Home affordability has been in the news in recent weeks. The “problem” is a perennial political football, but things got a little more serious recently when the National Party released broad-brush details of their plan to deal with the issue. The Minister of Finance, Bill English, has correctly recognised that housing is becoming less affordable to low income earners – this is how they propose to deal with it:
- Increasing land supply.
- Reducing delays and costs of RMA processes associated with housing.
- Improving the timely provision of infrastructure to support new housing, and
- Improving productivity in the construction sector.
Mr English added. “Many of the changes that will make a difference lie with councils and the Government expects them to share the commitment to improving housing affordability”.
He’s right – councils are a significant cause of house price inflation, but so too is central government:
- The Resource Management Act has imposed huge costs and 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. The simple fact is greenies and iwi have used the RMA to advance their own agendas and that has imposed costs and delays that cost homeowners dearly:
- The Local Government Act 2004 (LGA) gave councils the power to impose development fees. The fees are nothing more than a new tax that has added tens of thousands of dollars to the cost of a new home. In my view the manner in which councils have introduced this development fee verges on the dishonest. For example, in the case of the Whangarei District Council the fees were “sold” to the public as shifting the cost of new infrastructure from ratepayers generally to developers specifically. However, when development fees were introduced, general rates were not reduced at all – to the Council it was a new income stream. The Council also intentionally made it virtually impossible for a ratepayer to contest the fairness of the new fee by introducing it under the Local Government Act which limits appeals to judicial review only. If Mr English were to repeal the fees the cost of building would fall by $25,000 in Auckland, and tens of thousands of dollars elsewhere.
- GST adds 15% to the cost of building. For some reason those who advocate the removal of GST on vegetables don’t seem to have the same regard for housing.
- 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 (which will increase again from 1 April next year) add at least 10% to wage costs; and the nonsensical emissions trading scheme has increased fuel and power prices. These costs hit building and manufacturers hard because they are energy, labour and transport intensive.
- Regulating the building industry via builder registration is also likely to add to labour costs (my guess is as much as $10,000 to 20,000 to an average home).
- New building standards have also increased building costs. According to one joinery supplier, double glazing alone has added about $6,000 to a small house lot of aluminium joinery.
- Council planners and greenies have restricted land supply by pursuing an ideology to restrict green-fields development. The objectors include activists group like the Environmental Defence Society (EDS) and the government’s very own Department of Conservation. The government should remove DoCs advocacy status, and prohibit objections to plans and consents by parties not directly affected, such as ideological groups like EDS.
In my view if these issues were addressed new housing would become much more affordable.
Mr English has gone some way to identifying the issues to be addressed, and for that he should be commended, but to make worthwhile gains the RMA and the Local Government Act need major reform, not just tinkering.
The other area not talked about much in the housing affordability debate is the fact household incomes have failed to keep pace with building cost inflation. In the last 50 years or so we have become a low income nation, relative to other countries. In part that’s because the taxman is taking more but there are also many more people on welfare. Housing would be more affordable for low income earners if more people went off welfare and into work. To its credit, the government is making some reforms in this area.
Also to Mr English’s credit he has dismissed Capital Gains Tax (CGT) as a solution. One only has to look to Australia to see that a CGT does not prevent house price inflation – if anything the “Mansion effect” will see more money put into private housing as it will be the only source of tax free investment.