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A variety of politicians and industry leaders have quickly responded to the first rise of interest rates in nearly four years

A variety of politicians and industry leaders have quickly responded to the first rise of interest rates in nearly four years

Politicians and industry leaders have been quick to respond to the Reserve Bank's raising of the Official Cash Rate to 2.75% from 2.5%.

Here is some of the reaction:

This from the New Zealand Bankers' Association:

OCR rise well signalled

The 25 basis points rise in the Official Cash Rate to 2.75% announced by the Reserve Bank of New Zealand today was widely expected said the New Zealand Bankers’ Association.

“The OCR rise has been clearly signalled by the Reserve Bank Governor for some time, and comes as no surprise,” said New Zealand Bankers’ Association chief executive Kirk Hope.

The OCR is part of a range of factors that drive interest rate changes. Other important factors that influence rate changes include the cost of funding from domestic deposits and the cost overseas wholesale funding.

“It’s a good time for mortgagors to assess their circumstances to help ensure they can manage an increase in the cost of borrowing.

“This is especially important for first-home owners who have borrowed at historically low rates.

“Talk to your bank about your particular circumstances. Banks are happy to provide information about products and services to suit individual needs.”

Hope added that the gradual rise in interest rates was good news for people with savings in the bank, especially those who relied on interest income from investments such as retirees.

This from the Commission for Financial Literacy and Retirement Income:

Interest rate rises will squeeze some household budgets

Kiwis are being urged to take another look at their household budgets, following the Reserve Bank’s announcement today that the Official Cash Rate (OCR) will rise to 2.75 percent.

“The increase in the OCR means mortgage and savings interest rates are likely to rise,” said David Kneebone, Executive Director of the Commission for Financial Literacy and Retirement Income.

“Current and potential mortgage holders may need to review their budgets and start preparing for higher interest rates now, particularly in light of the Reserve Bank predicting further rises for later this year.

“Because mortgages involve repaying a lot of money over a lot of time, even slight increases in mortgage rates can add up to tens of thousands of dollars in the long haul,” said Mr Kneebone.

According to Sorted’s mortgage repayment calculator, even an increase of 0.25% in interest rates can affect a household’s budget, especially if things are already tight. For a $500,000 mortgage over 20 years, an increase from 5.75% to 6% will increase repayments by $33 a fortnight.

“However, an increase in the interest rate will be good news for savers – particularly those reliant on the interest earned off their savings for income,” said Mr Kneebone.

For example, if you have $100,000 invested now at 3.75% in a 12-month deposit, and rates go up 0.25% you’ll earn a further $250 over a 12-month period (before tax and fees).

“Whatever financial situation Kiwis are in, our advice is check in with Sorted’s free calculators to see how interest rate increases will affect them,” said Mr Kneebone.

This from the Labour Party:

Government housing failure forces up interest rates

Homeowners and first home buyers will feel today’s interest rate increase as the tightening of the noose, says Labour’s Finance spokesperson David Parker and Housing spokesperson Phil Twyford.

“The Government has been incapable of reining in the out-of-control housing market, leaving it instead to the Reserve Bank,” says Phil Twyford.

“Homeowners will have a sickening feeling in the pit of their stomach today, knowing there are several more increases in the pipeline that will add hundreds of dollars to monthly mortgage repayments.

“The Reserve Bank Governor said mortgage interest rates will get close to 7% by the end of the year, adding $233 to monthly costs on a $300,000 mortgage

“National has been quite happy to sit and watch first home buyers and ordinary Kiwi families either shut out of the housing market or financially squeezed, while property speculators and the big end of town clean up,” says Phil Twyford.

“Today’s rate rise follows five years of out-of-control house price increases which have seen the average Auckland house rise over 40% while National has been in government,” says David Parker.

“In Auckland, where prices are highest, it is not uncommon for people in the last few years to have taken on mortgages twice that size. As the year goes on those people are really going to feel the heat.

“Interest rates rises not only hurt homeowners they also put the squeeze on all businesses. Exporters suffer the double blow of a higher exchange rate and higher borrowing costs

“Yesterday the trade weighted index hit a post-float high, showing how tough it is for exporters outside of the primary sector.

“Low interest rates due to the global financial crisis were the only thing National could claim were working for homeowners.

