BNZ chief economist has a radical eight-point plan for tackling the over-heating housing market

As local councils, the Government and the Reserve Bank all try to grapple with an ever-heating housing market, BNZ chief economist Tony Alexander has come up with some suggestions on how to solve the problem.

Real Estate Institute figures for May out this week showed that the winter is not doing much so far to cool the market. Auckland, which is suffering from a perceived shortage of about 30,000 houses, is the particular problem, with house price inflation currently running at around 15%.

The Government and the Auckland Council have negotiated a housing accord, targeting 39,000 new houses in three years, but the council and Government are at odds over the terms of the legislation enacting it - given that this would currently give central government the power to over-ride the council. See our housing accord articles here.

The Reserve Bank is strongly hinting that it will look at "speed limits" on bank lending to people with low housing deposits, but Prime Minister John Key is pushing for some kind of protection for first-time buyers, while the RBNZ is indicating that it won't do that.

So, while a general state of paralysis seems to be setting in over what to do on the rising house market, Alexander has, in his weekly newsletter made eight suggestions to tackle the problem. He cheerfully concedes that each of the eight suggestions have chances ranging between zero and "mild" of actually being imposed.

Alexander says the optimal solution to the problem "is a quick jump in house supply combined with reductions in building materials costs".

His suggestions are:

  1. Initiate a large builder training programme targeting not just youth but low skilled migrants. "Yes, the migrant gates would need to be opened. Just the signalling of strong intention to boost builder numbers would make investors think twice about their capital gain assumptions," he says.
  2. Ban councils from imposing any development fees and allow developers to instal their own infrastructure.
  3. Create an SOE whose sole purpose is to undercut existing building materials suppliers through bulk purchases from offshore, nodal warehousing and distribution from just three or four locations in the country, with a separate agency responsible for monitoring the quality of materials sourced.
  4. Initiate a new large state house building programme relying largely on the to be created new carpenters etc. Constrain new state houses to more efficient building systems including containerised modular housing (this doesn’t involve shipping containers), central and screwed in foundations, etc.
  5. Ban house sales to non-residents (even new houses given the ease with which special developments could arise targeting solely folk offshore and soaking up construction sector resources).
  6. Impose a tax on all houses owned by Kiwis offshore with the aim of encouraging them to sell them.
  7. Put in place a capital gains tax on second properties and farmland and immediately payable stamp duty for all second house purchases.
  8. Rezone all land within 10-20 kilometres of existing city boundaries as residential.

Alexander's assessment of the chances of the eight, in order, of being implemented are: "Low, zero, zero, mild, mild, zero, low, zero."

So, what will happen? Alexander believes that some land will be freed up but it will have little effect section prices. "Construction will soar and rising costs will force higher interest rates and a higher New Zealand dollar," he says.

"The Reserve Bank will tighten high loan to value lending but the impact will be minimal and mainly encourage young buyers to raise more expensive finance elsewhere (a big business opportunity looms there) or to leave the country to make a purchase overseas."

Alexander says people should not get "hung up" thinking that freeing up more land would make all that much difference to the current housing cycle.

"I spoke with a real estate agent today who noted that a project they had sold units in has just been canned because the developer cannot find anyone to build the complex.

"Or more accurately, he got some quotes but not many, for the 32-unit development and the cost would have made it unprofitable given the prices which buyers had signed up and paid deposits for.

"Those deposits are now on their way back to the hopeful buyers. This just goes to reinforce that even now with the number of dwelling consents still well below average, construction resources are scarce and costs escalating," Alexander says.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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89 Comments

no.3 is straight out genius.

Mr Carter and Fletcher are not so keen on the idea.

I hope he gets to keep his job.
The main worry is that he sees no real chance of any of the ideas getting through- why not I wonder. Would labour/greens be against all of these proposals? I would not have thoughts so. Is he then betting on a perpetual National Government seeming unchanging. Except to do something like privatise the conscent process?
 

Labour.. forget it! Fletcher and Carters can just send them an invite to their corporate box. all will be hunky dory again..  anything for a free feed!

5 has got to be a winner too!  Tony for Prime Minister....

A silver bullet would be to restrict the ability of banks to borrow offshore to lend to home buyers.
Would have to be done in a planned , gradual manner if practical.
Remove the source of artificially cheap money and that would deflate house prices.

Kiwichas - the only problem with that is that with the current favourable capital requirements favouring housing for banks, all it might do is affect the availablity of funding for businesses and other parts of the economy. If it came in it would have to be accompanied by other measures as well I suspect. 

Didnt say it would be easy to implement, but just the idea makes sense, would hope externalities such as cost of funding for business investment could be worked around somehow with time and brains.Banks would not have to spend so much time and (other peoples) money trying to hedge against exchange rate fluctuations. Which could really kill this country given our massive overseas debt,largely incurred on our behalf by banks for housing.
Most agree that borrowing overseas cheaply merely inflates house prices, and does not appear to have helped business investment much.
If it became pointless to invest in houses excess capital may be diverted to something more productive.

Kiwichas - the only problem with that is that with the current favourable capital requirements favouring housing for banks, all it might do is affect the availablity of funding for businesses and other parts of the economy. If it came in it would have to be accompanied by other measures as well I suspect. 

