What a load of rubbish, Hugh,.
A most bizarre piece. You begin by heaping praise on both Mr Barton, and Mr Hall, before ripping them to shreds. And the piece is full of greasing:

"The statement is simply juvenile drivel "“ and a falls well short of the usual high standards of New Zealand's leading daily newspaper."

Actually I think the Herald is full of garbage most of the time.

You state:
"As Keith Hall of the New Zealand Planning Institute quite rightly states, the causes of these "housing bubble problems" are wide - ranging"

Yet nowhere in your reports or statements do you acknowledge this. Most of your writing almost categorically states that planning regulation is the sole or overwhelmingly dominant cause of the housing bubble. I can't remember any of your writings mentioning the whole range of supply and demand side factors that influence housing affordability, as referred to in the article.

My point is this - I think you've made a valuable contribution, but you shoot yourself in the foot to some extent. By dismissing the opinions of others as quoted in this piece, by dismissing the wide range of factors beyond planning that contribute to housing costs, you do yourself a disservice as you present yourself as a rabib right wing ideologue, which undermines your credibility.

In a previous post I criticised the Shelter NSW report as coming from a left wing agenda, which one sidedly ignored the credible research that has indicated that planning regulation is a significant factor (amongst other factors) in housing costs. They seem to be coming from one extreme, and you from another, so that you are both almost identical in your blind ideological positions.

And I still haven't heard a good answer from you with regards to the fact that most of the so-called "Affordable" markets are in declining areas or inhospitable climates, where housing demand is low and often declining.

And Kate no you won't get Hugh admitting that the economies of cities and their desirablity is a stronger factor in relation to housing costs than planning regulation, because his message is consistently that planning regulation is to blame.

Something else that Hugh never mentions about Houston is that although they have been a fast growing city, much of the immigration to houston has been of the "low skill, low income" variety ie. a lot of legal and illegal hispanic immigrants. So although the city has been fast growing, the make up of the immigrants is less inflationary to the housing market than the generally higher skilled immigrant make up of cities like NYC and San Francisco.

Edmund - no none of the above invalidates the fact that housing in NZ is unaffordable.

However a very large part of the Demographia report's focus is that planning is the overwhelmingly dominant factor in high housing costs, and that as a result we need to open the floodgates to urban sprawl. Indeed this is the major focus of the report.

This is dangerous and misleading because planning, although an important factor, is only one of many factors involved, and people in power like Mr Heatley seem to be swayed by the simplistic arguments put forward in the report.

Building large family homes on the fringes of our cities doensn't make sense when:

1. Our population is ageing and baby boomers in centres like Auckland are likely to downsize en masse in the next 10 years into townhouses or apartments, or move to the country or the beach (of course this is a generalisation). A lot of existing family housing will be freed up as a result

2. The world faces a huge threat in relation to global warming and mass sprawl will only exacerbate that

3. And despite the temporary lull in petrol prices, prices are likely to rise again to high levels

Given all of the above, doesn't it make more sense to intensify residential development within our existing urban centres, and increase housing supply that way, rather than the sprawl on the urban margins that Hugh advocates?

Intensification doesn't have to mean 20 level apartment towers - we are talking here of medium density terrace housing and low scale apartments

Edmund - agree action is required, but we don't want dumb action like endless sprawl.
Development within cities needs to be freed up.
And the market correction will help too.
Matt

Robert - good points
In addition to Aus's high immigration, much fewer (proportionately) Aussies emmigrate compared to kiwis, so their net immigration gains are high

I will respond to comments Tuesday evening. Keep them rolling..........

Hugh Pavletich

Hugh - here is a question I look forward to an answer to...
Las Vegas has one of the most liberal planning regiemes in the States (refer Gyourko's wharton land use regulation index), so why is housing relatively unaffordable there?

One final point before I do something more productive and help the Nz economy:

Demographia focuses almost exclusively on the supply side of the equation, largely ignoirng demand.

1. Why is Winnipeg much more affordable than Vancouver? Surely a large reason is its a less desirable place, with much lower demand for housing. Less restrictive planning controls in a place like winnipeg are probably largely a result of the fact not many people want to move there and they want to encourage development DEMAND

2. Why are houses in the Auckland Grammar zone more expensive? A large part of the reason is the desirability of the school DEMAND

If you took a simplistic view you could say that housing will be affordable if supply responds to demand. Whilst theoretically true, in many developed cities there is no more room for new housing and higher density housing is politically unacceptable

CTNZ - great comments. Demographia gets plenty of press because people like simplistic descriptions and "solutions", people also love lists of things. ALso housing prices are a very topical issue.
I had some correspondence with some high end economists in the USA last year, most of them had never heard of the Demographia reports, and the reports get little credible media coverage in the USA.
I would imagine that is because the leading newspapers in the States are a bit more discerning than the media here. I mean the Herald is junk and will report any old stuff.

CTNZ

We seem to ignore the European experience, this site is interesting Bavaria is clean green like NZ but they realise unlimited sprawl is the enemy. Some of these developments are housing 80+ people per hectare (Auckland = 19, Flatbush (planned) = 23), also note how close some are to the centre of the cities! as they renew the city core from the inside not tack suburbs on the fringe.

I asked Hugh before why we persist on using the English terrace house model for medium density (vertical side by side) not the more user friendly horizontal partitioning of low rise apartments (common Bavarian format 3 by 3 with a common stairwell) and he didn't know/care which shows what an 'expert' he is.

Neven

Futher to RObert's comemnts.

Edward Glaeser, perhaps the preeiminent Economist in the US in relation to housing and urban development, is critical of the impact of zoning on house prices, as has been quoted in the Demographia report.

However, what the Demographia report doesn't tell you is that Glaeser favours greater development within cities rather than the urban sprawl Demographia advocate. In fact he has been quite critical of the sprawl of places like Houston. Read these two links:

http://greeneconomics.blogspot.com/2007/01/glaeser-on-urban-greeness.html

http://www.hks.harvard.edu/rappaport/downloads/policybriefs/greencities_...

Neven,

Thanks for that link! Having grown up in europe before emigrating to NZ, I KNOW what can, and is being done over there. What I really lament though is precisely your experience of asking an 'industry expert' like Hugh. After having had similarly blank stares from builders, architects and other trades people, I have given up a long time ago to try and get anyone to even look at ANY european (excluding british) architectural and planning or building knowledge. To make matters worse, the relatively short time span that people spend living in their house before selling and moving on again, compounds the problem. It causes a lot of people to think 'she'll be right mate'... let the next one (owner) sort it out.

I believe that NZ needs some clear nationally driven guidelines and strong incentives to think a lot more long term about housing. In essence, that's what people do in europe and that is a key driver in their decision making process. I don't believe this will happen as we are simply in a 'young' country. These things have taken centuries to develop in europe, so why would it happen here overnight?

Let me put Roberts "commuting costs' comments referencing a Brookings Report of som,e two years ago to the side - and I will respond to this when I get further information. "Transport" is not my particular area of expertise - but I do recall that it was subsequently found to be inaccurate by others.

I couldnt help thinking to myself as I was reading the comments - that it feels like one is talking to the orchestra on the Titanic. Talk about being distracted from the real issues!

It seems you are all completely oblivious to the significance of the housing bubbles - where California hit a Median Multiple of around 9 = burst - setting the stage for futher housing bubbles to burst and precipitating the Global Financial Crisis.

New Zealand housing too is currently going through a deflating housing bubble that hit about 6.3 Median Multiple and has since fallen to around 5.7.

These bubbles are massively destructive and I would suggest you all read up about California. Check out the latest California Association of Realtors Monthly Report, Dr Housing Bubble and patrick net for starters.

New Zealand with its small population has ample land for urban expansion - with just currently 0.70% of our land area urbanised. Refer my article 071111 Land Mythology on my website. Deer farming takes up more land area than our urban areas - yet I suspect our urban areas generate at least 80% or possibly 90% of our GDP. Why strangle them - and strangele our economy in the process?

Im all for urban consolidation - but not forced urban consolidation. There is absolutely no need for the latter with our small population. English visitors quite rightly laugh at us when we rabbit on about a shortage of land here.

Whats the point inflating our urban market house prices - and turning people in to "planning refugees" forcing them out to outlying rural towns and rural areas, taking rural land out of rural production. So these "refugees' can spend more on gas - supporting the oil companies?