“Now you can add rising interest rates to sky high prices in Auckland, extortionate rents in post-quake Canterbury and LVR lending restrictions that have shut first home buyers out of the market.

“This Government’s housing policy is in tatters,” says David Parker.

This from the Green Party:

Higher mortgage payments, fewer jobs as Nats let rates rise

The current government’s failure to stabilise house prices and lower power costs is now going to hit families in the form of higher mortgage payments and cost the economy up to 30,000 jobs, Green Party Co-leader Dr Russel Norman said today.

 The Reserve Bank has today increased the Official Cash Rate (OCR) by 0.25% and is expected to lift it by 1% over the coming year. The Greens have released Reserve Bank papers that show an increase in the OCR of 1 percent will lead to 12,500-30,000 fewer jobs in the economy. Employers and Manufacturers’ Association head Kim Campbell warned this morning that there would be ‘mass closures’ of manufacturing firms as OCR rises pushes up firms’ borrowing costs and the exchange rate. Housing and electricity accounted for a third of inflation in the past year.

 “If National had tackled house price inflation and brought power prices down, we wouldn’t be facing higher mortgage rates and job losses today,” said Dr Norman.

 “John Key sat on his hands as house and power prices skyrocketed. National left it to the Reserve Bank to clobber the economy with the blunt tool of interest rate increases, when it should have used smart tools to target price rises in housing and electricity.

 “National’s failure hurts families in three ways: We’re paying too much for housing and power, we’re seeing our mortgage payments go up, and there will be fewer jobs to go around.

 “The Reserve Bank says that there’ll be up to 30,000 fewer jobs in the economy as a result of a 1% OCR increase over the course of a year. There are 50,000 more Kiwis unemployed than when National came to office. The last thing we need is more businesses closing down or putting off hiring new workers.

 “The Green Party would increase the supply of affordable housing, give families an affordable pathway to homeownership, and stop speculators forcing up house prices with a tax on capital gains (excluding the family home). We would use NZ Power to bring down power prices and introduce real competition to generation and electricity retailing.

 “The Green plan would lower inflationary pressure, keep interest rates lower for longer, and create more jobs for New Zealanders,” said Dr Norman.

This from the ACT Party:

ACT leader Jamie Whyte supports Reserve Bank Governor
 
ACT Leader Jamie Whyte strongly supports the Reserve Bank Governor's decision to raise interest rates.
 
"All party leaders should be supporting the independence of the Reserve Bank Governor.  The statements from the leader of the Opposition are reckless and self serving.  The statements from the Greens and New Zealand First are dangerous," said Dr Whyte. 
 
"If Labour were to implement its present election promises, interest rates would have to rise further.  Every economically literate person in New Zealand knows that if the country wants to avoid damaging inflation then interest rates need to rise.
 
"I have spent the last ten years as a consultant working to correct the wreckage of the Global Financial Crisis.  Part of the reason for the crisis has been politicans refusing to back strong independent Reserve Banks.  Countries that have tried to impliment the policies of New Zealand First and the Greens have ended up in a mess - like Greece.
 
"ACT strongly supports an independent Reserve Bank.  We believe it would be helpful if the Minister of Finance Bill English came out strongly and not only supported the Bank's independence, but also said what we all know to be true - that this rise is needed.
 
"Having politicans fix interest rates is a road to economic chaos.  In election year it is important party leaders show some courage and tell the truth that the Reserve Bank is without doubt correct to raise interest rates, and more rises are inevitable.
 
"It is also worth pointing out that for every borrower there is a saver.  The decision to raise interest rates benefits even borrowers and exporters because no-one wins from runaway inflation."

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37 Comments

I agree with Dr Norman and the Greens. The Reserve Bank puts up interest rates when it believes the economy will have inflation due to hitting supply constraints such as labour shortages causing wage inflation and therefore price rises.

 

But wage inflation is absent, the dairy boom doesn't seem to be causing a boom in the provinces. The problem is housing inflation in the cities, in particular Auckland and Christchurch. The LVR took some pressure off, but still prices are significantly up on the last peak of 2007 and we have lost the pressure release valve of migration to Australia due to the down turn in their economy.

 

Read Hugh Pavletich's analysis of how and possibly why John Key has failed to address the housing issue.

