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. In his article “Affordable Housing” he states:
“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
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.”
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!