I am a property developer in Auckland city, I agree with your comments regarding the injustice of inflated house prices in New Zealand.

However freeing up land outside the city limits will not drop land prices. Land values outside the MUL will skyrocket once the land has development potential.

If a section is worth 300k inside the city limits, developers will sell the same section for 300k just across the border.

To suggest these new subdivisions will all be selling sections for 100k or house and land packages for 350-400k is incorrect.

If they did people would simply snap them up and on sell them at a later date for 300k per section.

The only real solution is to limit immigration and stop population growth. This is the only way to stop house prices rising. (a capital gains tax would also help!)

Importing wealth only makes the 'natives' of this country poorer. Our houses are still very cheap when buying with pounds, USD or yen.

Our quality of life in NZ centers on our green space and landscapes. Selling them to foreigners will deteriorate our quality of life not enhance it.

Extolling the virtues of capitalism then complaining about its inevitable effects is pointless.

Hi Bernard,
A good article and accurate. There is a very good example of this in Birkenhead where ARC through the Regional Growth Plan had allowed a high rise close by the Highbury Countdown Complex as being close to a Transport node of buses. The local politicians on NS City Council like Holman, Gillon, etc are against the proposal at a local level yet NSCC had signed up to the Regional Growth strategy of ARC.
The NZ Economy has "No show" of recovery while ever these draconian restrictions you alluded to are in place as the "Building Industry" is a huge employer of people across the board. While ever silly local politicians perpetually argue then I say the only remedy is to EMIGRATE, EMIGRATE, Emigrate to Australia where house prices are on the way up and not the level of left wing politics in Local Government as we have had in New Zealand. Also Council fees are a disgrace and deterrent for costs to build. Regards Ray Clarke.

Bernard,

Sometimes I disagree with you on what policy NZ requires to become more prosperous, but your expose on the MUL and the Auckland property market (I call it that because there is a taboo about calling out property investment back home) was right on the money. It is hypocritical for folks on both sides of the political spectrum to talk about improving home ownership rates without addressing the perverse incentives to keep land too tied up.

How do you rate the chances of Key et. al. listening to you? Or are there too many votes, both in the Nats base and voters they wooed in 2008, to risk any devaluation?

Now we know why in Australia, they can build (more quality) homes at cost of between $700 - $800 per square metre. Here in NZ, it's between $1200 and $1500 sq metre (This figure was given to us when we were looking at building by building inspector at Auckland City)

Owen McShane has been putting these figures out for years. Local councils are completely out of control, and have been for a long time. We are in a country moribund by bureaucracy and red tape at both central and local government level (we've only got a population of 4.13 million for Christ's sake): this is what any government and every government needs to take the knife to, and not just tinkering around the margins (Bill), but wholesale slashing.

[Credit where credit is due: Bill English was 'starting', and we're talking baby steps, to make the right sounds on Q & A on Sunday morning. But I reserve judgment until I see the program he announces on 20 May.]

@Grant. "If a section is worth 300k inside the city limits, developers will sell the same section for 300k just across the border."

No it won't. The increase in supply will pressure those prices downwards. Of course the new subdivisions won't sell at 100k but the old sub-divisions will find it a lot harder to maintain the 300k price.

" It's also good that you've noted the social cost of people being locked out of home ownership, I'm just baffled as to why people aren't up in arms about it, and why any government ever allowed this to happen."

Easy really, because those locked out as a group are much smaller than those who have made a killing of rising prices at their expense. Also, NZers tend to protest with their feet and leave rather than protest like French truck drivers.

Its not just the red tape, its the absolutely woeful levels of efficiency as well......and they have to recover the cost of that inefficiency somehow.

Somebody (the Govt) needs to go through the councils in NZ like a bad curry....one by one.

Just looked at a property in Whitianga. CV $330k. Rates all up $ 2,800. Ouch.

