Tuesday, 22 January 2008

Housing affordability: It's regulation, stupid

Since the news of New Zealand's leading position in the field of housing unaffordability is finally being digested, but unfortunately still with so many indigestible misconceptions, I thought I'd repost this concise summary of the reasons for rising housing costs produced by Pieter Burghout of the Master Builders Federation. He naturally overlooks the expected cost increases due to the senseless certification of builders and designers, but since planners, regulators and Alan Bollard have yet to focus on the real causes of that unaffordability, it's important that we do. I've retained my original introduction to the piece.

Demographia's worldwide survey of housing affordability demonstrates clearly enough that since all housing markets studied have similar tax and credit regimes but distinctly different policies on land regulation, the crucial factor in housing affordability is land regulation, not new taxes.

The problem in those markets experiencing serious unaffordability (those in which average house costs around six to seven times the average income) is overregulation of land use. Conversely those cities enjoying more affordable houses (those in which average house costs around three times the average income) is minimal regulations on land use. It costs more than twice an average household's income to buy a house in Auckland, Wellington or Christchurch for example, around which "planners" have imposed artifical "urban walls," than it does in Houston, which is unzoned.

An editorial in the NZ Master Bulders' magazine Building Today highlights the problem perfectly with points keenly summarised in the graphs below (click on them to enlarge): over the last five years material costs have increased by twenty-five percent and labour costs by fifty percent (much of that due to the green-plated new building regs). Over that same time consent fees have increased by fifty percent, land costs have doubled, and levies and compulsory contributions levied by council have increased by ten times!

In dollar terms, the biggest increase is in the inflation of land costs due to regulation. In percentage terms the biggest increase is in infrastructure levies and fees. If that doesn't leave you incensed, then you're probably part of the problem. And if you think either are susceptible to interest rate increases then you must be Alan Bollard.

Because of its brevity it's worth reading Master Builders' CEO Pieter Burghout's piece in full (or nearly enough), so here it is:

Housing affordability -- it can be fixed!
...0ne of the recent, big public issues has centred around housing affordability, with nearly everyone jumping on the bandwagon and suggesting how it can be fixed.
...For certain, Kiwis have aspired, and probably always will aspire, to own their own home — their own “quarter acre section of paradise”. And that’s entirely how it should be.
...Unfortunately, the lift in house prices over the past five or so years has put the average home out of the reach of the average Kiwi family, which is not good. […]
...The construction industry, and New Zealand as a whole, benefits from having an affordable housing sector, and we believe there are a number of measures that can be taken to improve housing affordability.
...The main points we made in our submission to the [Select Committee Inquiry on Housing Affordability] are noted below. Our research, within New Zealand and offshore, validates that the key drivers of the housing affordability issue have been, in order of priority:
  • rises in land cost,
  • rises in local authority infrastructure levies and fees,
  • increasing compliance costs, and
  • increased labour and material costs.
...This analysis is shown in the graphs at right.
...And as the prices of new homes have risen, so have the prices of existing homes — because that’s how the market worksl
...If these are the cost drivers behind house price increases, then what are the things that need to be done to fix them and make houses more affordable again?
...First, the biggest factor affecting land cost is supply, and central and local government need to consider what measures can and should be taken to free up land availability, particularly in the main centres.
...Second, the biggest percentage increase in cost has been burgeoning increases in local authority infrastructure levies and fees. These should be better assessed and monitored to ensure they are fair and reasonable — rather than the “laissez faire” approach that applies currently. [It’s worth noting here that the Libertarianz submission on Sandra Lee’s expansion of local government powers pointed out at the time that good objective law allows individuals the right to do anything except that which is specifically prohibited while restraining governments to acting only on that which is specifically permitted, and that Lee’s Local Government Act reverses this important principle. The explosive consequences for the cost of local government that we’ve seen since the Act’s passing are entirely due to that reversal.]
...The construction industry can and should pay for those extra infrastructure costs that it imposes, but it’s not fair that new home owners pay inflated infrastructure levies to subsidise existing home owners who otherwise have lower rates to pay
...And third, the next largest significant increase has been in the area of compliance costs. Some of these costs are reasonable as the industry lifts overall quality levels since the leaky building saga, but some are unreasonable, and steps should be taken to reduce them, particularly:
  • consent process delays (consent, inspections and code compliance certificates),
  • consenting uncertainty and variability, and
  • producer statement uncertainty and variability.
...There have been increases in labour and material costs but, in our view, both of these are subject to strong competitive pressures across the industry and across the economy as a whole. We are generally comfortable with where these costs sit in perspective against the other cost drivers noted above.
...The final point we made in our submission to the Inquiry is that similar housing affordability issues apply in other countries, and New Zealand should take heed from the remedial measures being proposed in those countries to adopt what is applicable here.
...In nearly all the cases we researched, the three factors we have highlighted — land prices, infrastructure levies and compliance costs — are at the top of the list of things to fix. And so it should be in New Zealand, too.
...The problem won’t be fixed overnight, but it can be tackled, and we strongly encourage the Government to do so.
* * * * *
Burghout makes the point abundantly clear, don't you think? A commenter here at Not PC prescribed the solution just a few months ago:
Here's the solution: get rid of fiat money, get rid of zoning, don't fight so-called sprawl and let people free to develop according to demand, and let development "end the divide between rural and urban areas" by having the council-imposed 'Urban Wall' removed.
Good luck getting either this Government or the planners responsible for the problem interested enough to care.


