|
 Housing
affordability is shaping up as a defining political issue -
probably an election issue in 2014. The problem is that
housing costs in Auckland in particular are rising so rapidly
that many low income families are being locked out of home
ownership. While the reasons are complex, a major burden of
the responsibility must lie with central government.
Over
the years, governments have committed the country to smart
growth, a planning ideology that is part of the United Nations
sustainable development agenda. Smart growth restricts housing
development to within urban boundaries, and while some local
authorities have only paid lip service to the concept,
Auckland has embraced it.
Within the Auckland city boundary the average price of a
section is 60 percent of the cost of a new home, compared with
40 percent around the rest of the country. Not only that, but
outside the metropolitan urban limit, land costs only 12
percent of that inside.[1]
The
Resource Management Act has contributed to the problem as
well. Introduced as “enabling” legislation to replace
prescriptive town and country planning laws, the RMA has been
used successfully by opponents to delay progress on
developments such as subdivisions.
Then
there is the escalating cost of government regulation.
Whenever a government tries to show that it is resolving a
problem, it over-regulates. The restrictions that have been
imposed on the building industry as a result of leaky
buildings, the earthquakes, and energy efficiency concerns are
a case in point – taken together, they have significantly
forced up the cost of housing.
In
addition, the regulation of builders - one of the law changes
to emerge from the mix - has had the effect of driving
tradesmen out of the industry and out of the country, rather
than having to go through the hassle of registration. This is
forcing up the cost of labour as well, creating a double
whammy for low income families aspiring to build their own
home.
One
of the biggest housing cost increases arose as a result of
changes to the Local Government Act that were made by the
Labour Government in 2002, which allowed councils to impose a
new tax onto developers. Ostensibly to recover the cost of
providing water, sewerage, footpaths, roading and other
services to new subdivisions, councils were meant to offset
these tax gains by reducing rates. The problem is that most
forgot that side of the equation, viewing development
contribution fees as an easy way to generate extra income.
This
week’s NZCPR Guest Commentator, investment analyst and
former councillor Frank Newman, has researched these issues
and quantified the impact of these central government costs on
the price of building a home:
“The
Resource Management Act has imposed significant costs and
lengthy delays on new developments. The Long Bay residential
project in Auckland is an example of a development “where
environmental factors were put ahead of people's housing
needs”. Planning for the estate began in about 1998 but work
did not start until 2011. From my experience as a councillor
on the Whangarei District Council I can say that delays
measured in years, rather than months, is not unusual.
“Here’s
a quick example to show how delays inflate property prices.
Let’s make three assumptions:
1.
An investor needs to make say 10% p.a. on their investment to
make it
worthwhile,
2. The all up cost to develop a section is $100,000, and
3. The time between buying and selling the section is one
year.
“Under
that scenario the developer would price the section at
$110,000.
“Change
the third assumption from one to 10 years then they would have
to sell the same section at $260,000 to achieve the same
annual return! In other words, reducing the consenting time
from 10 years to one year would reduce land prices by more
than half! Council staff and politicians (local and central)
simply do not understand the numbers. They need to if they are
going to be part of the solution rather than the problem.
“Reducing
excessive time delays along could reduce the land costs by
many tens of thousands of dollars. The simple fact is greenies
and iwi have used the RMA to advance their own agendas and
that has cost homeowners dearly.
“The Local Government Act 2002 gave councils the power to
impose development fees. The fees are nothing more than a new
tax on those building a new home. If Mr English were to repeal
the fees the cost of housing would fall by about 10%.”
Frank
mentions other government-controlled factors that are driving
up the cost of housing such as GST, which now adds 15 percent
to the price of a dwelling, and the registration of builders.
“In
addition building material costs have risen faster than wages.
This is not surprising given the new costs central government
has imposed on the business sector. The extra week’s holiday
added another 2% of company wage costs and holidays and other
paid entitlements like KiwiSaver add at least 10% to wage
costs; and the
nonsensical emissions trading scheme has increased fuel and
power prices. These costs hit building manufacturers hard
because they are energy, labour and transport intensive.” To
read the full article, please click HERE.
While
these factors have all contributed to the rising cost of
housing, saving also plays a major role in housing
affordability. Saving a deposit can be tough for those on low
incomes, especially as the prevailing culture is not as
aligned to saving as it once was. However, KiwiSaver now
provides a cost-effective pathway to first home ownership.