"Of the $93,750 in fees he was charged, $46,000 went to the Auckland City Council as a financial contribution. "

What did the developer receive in return for this?

@Anon

the developer got to use his section, and because the original house and the new one that is now built on the original houses outdoor area have no grounds, and due to this they new owners of both homes have no place to be other than indoors - unless they go to the park (reserve) and play on the free swings, and walk on the free grass that is cut for free, with the graffiti removed for free, and the toilets cleaned and maintained for free etc etc. guess what, all that is true but the reserves cost money to run, especially if the population now has no alternative (like their own back yard)

small price to pay

There are really two issues here. The ridiculously high compliance costs and the restrictions on land availability. They are only tangentely related. 40% for compliance is over the top but restricting land supply does have positive outcomes. Water and sewerage reticulation becomes increasingly expensive as cities sprawl outwards and existing suburbs are affected too, as more and more demands are placed on the network.

Building bog standard housing on 700m sections becomes increasingly expensive and unattractive the further from the centre you sprawl because of the service and traffic problems. Its far more economical to increase density in central suburbs but the RMA and district plans do not encourage this and developers are warry of changing the business model that has worked for them in the past.

Anti sprawl measures are good but there needs to be more densification of existing areas to take up the slack. And enough quality public spaces to preserve quality of life. District plans should accomodate this better.

President of property is right, cities can't grow forever. High land prices are a market force that leads to population growth in other areas...

Bernard

The big issue here is that council charges put a disproportionately high cost on affordable housing but not necessarily on the price of mid or high end housing.

For example if I want to build a very basic 80m2 group housing type 3 bedroom home ($90,000 build cost) on the back section of an existing house, actual real costs to subdivide and develop the land excluding council fees will be about $15,000. But in Chch council fees to do the whole project will be at least $40,000. That's $40,000 out of a total of $145,000 cost - nearly 30%. Assume the undeveloped land was worth $70,000 then the total project cost is $215,000 and it's end value might be $260,000 so council costs make 15% of the end price.

However build a $350,000 on a $250,000 section (end price perhaps $650-700,000). Total fees are about the same maybe $5,000 more at most than the previous (maybe less as the development contributions tend to be higher in the cheaper areas than the more expensive ones in Chch). So total council costs are perhaps under 6% of the total cost.

On a $1.5m house council costs make up less than 3.5% of the cost (not much more than selling fees).

Cutting council fixed fees won't solve the situation of charging disproportionately high amounts on the construction of cheaper homes. The fees need to be charged more in proportion to the end cost of the house. At the moment, even in cheaper suburbs, there is more incentive to build fewer larger homes than more smaller homes because of these fees. So the cost of new homes is driven up. The fact is how many small budget houses are built in even the cheapest suburbs of ChCh like the first example I outlined? Virtually none. Most new homes in Linwood or Hornby subdivisions are $420,000 180m2 mid range houses.

Unlimited supply of land won't cure high section prices either. High oil prices have driven the cost of developing land up far faster than inflation (cost of crushed metal, asphalt, plastic piping, plus high copper prices). So on a $250,000(incl GST) section maybe $35,000 is the developers margin, maybe $70,000(plus GST) is the underlying land cost, $40,000(incl GST) council fees, $7,000(+GST) sales fees, $15,000 debt servicing, $60,000(+GST) actual costs.

Slashing council fees may cut 10% off the finished section price.

Cutting the cost of the underlying land (rezoning more land) will cut some, but how much?
On the outskirts of ChCh a 4ha block (current minimum size) will sell for at least $1m for use as a lifestyle block. (Smaller blocks 1 or 2ha that are already there sell for not much less). A 20ha rural block close to residential land in the north-west recently sold at $550,000 per hectare (rezoning possibly 10-20 years away). So even if this type of land was rezoned now and prices fell substantially say to $300,000 per hectare then underlying land cost would still be $30,000 per section, reducing the price of the finished sections maybe 15%.