By my calculations if we allowed normal urban expansion to happen - we would require one hundredth of one percent of our land area annually. We couldnt urbanise a further 0.50% of our land area over the next 50 years if we tried.

"Planners splatter" simply cannot be justified on economic, social or environmental grounds.

Matt - I note you stated you work in the development business. Surely you understand the importance of the relationship of property prices to the underlying incomes that support them And development ratios too. How about you read Performance Urban Planning article 080428 dealing with the pricing / productivity degradation of our construction industry - thanks to years of disruptive planning

Am I meant to apologise for suggesting that it might be a good idea, that policies are put in place to ensure that these current housing bubbles are dealt with effectively - and fiuther to this - ensure that they dont get underway again?

I would siggest you all go to my website and read "Getting performance urban planning in place" - so you get a broader underrstanding of why I think we need to get more performance thinking embedded in to the Local Government culture.

Hugh Pavletich
Performance Urban Planning

Hugh....agreed that most local bodies are a pain in the a**e to deal with but what about increased construction costs due to to esculating commodity prices? oops those prices have just fallen over the cliff.....

How many large margins have been pulled out of a new house build before it gets to the purchaser?

Hugh,

Quote:

"Deer farming takes up more land area than our urban areas - yet I suspect our urban areas generate at least 80% or possibly 90% of our GDP."

Where on earth do you get the ideas from to make those kind of comparisons? And couldn't you at least try to get some real facts/numbers behind the second part of the above statement instead of being just suspect?

Quote
"Transport" is not my particular area of expertise - but I do recall that it was subsequently found to be inaccurate by others"

Well, if transport isn't an integral part of performance urban planning (in a general sense of the words), then I don't know what planet you are on. The one I live on (NZ), and have grown up in (europe), the last time I looked, transport seemed to me as one of the key issues affecting every single person living in a city. Regardless of which 1 mill. + city in the world you go!

Oh well, at least I found a great new 'buddy'! What a shame I might not be able to afford the petrol one day soon to visit him regularly at his future auckland fringe suburbian home. Never mind, there is the fantastic rail system or bus he will use to pop on over and have a barbie and a beer at my place (close to auckland central)... and it would be much cheaper and faster anyway, so, she'll be right, mate.

We should be truly worried for the future of this country when the Government gives this Demographia garbage the respect that they are.

Well done guys, very interesting comments and I heartily agree with you on the limits and narrowness of the demographia research. I just have one question for Hugh. You wish to reduce the median multiple from 6 to 3 by freeing up more land for development. Your theory is that if we build cheaper housing at the fringes, it will drag the overall house price down. To get from 6 to 3 (assuming minimal wage growth) house prices will have to halve from where they are today.

Can you tell me roughly HOW MANY new houses you would need to build at the same time to create the level of oversupply that will have the effect of reducing overall house prices.

Do we have enough demand from people who will actually want to live in all these new cheap houses?

Here is excellent link about housing affordability survey in Poole, England. The first part is called the Core Strategy, and this document seeks to provide an overall strategic direction for the planning of Poole over a 20 year period. The list of docs on the link below is all the evidence which underpins the Core Strategy. http://consultation.limehouse.co.uk/poole/drafts/29/index.html -

and the background information.

http://www.boroughofpoole.com/go.php?structureID=U46406c5c3ecc3&ref=S472...

Thanks for reply Hugh, but I still don't see evidence more land supply will lower house prices. Supply-demand teory is fine, but it does not really work in housing market. Mainly because housing market is very speculative.
Housing demand has tripled since 2007, demand has droped drastically, yet houses have droped by some 6%.. Also increase in supply is pointless if there is no need for it. Single parents and big familly with small income will always be missed out. Simply increasing land supply without (financial) Local Authority input and wider strategy will not achive much

Got blocked again Interest Co Nz - can you check you Spam Box please?
Thank you
hugh Pavletich

"Vital few, and Trivial many". Hugh is just pointing out a vital factor, namely the cost of land, responsible for the current unaffordable house prices. I find Hugh is being overly criticised for pointing out the obvious. Many point out trivial reasons why land prices cannot be brought down or cheap land is unsuitable for public etc. The value of land in all old houses is grossly over-estimated by QV. Are we losing our common sense and fundamental abilities to solve basic problems? This is similar to our inability to do any arithmetic without a calculator these days. Modern life created too many complexities but also seem to have removed our basic ability to reason. I can't stop thinking philosophically when I read the critics of Hugh.

CTNZ - I am following up on the odd Brookings transport report as stated earlier.

Neven 911 - Lighten up on the cheap shots (yawn) and focus on the key issues - land supply - appropriate infrastructure financing - performance disciplines in Local Government. And on the subject of "sustainability - California aint. Its an unsustainable shambles.

Robert - these housing bubbles are unnecessary and hugely destructive in social and economic terms. It will take many years to restore affordability in this country. Read the article on my website dealing with the degradation of construction performance caused by poor quality urban planning.

As Sam P correctly states - the evidence is crystal clear with respect to the nature of the problems and what needs to be done to sort them out. I am most impressed with the New Zealand Governments initiatives these past few weeks.

Hugh Pavletich
Performance Urban Planning
www.PerformanceUrbanPlanning.org
Christchurch
New Zealand

Hugh

What "cheap shots"?. I thought I had thoroughly exposed your cheap shots (to ctnz "this is the new world", who do you think you are? a modern Cortes?) low cost Land Supply = Sprawl or cant you comprehend that? As for sustainability, can you give an example of your dream 200 m2 home on a 700m2 section that is?. What I have read here consists of unsubstantiated populist twaddle 'supported' by irrelevant numbers, the biggest fear I have is that politicians will take what you say seroiusly.

Neven

Hugh - really using the american model of large 235 sq. m houses on large lots is absurd
One of the reasons housing is unaffordable is because modern houses have got so much bigger
I live with my wife and two children in a 3 bedroom houses that is 120 sq. m - it is more than large enough for our needs
People can read recent research here which illustrates how unsustainable large houses in sprawling cities are:

http://www.mi.vt.edu/data/files/hpd%2019.1/ewing_article.pdf

Hugh

Here a good graphic for you Its the new world baby - party on dude"

Now tell me which economies are most at risk from high energy prices?

Neven

Would be nice to hear Bernard's view on this, or are you going to stay impartial Bernard?

I will get back to you guys regarding the commute / transport points in due course.

It is pleasing to see a vastly improved standard in the quality of responses.

Allen is suggesting that by increasing land supply - prices will not fall. Thats just plain wrong Allen. I dont know how much clearer the Demographia Surveys could be in illustrating that what you (and of all people Prof Bob Hargreaves of Massey) are suggesting is correct.

In mid North American urban markets they are supplying fringe lots for starter homes at the $US30,000 mark. Where are these pricing levels on the fringes of our major cities?

The reality is that Local Authorities are artificially creating "scarcity values" of one million / two million dollars plus per hectare on the fringes - which with monopoly margins, inappropriate infrastructure financing and degraded construction productivity performance thrown in - Kiwis are getting taken to the cleaners for fringe new housing and all new housing generally. Whats sustainable about that?

Strangling fringe land supply provides the foundation for bubbles to get underway. Are you guys aware of the sheer destructiveness of allowing these bubbles to get underway?

Hugh Pavletich

Hugh

I'm sorry but your contention that "strangling fringe land supply" was a significant contributor to the current global housing bubble is absurd.

Your contention that we should all aspire to live like Americans (5% of the worlds population that consume 25% of the worlds energy) is equally absurd, though I will admit it would appeal to those who seldom venture outside their own self-interest.

Your drawing parallels between urban living and "East German style concrete slab complex" is equally absurd, Been to Paris? The French happily live in 40m2 per occupant dwellings (US 100+m2), didn't see any East German style concrete slab complexes when I was there last (though Le Corbusier tried his best), I did see kids playing in the park in Florence (35/Hectare).

Sorry Matt for hijacking 'absurd', but it seems the most appropriate work for this thread

Neven

Hmm, living like Parisians ... in rented inner city shoebox apartments, dodging dog shit on the footpaths and eating bad steaks cooked by nth african immigrants being paid below minimum wages in the 'authentic' french cafes.

;)

Matt,

I was pointing out he has a valid view that isnt a million miles from the truth.

Certainly a view from outside the status quo, but perhaps some of those views might be worthwhile looking at. Or has the current system worked so well that we should just carry on ....