I think if Labour/ Greens got in and had to deliver on the house building policy, they would pretty much have to do #4 (and maybe #3) to stay within budget.

mr tony "can do" alexander ..
yes the problem is solvable - obviously ..
what's radical about that?
all these propositions have been canvassed here before
apart from bringing in additional migrants
you really mean desperates - don't you
can you see the wealthy "princelings" rolling up their sleeves?
the question is - will the cloth-ears in wellington listen to you?

no mention of the obvious - build 100 sqm houses instead of 250 sqm palaces

Why is that obvious? When I look at housing in the median multiple 3 cities in the Demographia Reports, and housing in the median multiple 6 cities, I notice that the pokiest little shitboxes in the median multiple 6 cities are still more expensive than a McMansion in the median multiple 3 cities.
Just at random; compare housing on RE sites from Manchester or Birmingham or Coventry with Nashville or Indianapolis or Salt Lake City. 
It's all down to whether there is a racket being run in urban land or not. End of story.

#5 and give existing non-residents 2 years to sell up or apply and prove their resident status
#6 Not needed in low pressure areas like baches outside cities.
#7 Should be an annual tax of significant proportion of the value

And number nine....do nothing that might crimp the fat profits made by the banks selling the credit drugs.

I have suggested a number of these measures as part of a comprehensive solution on numerous occasions. Hopefully the govt might listen to the Bnz's chief economist as they ignored me

You are in the wrong job Matt !  

Create an SOE - you mean like Kiwibank Tony!!  Sounds like a great idea!!

Yes, an excellent idea until the Nats try to privatise that as well!

Why stop there how about a whole new department of building the full monty they could under cut all others at the same tmie creating tens of thousands of new jobs eliminating unemployment paradise.

In response to Matt In Auckland and Adelaide
 
Greg Sheridan writing in "theaustralian.com.au" on how and why the news-media and governments and politicians become paralysed and thus unwilling to do anything

http://www.theaustralian.com.au/opinion/columnists/people-are-fed-up-with-continued-growth-in-asylum-seeker-numbers/story-e6frg76f-1226662756746
 
There is a direct parallel in this story to NZ's looming housing crisis.

THE Australian people are completely fed up with the boatpeople saga.

But that is not the whole story. The Australian people in their overwhelming majority want the national government to reassert national sovereignty over our borders. When the flow of illegal arrivals in our north started after Labor abolished John Howard's policies in 2008, all the wiseacres said it was silly to get exercised about the relatively small numbers who initially arrived.
 
But as anyone who had studied these flows for a moment knew, once an inflow is established, it will grow and grow and grow.
 
With this week's boats, the total number of refugees who have come since Labor softened the policy is 43,660. But the rate keeps on accelerating and as long as people keep arriving in Australia and don't get sent back, there is really no natural limit to the level it might reach. If you convert the past three months to an annual rate, illegal arrivals are now coming at 40,000 a year. Even without counting the inevitable family reunion chain migration that will follow, you only need that rate for a few years and you are dealing with hundreds of thousands of low-skilled, mainly Muslim immigrants, predominantly with poor English. This is a devastating crisis building up for Australia.
 
Singapore, the richest country in Southeast Asia, could effortlessly absorb 10,000 asylum-seekers a year if it wanted to. But Singapore gets no asylum-seekers because it will accept no asylum-seekers. Singapore understands that if it accepted 10,000 people turning up on its shores this year, then next year it would be dealing with 30,000, and 50,000 the year after.
 
The key concept to understanding what is going on is to recognise that we are dealing with determined immigration rather than a classic refugee situation. This is true even if you accept that the majority of people coming to Australia could qualify as refugees. They make their decisions about where to seek permanent residence on the basis of which nation is the softest touch and which offers the most extensive welfare.
 
The refugee convention envisages people fleeing across borders to avoid persecution. Consider Sri Lankan Tamils. There are tens of millions of Tamils living next door to Sri Lanka in India. They are certainly not persecuted. But India is poorer than Sri Lanka. Australia is much richer. So they choose Australia, not India. That is an immigration decision, not a refugee decision.
 
The Australian Press Council, has ruled that I may not call people who arrive illegally, illegal immigrants. I respect the Press Council, and the integrity with which it deals with such questions. But I believe its ruling is wrong in fundamentally important ways. It leads to a contortion of language and an inability to discuss the issue properly.
 
It is similar to the coercive political correctness, and the institutional enforcement of a left-liberal ideological world view, which has previously crippled Europe in its ability to deal with illegal immigration. The fraudulent and offensive use of Holocaust rhetoric and analogies rendered sensible debate all but impossible.

There is a vast, pervasive pressure against people, especially journalists, speaking plainly and truthfully about this. As Orwell observed, control language and you control thought. This issue needs clear thinking and plain speaking.
 

Are kiwis flooding into Oz in boats now?

"....Singapore, the richest country in Southeast Asia, could effortlessly absorb 10,000 asylum-seekers a year if it wanted to....."
HUH? Kiwis and Aussies are paranoid about "room for housing", and you charge Singapore; population 5 million, land area 710 sq km, with not taking enough refugees????
For comparison's sake, NZ is 298,000 sq km. The Auckland super council alone, has more land than Singapore.

I like Tony's suggestions. Great to see some creative and independent thinking.
cheers
Bernard

Bernard, you do realise that you are personally responsible for a good chunk of both the current boom and the collapse in the number of building consents from 2008 on!!!!!
 