So even if both council fees are cut and land is made available we would still have sections on the outskirts of ChCh at no less than say $175,000 (even reducing the sales fees, interest costs and margins proportionately). So unless you cut the standard of amenities provided as well then there is little chance of severely impacting on finished house prices.

Remember even if you reduced section prices by the $75,000 outlined above you would only cut the finished house price by about 10%, of which 2.2% will be lost to an increase in GST.

In places like Dunedin where there is no real shortage of land and virtually no council charges, sections prices in new subdivisions are not that much lower.

You can buy in a development finished a few years ago for around $100,000 (or an old section in an undesirable area for $30,000 for the bargain hunters). But in new developments you will still pay about $130-150,000.

Really the absolute minimum value a new section in a new street on a flat piece of land would be a total of:
$10,000 underlying land value (only possible in really rural areas)
$5,000 council fees (council would need to be very generous)
$35,000 actual costs (the most basic services only - no footpaths or curbs)
$5,000 debt servicing/holding cost
$5,000 selling/marketing fees
$15,000 margin (would need to be a large subdivision which is not likely in the type of areas this sort of development would be possible)
Plus GST at 15%
And the total is just short of $90,000.

This shows just how unrealistic it is to get quality subdivisions in the big cities at anything like $100,000 sections.

To make housing affordable, any reform needs to be targeted at bringing down costs in developing infill housing in existing areas.

Any changes however are not going to drive down house prices, as shaving more than 10% off the cost of the average new house would be a huge challenge.

Councils are too powerful. But they are just lagging in their adjustment to new realities. The power in councils was built over the term of the Labor govt enhanced by the establishment of the Dept of Housing and Building and given further impetus by the leaky buildings and the failure of the private consent processors.

As we enter a new era strong new leadership will emerge once the dust settles. Councils are elected and economics will force rates lower and red tape to loosen. I actually agree with POP here, new town centers are required. These could be located near transport hubs and have predetermined ultimate populations sizes so that they did not overflow onto productive land and result in to sort of urban sprawl that is so inefficient and reliant on cars.

As for prices I for one am not tempted to buy a Mount Eden Villa that I used to rent as a student when it was worth $240k for $750k. Housing has peaked, prices will correct. Lets leave that alone and get on with ensuring New Zealand has the sustainable economic future it can and should have.

If you could build quality 8 x 80sqm 3 bed apartments x 10 - 20 levels in the CBD and upgrade the CBD infrastructure with the money charged by the council it would mean 80 to 160 sections would not be required? This would go a long way to creating a vibrant city

GBM: Here's a twist on your post. Harry Triguboff ( Meriton Apartments - Aussie's biggest apartment builder) says 'apartments without parking will be the new alternative'. Why do you need a car, parked in the garage all week, if you can walk/public transport it to work efficiently? Just rent the sucker at the weekend if you need to, and the cheaper cost of the apartment & no car easily outweighs the cost of hiring the car! Makes the build cheaper, and hence sale price, as there's non of this digging big holes underneath the apartment block to deal with.

@ GBM Not smoking anything. My point, obscure perhaps, is that we have only just entered a new era. Over nine years councils became stronger and the bureaucracy entrenched. We should expect that real change will take as long.

@ Chris,

One way to shave huge cost off new houses is to make them much smaller. A 50 sqr meter house can probably be built for 60k without any difficulty. A smaller house requires a smaller section etc.

As a side issue re councils, who wouldn't like some openness around the contracts that Wilson and Tournament parking have with the councils?

Surely ratepayers deserve to know a bit more about how these contracts were awarded, what the terms are, and whether ratepayers are happy for those contracts to remain in place. I know that parking is necessary, but the tail should not wag the dog should it?