Kate - just a Private Plan Change from rural to urban on the fringes - and yippee more land becomes available on the fringes!!!

It would be much appreciated if you could advise readers how long this would take, the costs involved and the likelihood of success - if one applied to rezone land on the fringes of Auckland and Christchurch for example. Pegasus is a wonderful example - just one of many.

It appears to me you are a lawyer. Provided your firm is prepared t0 enter in to a contract with me gauranteeing that consents can be obtained within 12 months at a negotiated fixed cost fior fringe land - you have got a deal. Please contact me personally as quickly as possible so we can lock up a contract. I dont want to see those other greedy developers beating me on this one Kate.

Hugh Pavletich

It's very clear to me that Central Government must - as soon as possible - get the appropriate structures in place so that there is a "performance based relationship" with Local Government.

Hugh

"27 minutes is about average for larger cities" - you are a fraud Mr Pavletich, you are cherry picking statistics here, I can assure you that the commute from your ideal suburban home (200m2 on a 700m2 lot ) on the fringe of a large US city is not 27 minutes!
When bundled with the commute times from all the urban properties the average probably is, but I doubt an inner city property comes at your mystical affordability ratio.

This unfortunately is indicative of the poor quality of your opinions.

Sydney (in fact all Australian Cities) are hardly prototypes we should aspire to.

Neven

The link provided is to 2007 US Census data of average commute times for US metro areas. It appears both Natt and Neven have yet to realiize that employment is scattered throughout all metro areas and the central areas as a percentage of employment have been declining for decades.

Another matter they havent obviously thought through is that if households are paying just $140,000 for housing with a mortgage of say $120,000 - they have more of their disposable income available for further travel and recreational activities. In other words - they are nopt forced in to being "mortgage slaves".

Neven and Matt might like to consder setting up the "Bankers Welfare Society"!

its incredible the "excuses" people come up with in their attempts to justify inflated housing prices.

Hugh Pavletich

Kate - interesting points! Its more about Governments at the Local or State / National level having the capacity to cope. May I suggest you and other readers study the situations the Governments in California have found themselves in. The sad reality is that places such as California and the United Kingdom and Ireland for example have experienced serious political failure.

The two major problems are (a) the protectionists within the property industry and (b) bureaucracies that are allowed to get out of control.

With respect to the first point - you will note a couple of Auckland property guys poring their litle hearts out on the NBR website about the "dangers" (entertainment plus) of affordable housing and (b) Matthew Hootons article within the inside front cover of last Fridays NBR. When these two groups get their heads together - I refer to it as "the unholy alliance"! They are in it for themselves of course.

Hugh Pavletich

Lead us all back to the caves Neven!

Hugh Pavletich

The blog has served to expose lots of issues - all valid in certain respects. But, I agree with Hugh's identification of the two major problems - these really get to the core, or heart of the planning problem: property rights and governance.

Perhaps the subject of a new blog entry!

Neven - thankyou. Bear in mind that the major issue is creating the "artificial scarcity values" on the urban fringeh pump fringe lot prices up from the 30 to 40k to north of 200k. May I suggest you research carefully the sheer destructiveness of these housing bubbles - taking particular note of California, the UK and Ireland. Bear in mind we are at the very early stages of this "readjustment".

Kate - thank you for your usual sound comments. Before I follow up on the points you raise above - I still need to do considerable research on the important matter you bought up during January - in how best Central Government can get the appropriate "performance based relationship" with Local Government.

For those interested - they might like to go to the Christchurch City Council website to see the massive difficulties this organisation is having with respect to "performance". Have a close read of the latest Audit Report.

Hugh Pavletich

Hugh

[quote]Bear in mind that the major issue is creating the "artificial scarcity values" on the urban fringeh pump fringe lot prices up from the 30 to 40k to north of 200
[end quote]

This is not the issue at all unless you are on Planet Pavletich, I've posted links to data showing your beloved Houston is an energy intensive screw up, but you don't look.

NZ just spent 360 million building a toll road so everyone can spend an hour driving Auckland CBD to Warkworth (which is now your beloved city fringe) and its a screwup

You simply endlessly mindlessly repeating something does not make it true, unfortunately Dorothy this is not Oz

Neven

I'd like to post a link to a website, whos' author has made a big impact in my understanding of the Boom/bust cycle in Real estate.
http://www.fredharrison.org/
Fred Harrison has acurately called all the boom/ busts since 1979ish
In 2005 he published a book and predicted this current boom....and bust

He says it is the land component of real estate that is the cause of the cycle.
In a boom there is a tendancy for Developers and investers to "landbank".
Because the supply of land is incredibly "inelastic"... ( it can't move around like other commodities ,to balance demand )... , in a boom land prices go sky-high....

SO, in that regard Hugh is right.... it is the supply of land that has a big foundational buildup to a boom....
In the later stages , i suppose, Sentiment takes over and the mkt moves into a "crazy" phase.... It takes 18 yrs for this cycle to repeat.

Another point Fred raises is how the value of infrastructure investment is appropriated in the value of the land.
That is, the cost of infrastructure investment ends up benefiting landowners in the form of increased value of land.... Often this is a transfer of wealth from taxpayers to landowners.... This has a distortionary influence on the supply/demand dynamic of land..... and hence land values

This thread seems to be an argument between Nevan and Hugh.
The irony is that probably somewhere in the middle ( between their views) is the practical solution.

Neven makes some really good points about town planning .. and density living.
Auckland has been a real mess in that regard.... Infill housing.... Rows and rows of stucco units..... big traditional houses "squeezed" onto a small sections........yuk.
Town planning has alot to answer for..

Here is a link to an interesting site... about "building a village"..... very interesting in regards to town planning... (these ideas have been around for a long time)

http://villageforum.com/index.php?option=com_content&task=view&id=15&Ite...

Nevan..

It is not so much the fact that Fred called the bust correctly.... it is how he did it that made me sit up and take notice.

He wrote a book in the early 80s' called "The power in the land". Building on the research of others ( mainly Homer Hoyt and Henry George) he determined that there has been a real estate cycle that is about 18 yrs and has been running in USA and Britian since the 18th centuary.... and then came up with a probable cause of that cycle.

He found that the underlying cause was land.... ( especially the tax treatment of land)
The conclusions he reached , explain why housing is becoming increasingly more expensive... over long periods of time. There is more to it than opening up supply on the fringes at 2.5 times the medium household income.
........ Just wanted to point out that his book is not a "get rich " book.... It has nothing to do with North sea oil... and he is the ONLY one that I know of that has been able call the market so accurately for so long... AND this is as a consequense of his studies of the history , philosophy and economics of Land.

This discussion is complex like so many I've seen around economics, but it seems very worthwhile to have it and I've found the dynamics of the problem as described in this thread interesting and educational. I would to focus on some aspects of inflation and while I take the point that throttling land supply might lay a foundation for an inflationary bubble I welcome further discussion and critique on the following thoughts.

Anyone deriving wealth from the gain associated with, what could be, a passive asset like land and property might welcome inflation. My read on the matter is that New Zealand has derived most of its wealth from productive activity (not passive use) associated with assets, resulting in an economy that is renowned for it's strength in soft commodities. I think this is reflected in the 'intent rule' that IRD use to distinguish if a property is purely bought for profit at resale or not. I think it is being used beyond its original purpose perhaps and seems inappropriate and slack, as Bernard Hickey has highlighted in an article for The Herald, 'End the giant rental property tax break', August 24, 2008. Bernard identifies a range of compounding reasons for the recent inflationary property bubble, not least of which, as we all know, is the slackness associated with the 'intent rule'.

Back to the present 'intent rule', I have not found anything on it's original purpose. However going back to my point about how New Zealand has derived most of its wealth, I suggest it's original purpose was not only to distinguish those trading assets for a living, but to ensure that those taking on the risk of ownership of an asset as a primary source of income for themselves and others would, a) not be penalised for the risk of ownership of that asset (farm, forest, wood mill, etc.), especially as in some circumstances of failure or loss at resale they may have no way of loss adjusting in the future, and b) because having paid tax on income derived from the asset it would have seemed like being taxed twice if the capital gain was taxed at resale.

