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Affordable housing in the CBD – a pipe dream

affordable

by PCGM
There’s an old joke in project management circles: in any project, there are three variables of time, cost and quality … and you can pick any two. It’s a short-hand way of recognising the inevitable trade-offs that a project can be fast, or cheap, or high quality, but never all three. And that’s the heart of the conundrum about affordable housing in the capital.

Partly as a byproduct of the Spatial Plan and partly because of the real-world challenge of trying to find well-priced housing in an increasingly expensive city, the current debates are tending to polarise into the people who want to preserve heritage and the people who want a sensibly-priced place to live. Both ambitions are laudable – but in Wellington, it may well be that “affordable” is not one of the feasible options, no matter how many ratty old flats we demolish.

There’s no getting around the fact that construction is expensive in New Zealand. Our costs of building anything are significantly higher than places we typically like to compare ourselves to, such as Australia – across the ditch, it can be anywhere between half to two thirds of the cost to build an equivalent apartment. Debates have raged about why this is so, but the usual factors are our small market for building materials (coupled with our distance from their sources) and a constrained supply of people and capabilities. Undoubtedly both of these are true.

But we should also recognise our unique geography (read: our enthusiasm for earthquakes) and the requirements of our Building Code – both of which add expenses that aren’t encountered in Australia.

We have the entirely reasonable expectation that our big buildings won’t fall down in a serious earthquake and kill lots of people. This applies to our large civic buildings, but it also applies to apartments – and the bigger the apartment building and the bigger the chance of a big earthquake, the more engineering effort we have to expend to make sure everything stays upright. And surprise surprise, all that engineering costs money. If we want the buildings to remain useable afterwards and employ technology such as base isolators to make it so, then our costs will step up again.

The problem in Wellington is immediately obvious. We have high engineering requirements because we’re in a high risk earthquake zone – so on a per-square-metre basis, it will inevitably cost more to build the same apartment in Wellington than it will in Auckland.

Plus, we have less flat land and building on slopes costs more (there’s that engineering again). And if there’s any land remediation required – say, if we’re building on reclaimed land or brownfield sites full of old landfill and contamination – then costs will keep on rising accordingly.

To add insult to injury, our pool of people and companies to do the construction work is also smaller, because we’re a smaller market. Supply and demand means that our construction costs may be similar to elsewhere on a good day, but they’re highly unlikely to ever be lower.

And then there’s the part played by the Building Code and the regulators (MBIE and the Council). Remember the old joke about time, cost and quality? The regulators only care about quality, and are supremely unconcerned about whether the result is a building that costs more or takes longer to construct. So every time the standards are lifted in the Building Code – as happened after the Christchurch and Kaikoura earthquakes – then time and cost are likely to suffer, just like the old project management joke points out.

This is a game you can play at home if you’ve ever attempted any renovations. When the building inspector shows up to check on your workmanship and spots an error, try telling him that fixing the problem will cost more money or taken more time, or both. It’s a definite “speak to the hand” moment – he doesn’t care how much time or money is needed, as he’s there to make sure the quality standard is achieved, come hell or high water. You can take longer to re-do the work or pay someone else to fix the problem – pick your poison – but what you can’t do is compromise on the quality. That’s the way the Building Code is intended to work.

And fair enough – the leaky homes debacle underlined how disastrous it can be to just let the quality slide. But progressively ratcheting up the standards in the Building Code has also ratcheted up the costs, and is one of the contributors to construction inflation running at 500%-800% higher than the general CPI index.

So here we are, trying to build affordable homes on limited amounts of rather expensive land in a high-risk earthquake zone that requires lots of expensive engineering, using a Building Code that emphasises quality irrespective of the cost, with a construction industry that has few economies of scale and expensive materials. To state the obvious, this doesn’t sound like a recipe for success, no matter how much we’d all like a bigger house (or apartment) for less money.

There are plenty of places in Aotearoa New Zealand where the land is cheap and houses are affordable and the cost of living is low. But perhaps we need to admit that the middle of our capital city is never going to be one of them, and start planning accordingly.

14 comments:

  1. claire, 14. October 2020, 10:20

    Finally this article speaks to the ever present issue in Wellington of seismic instability, with its related building costs and insurance, and always changing standards and then cost to owners to fix earthquake-prone buildings. Put on top of that the geography, and you can see why there are suburbs well away from the centre and inner suburbs. And so many one-storey wooden buildings. They are the safest to live in. It’s wishful thinking that affordable apartments and houses are ever going to happen in the CBD. And putting many more people in a hazard zone so they are not driving is not a good enough reason to put people at risk. However public transport being free would transform use.

     
  2. bsmith, 14. October 2020, 11:36

    Can someone name one capital city in the world (first world countries only need apply), where a dwelling would be deemed affordable? It’s pie in the nonsense to think it’s a god given right to be able to afford this.

     
  3. Conor, 14. October 2020, 12:06

    Yep, lots of fixed costs for sure. It’s why it’s important to do the things WCC can do. Zone for more homes, thereby fixing the council concocted artificial constraints which push up land and house prices.
    At what height do the additional engineering costs kick in, or is it for all homes in Wellington?

