographia Survey, we use to be "affordable" in New Zealand. In other words our performance use to line up with that of Texas and the rest of middle North America.

It sure amazes me how you industry guys have failed - after 9 Demographia Surveys - to get over to Texas to learn how housing is built at true market prices.

My sense is that those who fail to get over there to learn, just wont have the skills to survive in the industry too much longer.

Hugh Pavletich

4/15/2013 01:04:00 am  

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