New Zealand

New Zealand Housing Hits Political Hot Button

Leith van Onselen — Thu, 24 Jan 2013 17:11:49 -0500

The release of the 9th Annual Demographia International Housing Affordability Survey on Monday appears to have caused a political storm in New Zealand. This year’s Survey was particularly controversial in New Zealand for two reasons.

Not only did it show deteriorating housing affordability, as measured by a worsening of New Zealand’s ‘median multiple’ (median house price divided by gross annual median household income), but the foreword of the Survey was written by none other than New Zealand’s Finance Minister, Bill English, who had some stern words to say about the state of housing affordability in New Zealand, brought about largely by the strangulation of supply:

“Housing affordability is an important focus for the New Zealand Government . Last year’s New Zealand Productivity Commission report on housing affordability, relying in part on Demographia affordability data, showed a substantial worsening in housing affordability in New Zealand in the last thirty years…

In its response to the Productivity Commission, the Government agreed with the Commission’s analysis that supply side factors explain the deterioration in New Zealand’s housing affordability.

The Government’s response to the Commission’s report concentrated on land supply, infrastructure provision, costs and delays due to regulatory processes, and improving construction sector productivity…

It costs too much and takes too long to build a house in New Zealand. Land has been made artificially scarce by regulation that locks up land for development. This regulation has made land supply unresponsive to demand. When demand shocks occur, as they did in the mid-2000s in New Zealand and around the world, much of that shock translates to higher prices rather than more houses. It simply takes too long to make new land available for development.

We may be seeing the beginning of a repeat of the mid-2000s demand shock. As interest rates stay below historic norms, expectations are shifting that these rates are here to stay. As a result, demand for real assets has increased, observed in booming equities markets in 2012. Demand for real estate is also increasing, with the median house price in Auckland recently exceeding the highs of 2007.

Costs of other housing inputs contribute to New Zealand’s affordability problem. Building materials cost more in New Zealand than neighbouring Australia. The structure of infrastructure financing, and the timing levies are to be paid, raises the market price for housing. Appeals under the Resource. Management Act, New Zealand’s land use regulation, can hold up developments and city planning for a decade or more in some cases. Time is money because development is risky…

Certainly, the affordability situation in New Zealand has, once again, started to deteriorate, with house prices in New Zealand’s two major markets – Auckland and Christchurch – rising strongly over the past two years (see next chart).

In late 2009, the Reserve Bank of New Zealand dropped the official cash rate to just 2.5%, where it has remained ever since. In turn, the discount variable mortgage rate has fallen to just 5.45%, which has fueled a sharp rise in mortgage finance commitments and house prices (see below charts)

At the same time as credit demand has been rising, the supply situation in New Zealand has also deteriorated. The February 2011 Canterbury earthquakes wiped‑out more than 10,000 homes in Christchurch, New Zealand’s second largest city, adding to the already tight housing supply.

Meanwhile, in New Zealand’s largest city – Auckland – the Council has moved to tighten the city’s already highly restrictive urban growth boundary (called the “Metropolitan Urban Limit” or MUL) into an even tighter “Rural Urban Boundary” that would effectively ban development outside of the rural-urban line and limit the area in which development could take place (see here and here for details).

The Productivity Commission’s Final Report into housing affordability, released last year, was scathing of land-use planning in New Zealand, citing a body of evidence showing that strict policies of urban containment and slow development approval times had adversely affected the rate of new home construction and housing affordability in New Zealand.

In particular, the Productivity Commission’s Report noted that the land value of housing had risen significantly, particularly in Auckland, with land-use constraints a key driver of this escalation (see next chart).

Moreover, the Productivity Commission report showed that the cost of new housing blocks had escalated in real terms, particularly in Auckland:

And that the land price escalation has occurred at the same time as the number of sections sold has plummeted:

The release of the Demographia Survey on Monday appears to have brought New Zealand’s housing affordability problems into the limelight.

Yesterday, in response to the study, the New Zealand Prime Minister announced a reshuffle of Cabinet, assigning Nick Smith to housing in an attempt to improve affordability. The Government has also threatened to take planning control from local councils if they do not improve the supply situation, with the Auckland Council, in particular, in its sites.

For its part, the Auckland Council is holding firm to its Plan to tighten the city’s growth boundary, stating that it doesn’t “agree with the unplanned wholesale release of land which is going to cost the ratepayers a fortune to service”.

Meanwhile, the Opposition Labour Party has promissed to build 100,000 basic homes for first-home buyers, focusing on Auckland, over 10 years, in order to relieve the supply situation and improve affordability.

It looks like housing affordability is, once again, gearing up as a hot political issue in New Zealand.

This piece first appeared at Macro Business.

Trials, Tribulations and Middle Class Protest in Christchurch, New Zealand

Wendell Cox — Mon, 06 Feb 2012 11:10:07 -0500

It has been a tough year and a half in Christchurch. Christchurch is the largest urban area South Island and second in size in New Zealand only to Auckland. On September 4, 2010, Christchurch was hit by a 7.1 magnitude earthquake, stronger than the 7.0 magnitude earthquake that with its aftershocks killed 300,000 people in Haiti in 2010. To the great fortune of Christchurch, there were no fatalities from the September quake.

In Christchurch, the earthquakes just kept coming and the luck ran out. A major aftershock nearly a year ago (February 22, 2011) registered 6.3, but did much more damage to buildings and infrastructure weakened by the September 2010 quake. A total of 184 people lost their lives, with more than one-half of the victims in the Canterbury Television (CTV) building (photo), which collapsed. Many of the victims in the building were foreign students. The area's tallest building, the 23-story Grand Chancellor Hotel (photo) was condemned and demolition is underway. Another major hotel, the Crowne Plaza, was too damaged to be repaired and will be demolished. A number of heritage buildings were also condemned and have either been demolished or will be, such as the Manchester Courts (photo), built more than 105 years ago and the Christchurch Press building (photos: before and after), which housed the city's daily newspaper.