 

It is a pity Prime Minister

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Years ago someone explained the way RBNZ adjustng the OCR  is like driving a car; you see the road ahead and adjutsing your gear and change speed accordingly - that'd be the most economically and safest way to drive.  Or you can drive the car and change gear/accerelation as it runs out of power, or you can see how the road was by looking at the rear view mirror as you are driving along!  Has the Greens offer any better alternative other than CGT?

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I think the car driving analogy is quite good for how the Reserve Bank behaves. I think it would have been possible for government to have built a 'straighter road' by changing the housing market regulations so that the private sector supplies the market more elastically. Thus we would not have these supply constraints and price bubbles.

 

The Greens are proposing something similiar to Labour's 10,000 affordable houses a year. This will be state provided and given the scant details hard to assess. But being in opposition it is not there best interests to do the governments job for it. So I do not expect a more detailed proposal until closer to the election.

 

I am not a fan of state provided housing but this proposal is big, roughly half the current annual supply. So significant compared to John Key's 'too little too late' policy. Also the Greens are moving away from their BANANA housing policy, Build absolutely nothing anywhere near anyone, so that has to be encouraged.

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Hugh the question for National is if they are so serious about housing affordability why have they done only one weak housing accord?

 

I think you and me know the answer and it is JonKey the slow a...   donkey.

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The Emperor has no clothes.....  When do we stop pretending to see the finery and see the actual facts on the ground....

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It's not a mystery to me "how Mr Key gets away with this flaky stuff" because you can just as easily if not more so, say Cunliff i guilty of "poor performance. It’s just not good enough."

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Let me see......first we have the GFC......NZ and around the world  is in deflation as everything tries to rebalance itself. Normal market adjustments aren't made due to Political interference.

Government raises costs across the board and borrows to the hilt in order to reflate the economy.  Government knows that it can cause inflation and doesn't have to worry about paying for it as all bases are covered.

If business can generate enough income that flows through to the tax base the bills can be paid. If business can't generate enough income the RBNZ can be used as we have inflation targeting and we the Government control inflation.........we just keep raising the costs until we have our inflation and then we don't need to have business growth paying our bills via tax, we can get our extra tax to pay our bills off depositors who will be receiving more in interest.

 

It doesn't matter whether your National, Labour, Greens, Act etc.........you all talk rubbish and you all do the same damn thing........so stop pretending that you care about the people of NZ and the NZ people's welfare......

 

 

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Sorry Notaneconomist, when did NZ have deflation, I missed that important point ? When did the world as a whole together have deflation during the whole of the GFC, it was for one quarter in 2008. 

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Grant A - I'm not too interested in what the official line is on the deflation/inflation as it doesn't take into account any policy meddling involved in pricing.

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whos line on inflation do you follow, if not the official statistics?

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The task of controlling inflation (i.e., maintaining it within a certain band) involves actions that are more complex than simply reacting to the current level. Techniques like "feed forward control" and "prediction control" often render a "smoother" process variable behaviour compared to simple "feedback control". This is applicable to economic mathematical models just as much as to physical / engineering systems.

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dtcarter -  Statistics include the real market value of goods and services and embedded costs from policy and legislation. Official statistics do not provide transparency as they lump the whole lot together.

I prefer to seperate the two to try and ascertain the real market value of goods and services i.e. the price without all the fluff.

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The net effect of NZ's housing policy is a transfer 'tax' of at least 10% and growing from the property less working class to the property class. Read the below to see why. What is JonKey doing about it? Probably playing golf with the property class..... 

 

Mike Greer from Mike Greer Homes the biggest builder in Canterbury puts it simply.

 

"Honestly the main problem is land costs. Land costs are just rocketing," Greer says.

Ten years ago he bought sections in Milnes Estate in Halswell for $70,000 and now sections in Aidanfield across the road were fetching $240,000.

He points to Wigram sections, being sold by Ngai Tahu Property, rising nearly 20 per cent over the past year.

The cost of labour and materials in Canterbury was not too different from the rest of the country.

"But the land in Christchurch and Auckland is the killer," he argues.

One of the keys to greater affordability is a lot more land being zoned residential and councils providing the essential water and sewer services pretty quickly.

"That's the problem, not enough zoned land that is serviced."

For example, parts of the Awatea Basin between Halswell and Hornby were zoned residential but did not have services still.

If Christchurch local authorities mass zoned new land residential and provided the services of sewer and water plus intensified housing in the city, land prices would come down, he says.