This may or may not be the case, but it might give some plausible reasoning behind the 'intent rule', a base from which to develop something more appropriate for the present day against the possible orginal intent and a more rational reason (beside simple vested interest) for the almost hysterical political reaction to anyone suggesting a general 'capital gains tax' (CGT) to resolve this problem. I suggest two possible solutions to the 'intent rule' issue:

1) Replace the intent rule with a 'primary income' rule. That is, if difference in asset (property) income (rental) and property debt funding is less than any other income, the asset (property) does not provide the primary source of income and the gain is taxable at resale. Unless, that gain is retained in a 'personal wealth trust' (PWT) which would be held by the trust and may only be used for similar investment until the PWT becomes the primary source of income. With some refinement in the detail (he said in humility) this might account for those purposefully using property investment over the long-term as a retirement fund. However, it might also deter those simply speculating in a hot market and who use their actual primary income to over-gear and inflate their purchasing power in pursuit of tradeable property. As Bernard points out (in article quoted above) these speculators are subsidised by the tax-payer, and more ironically, if not unjustly it seems, also their tenants' taxes - who are also paying their mortgages for them! This seems all the more ironic, if not just plain sad, that many 'mum and dad' property investors involved in this might also be lamenting the fact that their children have been deserting New Zealand at an increasing rate, again as Bernard highlights. It seems bit like 'economic cannibalism' to me.

2) Introduce a general 'capital gains tax'. Something that does not appear to have been widely and rationally discussed in my opinion. (Some arguments for and against are reported elsewhere.) Although other countries have CGT, but still have property affordability issues, this may not be a reason to dismiss it's possible use in New Zealand going forward given a changing context, where the balance of income generated seems to have shifted more toward passive rather than activity based usage of assets in New Zealand than may once have been the case. Introduction of a CGT could well address this and in re-balancing investment toward the productive economy also allow a more diverse shape of New Zealand's economy as a whole to emerge. This would lead to a more diverse and less risk prone export mix (more arrows in our quiver), which would also be reflected in more diverse personal investment portfolio's. Therefore portfolios need not be mainly property based - hence the reason for a more systematic long-term rather than temporary reduction of inflation drivers in the New Zealand property market if we did phase in CGT. (Family home/s exempt as they are now.)

Inflation drivers are many and complex, but inflation control is another topic for consideration and I have made a suggestion about a different inflation control system for New Zealand on the NZX website blog associated with David Skilling and Mark Weldon's "˜Swan Dive or Belly Flop' paper. I'd welcome your critique about that and the other suggestions made, it's entry 87.

Finally, we have to decide, do we really want lower property inflation? And, what 'we's' would answer what?

some further thoughts.

Quoting from the second sentence of Chris Barton's article, 'Home truths: Buying a home in New Zealand':-
 
"The reality, however, is far more complex."
 
If we recognise this, we cannot ignore other inflation driving issues and factors besides constrained land supply. There is little doubt this is a factor, however, to treat this as a mono-causal problem could be a great mistake and not deliver a solution, or ranges of solutions for progress and lead to other problems unnecessarily, and disappointment. 
 
Let me ask, if we listed the inflation drivers and factors that have led to poor home affordability, in New Zealand, how much impact as a percentage would you ascribe each one for reducing affordability?  
 
Let me now ask where the more widely considered costs and benefits lie for the solutions to these drivers?
 
Let me now ask, does it still seem there is only one valid answer to this problem?
 
Or, balanced against wider consideration of the full list of inflation drivers/factors and the costs and benefits to the whole economy (including the finite resources we call the environment and peoples lives) of these solutions, would it not seem that a non-simplistic multi-solution approach to the problem is warranted, that would include, but need not be limited to, deconstraining land supply?  An answer of yes, or maybe, then means we need to consider a wider range of causal factors and their appropriate solutions.

Matt - you are being very cheeky !

It is obvious that when the rest of us get the Local Government / housing issues sorted out - we need to get in place courses along the lines of "the differnce between night and day" for the stragglers struggling to understand the basics !

On a more serious note - I would very much appreciate assistance from readers (including Matt of course) with respect to the US infrastructure financing vehicles - Numicipal Utlity Districts - as touched on within an earlier comment.

Hugh Pavletich
Performance Urban Planning
www.PerformanceUrbanPlanning.org
Christchurch
New Zealand

FYI to all

Here's our measures of income to price multiples broken down by region and including the latest data. It's essentially the same data we use for our affordability indices but sliced in a different way.

http://www.interest.co.nz/HLA/house_price_to_income_ratio.asp

We welcome your perusal and suggestions.

cheers and thanks to Joey and David for this.

Bernard

Bernard - fascinating - thank you - so whilst Demographia is claiming a median multiple of 6.3 for NZ total, your numbers come out at 4.4. Apart from Queenstown lakes which is an exception a large number of home / unit owners live outside the area, the median multiple ranges from 2.8 to 5.9 - which is a much more representative sample than Demographias main urban areas. For example Wellington is 4.4 compared to Demographias 5.9... I understand the reasons the data would be different - but I think your methodology is much more robust and representative of the real world. Yes, we have some affordbility issues, but it's not as bad as Demographia likes to make out and with your predicted market correction, we can hit Hughs median multiple target without having to build hundreds more unneeded houses on what little buildable land we still have around our urban centres.

Does anyone, anywhere have some figures of houses that currently sit empty and are for sale? If such info were available and reliable, could it show that we do have already some spare housing stock available at reasonable prices very soon? All we need to do is wait for the vendors to drop their expectations or the banks forcing them to do just that...

CTNZ - this is an interesting article relating to housing shortage - http://www.stuff.co.nz/4851879a20975.html I agree with Eaqub, that there isn't a massive housing shortage and I'm interested to know who is predicting a significant rise in immigration (a rise substantial enough to affect the demand/supply of houses).

Strummer - if you go to www.bnz.co.nz and look at Tony Alexander's recent commentaries you will see that he has been consistently saying that a flood of expats will return boosting housing demand

Yes your demographia survey is helpfull in comparing other countries and has helped highlight the fact that NZ has become very unafordable, I agree with the 3.0 price, most of NZ will be within this by 2010 but it won't be because of a massive supply increase or easing of planning regulations. The sole reason housing will become affordable again is because negative returns has driven away all the artificial demand.

There will allways be areas that are above the affordable multiple because people are prepared to pay a premium for more desirable towns such as Nelson, Tauranga, Queenstown etc.. these areas attract a large retiree population who's income may be fairly low but have high net worth and are mortgage free.

I agree there hopefully won't be another bubble again banks and governments will not allow it to happen, they will learn from what has happened and regulate the taxes and lending practises around home ownership and investment.

Peoples preferences are going to be for smaller townhouses closer to amenities because of the demographic changes I mentioned before. You can't look back on history to see what future planning needs are going to be just because most people wanted a stand alone family house on a 1/4 acre section in the past does not mean thats what is going to be wanted in the future. Take a look at the future population projections by statistics NZ they show future demographics are going to be ALOT different to what they are now.

You can't ignore the fact there was a massive baby boom between 1946-1966 then a massive decline in birth rates after this. The effect of this means that there is going to be a huge influx of boomers retiring (starting 2011) The next generation coming through to replace all the baby boomers is actually SMALLER!! boomers have allready built all the family homes on 1/4 acre sections that will be needed. This will be the first time in history that a preceeding generation is smaller than the current one. Thats why urban planners are doing the right thing by planning ahead for this massive change, its not about saving land its about making sensible planning decisions based on the facts we have of future population needs.

Kieran and Matt - you both make interesting points in endeavouring to predict what peoples future needs might be - but this issue is much more serious than that. It doesnt appear to me that you are both adequately recognising the seriousness of these urban bubbles.

Its the artificial creation of land scarcities on the urban fringes that is the core problem that must be dealt with. By persisting in strangling land supply on the urban fringes - we are simply setting the stage for further bubbles to get underway in the future.

So the Governments focus must be on getting the appropriate regulatory mechanisms in place to (a) do away with these fringe artificial scarcity values and (b) get appropriate infrastructure debt dinancing arrangements in place.

As I have said repeatedly (talk about a scratched record!) normal markets should not exceed three times annual income and to ensure they dont exceed this - new stock (house and land packages) should be going on the fringes at 2.5.

As we move in this direction - over time the important development ratios for new fringe housing should move to 20% serviced section / 80% actual house construction.

Matt - My understanding is that you are employed in the development industry and you should understand the importance of these development ratios. You might like to inform readers just how badly they are out of whack in the Auckland region.