Aaron

For your viewing pleasure...

http://www.interest.co.nz/ratesblog/index.php/2010/02/22/securities-comm...

cheers
Bernard

Chris J
Many thanks for your contribution. Very interesting detail.
cheers
Bernard

Agree with many of the commentators that our beauracracy is out of control. The trend over the past 10 years have been spend, then tax to cover the bill. The most concerning thing is that the majority of expenditure has gone into back and middle office beauracracy, not productive expenditure. Helath care is a prime example of this. Just ask the front line doctors and nurses.
National needs to take the knife to this very aggressively. We will probably be very surprised that we can cut high chunks of fat off without any impairment in service, in fact it will probably improve. Just look at the higher paid career job ads to see how out of balance things are..most of the professional jobs over the last 5 years have been in he public sector, with tiles such as "Manager of Strategic Thinking" and "Manager of Community Feedback" etc. All absolute time-wasters. Then add the "consultants" on top of that, it is criminal.

Offical word is NZ now have more beuacrates that sheep. The only difference is that you can eat a sheep so it actually has some value. The again, you could possibly eat a beaucrate, but given their exclusive diets of bull-s**t, they probably would taste terrible.

Chirs_J
Good points!

Your suggestion that Development contributions could be charged on their build value is an interesting one.

However my preference is that contributions be tied to dwelling size. This then has the sound basis of tying contributions paid with average impact on infrastruture (there is no infrastructure-related basis for charged a cheaprer house less than a more expensive house). On an averaged basis a 2 bedroom 80 sq metre house will generate significantly less impact on infrastructure than a 5 bedroom 200 square metre house, as occupancy is the key factor that relates to wastewater, water, roading impacts.

So you could say that any house over 120 square metres pays the status quo, then there is say a 1 % discount for every 1 square metres smaller than that

So a 105 square metres house would get a 15% discount, an 80 square metre house a 40% discount etc.

What is clear is that a comprehensive approach is required. the problems won't be addressed if only one component is attacked.

So we need:

- Release of the MUL except in areas on the MUL edge that have exceptional ecological values
- Liberalisation of planning controls in existing urban areas, to allow more ready development of duplexes, small scaled cluster housing, low rise terrace housing and apartments (3 levels)
-Reform of development contributions
- More kick ass penalities for poor council performance in processing consents

I built a double carport in my back yard went through waitakere city council from the time I applied for building consent to getting cop took 9 months and cost me $1400 and that was 5 years ago.I thought they were a bad joke then and my opinon of them has'nt changed.

Opposing views from Aussie:

"Real Estate Institute of Australia president David Airey says the sector "cruised past" the global financial crisis, with younger buyers not afraid of high debt levels." According to News Limited journalist Anthony Keane, "Total housing debt is set to reach $1 trillion within a year. The figure itself is not a worry, but there is concern the pace of borrowing is exceeding household income growth."

Kris Sayce : "Not a worry! Is he mad? Nearly $1 trillion isn't a worry? Oh Lordy. We've heard it all now."

@MattinAuck

Can you give a couple of examples of those US markets without bubbles? Or a reference to where there are more details, I'd like to have a look.

James - Oh, for example Houston or Dallas. Popular , growing cities, limited housing bubbles and subsequent crashes

get rich on the internet make money at home.
http://twurl.nl/hdol4f

So the land tax proposal by the TWG was not a goer.
It would have been too low anyway to be acceptable to help release land.
What might just work would be an increasing 'betterment levy' on the difference between the present use value and the final value at market.
Just to make it work to release sites would be a low start level increasing year by year by 10% steps until it reached say 50% of the gain.
That would release enough land to lower market prices.

Bernard,

I have posted on this before but I will persist.

Noone from the 'planning restrictions in booming Auckland drive prices to unaffordable levels' camp has explained why the data suggests that the last decade's boom in property prices was across the board in NZ.
Rural prices and provincial town prices went up as much and in some cases more than in Auckland.
Easy credit is the villain.

@James

"It seems to me that the explanation needs to be something that changed in a number of countries around 2001. "

Two words 'Alan Greenspan'.