Your public and vociferant comments about house prices being on the precipice of an imminent 30% collapse (all over TV and newsprint headlines), had a huge impact on public confidence.  Hence first time buyers held off purchasing, naive investors started selling which of course made builders and developers cancel plans to build thousands of new homes (the negativity in the market place made me cancel all the building projects we had planned at the time).
 
Of course sensible people were in fact snapping up bargains at that time (which was a better way to make money than building) so nothing got built, and the supply of homes dwindled even quicker.
 
Unsurprisingly, given that we didn't have an oversupply of houses, reality eventually set in (hastened by an EQ) and the public started to recognise that not only is there no oversupply problem, but there is actually a massive undersupply problem!
 
Readers who weren't here in 2008 may not remember my very sharply pointed comments to Mr Hickey, criticising the impact his negative, unrealistic and unsubstantiated comments were having on the market and predicting that prices would not fall much at all on average and that the lack of supply and high new building costs would see another boom come within 5 years.  (The EQ brought that boom forward a year to start about 2012).
 
 
So all thanks to Mr Bernard C Hickey, the bust was bigger then need be and consequently the boom will be bigger.

I was around here at the time, don't exclude Garath Morgan  was making similar comments at the time...

I was around here at the time, don't exclude Garath Morgan  was making similar comments at the time...

Chris j...  ur having us on..??     Do u really think Bernard has the power to move mkts.???     

Can't speak for ChrisJ however the media have a definite impact at the local level BH and Gararth were all over the media continually talking their point of view, still are...I know of a lot of people that are effected by the media. Like the media..lazy people collective actions effect the economy, no question. 

Like the media..lazy people collective actions effect the economy, no question.
 
And let's not forget the untrained, self-proclaimed professionals - the financial world is underwritten by acts of grasping eagerness substituting for knowledge and talent. Read on
 
 

Say what?
 
The "bust" wasn't significant at all.  The market for new build/construction slowed to a near full stop due to this;
 
http://www.interest.co.nz/saving/deep-freeze-list
 
Bollard intervened in what would have been a much bigger individual house price "bust" with his swift series of OCR cuts, whilst English headed overseas to secure our foreign borrowings.
 
Interest.co.nz was awash with comments on the banks charging unreasonable break fees associated with the scramble to get off fixed rate mortgages.
 
The "bust" was an international credit event - locally we got off lightly. 

I was around at the time and I have to say I dont remotely recognise the picture painted by Chris J. By the end of 2008, due to their previous inaction (and the fact that so many had previously insulated themselves with fixed rate deals) the RBNZ had been forced to shift interest rates up to 8% plus to try and control inflation which had hit 5%. The housing market had been allowed to inflate relatively unchecked in the period 2003-2007 and it was a reasonable assumption (which was realised in many other housing markets globally) that bubble would be followed by bust - which the high domestic interest rates were well on the way to initiating (there was a fairly rapid 9% fall or so (QV) in housing prices between the start of 2008 and mid 2009). In fact there is a strong case to be made that the global credit crunch came to the rescue of the NZ housing market - it allowed Bollard the pretext to slash interest rates much faster and to much lower levels than he would have done (for example it initiated a surge in commodities deflation which rapidly impacted our domestic inflation problem).

Exactly as I recall as well.
 

Does the initial cost of a site for development not figure prominently as a problem here? When these are costing developers 10 times or even 100 times as much as they used to........?
Hugh Pavletich calls the developers who could not see the writing on the wall when land prices inflated, "bubble bunnies". And the finance companies and their investors who saw nothing wrong with a "business model" in which 10% per annum capital gain in land values was a "given" are idiots who deserved to lose everything and I deeply object to my tax money being used to bail out any of them. 

No mention of 'use it or lose it' zoning, to prevent land banking. Allow zoning for development to be removed if the land is not developed within a reasonable time frame, say ten years. 
National government slow to realise that you can zone land for development, does not mean it will be developed.

That's a very helpful suggestion. Almost everyone is "slow to realise that you can zone land for development, does not mean it will be developed", especially people who went to "planning school", for some perverse reason. 
I have an even better suggestion. Every property owner in the part of the zone that planners wish to see developed next, has 1 year to sell "options" to any Kiwi citizens who do not own their own home, for a given amount of land in their holding; perhaps from 1/4 acre up to 2 acres. At the end of the 1 year, property owners who have sold options for their entire property, get to sell the land to those who have signed up for the options. 
Property owners who have not sold options for at least 50% of their property, get their property zoned "conservation", and it then comprises "green space" in the growing urban area in perpetuity  - like the Green Belts in UK cities. 
This avoids forcibly dispossessing any farmer who is genuinely attached to his land. It also means that any gains in the value of the land that does get developed, goes to non home owners. They can either proceed to get their own home built on the site they have secured, or sell it and put the "gain" towards their own home somewhere else. 
Of course some 50% or so of a development is not able to be sold as sections - there has to be space for roads and other public uses. This all needs to be taken into account. Those purchasing options in the first place possibly need to buy double what they will actually need for a home. Of course the land will be so cheap that this will still be far cheaper than what a 1/10 of an acre section ends up priced at now. 
Those proceeding to build their own home will need to do a deal with a developer who will provide services and infrastructure. The site owners could form an association and put this out to tender. Some site owners might just sell to a developer anyway. 