Hugh Pavletich

Matt - Many thanks for stating your role in the development / construction industry.

The most important point to recognise is that by openning up the fringes and doing away with those artificial scarcity values (which can ramp it up by a million dollars per hectare and a lot more) - all forms of urban development are helped.

Some are concerned that if the fringes are openned up - sprawl will take off. At urban densities of about 1900 people per square kilometer - you might be looking at say 20 to 30 square kilometres per annum nationally being required. About one hundredth of one percent of our total land area.

Bear in mind people need to live SOMEWHERE - and a Lincoln University Report in 2004 as I recall found that we werre burning up something like 375 square kilometres (largely of productive farmland) annually with lifestyle blocks - in large measure by urban refugees seeking cheaper land. The churn rate on these life sentence blocks (as I like to refer to them) is once every three years - as people get over the romance of it and tire of the inconvienience and commute costs.

May I suggest you compare the total and multi unit build rates in California and Texas. Go check out the United States National Association of Home Builders websites. Essentially - by strangling its urban markets - California has pretty much shut down all forms of residential development - whereas Texas is humming along still pretty well.

There really is an urgent need to get solid structural "nuts and bolts" research done in this country - instead of the superficial academic stuff we have been inflicted with over the years. I do hope the Government gets on to this before too long.

Hugh Pavletich

Hugh
I would like some further explanation please.
Your goal is to see starter housing on the urban fringes at 2.5 x median household income
I can't see how this will be at all realistic in Auckland
At an absolute minimum, 600 square metre sites on the urban fringe of Auckland would sell for $150,000 (they might sell for $75,000 on the edges of Christchurch, but not Auckland!). And don't tell me that unlimited land for development would mean they would sell for $50,000 - that would never happen, land owners would ration land and filter sections through to the market
A low end, low spec 200 square metre house would cost $240,000 to build (based on $1200 per square metre which is bottom of the heap in Auckland)
Already thats close to $400,000
And that ignores development contributions, professional fees etc etc
So even if we ignore the Council costs etc. which I know you want abolished, we are left with $400,000 houses. Thats still 5 or 6 times median income!!!!!!
I might be missing something, but I don't think so
So the urban fringe houses won't actually be that cheap, and we'll get ticky tacky, soulless surburbia spreading as far as the eye can see. An environment that would make Botany Downs seem beautiful and soulful!

Matt and Kieran - its very pleasing to see you both getting in to the "nuts and bolts" structural stuff - because thats exactly where the public discussion, research and political focus needs to go on these issues - with urgency.

Bear in mind that this is a wider issue than just housing - in that it is of crucial importance that the focus must be on getting much greater productivity performance in to our domestic economy, so that our export sector is able to be more internationally competitive as well.

To assist in this regard - we need to see a focus on improving the productivity / pricing performance of our residential (and by extension our commercial) property development / construction sector. Within an article on the Performance Urban Planning website - specificially 080428 "Urban Planning degrades housing productivity" iIillustrate the performance differences of three markets in the UK, NZ and an affordable US market.

The reality is that prescriptive urban planning seriously degrades the performance of the construcion sector. It will take many years to rectify this - but the work must start now.

We need to learn from history as well - and I would refer you to the paper on my website "Getting performance urban planning in place" - specifically the Chapter "We must learn from history" - where I outline with hyperlinks, the Bill Levitt story. I see Levitt as the "Father of Affordable Housing" and would urge you both and other readers too of course, to read this carefully.

In 1947 Levitt got new house / land packages in place for $US7,000 - and the young people buying these houses (with just the husband working - one income) had a household income of between $US2,300 and $US2,300 per annum.

The Annual Demographia Surveys illustrate how most mid North American markets are still achieving these performance standards. The Harvard University Median Multiple Tables (access left column Performance Urban Planning website) illustrate how most North American urban markets achieced these performance standards until recent times. This years Demographia Survey illustrates the situation in Australia as well.

So its very important to realize that Im not "talking theory" here. This is very much a case of learning from history - and very recent history at that. And dont you think its long overdue for policy and industry people in this country to get off their rear ends and visit selected affordable North American markets, to see how they manage to get affordable housing in place?

Those Auckland numbers you have provided Matt can in my view only be described as a disgrace - and illustrate I would hope the seriousness of the situation in New Zealand.

Hugh Pavletich

Kieran - just following up on a few of your points.

You might like to provide examples to readers where policies of forced urban consolidation (creating artificial land inflation on the fringes) have achieved affordable housing - in that new residential stock is being provided at around 2.5 to 3.0 times annual household income.

May I suggest you go to the latest Houston Association of Realtors Monthly Report for January. Go to www.har.com - then click Find a Home - then down right side Monthly Report. Be aware that Houston got in 48,000 new residential (all types) during 2008 - with its population of 5.6 million - thats a build rate of 8.57 per 1000 population. Note the number of existing stock sales through this period and the relationship to new builds / Note too - the sales volumes for existing stock compared with the REINZ numbers. In essense - we Kiwis flick existing houses to each other (well at least we did!) to get "wealthy (phony wealth actually) while affordable markets actually build real wealth instead.

The reaon I use the Houston Association of Realtors website is because (as I see it) it is the most professional realtors website ihn the world. The information is just so well set out.

About all we have done in New Zealand this century is flick our approximately 1.6 million houses to each other - inflating them from $300 billion to $640 billion (at the peak) and burdened households with about $60 - $70 billion of additional household debt in the process - much of it provided by Japanese housewives.

At one stage - in US dollar terms (when the Kiwi was stronger) our housing was worth more than Houstons - even though the Houston economy is in excess of three times the size of New Zealands!

Hgh Pavletich

All unaffordable locations were originally affordable when they were developed. The first owners of properties must have paid much less in terms of their income multiple. Hugh's crusade to free up land for making houses affordable is just a matter of coomon sense, fullstop.

Hugh
The development costs of a subdivision within existing urban boundry is half the cost of rezoned land on the fringes at $30-50,000/section compared to $60-80,000 the infrastructure is allready in place and less work is needed. Smaller townhouses flats, apartments are much cheaper to build than stand alone houses. this is the answer to providing affordable housing.

Maybe you can explain how new house and land packages can be supplied for $150,000 on urban fringes? and also why do you want new houses cheaper than existing ?

NZ has built 25,000 new units on average each year since 2000 thats 6.25 per 1000 more than what the population increase of 35,000 each year needs. This equates to 1.4 new dwellings per person. Housing supply is not a problem.

In terms of productivity thats exactly the reason why we need to divert what savings we have away from housing and into the capital market so they can use it to create jobs and increase our economic growth. The only way you are going to do that is change the tax laws so investment in shares and bonds have higher returns than property, This would benifit our economy and reduce the chances of another property bubble.

Current tax laws encorouge capital gain (not taxed) over rental yeild (taxed) also losses on rental investments can be offset against personal income whereas company losses cannot be this gives a massive advantage to property investment over shares but the advantage should be the other way around.

I happend to be briefly present at local council public meeting, on which council proposed rural zoning change to allow subdivisions down to 300m2, as part of their Urban Growt Strategy and then developing land and creating new local centres, (on fringes, as some like to say). there was about 50 people, mostly locals, and every single one of them opposed this, in my opinion stupid idea, even thou they could make profit by selling part of their land.
When asked by one land owner, what if we don't want to sell our land , councilor replied: "Developers will purchase your properties, if you refuse we can have land owners forced to sell by legal intervention"
People were shocked with this bullying response, but then I guess some delighted developers will call it "heartening"

NZ doesn't have forced urban consolidation, fringe land is available for development as needed so not quite sure why you keep saying that. As I have said before inflated prices are because of the property investment bubble not urban consolidation.

In 2001 affordable housing was available everywhere in NZ median household income was $40,000 house prices were $170,000 and you could buy a section for $80,000 now that the bubble has burst housing will be affordable again.

The social, economic, and enviromental benifits of urban consolidation are many: cheaper housing, less commuting, closer to community services to name a few.

As I have also said before its no good looking at the proportiion of the population who want to live in apartments etc from the past, Its what future needs are going to be that matters.

What part of 'performance' planning is subdividing urban fringe land and building more suburbs, a monkey could do that. Althoud would a monket have Hugh's persistence at constantly repeating the same point?

Why would anyone want to live in Houston rather than Munich?

