The market for affordable housing is still broken

I was struck by the posturing last week of Nick Smith and Len Brown, slapping each other on the back out at Manurewa, both trying to take credit for a new “affordable housing” development at Weymouth.

If you read their press releases, these new “affordable homes” are supposed to be the harbinger, somehow, of “39,000 new homes built in the city over the next three years,” so “avoiding a repeat of the previous [present] runaway housing market [that] had been an ongoing concern of the Government.”

So they’re all ever hopeful. But there's no need for them to fight over the accolades—all of their colleagues can take credit for it. Because not only is this development “affordable housing” in name only, it shows in microcosm what’s making it hard to build affordable housing at all.

The devil is in their details.

What's being touted as New Zealand’s largest community housing development … has been unveiled by Housing Minister Nick Smith and Auckland Mayor Len Brown.
It involves 282 social and affordable homes on surplus Government land at Weymouth in South Auckland.

So how much will this development of 282 “affordable” homes cost?

The Government-owned land is being sold for $8.9 million…. The Government is investing [sic] $29 million from the Social Housing Fund into the $102 million development to enable the consortium led by Ngā Mana Whenua o Tāmaki Makaurau (the Tāmaki Collective), along with members of the Auckland Community Housing Network, including the New Zealand Housing Foundation, CORT Community Trust, the Auckland and Onehunga Hostel Endowment Trust, and Habitat for Humanity, to deliver 282 social and affordable homes. A Heads of Agreement has been reached and contract negotiations are expected to be completed later this month…
    The affordable homes, priced between $325,000 and $475,000, would be made available through rent-to-buy and assisted home ownership programmes to first time buyers on low-to-modest incomes, Smith said.

Do you see that panoply of worthies involved? While some are possibly just clipping the ticket, the New Zealand Housing Foundation and Habitat for Humanity do at least have significant experience and expertise in building low-cost houses—that is to say, at as low a cost as one can in the present regulatory environment. And good on them for that.

Yet to produce these “affordable” homes (and at prices between $325,000 and $475,000 they’d be at the top end of what some would truly describe as affordable) in a development costing them $102 million (plus cockups), on land obtained cheaply, nearly $30 million of the money going into their construction—nearly 30 percent!—is a direct subsidy from government.

This represents  a subsidy of nearly $111,000 per house, without which not one of these houses would be affordable at all.

On land costing only $31,500 per site, which in this market practically amounts to a donation.

Smith reckons

This new development shows how the Government’s housing reforms are delivering real results for families in the highest areas of need.

Which is really just complete baloney. Because what it really shows us is how his reforms won’t even touch the sides.

What it really shows is that in the current regulatory environment, it’s not just the undersupply of land that’s keeping housing prices up, it’s building costs as well. Because even with heavily subsidised land parcels—the cost of which on unsubsidised projects these days can be well over forty to fifty percent of the final cost of a project—producing affordable housing at all is not at all a profitable proposition. It has become instead a creature of welfare.

Which was, if you recall, the conclusion of a recent housing conference I attended, at which a roomful of expert architects, planners and a developers there to talk about solutions to the current problem concluded that the only way they can deliver anything close to affordable is by huge government subsidies or having everyone involved donate their time.

To put it another way, in the current housing market, even with house prices going through the roof, there is no way for a speculative house builder to make money building houses at this end of the market. Not without a government subsidy for every builder (which would be neither sustainable, nor moral).

So if anyone really does hope for “the building of 39,000 new homes in the Auckland region over the next three years,” which is Nick Smith and Len Brown’s ever-hopeful boast, and Labour’s Phil Twyford’s  hopeful policy, they must realise that will not happen at all if no-one can make a profit on those houses.

Which is to say that the market for spec building is broken. And you will not get truly affordable housing until it is fixed.

If Nick Smith still wants to boast that his housing policies are “delivering real results for families in the highest areas of need,” then let him fix the regulatory environment that is still raising costs for builders. And if Labour’s Phil Twyford wants to keep promising their Kiwibuild programme being able to deliver houses at less than $300,000 each, then let him or his successor(s ) get their heads properly around the fact he acknowledged at that housing conference I mentioned above: that Labour Party's Kiwibuild policy too "will quickly run out of money" unless the regulatory costs imposed on builders can be fixed.

Because the simple fact of the matter is this: welfare will not build 39,000 homes in three years. Only the market will.

And it just won’t happen unless the market for spec building is fixed.