Though the situation is a little more complicated in NZ (as I see it).
Post 9/11, lord of the Rings etc. there was massive net migration into NZ, 45k net in 2002/2003.This kicked off the housing boom. People, especially investors, saw that there was a quick buck to be made and piled into housing.
Where Alan GS came into the mix was lowering interest rates post 9/11 (for far too long) to avoid recession in the US (All he did in reality was postpone and make it worse when it came). This flooded NZ banks with cheap money which gave the housing market an extra kick to sustain it for another couple of years.

The reality is that the main driver was lack of supply caused by the net migration boom, the other reasons just added accelerant to the fire.

Once the prices jumped up through lack of supply there was no coming down due to the stickiness in house prices. While it doesn't help people who want a house now, we just need prices to stay stable for 4-5 years (or even decline a small degree) so that inflation makes their real value a lot less. 4-5 years of 4% inflation combined with 5-10% decline would make proces 25-30% cheaper in real terms.

What you missed expat was that Auckland's prices boomed in the 90s relative to the rest of NZ, so provincial NZ did a catchup in the 2000s boom.

James "“ Oh, for example Houston or Dallas. Popular , growing cities, limited housing bubbles and subsequent crashes

And unfortunately that confound of there being considerably tighter lending criteria in Texas than other states during the bubble years of the early to mid 2000's gets ignored again and again and again.

Maybe the Growth Lobby chooses to ignore that irritating little factoid, coz it will cause Cognitive Dissonance for the "Housing Regulations caused the bubble" mindset.

A couple of relevant links
http://www.dallasfed.org/research/swe/1995/swe9503a.pdf
This link gives a view of how the banks in Texas were probably still feeling "once bitten twice shy" in the mid 2000's. Have a read about the boom in the late 80's cheap and easy credit galore then.

Never mind that people in Texas subsequently found it hard to get subprime loans in the mid 2000's when people in California found it as easy as pie. Must have been those planning regulations... Or maybe the Texas bankers had a memory of having been burnt recently so didn't want to play with that fire.

http://baselinescenario.com/2009/08/18/vermont-texas-and-subprime-loans/

which points to a Wall Street Journal article

http://online.wsj.com/article/SB125054188939938015.html

Yeah, of course every mongrel and his dog is cutting a margin out of house building, but consider this, just how much productive land do you allocate to housing, and what percentage of population is to much?
Also remember that every new mortgage is written into existance as debt book entry, becoming part of tier 1 capital valued at current market value, is then under current international banking regulations handed down by BIS, allowed to expand those reserves as further created credit, leaving it up to the prudence of the lending institution as to just what expansion ratio that might be provided they can keep their customers "confidence" in their abilities to cover their liabilities.
Thus ever increasing mega cities have become unsustainable sinkwells of debt that have led their nations down the plug hole.

Dont believe me about new mortgages being written into existance as a debt book entry, observe my question and reply from Bill English;

9. Could you please tell me if in New Zealand, a "new" mortgage at issuance, before it becomes tradable, is loaned to a borrower by a registered bank, is that mortgage created as a debt book entry account, not anyone's existing savings, but an electronic debt book entry creating "new money"?

The creation of a new residential mortgage will generally result in new money (bank deposits) being created. The bank grants a new loan to a purchaser, who uses the cash to buy property from a vendor. The vendor then may spend or save the proceeds boosting deposits in the financial system.

the full version is here
http://www.interest.co.nz/ratesblog/index.php/2010/02/12/top-10-at-10-nz...

Time you house traders opened your eyes to what goes on behind the diplomatic curtain.

@Gibber

Thanks for the info and the links.