Compulsory expiry of Resource Consents might also help and the wonderful thing is that it can be done right now!
 
Subdivision consents are normally issued with an expiry date of a couple of years out. Although practice varies it is possible to apply for a rollover of the consent for a small fee ($750 in Auckland) basically making it way easier for a developer to pick their moment to maximise profit. Once the consent is issued many of the unknowns for a developer are out of the way and its just a matter of timing after that.
 
Outlawing land-banking would be problematic since, if you applied that principle equally across the board, you would also have to ban, say, art auctions. There are no laws against speculating in assets. The only time a developer declares their intentions is when they apply for a Resource Consent to subdivide. So that would be the time to start the timer. Not as good as out-laing land-banking but at least do-able today.
 
The legislation banning extensions would be trivial to draft and pass but I wouldn't be surprised if somewhere amongst all the powers the Nats have granted themselves there isn't the ability for Amy Adams to simply ring Len Brown and say don't do it any more.

Excellent work Tony ... especially from a bank guy ;) The pollies and vested interests will cower ... also notice the usual "spruiker" suspects are remarkably quiet on the comments section of this article ... hmmmmm

Nice effort Tony. How many bags of rice have you got stored at the moment?
A few comments:
1. Long overdue. No child should leave school without a trades skill, job or path to further education.
2. Sure but could lead to patchy infrastructure? 
3. So much for the "free market" :-)
4. Funded with 0% loan from the RB (replicating success of 1936 loan for same purpose).
5. Must be ways around this? 
6. Just get on with a land tax. Somebody must be living in those houses, so doesn't necessarily lead to lower or more "afffordable" prices. 
7. CGT is a given, as a precursor to a general land/asset tax. Of course, you could just jack up rates by adding on a central govt "levy".
8. Sure. Windfall profits to those landholders though, as in the Auckland case. May start to drive up prices outside MUL, as speculators see that opportunity. Perhaps more generous zoning laws could be applied all over? If no 2 comes into play, then why shouldn't people be able to build anywhere, if they have to pay for infrastructure costs (including sewerage/waste etc)?
One issue you are missing is a de-leveraging of the credit system. Strangling land supply has clearly contributed to rising prices but I see no mention anywhere of the switch in lending criteria from multiple of salary to interest only servicing. Leverage is the silent elephant in the room here and needs to be considered in the mix. 
 
 
 

FYI, I've put a new opinion poll up on Tony's 8 options. Vote for the one you like best here - http://www.interest.co.nz/node/64944

1 - still has the problem of specialisation/exclusivity (Alexander obviously hasn't read Buckinster Fuller's '68 Franklin Lecture).
2- Who monitors the corner-cutters? Who pays when the cut-corners come to light? We've had recent experience (leaky homes) of that. All levels wre responsible, but Tony offers no improvement. no guarantee.
3 - There's something to be said for bulk-buying, but you have to eamine other options too. Again. Buckminster Fuller, Franklin Lecture, '68. (mass of buildings).
4. I don't care who does it, if it's properly done. The structural approach is sound - as far as it goes. Build energy, though is only part of a house's lifetime demand. There should be minimum standards much closer to Passivhaus standards - if I can build 135 squares to 'Homestar 8' standard for 50 thou, there's no excuse.
5,6,7 - yes, yes, yes, - but add 'disincentivise all house-ownership after the first, and on an upward-sliding scale'. There is not the excess energy in the system, to fund rentery (or usury forthat matter) any more, without it displacing someone else's gain (1st-home wanna-be's, tenants).
8 A  flat-earth nonsense. Has he never heard of 'goalposts, shifting'? Classic example of economics teaching - here we are staring down the right-hand side of the gaussian, and folk still think in up-the-left-hand-side terms. Classic example of what Fuller spoke of, yet again. In this instance, the lack of correlation between Economics and Physics.Perhaps Tony could enlighten us as to how much area '10-20' kilometres around each city' is, compared to what is presently covered, followed by googling "limits to growth double resources'. Then he could divvy up the area by 1000 square lots, allow 3 people per lot, allow 4 hectares of support land per head (actually, some of that will be elsewhere or discretionary-when-the-chips-are-down, so to keep it NZ valid, say 2 hectares) and assess the displaced dairy 'income'.
 

PDK, you just refuse to learn, don't you, that there is no necessary or causative correlation between  urban density and energy use. This is in spite of YOU consuming exponentially more land than the average citizen, and using exponentially less energy.
What are you, a Pharisee or something? Lifestyle block living for me, growth-containment chicken-coop living for thee? Like your mate Len Brown?
For the zillionth time: all urban amenities disperse at a similar rate to housing, when you let them. We do NOT all get in our car and drive to the centre of the CBD from where we live every time we
1) post a letter
2) take kids to school
3) go shopping
4) go to work
5) go to the pub or club or sports ground
People gotta exist somewhere. It makes nil difference where you are: if you have quick access to the amenities you need to, choose the right technology, and live responsibly. It does make a difference to everybody, without a scrap of discrimination about how they live, if you jack up the cost of the bits of land they have to live on.  In fact by jacking this cost, you reduce the chances they will retrofit double glazing or get low energy appliances or a low emission Honda.
You might get your rocks off at the thought of people being deprived of discretionary income to spend on "consumption"; but the people taking the money from the younger generation (in housing costs) are taking holidays in the Bahamas and flying around in executive jets. Does this make you feel good, in comparison to the money being spent on dentistry or remedial education or healthy food or games or music for children?