While I think Hugh's urban planning is anything but performance, more like Perfromance Urban Lobbying.

hugh, why don't you switch your obvious energy into developing some decent mid-density urban planning?

Kate, it's UHCC
http://www.uhcc.govt.nz/page/904/MaymornStructurePlan.boss

Strummer - it would take many years to work through - in no small measure thanks to the performance degradation of our construction industry.

Hugh Pavletich

Hugh - given that most regional councils around the country are firmly committed to urban consolidation, how do you expect them to change?
are you aiming for a central govenrment mandate for all Councils to relinquish urban fences?
I would like to know your strategy because without a central government mandate I can't see any of the regional councils turning their backs on urban consolidation
Or are you hoping that regional councils will eventually come around to your thinking? (that will never happen)

After Demographia released their 2009 International Housing Affordability Survey, the New Zealand Manufacturers and Exporters Association (NZMEA) called for more discussion on the introduction of capital gains tax. (See the NZMEA website.) This also supported recommendations made in the Treasury and Inland Revenue ministerial briefings. The suggestion was rejected and in discussing this in his 29 January BNZ 'Weekly Overview' Tony Alexander gave support to Hugh's argument by stating, "The only answer to improving housing affordability in New Zealand is opening up land supply and slashing compliance costs." In addition reminding us, "...if a tax on investment property was the answer to housing affordability, Australia, which has such a tax, would not be suffering an even worse housing affordability and availability problem than New Zealand."

"opening up land supply and slashing compliance costs," could help alleviate the problem. And UK, as another example, has also suffered issues with housing affordability with a variety of property taxation in place. (Although, see my first input to this thread 12/02/09 regarding a probable positive systematic effect on inflation if a gains tax was more effective, in New Zealand. It's good to have useful reference cases, but let's not forget New Zealand is our context.)

However do these two considerations mean we should totally ignore other causative factors to this problem, in New Zealand?

I am asking this, and repeating my previous questions, as I read this in Tony Alexander's latest 'Weekly Overview':

"Unlike banks overseas that lost sight of the need to make sure they could get money back after lending it, here in NZ losses attached to home loan lending have traditionally been extremely low "“ and remain so. Lending to business is a different thing however "“ and that is why new entrants into the banking sector in New Zealand since the early 1990s have always targeted the housing market and not businesses." [Most of them seem to have been quite effective at this.]

The inequitable approach to taxation in New Zealand, meaning the burden is carried mainly by income and corporate tax; not only leads to the subsidisation of "rental property investors", as highlighted by Bernard Hickey, The Herald, "˜End the giant rental property tax break', August 24, 2008 - but it also subsidises property developers and banks. Not because they don't pay tax on their trading gains, but because their property investor clients are not taxed effectively. (aka 'The Intent Rule') So should we be surprised if property developers and banks do not want to see a well rounded discussion on housing affordability including a more equitable taxation system to include an effective capital gains tax? This would not only lead to better balancing of investment flows (more toward productive activity) it would, help, reduce relative property inflation, but certainly mean income and corporate tax could be lower - and with full exemption on personal homes, would this be so bad?

To reiterate then, should we totally ignore other causative factors to this problem, in New Zealand? I repeat the questions I listed in my second input, 12/02/09?

To leave other causative factors unaddressed, to my mind, weakens the credibility of the primarily mono-causal solution being proposed here.

Kieran, re. your 23/02/09 input - well said, it's also about money supply, and over supply and confidence in that.

"....new entrants into the banking sector in New Zealand since the early 1990s have always targeted the housing market and not businesses."

I would like to see a higher proportion of New Zealanders owning property rather than renting as this has better social and economic benifits for everybody. To do this we need to reduce the number of landlords (state included) and encourage more property ownership of the occupants. We don't have a problem in NZ of a lack of property investors and landlords(we never will) the problem is too many!! a capital gains tax while not the sole answer by itself is at least a good first step in encouraging more investment in capital markets instead.

I don't give much creedence to Tony Alexander he is one of the worst economists in NZ. Yes we need to supply enough appropriate (not fringe land) housing, but to focus only on the supply side and do nothing about the huge artificial demand from investors will do nothing.

Landlords are not the ones who build new houses they simply buy existing stock. Its owner/occupants who build new houses to live in themselves (not as an investment) they are the ones who supply new housing stock not Lanlords. Capital gains tax etc.. would reduce speculators who don't contribute anything to supply but simply drive existing house prices up. If the artificial demand from them was eliminated prices would go down, helping the ones who do supply new housing.

Les Rudd - it would appear with respect you misunderstood what I said. im talking about solutioms here - and where I think the government focus needs to be.

I think its important to realize that 'housing' has degenerated over the past few decades in to a political play thing - with too many snouts in the political trough feeding off it.

Imagine if the car industry globally had the same political interference. Im pretty sure that if car manufacturers had to endure the same degree of political interference as housing manufacturers - we would still be getting around in horse and buggies today.

I like to kid the British for example (which is with California a housing disaster zone of the English speaking world) that they will likely generate more academic reports than actual houses this year! They have essentially collapsed their housing construction industries - and can now look forward to paying the economic and political consequences.

Note Californias unemployment is now over 10% - just announced. And they are only at the start of this process. One does not have to be clever to figure out where all thats heading.

So it is most important to focus in the key issues - that is - deal head on with whats impeding us from building affordfable housing. This is not "rocket science".

Hugh Pavletich

Les Rudd - your comments are much appreciated. With respect to the last points you raise -

Without capital gains - im sure more resiential rental construction would have happened in Australia. My overiding concern is to ensure that there is no impediment to the provision of residential rental stock - because of the negative social impacts as I outlined earlier.

I was surprised and disapointed the Manufacturers & Exporters came out publicly suggesting capital gains tax on this sector. It would be more helpful if this organisation clearly supported what I have been advocating for over four years now. The Government is very clear in that land supply is the key issue and is committed to take whatever steps are necessary in getting more affordable new housing in place.

What we need to see happen is for business, professional groups, local government, the banks and others to work together to "allow" affordable housing stock to be built on the fringes as soon as possible. Permitting had slumped to an aneamic 800 last month. Surely we dont want to stand idly by to allow the monthly numbers to fall to 200 a month - British and California levels.

My sense now is that there is an across the board political consensus to get this sorted at central level. It will require other interested sectors theroughout the community to focus on the key issues and work constructively with central government - now.

Hugh Pavletich

Hugh - it is my understanding that NZMEA do recognise land supply as an issue and speaking as a member I commend your efforts to date. Please see the NZMEA media release entitled, "People don't like tax reveals Peter Dunne" 27th January. quoting from that regarding the absence of CGT, "It is not the only reason for inflated house prices (issues like land availability also play a part), but it is a contributing factor,"

It is not difficult to believe many are surprised and disappointed when introduction of another tax is suggested, even though introducing a capital gains tax could effectively reduce income and corporate tax.

You have called for a variety of entities to work in unison to support de-constraining land supply to help with housing affordability. I also call for same to recognise, put aside vested interests and properly debate the other issues raised, including CGT. Then discuss their merit toward not only improving housing affordability, but also outcomes for the whole economy of New Zealand, not just the domestic economy. Because if we do not properly address the structural/systematic imbalance between that part of the economy and the productive part, the later will weaken and with it weaken the part you are more associated with. We need to boost our exports both in volume and diversity and a broader more rounded debate would benefit both parts of the economy.

Aside from the well received efforts you have already made in your area of expertise, so we can benefit the whole economy, how can you help with developing a broader more rounded debate of the type I am advocating?

Good questions Kieran - I have been asking the same things (albeit less well worded!) and get the impression I am being ignored. Developers already articifically constrain land themselves, by only releasing new developments in stages and only openiing up the next stage once the first has been sold in order to keep prices at their maximum. How do we know that the same thing won't happen in Hugh's utopia - developer A buys more land suddently and magically freed up by councils (they can afford to buy it all as Hugh says it will be cheaper) and then only develops what they need to to meet the demand, but keeping supply limited to continue to line their own pockets.