The young and working age native kiwis have already voted with their feet - there are very few left and those who are left talk of nothing else but how to get off these islands... Who will be left?
1) The wrinkly landlords, slumlords really
2) Immigrants mainly from China and India who have much lower expectations about what is the 'good life' than westerners.
Group 2 will be renting from group 1, as at 30K or 40K per year there is no way they can buy a 600K or 700K house in AKL.
Very little money will go into the state coffers, and the jobsworths will have to lose their do-nothing sinecures at some point sooner than later... what a shame we don't have a government which serves the people, they only serve themselves and the elites... but it cannot last long...

Try this: http://finance.yahoo.com/news/10-Cities-for-Real-Estate-usnews-375742734...

9. Fort Worth/Arlington, Texas: In recent years, home prices in the Fort Worth and Arlington, Texas, area have also grown increasingly undervalued when compared with longer-term averages. The area's price-to-income ratio fell from 3.95 in the fourth quarter of 2005 to 1.89 through the third quarter of 2009. Compared with an average price-to-income ratio of 2.02 for the 15 years before 2003, house prices in the Fort Worth/Arlington area are now relatively undervalued. And with a labor market that is projected to perform better than the national average, home prices in this region are expected to hit bottom in 2011 and begin moving higher, according to Moody's Economy.com.

Why are houses cheaper there? Land is called dirt in Texas. As in dirt poor. It is cheap and plentiful and flat. They do have tornados and snakes.

Here there is a vast amount of land of very low usefulness. It is suitable for sheep farming or forestry. There is no reason to ration its use. The council system works like a sort of legalised corruption whereby the bureaucratic process comes first.

Come on New Zealand, we can do better than this.

For those common taters wondering why, oh why Council rate and fee increases seem - shall we say - a tad excessive, point yo' Browser of Choice at the legislation site, call up the Local Government Act 2002, and read section 3.

For those disinclined to be IP logged by Big Gummint, here's the money quote from the aforesaid section: 3(Purpose):

d) provides for local authorities to play a broad role in promoting the social, economic, environmental, and cultural well-being of their communities, taking a sustainable development approach.

Now, ponder what conceivable expense cannot be fitted into one of those 'Four Well-beings'.

None, right?

I think the French expression for this is 'carte blanche', but then y'all may care to take this with a grain of salt: I convulsed an entire language class back in the day, as I conveyed the thought that my brother and I bunked, with the halting French sentence 'I sleep on top of my brother'.

And if anyone is thinking aboot breaking out the torches and pitchforks and having at the sorry excuse for a politician who got That wording past the House, save yer spleen. It was Sandra Lee, and she ain't there any mo'.

But the Unintended Consequences roll right along......

"Figures released by one developer reveal almost 40 per cent of the $250,000 cost of building a pair of two-bedroom units in Auckland went on a staggering array of bureaucratic fees, consents and permits.

The anonymous developer, who builds in Auckland suburbs with housing shortages, said the fees were blocking new low-cost housing projects.

Of the $93,750 in fees he was charged, $46,000 went to the Auckland City Council as a financial contribution. The resource consent cost $23,000 and an ACC consent, $8500. Water connection was $8300 and an electricity connection fee $5500. Other fees were paid for a right of way consent charge and vehicle crossing permit."

So lets put this down to basics.
$93K is about the salary of 1 council bureaucrat on the ave wage working for 2 yrs processing 1 application....
This is rediculus even assuming many off the charges are actual physical and the salaries are higher.
Or put another way (tongue in cheek) is this why the council bureaucracy is so over bloated and consents take so long...1 bureaucrat per application and the applications take 6 to 12 months to process.?

Gibber said:

"And unfortunately that confound of there being considerably tighter lending criteria in Texas than other states during the bubble years of the early to mid 2000's gets ignored again and again and again.

Maybe the Growth Lobby chooses to ignore that irritating little factoid, coz it will cause Cognitive Dissonance for the "Housing Regulations caused the bubble" mindset."

Interesting point, I wasn't aware of that. I DO still think that planning regulaiotns are playing a big part though (although I think Demographia exaggerate the impact)
I'm pretty convinced its a combination of supply and demand side factors