Number 5 kicks a home goal, both my folks are agents (not secret, real estate), in the month of April, a client working with their branch purchased 64 homes over a 30 day period, that is just rediculous, average Joe can't compete with that buying power.

Reinforces the point I have been making for some time .. nobody has any idea of the magnitude of what is really going on .. no data .. no information .. no means of obtaining it .. the intellectuals and talking heads keep spitting up conventional one-sided, one-dimensional solutions without even understanding what the causes are (note plural) .. you cant solve a problem if you dont know what the causes are .. for instance land-bankers are a sympton, the recipients .. the beneficiaries .. down at the other end of the benevolent food chain .. they aren't the cause .. not by a long shot .. but the talking heads would have us believe it so

Icon - I've never 'made money' from anything that wasn't a real service, knowing what the problem is when you believe blindly in 'economics'.
  For that reason, I don't 'invest', bet on futures, or approve of 'land-bankers'. But they're all the same thing. They're all gamblers, they all choose their table and their odds, and they all expect to get something for nothing (the $ they 'gain', they expect to acquire 'bits of the planet' with, despite having done nothing actual to the supply of same - a cranial-confusion transfer of the expected purchase as a value, to the proxy itself. They are what the free market is - and one reason why it won't/can't continue. Like usury, they're unsupportable beyond a certain point.
 
But some folk just want to exorcise the gamblers from their particular arena (spot me an anti-land-banker, and I'll show you an investor in some other arena, nothing surer). You gotta laugh.

powerdown: I wasn't thinking of you, but you fit the profile of what I was thinking of .. there you are sitting on your bit of land happy doing your thing .. then one day the ants and the termites arrive .. spreading .. expanding ever outward .. and the developers grease the council and they rezone your rural land as residential .. but you are happy and dont want to sell .. nothing you've done .. not your fault .. but suddenly through the actions of others you are a gazillionaire .. but you refuse to sell .. and later your chillens who share your aspirations, refuse to sell .. it's their ancestral land .. they want to respect and preserve your memory and your ideals .. but they will be accused of being land-bankers ..

Kimy - I'd probably call him an ugly Minister. Amongst other things. Covenants are wonderful things for encouraging disinterest, it's about the only tool to fight what Iconoclast refers too - or was. I remember the post-mistress at Airlie Beach, turning down a million dollars ('79-'80) for her waterfront bach. She'll have been rated out, now.
 
Up until now, all folk like me could do, was move further away. A good read is "Losing it all to sprawl" (Belleville, University Press, Florida). From here on, of course, there is a limit to how much of anything will happen, in any co-ordinated fashion.
 
 

"....spot me an anti-land-banker, and I'll show you an investor in some other arena, nothing surer....."
Your callousness about non-home-owners is deeply repugnant. It didn't even occur to you, did it, than an anti land banker might be someone desperately looking for somewhere to live, that they can afford?
I hope your own kids give you hell over your support for the racket that makes their choices of housing so brutally expensive. 

Tony scores an immediate F for Fail for #2: not understanding what a development contribution is for. Developers already put their own infrastructure in - that's one of the main costs of development not the blades of grass. What they have to put in and to what standards is defined in the Resource Consent conditions. When the subdivision is granted its Certificate of Completion the infrastructure assets are vested in the Council.
 
Tony's "development fees" are, I assume,  what are defined in legislation as "development contributions". These are used to upgrade existing infrastructure around the development so it can cope with the new load - eg new pump stations, bigger mains, bigger roads. If you do not collect these contributions then the developer gets a free ride at the expense of existing ratepayers. Believe me that free ride will not be passed on in the form of lower section prices.

There is some comment however that the contribution is too high as some of that money is syphoned off for other purposes.  Now I dont know whether that is true or not, but Id like to see that investigated and put to rst, ie council should only be charging for actual cost and not for advantage.  ie we shouldnt support the developers as you say, but at the same time neither should they support us existing ratepayers. 
And yes I agree that free ride wont be passed on. The developer has a great ability in pricing the sale at the max the punter will stand, so yes its a profit thing IMHO, however I do think there is such behaviour throughout the construction...
regards

OK there is probably some wiggle room but the basic rule of the game is that if a council does not apply development contributions to the specified purpose it is refundable. Where I have seen this in practice is rural subdivisions where a contribution is tagged to sealing a gravel road. The council gets 5-6 years to seal the road or give the money back. The developer gets the money not the purchasers of sections. But then we all know how hard done by developers are, dont we?
 
So let's walk through this:

  • Every council publishes in its Long Term Plan a policy showing the basis on which it charges development contributions
  • Every development contribution is tagged to specific projects to ameliorate the effect on a community of a specific development
  • There is a mechanism for arguing the quantum or amount
  • If these projects are not completed within a specified timeframe the contribution is returned

By law there cannot be any 'syphoning off' or cross-subsidisation.
The concept is not hard and has been in place for over a decade. So why do we pay any attention to the Very Serious People who have never heard of it?

