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Affordable housing (1): is it affordable?

by Ian Apperley
Get ready for it. It’s election year, and that means that we are going to have politicians of all walks selling us promises in the hope that we’ll vote for them. One of the big issues will be housing. Wellington’s new Mayor and several councillors have already promised housing measures. The reality is, they can’t deliver on it. Nor can the national politicians.

I walk around the Miramar Peninsula coastal road frequently. One of the things that I have noticed over the last year is the increase in people who live in their cars. It’s not unusual to see a handful clustered together. This is the extreme end of “homelessness.”

At the other end, we have people unable to move into the city because of the price of housing or rent. We also have people on lower incomes having to get out as the price of rent outpaces wage growth.

The City Council is promising to make housing affordable, but it can’t. All the will in the world belies the fact that they can’t control enough of the levers to make changes. And ideology will stop them from controlling one of the most important sets of gears: land management.

There are a number of controlling inputs into house affordability, and I’m going to look at them each in turn and dispel some assumptions and myths. I’m not an economist, however as a writer I am a researcher, and most of the information here is readily available on the Internet in the form of government reports, economic reports, and blogs.

When your average house price is above $500,000, and let’s face it, in Wellington City it’s a lot higher, then the number of people being able to buy their own property is limited. The Council has promised rates rebates for new builds. However, this will make only a tiny difference when you consider the overall price of a new build.

New builds are problematic. First, the bank takes a much more risk-averse view of them; a lot can go wrong. So, borrowing against an asset development is tricky. Second, while you build you will need to pay the mortgage on the build costs, and you’ll need to pay rent. When you consider building probably takes a year, the costs go up.

The cost of construction in New Zealand is extortionate. That’s because one supplier largely owns the market. It’s cheaper for you to go to Canada, with your builder, family, and architect, buy all your materials there, put them in a shipping container, and send them back to New Zealand. In some cases, building a house in New Zealand will cost you twice what it does overseas.

Now, central government could attempt to regulate that market, but they won’t. They have far too much invested in that company to do so.

Also, driving house prices up is the cost of making things “greener.” This is a good thing. However it comes at an increased cost. Renewable energy sources (solar) are not only expensive to install, but they are also costly to run, with some electricity companies charging you extra if you have them on your house.

Add double (or triple) glazing, insulation, eco-heating systems, and a host of other requirements and the cost just keeps increasing. It was found post-Canterbury that a lot of property developers opted out of rebuilding because the costs (earthquake standards for example) made it economically unviable to build.

Building a house relies on other inputs that are often forgotten. We’ve looked at construction costs and how you finance it, but consider land costs as well. Also, when it comes to land, consider the rules and regulations that surround where and what you can build.

Wellington has very little land left in the city, and where there is space, it is often protected under an environmental covenant of some kind, a poor (or expensive) place to build, threatened by climate change (coastal land), or doesn’t have the needed Infrastructure to support it.

That lack of land increases the price substantially. Consider the price of sections in the Eastern Suburbs for example.

The Council doesn’t exactly help with new builds. The time and cost it takes to get consents in Wellington is legendary, for the wrong reasons. Red tape and inconsistency, anecdotally, are quite common.

Regulation mostly governs Land supply. Asking a left-leaning Council to reduce that control, especially when it crosses green ideology, isn’t going to work.

The left often points out that if wages were higher then housing would be more affordable. While a real wage is fair and reasonable, in the case of house prices there’s a direct correlation between the growth of incomes and the price of homes. You guessed it; it drives home prices up.

Despite all of that, in Wellington we see a new consent about every two days. The issue is: that’s not nearly enough.

The infrastructure in Wellington city, arguably, is under invested in. From power to water, sewage, to roads, and so on, the City is not spending. This means that any growth in housing puts increased pressure on creaking infrastructure. If you want an example of that, look at Miramar’s stormwater and sewage systems. The Council is spending a lot of money attempting to attract people to the city without considering the balancing investment required, in my opinion.

Which brings us to immigration, which is a big driver of house prices. If we were to cut immigration, we’d suffer economically, putting a lot of people out of work and therefore out of reach of a home. But the more immigrants we get, the more housing we need and the more investment in infrastructure.

Investors are often blamed for increasing house prices and no doubt they play a part. The loan to value rules being implemented will slow that factor, but remember, changing a lever is not an instant fix, it could take years to show up. And one lever by itself is not enough to make a difference.

One more myth needs busting. House prices and rent prices are separate things. They have different levers to make them move up, or down. It’s natural for us to consider that house prices are the only lever that affects rent. That’s not true.

In the past few decades across Wellington, one thing has remained certain; house prices have increased. When you look at the long-term growth of Wellington, it ticks away at around 2% to 3% per year. Of course, there are bursts of massive growth, which are followed by corrections to pricing, always dropping back to around that growth level. All of this through successive governments and much tinkering with policy.

I’m going to look at what drives rent in my next article because it’s worth isolating that from the issues of house prices. Then, in a final article, I want to look at what we (the people), central government, and the Council, could do to make some changes.

Further reading:
Reserve Bank: A closer look at supply and demand factors influencing residential property markets
Croaking Cassandra Blog: Housing Topics

4 comments:

  1. Diane Calvert, 24. January 2017, 15:00

    Our housing stock has simply not kept pace with our increasing population and the need to improve the quality. We’ve got to get better at building quality housing, cheaper and faster.
    The old Dept of Building and Housing (which was subsumed into MBIE a few years back) either did not seem to provide the right advice and or was not able to suffciently influence the govt of the day in planning for the future.
    There is no ‘silver bullet’ but what is needed is a whole of system approach (similar to the Govt’s taskforce recommendations for Workplace Health and Safety). Local govt needs to play its part as one of the players but it is up to Central govt to be the princpal driver and demonstrate the top level integrated leadership required.

     
  2. Michael Gibson, 24. January 2017, 15:47

    Cr Calvert, our new Councillor, seems to be bringing a very commonsense and welcome approach to the Council. I am certain that the Council’s spending of $500,000 ratepayers’ money trying to rezone 55-85 Curtis Street from Residential (& Open Space) to Commercial would never have happened if she had been chairing the Committee in question.

     
  3. Rumpole, 25. January 2017, 0:11

    The former Committee chairperson failed to achieve personal ambitions for a flyover. Ratepayers funded this foolishness too.

     
  4. Mikey, 27. January 2017, 13:22

    The govt privatized the public housing supply, the govt created shortages when they booted people out of their public housing to develop nice homes for foreign investors, the govt is failing to support a timely rebuild in Christchurch.
    The middle income and poor can never buy property and just get poorer, + the growing population creates a bubble and shortage. The banks profit off loaning the money for the overpriced and overvalued homes.

     

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