Kieran - thanks for the encouragement. NZMEA is on the plate and has been for some while. NZMEA is independent of the chambers of commerce network and Business New Zealand and that means it can actually be on the plate, engage in debate and uncompromisingly promote policy that supports the productive economy. Just because what NZMEA says might not be popular doesn't mean it will not be said and will not keep being said. For example, change to implementation of monetary policy and a broad and equitable tax base that includes an effective capital gains element. Go to the website and look at the work in the 'Public Comment' section. The policy shape advocated would help, "reduce artificial investment/speculation demand," and help re-balance the economy as a whole, by allowing the productive economy to further develop. If you have any thoughts and comments that might help the work email them direct to NZMEA - open debate and thinking about the economic problems NZ has to face are welcomed.

Just FYI, see this in The Press today:

http://www.stuff.co.nz/business/industries/economy/1997967/Reserve-Bank-...

Hugh - you have said above that government(s) have treated the housing affordability issue as a "political football," and now "The Government is very clear in that land supply is the key issue..." I wonder if government(s) are more content to kick this vote catching football around and ignore, rather than grasp the nettles contained in some of the same points raised and same questions asked in this blog?

I've always thought that just because government(s) do or don't do something don't make it the right something thing to do.

Hi again Hugh
Just to answer your question. He is a land surveyor, those costs were from a recent project he did. $30,000 sections on a new subdivision is simply not possible. The construction costs alone are $45,000 this includes: power,water, telephone, curb and channel stormwater/sewer, roading services etc.. these are unavoidable costs as is the original land price, even if council costs and profit margins were reduced the absolute cheapest possible would be $70-90,000 a section. This is what they were before the bubble started in 2002.

looking forward to your next article.

Indeed, also looking forward to the next article. I find that the questions Hugh doesn't answer tell me much more than the ones he does.

Kieran, Les and Strummer - you guys are serious competition for me on the persistence front! I will respond to the points raised within the above four comments -

Kieran - our construction costs are seriously degraded and well below best international standards - plus - we do not debt finance infrastructure properly, along the lines of the Municipal Utility Districts in the USA. Is your QS aware of these.

The reality is that housing in an urban market across the board should not exceed 3 times gross abnnual household income. The fringes are the only "inflation vent" of a city - and to ensure they stay affordable new stock should be going in on the fringes at 2.5 times income.

Do read all about Bill Levitt the father of affordable housing, via a hyperlink down thwe left column of my website.

Les and Strummer - thanks for the backhanded compliments. Surely there is more than adequate material on my website that answer points I may have inadvertently overlooked.

and Les - I would be delighted to come along to the Christchurch event. We had a good time with the ChCh Rotary people recently and it would appear Im speaking to the Enviros as well in the near future.

All you guys are way too seriious - and for a bit of light relief may I sugest you and readers go check out the Greens website Frogblog (Dr Russel Norman) aka the Frog - who fell off his lilly in to the pond - when the Government responded positively to the release of this years Demographia Survey. Better than getting a bad smack from Sue Bradford the Housing Spohesperson.

Your exhaused scribe will within the next posting go back to Kierans 4 March posting - and attempt to answer the points raised as best I can. Dont let the Frog on to this website will you - because I cant take anymore "lilly bashing" from him!!!!!

Hugh Pavletich

Hugh - good on you for providing answers to some unanswered questions, doing so will lead to more constructive and useful debate. In my post March 4th 6.27am I asked you six questions and you only answered only one of them, could you answer the remaining five please, these are:

"Regarding money supply and speed [of it] here in New Zealand say, if 80% loan value ratios were applied throughout our upswing, would the result have been better or worse affordability?

Regarding inflation control in New Zealand, if the money supply reducing effect and immediacy effect of the OCR mechanism were not "˜blunted' (weakened) with approximately 80% of mortgages being on fixed rates, would the result have been better or worse affordability?

Regarding relevant loss adjusting rules here in New Zealand, if losses were "˜ring-fenced' and it was not possible to offset investment property losses against other income, would the result be better or worse affordability?

Regarding investment flows, if in New Zealand funds and savings could find more investments with equal or better risk/rewards than property, would the result be better or worse affordability?

Regarding the effectiveness of the "˜Intent Rule', if it were replaced with something more effective for taxing capital gain on investment/traded property, or simply replaced with a capital gains tax*, would the result have be better or worse affordability?

(* Personal home/s exempt.)"

And from my post on the same day 11.11am

"Aside from the well received efforts you have already made in your area of expertise, so we can benefit the whole economy, how can you help with developing a broader more rounded debate of the type I am advocating?"

Let's not leave this till the do at Mancan at the end of the month, because my "too serious" side will take as long to wear off as my attentive side once I've had a couple of sherberts, beside the others involved in this discussion will probably be keen to understand your thoughts on these questions as well.

Les Rudd - thank you for your response above with a few further "finance questions' which obviously I did not respond to earlier.

"Finance" is not my area of expertise - so I hope there are others out there who can respond to your questions. My focus as you are well aware is on the structural issues of the housing market.

you will be aware too - that Im none too happy with the "mixed measure" housing indexes where housing affordability and mortgage affordability are thrown in to the pot together to confuse people.

I am looking forward to the MANCAN event here in Chistchurch later in the month.

PhilBest - I am just amazed in how well read you are with respect to the issues we are dealing with.

And finally............all posters

Take it from me - as one involved internationally - New Zealand is the most advanced in the public discussions and political progress in working through these issues. i will have a few things to say on that score in the next day or two.

Les, I agree with Brian Gaynor's analysis. That's not to say however, that the regulatory costs associated with subdivision and conversion of land from rural to residential have not added to that cost - they have.

But, had it not been for the availability of credit without a proper calculation of risk (for example, developer's were allowed to borrow millions based on pre-consent deposits, and many of these deposits were sourced from existing homeowners using their homes as ATM machines) - neither would there have been a rush of developer's converting fringe pasture, establishing new 'resort' subdivisions and subdividing urban land for in-fill housing.

So the availability of credit fuelled both the homeowner and the developer activity which subsequently created the bubble.

thats a good article from Brian Gaynor. I think the fact is that there were multiple factors involved in creating the housing bubble, both on the demand side (eg. credit expansion, demographics etc) and on the supply side (planning regulation etc). Not to mention specu;lative demand created by the myth of ever inflating house prices.
Anyone who thinks one factor was overwhelmingly to blame has an overly simplistic understanding of the housing market.
So I think Gaynor is partly wrong (ignroing land supply issues) as well as Hugh P (ignoring factors beyond planning regulation). They both hold an element of truth.

Quoting from:

http://www.interest.co.nz/news/opinion-why-government-pumping-money-econ...

"In the last boom however, banks relaxed these restrictions. They reduced the deposit needed for a house. They sold off their loans to investors so they could make more loans. One by one, banks emptied the reservoirs they had made along the river bank.

This happened here, but even more so overseas. The river flowed faster and faster, and we all felt richer. We went white water rafting on the international rapids of cash. We didn't need deposits for a house, and interest rates were low, so we paid higher prices for houses. House prices rose, we all felt rich and so we took money out of our house and bought a new car."

Matt in Auck - from your post March 14th, 2009 at 2:40 pm, I agree:

"So I think Gaynor is partly wrong (ignroing land supply issues) as well as Hugh P (ignoring factors beyond planning regulation). They both hold an element of truth."

The problem we face is having this complexity recognised and a range of issues effectively addressed. To do otherwise and concentrate on just one issue, because it is more convenient - for whomever and for whatever their interest - will leave us with the same problem, albeit with a slightl different shape, perhaps.

Getting an effective solution set to this problem - that would also benefit the wider economy - will not happen if those involved in this debate hold to a simple mono-causal position.

http://www.interest.co.nz/news/guest-blog-hugh-pavletich-responds-herald...

Hugh - given the nature of your recent article, Opinion: NZ's pragmatic approach welcome,' I'd really be interested to get an answer to the following question, from my post of March 4th 2009 11.11am:

Aside from the well received efforts you have already made in your area of expertise, so we can benefit the whole economy, how can you help with developing a broader more rounded debate of the type I am advocating?

Les Rudd, I'm glad you agree that housing affordablity is influenced by a range of supply and demand factors. Like you I think the issue needs to be addressed across a range of areas, given that housing unaffordability has been caused by a number of factors.

It needs to be borne in mind - that the bubble values of assets globally is simply ginormous - by my rough calcs - as I noted in the Letter to Bernard Hickey earlier in the year - some $US100 - $US200 trillion globally - the eqivilent of some 2 to 4 times Annual Gross World Product - which I understand is about $US55 trillion.