 

This as Hugh says has consequences. A nursing colleague rents in Halswell. He has worked himself out of Zimbawe through brains, good character and diligence. Obviously he has little in financial backing from family. He has been renting a 3 bedroom home in Halswell for his young family. They are now well established in the area, in particular the kids are doing well at the local school.  When they first rented it cost $280 per week. Then a few years ago it was increased to $360 a week. A month or so ago his landlord sold up making a very healthy capital gains profit. The new landlord increased the rent to $450.

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Brendon, people in ChCh renting (3 bedrooms for $450 per week) could do well to look at:

http://www.realtor.com/homesforrent/New-Orleans_LA/beds-3/type-house-re…

Rents are per month over there. How come new Orleans can do this?

Or consider:

http://www.realtor.com/homesforrent/Houston_TX/beds-3/type-house-rental…

How can the USA's most thriving local economy also do this?

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apparently there is sufficient demand for the area to justify the rent.  What are you complaining about?

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How much land needs to be freed up before an effect on price of sections on the fringe occurs?

I talked to a young chinesse guy recently who had a contact in china who was going to start property development in NZ (auckland and welly) in sept this year.  He is starting with 20m to buy land.  Which they will develop.  Prehaps sell as sections? Or build and sell section/house package I am not sure I didnt ask.

My point is, if we free up enornmous tracks of land zoned for residential development, there is no shortage of foreign money out there that is keen to suck it all up.  What will happen is the land banks will need to be much bigger, which means the investors will need to be much richer, which means the likihood of offshore money coming in buying it up is greater.

Would a land tax, or 'council rates on unused land' set at a very high level help deter this? 

What is houstons level of residential land available at fringes (absolute measure and proportion to size of developed houston area would be very interesting) that makes it so vast that land bankers can not claim the lot and own the monopoly of its resale?

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Wow, Local Government is a cancer on society!

 

Big call.

 

Seems the public disagrees with you though or the small govt low taxes candidates wouldn't do so poorly in local body elections.

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Your point it not lost on those who understand. It has been made often enough. Unfortunately, the sprawlers from down south don't seem to understand the implications of what you say

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Sprawling far away and commuting into a geographically restricted space is easy if you build the right transport solutions. i.e. rail, which takes up a fraction of the landspace that motorways do.

 

Perth sprawls south along the coast just fine because they started on high speed rail 30 years ago to accomodate the growth of the city.

 

There are some good things in the Unitary plan were they have redirected some of the greenfields sprawl along the southern rail line.  That has plenty of capacity into the city (though congested at Britomart until the Rail LInk is built).  The southern motorway on the otherhand is a dogs breakfast for about 3 hours in the morning and 3 hours in the evening.  Good luck buying in a new development down there and driving into work.

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Ok so you say "If Christchurch had been a normal housing market, with fringe starter sections / lots priced at $50,000 and below and proper infrastructure financing (and here) , there would be well in excess of 6,000 new affordable homes out on the fringes by now.

My point is, who is making these sections available at 50k? If developers, and they produce 200k houses on them, the owners would then sell them at market value for 450-550k.

I want to know what change is needed (i.e the degree of increase in supply of res. zoned land) for the market to value a fringe section at 50k?

They will only do so if there was massive amounts of fringe land that made it impossible to buy the lot.

I suspect if this happens, foreign money would step up to buy the lot and have the monopoly on land zoned for residential development, and slowly drip feed to market at market value (essentially absorbing the abundant supply and replacing it with their own scare supply).

 

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Good points, Simon.  What we have here is a ratchet effect, and as you note, any small supply of cheap land will simply feed CG to the lucky owners once they give it the flick.  At the sorts of distortions we see here - sections at 150-250K - the CG on a $50K section is of the order of $100-200K.  Even if a swingeing CGT was put in, it would have to be well north of 50% to start to act as a disincentive - i.e. reduce the in-trouser sum to something less than say $30-40K.

 

And if the called-for effect - all housing values Cheaper by (thought experiment) 1/3 - was to come about by some sorta magic or perhaps via Normal Russian as Finance Minister, who would suffer?

  • Owners with underwater mortgages
  • Bankerz with impaired asset/collateral on their books and capital ratios to maintain
  • Savers who will be called on to prop bank's impairments
  • FHB's who will still be outta the picture as banks tighten lending to prop capital ratios
  • common taters can prolly think of many more effects.