In
addition to the generous benefits of KiwiSaver, which include
an initial government contribution of $1040 and annual
payments of up to $520 - along with employer subsidies - first
home buyers are entitled to receive a special $5,000 bonus.
Those who register are entitled to a $1,000 a year government
grant for up to 5 years. For a working couple saving for the
deposit on their first home, that amounts to a $10,000
‘gift’ from the government, on top of all of the other
KiwiSaver benefits.
Last
year the government asked the Productivity Commission to
investigate the issue of housing affordability, and suggest
changes that would improve the affordability of housing and
remove impediments to home ownership.
The Commission found that tax advantages were not a key driver
of house price increases, as claimed by some. It found that
‘smart growth’ and ‘metropolitan urban limit’ planning
policies were having an adverse effect by restraining the
availability of land for housing and that council delays were
exacerbating the problem. The commission recommended that
councils and developers should work together to ensure the
availability of sections at prices that allow the building of
homes at affordable prices.[2]
Last
month Finance Minister Bill English responded to the
Productivity Commission’s suggestions with a plan that will
focus on four key areas: increasing land supply, reducing the
delays and costs of the Resource Management Act processes
associated with housing, improving the timely provision of
infrastructure to support new housing, and improving the
productivity in the construction sector.
Here
are a few practical steps Mr English could take to make
housing more affordable:
-
Immediately repeal development impact fees.
-
Reject the baseless notion that investment in housing is
taking money away from the productive sector. At $13 billion
and growing, KiwiSaver will soon provide a more than adequate
savings fund for investment into New Zealand’s productive
sector.
-
Reduce taxes so households have greater disposable income,
which by definition, would improve house affordability.
-
Undertake an urgent audit of the regulations and red tape
associated with the housing sector to bring land and building
costs down to affordable levels. In particular focus on
forcing local authorities to become more efficient.
In
response to the debate about housing affordability, Tony
Alexander, the Chief Economist of the BNZ, has come up with 19
reasons why housing costs in the Auckland area will keep on
rising! These include,
-
the population of
Auckland is growing at a faster rate than building
consents;
- those who have
been in temporary living arrangements are now looking to
buy;
-
increasing
construction costs;
- the shortage of
builders;
- the reticence of
banks to lend as freely for mortgages as they once did;
and
-
“Members of the
Opposition believe monetary fairies can make the exchange
rate settle permanently lower by forcing interest rate
cuts and printing money while letting inflation therefore
go up. Given the non-zero possibility that such
economically ignorant policies get introduced it is worth
getting inflation protection by investing more in property
– not less.”
He
also soundly condemns the idea that a capital gains tax –
the flagship housing policy of both Labour and the Greens -
would have any impact at all on improving housing
affordability, saying that there is absolutely no evidence to
support such claims.[3]
Those
who support
proposals by Labour and the Green’s to introduce a capital
gains tax seem to ignore the fact that there already is a
capital gains tax in place for those who trade property or
assets with the intention of making capital gains. Their
supporters also seem naive to think that the family home will
remain exempt in the long term. Any cash strapped government
in the future, could include the family home into the capital
gains tax regime with just a stroke of the pen. In other words
it places every New Zealand home-owner in an extremely
vulnerable position and reminds us of President Ronald
Reagan’s immortal saying, “The nine most terrifying words
in the English language are, I'm
from the government and I'm here to help.”
Meanwhile,
at what will be David Shearer’s last conference address as
leader of the Labour Party, he focussed on housing. In
addition to reaffirming a capital gains tax, he announced a
plan to force private landlords to comply with new insulation
and heating standards in their rental properties.
However
the major policy announcement was their plan to borrow up to
$2 billion to build 100,000 homes over a 10 year period. With
the biggest housing rebuild in New Zealand’s history already
underway in Christchurch, one wonders whether the Labour team
thought to ask where the builders are expected to come
from!
This
week’s poll asks: Do
you support Labour’s plan to borrow and build 100,000 new
homes?
Click here for poll >>>
FOOTNOTES:
1.Rodney Hide, City
planners should be told: don’t fence me in
2.Productivity Commission, Housing
Affordability
3.Tony Alexander, BNZ
Weekly Update
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