The city's fabled Christ Church Cathedral (Anglican/Episcopal) was badly damaged (photos: before and after). The damage was ecumenical, with the Catholic Cathedral of the Blessed Sacrament also suffering serious damage (photos: before and after). Strong aftershocks in June and December of 2011 did additional damage. Much of the central business district was declared a "red zone," off limits except for special permission (red zone map). Finally, the disasters have been a serious enough blow to the nation to cause postponement the 2011 census to 2013.

For many of the survivors, the earthquakes were just the beginning. In the eastern part of the urban area, toward the Pacific Ocean, streets, houses and commercial buildings were undermined by liquefaction. New Zealand Prime Minister John Key said that 10,000 homes would need to be condemned. Some neighborhoods will not be rebuilt because of potential future liquefaction.

In the meantime, there has been growing dissatisfaction with the area's largest municipality (local government authority), the city of Christchurch. Replacement housing consents have been slow in coming and far slower than in neighboring suburban municipalities. This has caused considerable concern for households needing to move and rebuild.

Then, the city council narrowly approved a 15 percent, $68,000 salary increase ($56,000 US) for the city council chief executive (city manager) Tony Marryatt. The pay raise ignited the unusual phenomenon of an everyday citizen's protest movement. Marryatt initially defended the pay raise to $540,000 ($450,000 US) claiming he would be paid the market rate. As the debate intensified, Marryatt subsequently decided to decline the pay raise. That was not enough for the protesters, who include homeowners, business owners, members of the clergy and an array of citizens. Protesters demanded that Marryatt resign, that Mayor Bob Parker resign and that the national government schedule new elections.

For his part, Mayor Parker's television interview doublespeak characterizing the $68,000 as "not a pay rise" and then mumbling on about "paying the market rate," won him no friends. In the same interview, protest leader, the Reverend Mike Coleman questioned the council executive's travel for golfing outings to North Island and travel to Australia's resort Gold Coast. Coleman was particularly critical of Marryatt's not having interrupted his Gold Coast vacation to return to Christchurch after the December aftershocks.

On Wednesday, February 1, an estimated 4,000 people (according to the police) gathered in Christchurch at a rally to press their demands. A television report called the "most poignant moment" a speech by firefighter Kelvin Hampton, who told of having to perform a double amputation with "a hacksaw and a knife" above the knee of a victim. Hampton noted the irony that his annual salary was less than the salary increase for the council executive.

A protest committee released an open letter to Dr. Nick Smith, the Minister for Local Government calling for the national government to:

Call for mid-term (unscheduled) elections for city council and mayor
"to impress on our council to develop a process that will address the issues around the council holding up the rebuild of Christchurch. This will include how and when to fast-track land-zoning changes, sub-divisions and other consents in an open and transparent way, while ensuring that the suitability of the land and the safety of the buildings is assured."

The protest committee also called upon Mayor Parker and sitting councilors to "commit to transparency and accountability to the people they were elected to serve in the lead up to new elections."

TVNZ highlighted the uniqueness of the protest, running a feature on Andrea Cummings, who had never participated in such a protest before. She and her husband run a small business in a hard hit neighborhood
of east Christchurch. Like Ms. Cummings, most of the attendees had not protested before, though one lady indicated that she had participated in Viet Nam war protests in college.

Where it goes from here cannot be said. Mayor Parker remains confidently in charge, with the council executive by his side. And, the protesters are determined to keep up the fight. Christchurch may never have seen such a thing before.

New Zealand Leader Focuses on Association between High House Prices and Growth Management

Wendell Cox — Sun, 28 Aug 2011 12:27:43 -0400

ACT Party leader Donald Brash, who served from 1988 to 2002 as the Governor of the Reserve Bank of New Zealand (similar in function to the Federal Reserve Board) has noted the poor housing affordability in New Zealand and its connection to growth management policies (called by various names, such as "smart growth," "growth management," "compact cities," "densification" "prescriptive land use regulation" and "urban consolidation").

In an August 25 speech Brash said:

"It is impossible to avoid the conclusion that the interaction of the RMA, the Local Government Act and local government staff all over the country has produced a major obstacle to improved living standards.

One of the ways this has happened is through the way in which this interaction has pushed the price of housing well beyond the reach of far too many New Zealanders – or more accurately, has pushed the price of residential land well beyond the reach of far too many New Zealanders.

We know, from the annual surveys undertaken by the Demographia organisation, that housing in our major cities is now among the most expensive in the world, relative to household incomes. And why? In large part because too many local governments have quite deliberately limited the supply of residential land.

Arthur Grimes, now chairman of the Reserve Bank, found that the effect of the Metropolitan Urban Limit imposed by the Auckland Regional Council had increased the price of land just inside that Limit by some 10 times compared with the price of land just outside the Limit.

This is absolutely nuts, in a situation where New Zealand is one of the most under-populated countries in the world, and where Auckland is one of the most densely populated cities in the world – in terms of people per square kilometre, Auckland is more densely populated than Vancouver, Melbourne, Portland, Adelaide, Perth or Brisbane.

I’m delighted that one of the first projects of the newly-established Productivity Commission is to look into the affordability of housing."

The finding of a 10-times "across the urban growth boundary value" difference per acre in Auckland, is similar to findings in Portland, Oregon.

Dr. Brash had previously written (the "Median Multiple is a measure of housing affordability, with higher number indicating less affordable housing. It is the median house price divided by the median household income):

"... the one factor which clearly separates all of the urban areas with high Median Multiples from all those with low Median Multiples is the severity of the artificial restraints on the availability of land for residential building"