 

Point is, it's gonna be a hard landing.....unless ya has no debt....

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I suggest for the Canterbury case we rezone a 5-10km radius circle around Lincoln University as residential. That is roughly 300sqkm or 30,000 hectares at $50,000 a hectare (rural prices), that is $1.5 billion worth of land. So $20 million will give you no monopoly pricing power, so why would you bother. Better to buy something unique like Auckland or Wellington waterfront properties.

 

Then a similar area around a new Waimakariri bridge just north of Airport.

 

Not sure what you do Auckland....

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Hugh is talking about removing the concept of land-zoning.

 

There would be no such thing as "monopoly on land zoned for residential development" because you would need to buy up all the land in the country.  Anybody would be able to turn a random farm into residential land.  Which farmers wouldn't want to sell off 500sqm for 200K ?  They flood of supply would quickly lower the price of fringe land, and have knock-on effects for central land.

 

 

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Yes the point both Simon and Waymad are making are all true, although there are some mechanisms that a developer could put into a contract that prevented what would essentially be a speculative ‘flick’ that an owner enjoys in the CG. Community Housing groups have similar covenants built into the subsidised housing schemes.

The whole trick (for the Govt. at least) is to introduce a mechanism that makes housing cheaper but spread the cost of it across all housing (the pain does not hurt as much if we all share it) so as to stop or limit the growth in value of the whole market and allow inflation to reduce the value to what it should be ( 3x medium income) over a 10 to 15 year period.

This is an almost impossible task in Auckland and is best to left to a sudden market adjustment to correct. Christchurch is not far behind but has more ability for a smoother transition.

The real advantage for some areas lies in certain provisional towns that already have lower medium multiples making system changes to welcome business, employees, their families etc. and that allow housing supply to easily meet demand, therefore keeping prices stable, which further encourages business and people to the area.

However,  the first thing any of the elected officials like to promote to the established residents’ when promoting growth is that it will be good for their property values.

It’s a head space thing, and unfortunately we have a lot of land economic illiterates in council.

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But the infrastructure isnt in place to wack a new subdivision in the middle of a farm?

How would waste water, supply water, power, broadband internet, be distributed?

I think the idea of loosening up the boundaries has merit.  Most councils I believe set about 10 years worth of growth worth of res. zoned land.  Maybe make this 50 years? But there needs to be direction given to where it occurs, esp when we get siginificant export earnings from every sq m of furtile farm land that feeds a dairy cow.

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The developer already provides the residential roads, the three waters (fresh, storm and storage), paths, parks etc. The Council needs to provide the trunk infrastructure that these services connect to.

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It is for this reason that I think that infrastructure should be next political battleground. Not tax cuts or social welfare spending.

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Zoning is of course important but it is facts on the ground that matter. Nothing will change the shape of the land and sea around Wellington, Auckland and Christchurch. But generously planned for trunk infrastructure is what opens up what land there is. Residential land and infrastructure for that matter needs to be planned for but not necessarily provided. It just needs to be available so that housing is elastically provided and land banking monopolies are avoided.

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This is where I differ from HP in that I think to get affordable housing you need to free up zoning and increase trunk infrastructure spending to access these new areas. Note I have no ideological preference on what transport mode accesses these areas as long as it does so in a measurable efficient manner. See Alain Bertaud below for why.

 

The US cities with low restrictions on building new housing which HP uses as examples of affordable housing do not suffer from a lack of trunk infrastructure.

 

Since the 1956 Federal Aid Highway Act a motorway/car based infrastructure framework has provided the affordable conditions for new developments to move into. The US has six times the amount of motorways per person than NZ. See the graph here.

 

In my opinion to get competition and stable housing costs will take public investment in infrastructure. It is my belief the cost of this and the rise in public debt (because that is usually how long term infrastructure is provided) will be a lot less than the interest rate rises and cost increases from inflated housing which is mostly a private debt phenomena.

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See "Cities as Labour markets" by Alain Bertaud for further discussion of this.

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Hi Simon – the whole point is that you can start with a clean slate. You can buy land at its rural land value; develop your own infrastructure which does not need council involvement. You flip the growth boundary assumption on its head, rather than saying you only build in this area unless we say so, you say you can build in any area unless we say so.