But it is a very opaque process. New developments will bring benefits and costs. For instance in your rural council example new residents and their rates could pay for new services that everyone benefits from, say a new library. But development contributions seem to assume that new residents only bring costs for everyone else.
Secondly it is unfair from an intergenerational point of view. It used to be that infrastructure was paid a litlle at a time through rates and now new infrastructure is paid up front through development fees. This puts up the price of new housing, which affects the market price of all house values. A transfer of wealth from the propertyless to the propertied.
Getting rid of development fees would reverse this process and therefor help solve housing affordability that many are concerned about.

Only opaque in the sense that you will die of boredom trying to read the policy. I can do no better than quote from our council's 65 page (!) Development Contributions Policy:
For future expenditure:

((cg – s) x 1 ) + ((cd – s) x 1 )

h th

Plus in respect of historical expenditure, for each year in which capital 

expenditure including a growth component has been incurred:

((cg – s) x 1) + ((cd – s) x 1) 

h th 

x a multiplier reflecting funding costs

Where the multiplier is calculated along the following lines for each year 

in which historical expenditure occurred:

(1+ r t-1) x (1 + r t-2) x …(1 + r t-x)

 

You get the general idea. Your points are very good and have reminded me of some stuff I should have put down earlier. Development Contributions don't come anywhere near paying for all the costs of growth. Existing ratepayers will always have to pick up the tab as well.

 

The trouble with infrastructure is that it tends not to be incremental. If you are upgrading a collector road to an arterial to service growth areas in a city it makes no sense to do that 10m each year as funds allow. You do it all in one hit. And as I try to explain here the only sensible way to finance these big projects is through debt. Which delivers intergenerational equity but also lifts rates.

 

I'll have to tease this one out a little more some other time but while we understand the general economic efficiency benefits of growing the population in a given area its not true for the Council as an institution. From the perspective of managing money, work programmes and setting rates councils prefer zero growth. This is not a values thing it is an economic incentives thing. But it may go a long way to explaining a few things.

Family I know had a house in Central Otago.  Surperb example of the benefits of the area.  And furnished inside with the best linens and equipment.  It had the best barbeque veranda on the whole planet.  It had been a railways house and shifted in.
I used it often and at length.  Their business was to rent it to the travelling public and tourists on a night by night basis.
Until the council got involved.
As it was a 'business' there was a vast 'fee' to be paid.  The official name for which was unknown to me but generally 'development'.  To pay for infrastructure.  
But this was in a village that had been there since the gold rush.  And with modern infrastucture already in place for some decades.  So nobody could find any of the new infrastructure the fees were paid for.  Didn't exist.
Family took down the sign.  Disposed of the contents. Rented it to long term tenants for a while.  And sold it.
This is development apparently. 

All properties providing accommodation for travellers in Central Otago District Council area require resource consent except homestays catering for no more than 6 people. Under District plan rules, properties providing accommodation for more than six people were rated as a commercial activity. http://digital.thenews.co.nz/olive/ode/co_daily/
This is something I guess a lot of people are unaware of.  Not all councils have this rule.
 

Kumbei you are a thoughtful kind of guy. I suggest you review the literature around the economic definition of public good. You could start with http://en.wikipedia.org/wiki/Public_good . Many services provided by local government fit into this category. I have had a few drinks after the All Blacks win so I'm not really able help more. But see how you go.

There is some comment however that the contribution is too high as some of that money is syphoned off for other purposes.  Now I dont know whether that is true or not, but Id like to see that investigated and put to rst, ie council should only be charging for actual cost and not for advantage.  ie we shouldnt support the developers as you say, but at the same time neither should they support us existing ratepayers. 
And yes I agree that free ride wont be passed on. The developer has a great ability in pricing the sale at the max the punter will stand, so yes its a profit thing IMHO, however I do think there is such behaviour throughout the construction...
regards

Kumbel;
You are applying your intelligence to the problem.
"....Believe me that free ride will not be passed on in the form of lower section prices....."
Alan W. Evans, in "Economics and Land Use Planning", states that fees are a "share of planning gain". If "planning gain" is already higher than the amount of the fees, abolishing the fees will not lead to a reduction in selling prices of developed property. You are correct about this.
But Evans suggests that most of the benefit of any "free ride" is passed back to the original vendors of the property in higher purchase prices by developers. The "share of planning gain" captured by the original vendors tends to be what takes up any slack, not the developer's profits. 
Developers tend to be the meat in the sandwich; they have to compete with each other for sites as well as for end buyers. Therefore things tend to find their own level, in a condition in which it is not the poor b----y developers who are banking the windfall gains. 
 

Dammit - have to give myself a Fail too for forgetting the difference between a Development Contribution (compulsory and non-refundable) and a Financial Contribution (rarer but refundable). End result similar but mechanisms different to how I describe them in this thread.
 
In my defence it's years since I worked for the Council so I have forgotten how to be right all the time.

Your contributions are very interesting.
There is a system in some cities in the USA called a "latecomer contribution" scheme. That is, one developer who is earliest to a location can be made to wear the cost of getting services to it, but he then gets the right to get a "latecomer contribution" from other developers that end up hooking into the infrastructure and services he paid for. 
One of the things that stinks about our status quo set-up, is that Councils may well be double dipping and triple dipping and no-one is keeping them accountable for it. 
Are you aware that Councils largely favour "infill" development because they shake down developers for "contributions" (which are actually illegal) that actually pay for infrastructure renewal that was supposed to have been funded out of decades of rates
Developers know not to fight City Hall, so Councils get away with it. There really should be an auditing body with teeth to forcibly review and overturn all illegal levies, and to prosecute Council staff as individuals, for obvious abuse-of-power "revenge" tactics against developers later down the track.
This alone would make Councils a whole lot less enamoured with infill development than they are now. 