     
  4. Guy M, 14. October 2020, 12:19

    I’ll just repeat my comment from the other day regarding Affordable housing:

    “There is a huge misconception amongst some people that building more densely in the inner city will automatically mean more affordable housing. The simple answer is that: No, it won’t…. The only way to get affordable housing is to legislate that a proportion of any new housing constructed includes affordable homes. This is the law in many larger overseas cities – effectively, the obscene sales prices of the richlister’s apartment subsidises the more affordable prices aimed at the people at the lower end of the market.”

    So that is the real issue – which party running for Government will commit to legislation forcing developers to have a proportion of their projects to be marketed at a truely “affordable” rate? And there is the big question – what exactly is “affordable”? My reckoning is that this means that a person on an average wage should be able to pay the mortgage. That’s currently about $67,000 per annum, and getting a mortgage means that banks will comfortably loan 3.5 times that. That puts a house price at only $234,000 plus a deposit so we are probably talking about new affordable housing being a max of $250,000 each for one bedroom housing. And a minimum of 40m2 for a one bedroom house means that the developer needs to build that for $6,250 per m2 – just at the edge of possible.

    Jacinda – Grant – want to put your hand up for this?

     
  5. Guy M, 14. October 2020, 12:50

    b smith – Well, for a start: London, New York, Paris, Berlin, all have some policies regarding the creation of Affordable housing. As noted above, it is legislated – it doesn’t happen without hard work by dedicated legislators – and there isn’t nearly enough, but it does happen. In London, the Coin Street housing project meant that low-earners could buy into a housing project right on the edge of the river Thames – the rich folk got the apartments overlooking the river itself, but there are affordable housing apartments just behind that, overlooking a green field, and next to a kindergarten. All rather civilised. And all at the big developers’ expense – they couldn’t put up their apartments for the filthy rich (and in London, they really are filthy rich) without doing the development for ordinary working people as well. In New York there have been many widely reported cases of how developers have grumbled and tried to circumvent the law, but couldn’t get out of it.

    Legislate – it’s the only way.

     
  6. Conor, 14. October 2020, 14:06

    Guy M – Those new homes still have to go somewhere. Our current district plan makes building small affordable homes basically impossible outside the CBD. All the cities you mention have far more medium density homes outside the CBD than Wellington does.

     
  7. PCGM, 14. October 2020, 14:32

    Guy M – While you’re right that legislating for affordable housing is a partial answer, let’s run some numbers and see how far we get. There are about 200,000 people in Wellington (excluding the valleys), so let’s approximate this to about 100,000 households of two people each. We’ll assume the people who are prepared to buy an apartment in the CBD are more or less drawn from this population. According to CoreLogic, people hold on to their houses for around 8 years before moving. But let’s assume households in the Wellington CBD are a bit more itinerant than that, and they move every five years. This means around 20,000 of them are moving each year. Based on the national data, about 60% of those households will own their home. Let’s round that down a bit to 50% on the basis there are a few more renters in Wellington due to the student population and the like. So according to our estimates, about 10,000 properties will be bought and sold in Wellington each year.

    Not everyone wants to live in an apartment, but let’s assume 20% of the owner pool (including new home owners) are prepared to give it a shot. That means about 2,000 apartments will be bought and sold each year. Now, a whole bunch of those apartments are already-existing properties. But let’s assume 50% of them are newly-constructed, which is probably wildly optimistic but which should give us a pool of about 1,000 apartments/annum being built by developers to meet the demand for new places to live.

    We then impose a 1-in-5 ratio on developers; that is, for every 5 apartments they construct, one has to be an affordable apartment of 40 square metres or more that sells for no more than $250,000, as per your numbers. The developer isn’t going to make any money on these units, but hopefully they won’t lose too much either. But it will dent the profitability of the development and make developers less inclined to proceed if the numbers are a bit marginal. Let’s ignore that effect for now.

    Making the legislative change means we now have 1,000 new apartments being built every year (a wild over-estimate, but let’s come back to that), of which some 200 are affordable 40m2 units – that’s our 1-in-5 ratio. So 200 households are able to move into their own place. Based on our assumptions above – 100,000 households, 50% renting, 1 in 5 will consider apartment living – we have a nascent demand of about 2,000 units per annum. And our developer obligation delivers 200 affordable apartments a year, or about 10% of the actual demand.

    The median income cut-off means maybe half the people who are actually or potentially in the market for an apartment meet the standard for buying the affordable units – so about 1,000 people per annum are both willing and able to purchase the 200 developer-subsidised units. In other words, even with the best will in the world – and some enabling legislation – we can only stick developers with an obligation that solves 20% of the problem for people in Wellington. We still haven’t solved the problem for the other 80%.

    And if we’re not building 1,000 new apartments per annum – and we’re not – then the numbers get even worse. Build 200 apartments in a year and that pool of 1,000 eligible households will have a mere 40 apartments to choose from – or a potential waiting list of 25 years. Developer obligations are a sensible and worthwhile step, but they’re clearly not a full solution.

     
  8. k, 14. October 2020, 14:36

    This article leaves out a couple of obvious, but little commented on, realities.