Unknown said...

That is an interesting comment from your previous post.

It identifies the two main issues here which are land and bank created credit. Add the two together and you get speculation and huge rent profits.

I'm astounded at the doubling of land prices in NZ in the last 5 years. Has the population suddenly doubled?

I'd like to recommend an excellent book on the subject. It's a scholarly piece of work which examines land speculation over the last 400 years as well as clear 18 year boom/bust cycles. It's a real eye opener.

It's called "Boom Bust: House Prices, Banking and the Depression of 2010" by Fred Harrison.

Fred predicted the 1992 recession in the UK years in advance and wrote about it and the reasons for it in many places.

The US sub-prime meltdown is the red flag for the coming depression. Global stock markets at all time highs, the US$ in a serious downtrend, global inflation concerns and oil/war round off the other warning signals.

Just one leg remains on this collapsing table and that is the Chinese economy.

All of this down to land speculation and banks printing money to pay for it.

Anonymous said...

That makes for a depressing future really. When it occurs many hurt people will misguidedly call for more government regulation of the economy. More central bank fun and rorting. More of what caused the troubles in the first place.

If I wasn't an honest man I'd be in there with the rorting. Perhaps I should consign morality to the dustbin and get while the getting is good.


Anonymous said...

If that lesbian Minister of Housing wants housing to be more affordable...a good way to do it would be to require all Valuation Reports to reflect the 'immediate' sale price rather than the optimistically theoretical 'values' you get at the moment.

Share prices, bond prices, currency prices...they all reflect immediate sale prices, and real estate should, too.

Needless to say, this would lead to a substantial number of people having 'Negative Equity' and mortgagee sales..and..presto! immediate housing affordability.

Anonymous said...

your raging against percentage increases is irrelvant.

the fact is that the largest contributors to construction cost are still land cost, materials and labour cost.

land cost increases have more to do with supply and demand - and the speculation that comes with this.

furthermore - to state that new developments are funding old is rubbish - financial contributions are built up based on the cost of servicing new development - i know as i have been involved in both building these up as an employee of a council and also challenged them as a homebuilder

the alternative is for existing ratepayers to subsidise new developments which is not on.

additionally these contributions can be challenged and often are - so they need to be robust.

for the record i am building and am paying through the nose for the "pleasure" - and while i wish it was more affordable, blaming the affordability on land / govt policy is misleading, when the bottom line is that we are where we are due to a recent (and also long and oft repeated) history of speculation and greed...