The areas that you exclude are the environmentally sensitive areas etc. This way there is in theory an oversupply of buildable land. There is no more people to build for than there was previously (although now more people can afford to build), just more land options.

You don’t need to worry about a 10 year, or 50 year, or 100 year growth boundary, as these are just arbitrary numbers that councils create and make no more sense than if you had said 11 year, 51 year, or 101 growth boundaries.

Also since present growth boundaries are mainly concentric in nature, and a small amount following transport lines, they have never taken into account fertility of land anyway. What decides whether fertile land gets sold as development land, are the owners of that land. It would be quite simple, if the owners of that land cared enough about its fertility, for them to covenant that as a protected use when they went to sell it.

But of course they would only receive $30,000 to $50,000 per ha rather than over $500,000 plus per ha.  With no urban growth boundaries, owners can only sell the land at its rural land price. For starters, you have removed the greed factor for the old owners and would get more of them covenanting their fertile land, assuming that was something in their nature that they cared about anyway. 

You also would get developers still looking to buy the cheapest rural land (so as to be competitive and more so because anyone could potentially enter the market) to develop and in many cases this means looking to buy the least fertile land. The present system encourages the use of fertile land as the price the owner can sell for as development land is greater than its present value as fertile rural land.

When you remove UGB’s there is less incentive money-wise that a developer can offer a rural land owner that does not want to sell, to sell, because if the developer does offer more then he becomes less competitive in price than if he had purchased from a rural land owner that was selling at the rural land price only.

UGB’s cause high section prices, which the beneficiaries are land bankers and council. 

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In p.n fertility of land is definitely considered. If it's high quality land and most in Manawatu is, then its unlikely to be get changed to residential zoning. That's why a lot pn is growing on the hills east of the city as less valuable farm land even though infrastructure costs are much greater. It makes sense to maintain land that is used to produce valuable export earning dairy products then to cover it with sprawling houses. I'm sorry but neither of the 2 extreme views works

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Who definitely considers the fertility of the land?

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http://www.pncc.govt.nz/plans-policies-and-public-documents/strategies/…

The council planners assess soil quality. One factor in considering future growth zones along with flood risk and infrastructure costs.

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not just fertile farm land, but farmland close to cities tends to have capital gains value, thus high equity, and therefore much invested in its own farming infrastructure.  The better the land quality, the more is likely to have been spent in development already.

Open up the sprawl corridors through government legislation and RMA, and it becomes a lot more risky to develop decent farms on good land near towns/cities.  This includes rural and industrial areas within RMA distance of the work (as pig farms with generations' old farms found when the town came to Dunsinane! )

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Having worked in property development in Texas and New Zealand, I have done the figures and the ability to develop sections at $50,000 per site, as I’ve commented on here  before,  is easy enough to do, including all infrastructure.

The reason it has not happened and cannot happen at present is certain groups do not want you to.

The difference in price between what you pay now and $50,000 is revenue to many groups like Central Govt, banks, councils, and land bankers.

However you could take these groups out of the equation, and you would easily develop fully services sections for around $50,000 each, so another way to describe this revenue to others is waste. Or another way of looking at it is you are subsidising the rich.

The urban growth boundaries are the key manifestation of all waste. Remove urban growth boundaries and you solve almost every other aspect that causes high prices. Councils control this function and for them to do away with UGB’s then they would have to admit they are wrong in their present ideology, and just as importantly, they would lose their monopoly, are not as important as they think they are, many would not be needed, and the ones left would not be able to command the high salaries they now do.

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Hi Simon, from the PN Council website link you provided ‘Council has identified the need to avoid the loss of high class soils as one of its top priorities….. While the preferred locations for rural residential development are located on the City’s poorer soils, subdivision does occur on higher class soils and the overall level of ongoing subdivision represents a threat to the overall productivity of the rural zone.’

So the question has to be asked (The answer to which I have already pointed out in my previous post), why would the council need to pass legislation to prevent the loss of high class soils.

After all if the farmers who owned this land, as the stewards of this land, did care enough about this land, then all they have to do to prevent the loss of these soils is put a covenant in any sale and purchase agreement that prevented any other use bar rural use, just like many do with native bush covenants?

Do farmers have to be told by council who they can sell their land to, to protect the land from their actions?  

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