    First: Developer margins in Wellington are huge. The “cost” of new housing in Wellington is nowhere near the price new build developments are sold for. It is extremely profitable to build units and townhouses in Wellington because the zoning laws prevent much in the way of high density development outside the CBD, so those with the limited supply (developers) can pretty much name their prices for the overwhelming demand from buyers. If you want an obvious example, there are developers who build in both Christchurch & Wellington, and their almost identical developments sell for a lot more in Wellington than they do in Christchurch – far above the cost difference the land component makes (Christchurch has ample supply to meet demand). There is definitely room to provide much more affordable apartments & townhouses in Wellington if the zoning was changed to allow more of them and bring some competition and increased supply to the market.

    Secondly, people seem to be ignoring the fact that there are quality new and near new small 1 bedroom apartments being offered in Wellington for prices most would consider affordable (~$500k). It would not be difficult to build many more of these small apartments in CBD wellington (instead of luxury 2/3 bedroom apartments) if the council insisted on raising the proportion of these smaller units in new developments. Yes it’s not the classic kiwi dream to live/own a small apartment, but it is a good first step on the property ladder for many. (My wife and I lived and owned one for 8 years, building equity before moving on to our first small house once we had enough).

    Lastly, it doesn’t require huge effort from the council to enable more affordable housing – just a little bit of innovative thinking in concert with central government.

     
  9. michael, 14. October 2020, 15:25

    Finally . . . a sensible article about the issues, constraints and huge costs associated with building in Wellington city.

     
  10. Guy M, 14. October 2020, 21:26

    PCGM – yes, it is only a proportion of the needed housing, but at least it is a start. Currently we are achieving Zero affordable houses in Wellington. We will stay at zero unless someone legislates that this must happen. And yes, it is only one solution – and we need more. Next idea?

    For the next idea, it needs Government or Council to come to the party and provide one major part of the equation free of charge. That’s the cost of Land. You can never expect private developers to build houses and give the land price away for free, but that is something that is within the scope of Councils, and also central Government. Requires the bean-counters at Treasury to think of land in a different way, ie not as something that is there to make a profit from, but as a means to an end for gaining social equilibrium for ordinary people. If you don’t allow for less wealthy people to own property in the city, you’re basically screwed.

    Case in point: Queenstown. No one in an “ordinary kiwi” wage bracket can afford to buy in Qtown, and certainly there is little in the way of low-cost rentable housing for all the workers that keep their town running – of which there are many. They all live out of town – formerly in Frankton, but now further afield. Unless their town builds some rentable, affordable, simple housing in the centre of Queenstown, then the city just keeps grinding to a halt. Same here. We don’t want all our hard workers having to live in Wainui or the Hutt – some of them need to be living in Te Aro and Newtown and Island Bay, the same as the rest of us. Not Oriental Bay or Mt Vic or Roseneath, as those are the highest priced areas in Wellington, but we need affordable projects in walkable distance from the centre.

     
  11. bsmith, 15. October 2020, 6:26

    Cant say I have ever seen Queenstown grind to a halt (well apart from a virus ). Service workers, to me implies the lower end of the wage scale, and it makes more sense to live in outer areas (cheaper areas), and commute, like they do all over the world.

     
  12. Guy M, 15. October 2020, 8:52

    b smith – well, time to book yourself a trip to Queenstown then! The problem with that town is quite well known – it’s not me just making something up. And yes, while the service workers formerly lived mainly in Frankton (7km away), which was a cheaper area at the edge of town, even that has gone up in price and the lower-priced houses have disappeared. Queenstown/Wanaka is the most explosive property region in the whole country – and due to the mountains, there is limited / no ability to spread out the edge of town in most directions like Auckland is doing. Only one road in / one road out – and so in an area that regularly gets covered in snow, having service workers drive from Cromwell (60km) or Clyde (85km) as some are having to do now, is a recipe for disaster as well as complete madness. That’s why we need a solution that provides low-cost housing as well as high-cost housing.

    But for now: back to Wellington and the discussion at hand. Although we are not in the same strained condition as Queenstown, we are on the verge of it, and we need to look for solutions now.

     
  13. PCGM, 15. October 2020, 9:27

    k – I’m not sure I agree with the idea that developer margins in Wellington are huge. The retail price comparison with Christchurch is interesting, but so is the price comparison in Auckland – where apartments sell for significantly higher prices than in Wellington in a much bigger market for builders and materials, so with presumably lower costs … yet we still have large developers going broke on apartment developments.

    Basic economics says that if there are windfall profits to be made in any market, new entrants will arrive and prices will fall. There doesn’t seem to be anything special about the construction market, so if there really were excessive margins then there would be a rush of new companies getting into the business, not old established businesses going bust.

    And in terms of apartment sizes, it’s probably the case that there is simply more demand for big apartments than small ones, so that’s what developers provide. They’re in the business of giving purchasers what they want, not achieving wider social outcomes.

     
  14. Ross Clark, 15. October 2020, 22:40

    This is about demand well exceeding supply and there’s little scope to attend to the supply issues – within the city proper. This is something which needs to be attended to on a *region-wide* basis, which means thinking about transport links as well.

     

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