"Latecomer" would make a significant difference to some of the problems of managing growth. Money would have to go to the owners of the lots as the developer has already recovered all his/her outlays from them and b******d off to Spain
 
Couple of corrections:

  • Development Contributions are completely legal. Think they were authorised in the Local Government Act 2002. My council has a 67 page document explaining how they are calculated and the policy is up for consultation with the Ten Year Plan.
  • Audit New Zealand audits council budgets before they go out to consultation as well as auditing final accounts and they pay attention to stuff like use of these contributions
  • Any problems with a resource consent can also be taken to the Environment Court
  • If a council favours infill over dispersal its because the toal cost of ownership of dense networks is way lower than dispersed ones.

Development contributions are only legal in so far as there is a provable nexus between the development, and costs incurred by Council in expanding infrastructure capacity
I would be very interested to see if there is a Council anywhere in NZ that provides backup calculations of this for fees charged to developers of infill developments, that fit this definition. I have seen some formulas that clearly do not meet the requirements of the Act and legal precedent. 
The argument is being made in very bad faith, to the effect that "we should better utilise existing infrastructure" before allowing more greenfields development. Why, then, charge a developer of an infill development anything at all, let alone almost or just as much as developer doing a greenfields development?
"......If a council favours infill over dispersal its because the toal cost of ownership of dense networks is way lower than dispersed ones......"
Where is the proof for this? The Productivity Commission Inquiry into Housing Affordability looked into the academic literature on this and found there was no conclusive proof beyond that very low density is costlier than not-so-low. The cost of access and disruption for renewal and expansion is very much higher in higher density; and bad planning (lack of rights of way, etc) makes this an absolute killer. 
There is no correlation between the fiscal sustainability of local government and local urban density. Other factors matter a lot more than density. Generally, the US cities with low cost land and sustained economic growth do not have any more of a crisis with their ability to pay for infrastructure, than comparable higher density cities with high land costs. The UK, which has been constraining urban growth the longest, definitely has multiple crises stemming directly from urban-economic stagnation.  
It was calculated in the 2006 "Costs of Sprawl" study that the cost of infrastructure was $80 per household per year higher if growth was unconstrained, which I would have no problem with. The point is that this modest expenditure avoids increased costs to households that are orders of magnitude greater. But because these increased costs consist of wealth transfers to the finance and property investment sectors, of course there is a strong political constituency in its favour. "Environmentalist" politicians and advocates often have not worked out why they are so well funded from certain directions.
Councils actually long since needed to make the case for higher rates and FAR lower housing costs. One step might be taken backwards, but several taken forwards. 

Perhaps "tends to be" would have been more accurate but here's three proofs:
 
1. Logic
If a water main supplies 20 properties over its length it will cost exactly half per property over its entire lifetime (commissioning, repairing, replacing) than if it only services 10. Before we get excited about different size pipes there is a simple rule with below-ground assets: it's digging the hole that costs the real money not what you bury in it.
2. Empirical evidence
The taxpayer had to pay Telecom/Chorus to supply broadband to rural communities
3. The evidence of the Productivity Commission
On p112 they say
However, despite the difficulties the Commission has identified, the main findings are:

  • All else being equal there are capital savings in infrastructure from higher densities and savings in transport from shorter travel distances (although this is generally estimated as the distance to the CBD). However, the magnitude of the gains available and the capacity to achieve them may well be overstated.
  • There are diminishing gains to increasing densities (high density may be more costly than medium density) and the relationship between transport time, distance and cost is non-linear.
  • A significant proportion of any cost differential between different urban forms is borne directly by householders (by way of transport costs and by the infrastructure and subdivision development costs that are incorporated in house prices).

(I have been waiting a long time for my "Annie Hall" moment - thank you so much for providing it)
 
Please recognise that I was talking about the network operator not the total picture. Please also note that the Productivity Commission were mainly looking at the contribution that up-front infrastructure works made to the sale price of a plot of land.

Love it except for the part in no.1 re the migrants.  We don't need any more migrants - they would add further weight to the problem by exhausting more of the housing stock.

Love it except for the part in no.1 re the migrants.  We don't need any more migrants - they would add further weight to the problem by exhausting more of the housing stock.

Just about every suggestion made will result in higher rents for those who choose or need to rent.
More controls equals more distortions. Taxes of any sort push up prices. There is only one sensible solution. More supply and abolidh gst for first home buyers. There will always be the haves and have nots and controls will make the gap wider.

Just about every suggestion made will result in higher rents for those who choose or need to rent.
More controls equals more distortions. Taxes of any sort push up prices. There is only one sensible solution. More supply and abolidh gst for first home buyers. There will always be the haves and have nots and controls will make the gap wider.

BD. The simplistic answer would lead to your conclusion.
Some of these ideas actually reduce the pressures from investors and can reduce prices for existing properties. After adjusting to lower prices yields can be maintained with lower rents.
The market will accommodatemoves both down as well as up.

#5 still has the potential to be the elephant in the room and the quickest and dirtiest market mover. 