Do you think that Governments / Reserves / Trasuries have the capacity to head this off? I dont for one moment. Bernanke can splash a trillion or two around the place and Washington can create the illusion that it "has everything under control" with stimulus packages / bailout etc - but in the scale of things - it doesnt even touch the side. In my view about all they are succeeding in doing is unnecessariliy prolonging the necessaruy adjustments and loading future generations up with excessive debt.

My strong view is - that once the political, social and economic costs of these unnecessary bubbles are actually experienced by people - policy initiatives will be put in place to ensure they dont happen again - particularly with respect to housing markets.

Hugh Pavletich

Les Rudd - with respect to your "Capital Reserve Fund" idea - I assume administered by the Reserve Bank - as a "stability idea".

Firstly - I refer to the New Zealand Reserve Bank Governor Dr Alan Bollard as the "housing bubble chaser" - who in my view has only succeeded in ramping the NZ dollar up unnecesssarily during the first phase - and tanking it through the second - creating of course even greater instability. How on earth exporters are expected to stay in business through these unnecessarily wild currency gyrations excacabated by the Reserve Bank - is a mystery tio me.

Not once has Bollard spelt out clearly the the structural reasons for the New Zealand housing bubble to politicians and the wider public - but instead has articularted the idea that he has the capacity to control housing markets through the interest rate mechanism.

The reality is that Kiwis coundnt care less whether Bollard had the OCR at 2% or 10% - because their focus is on looking in to the horizon - whether housing will likely inflate or deflate going forward. Again - they will borrow up to the gunwales if they think the former is happening and get out prior to the latter getting underway - if possible.

Its all about leverage through the first phase - and perfectly rational behaviour by market participants - contray to the views of the likes of Brian Gaynor and Prof Robt Shiller. Played right - the canny speculators can make 100% plus on their money if they get the timing right.

Many tried - most failed - tough luck. And it sure beats working for a living - as the attraction of "easy money" is simply irresistible!!

Clearly - Bollard doesnt understand housing markets. I doubt very much he has much grasp of markets in general - because he has only worked in government all his life. I seem to recall reading recently the guy came out with the extraordinary statement "that New Zealand has sufficient houses". Extraordinary stuff.

I would only shudder at the thought of people such as Bollard haviing a greater role administering what you are suggesting - a "Capital Reserve Fund" as a further tool to enhance stability! Aren't they already creating enough instability?

If I thought the issues surrounding these housing bubbles were more complex - I would be the first to say so. But I am sure in my own mind that the "core problem" are the fringes as the supply vents being strangled coupled with inappropriate infrastructure financing.

I am particularly heartened with the New Zealand Governments initial approaches to these issues and look forward to sound policies and appropriate structures being put in place as soon as possible - to solve these problems. In my view - New Zealand is leading the world in addressing these issues.

Hugh Pavletich.

Matt - the 3 fastest growing major metros in the US - Atlanta, dallas Fort Worth and Houston have been experiencing annual population growth at in excess of 2% for years. Cities of course have been a magnet everywhere for people to better themselves.

remember how for years the Gold Coast in Australia was (possibly still is) the fastest growing urban area in Australasia - and it was always seen as the most affordable n this part of the world. Until strangulation planning stuffed that up of course.

What Im advocating is normal / natural urban consolidation - not the forced / inflating type the so called "anti sprawlers" are advacating. All they are creating is housing bubbles and splatter - as preference as always trumps policy - and people will develop their homes on more affordable land wherever they can.

What they certainly wont do is move in to those slab developments and rinky dink romantic new urbanist type developments - contrary to the "hopes" of the Richard Floridas of this world. They may at best meet the needs of 5% of the population. Really - to suggest that the current crisis - caused by the forced urban stranglers - is the end of suburbia ( referring to your hyperlinked article)............really is a nonsense.

I am sure the days of starving fringe land supply - unnecessarily creating housing bubbles are drawing to a close - once people experience the consequences of them.

Do you think it is better to have $40,000 sections / lots on the fringes - or do you think it is in the public interest to have them artificially jacked up to $200,000 and beyond? Can you explain to readers why the latter pricing is a good idea? Or put another way - why struggling youing couples should be forced to pay these inflated prices to politically well connected property speculators?

Hugh Pavletich

Kieran - i think you will find that approx just 5% of California is urbanised - much less in % of land area terms than most countries in Europe. It is well understood the Global Financial Crisis was triggered in California - where unemployment is now north of 10% and rising with massive and persistently growing State budget deficits.

Sadly - California is a basket case - to the extent they are getting tent cities in place in Sacramento.

With respect to Brian Gaynor and his comments on the housing market - he is clearly wrong. What are Gaynors property market credentials as a matter of interest?

Hugh Pavletich

Kieran - with all due respect to Brian Gaynor - within this article dealing with the housing market he is clearly wrong. What Im saying is backed up by reputable international research - from the likes of Barker in the UK, Glaeser the US, Moran australia and Grimes here in NZ - just to name a few..................

You may like to pop the question to Brian Gaynor - if $40,000 lots / sections were supplied on the fringes instead of the $200,000 plus current ones through the era of easy money - would we have had housing bubbles in this country?

Again - normal affordable markets should not exceed 3 times annual household incomes - and to ensure they stay affordable, new starter housing should be supplied on the fringes at 2.5 - what I refer to as the swing multiple. As activity increases they should move up to the cieling multiple of 2.7 stimulating greater volumes of construction. As that becomes oversupplied, they should fall back to a floor multiple of around 2.3 at the bottom of the housing cycle.

But instead - by strangling the fringes - and driving lot / section costs up from $40,000 to in excess of $200,000 and degrading the construction industry performance as well - we are seeing new fringe house / land package supply going in at $400,000 and $500,000 - whopping multiples of 6. 8 and 10 - creating bubbles throughout those urban markets.

I trust the above gives you some idea just how badly out of whack our bubble markets are.........From a property guys perspective, they are a shambles and its going to take many many years to sort this - sadly unnecessary - mess out.

Hugh Pavletich

PS - You might like to consider much of the rubbish housing stock in this country. I was watching a video copy of a superb lecture by Prof Paul Callaghan - who mentioned about the student accommodation in Dunedin where on a September morning at 6 am the internal air temperature can fall to 2 degrees - at which time the warmest place in the house is the fridge at 3 degrees !!! Most of the housing stock - the only way you could heat them to reasonable temperatures in the winter here in the south - would be by putting a match to them. Just iceboxes and health hazards.

Hugh - I guess if, as it seems, you believe this is a mono-causal problem and that your solution is the only viable one, you will not be answering the question I repeated to you March 20th, 2009 at 9:40 am, that was:

"Aside from the well received efforts you have already made in your area of expertise, so we can benefit the whole economy, how can you help with developing a broader more rounded debate of the type I am advocating?"

I first asked you this in my post March 4th, 2009 at 11:11 am, where I stated recognition of constrained land-supply as a contributory factor.

Quoting Kieran immediately above:

"Even the IMF say we need tax reforms to remove the bias property receives and to make the economy stronger."

However, no matter what the IMF say, there surely are enough other people saying similar for you to recognise this as multi-causal problem and re-consider and broaden your approach?

I stated somewhere above, but perhaps in a slightly different way; if land/housing supply could be deconstrained perfectly so that supply perfectly matched demand then it is probable that affordability would improve, in theory. My concern is however that perfect deconstraint of land/housing supply is not actually possible and so other causative and distortionary factors also need to be addressed. In that regard and adding further evidence that this is not a mon-causal problem, please have a look at this article by Bernard Hickey:

Bernard Hickey: End the giant rental property tax break

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1052...

So, can you recognise this as multi-causal problem and re-consider and broaden your approach?

PS - Thanks for your concern with:

"How on earth exporters are expected to stay in business through these unnecessarily wild currency gyrations excacabated by the Reserve Bank - is a mystery to me."

Hugh - thanks for helping with my education in this area, I've found the debate and your approach to it very interesting and informative. I respect your opinion and hope that we can make progress on the issue you have focused on, and the "other matters" you now recognise as important, with appropriate priority.

I guess only time will tell and rather than devote any more effort to this discussion at this time, I'm going to copy it so that we can reference it in X many years time should/when we experience the next damaging cycle and bubble - because the multiple issues we all know exist have not been addressed adequately.

This is a good post in another thread on this website:

http://www.interest.co.nz/news/have-your-say-housing-supply-tight-and-do...

Again, thank you, very informative.

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