Bernard as you will know I have advocated a multi-faceted solution revolving around a number of Alexander's solutions, for at least the last 3-4 years. On this website and in letters to MPs so alexanderl's multi faceted solution cannot really be called creative or original. But it's good to see soomeone I have considered a spruiker coming to the party with solutions. I guess kiwis are just really slow learners

Brendon: Upthread. Property player buys 64 homes in one month
 
Something is going on. One could extrapolate from that a number of scenarios and possibilities. I could offer a plausible explanation. But would prefer to know (a) the region or locale (b) the nationality of the buyer (c) resident or non-resident (d) were they all bought and registered in same name (e) was it corporate (f) were they registered in the names of one or many different trusts or company fronts, or (g) registered personally in the buyers name (h) financed? (ii) cash? (j) source of funds - domestic or off-shore. Brendons post comment-740842

Keep pushing, this needs to be exposed  - NZ is too small to accommodate fleeing capital trying to protect value in our domestic dwelling market - didn't we just receive anecdotal evidence of a Japanese buyer consummating the purchase of 27 individual properties before heading back home?

Listen to the chatter ..
rivers run deep .. while the locals froth and bubble on the surface .. talking about the symptoms .. never about the causes .. down below .. under the surface .. in the sludge at the bottom of the swamp where daylight never penetrates .. under the cover of darkness .. there is a bigger play going on that has no regard for Len Brown .. Penny Hulse .. Hewey, Dewey, and Lewey .. they, along with a lot of other people, are simply pawns, collateral damage .. I see a lot of real-estate being taken off the monopoly board .. price no object .. the cloak of anonymity is provided by the silence and invisibility of data .. one day someone will look back and ask "how did that happen"

Assumptions
The 64 properties are located in Auckland
Average price $500,000
 
Total outlay of one individual in one month $32 million
Improved Value $32 million (land+dwelling)
Unimproved Value $16 million (land only)
 
This type of land acquisition and aggregation is dis-incentivised in AU where Land Taxes apply once you start acquiring more than one property. The Land Tax liability kicks in when the unimproved value of all your aggregated land holdings exceeds $400,000, the Land Tax rate reaches 2% in NSW or 2.25% in VIC when the total land value exceeds $3 million
 
Property investors get their private personal residence plus all investment properties aggregated together. In Victoria there is a lower threshhold for properties owned in a Trust Structure thus dis-incentivising shifting the family home into a Family Trust
NSW http://www.osr.nsw.gov.au/taxes/land/rates/
VIC http://www.mymoneycalculator.com.au/land-tax-rates-thresholds-vic/
 
These Land Taxes are in addition to Local Rates, Stamp Duty on purchases and CGT
You may wonder why New Zealand is seen as Tax friendly to Overseas Investors

Hey there is a Brendon (myself) and a Brendan who wrote the thread Iconoclast is interested in.
 
A little confusing but we should get used to it. At least we do not have another Stephen...

Maybe this will just limit growth of auckland, which would be a good thing......so more people don't move here. They should limit foreigners coming in and foreign investment. 

Nothing that may be done can stop the inevitable rise and rise of real estate prices. Maybe some actions will have short term effects but the future is clear. Having just been to London the prices of homes are astronomical. The pressures on London property may be hard to compare to NZ but the direction is obvious. In good parts of London rents start at 4000 pounds per week for an apartment rising to 20,000 pw for luxuary accommodation. A shoe box in a dodgy suburb is 600 pounds Quality two bedroom apartments start at 3million pounds and rapidly rise through 5million pounds to 30 million pounds. Any many are leasehold as well. Capital gains tax makes it much more expensive still. I visited an ordinary small home north of London in an ordinary working class suburb. The owners had just paid 500,000 pounds for a tight semi detached house of no more than 70m2. And they regarded that as a bargain. Within 50 years it will be the same here. In london over half the population are renters. Open your eyes and research for yourselves. This is the future controls or not.

"The pressures on London property may be hard to compare to NZ"
 
Exactly - there are no real Brits left in London, its all Russian billionaire wide boys hiding from Putin or Asian funny money. Whole areas of London look like downtown Islamabad. The City of London is more unregulated than Wall Street and is the center of the Global Financial scams eg London Whale, interest rate rigging...
 
Definitely not Auckland, not yet...

Rubbish, London is absolutely unique. It is turning into a de facto gated community for the WORLD's elite super wealthy. It is one of a handful of genuine "global cities" as defined by Prof. Saskia Sassen. 
The rest of the UK's cities are examples of what happens to ordinary cities when you strangle them with growth containment policies. You end up with an economic basket case city, high unemployment, and still-unaffordable housing of appalling quality. Detroit without the low density and housing affordability. Detroit will recover. Liverpool never will.
Houston is far more the model city than London. Thinking you can emulate London by urban planning is about as intelligent as primitive savages and their cargo cults - clearing landing strips in the jungle for the magic birds from the gods that make the white men rich. 

#1, no way, we need to shut down immigration. Chronic unemployment, lots of real Kiwi guys would jump at chance to get skills training.
 
Hanging Kiwi men out to dry and spend tax payer money importing Indonesians and training them to take Kiwi jobs - already happening anyway  :(
 
Tony Alexander is out of touch with ordinary NZers - he earns obscene amounts of dosh and swans around in luxury - bet his kids aren't freezing in leaky or uninsulated substandard rental accommodation. He doesn't have to report to WINZ every week like a detainee to prove he is "job searching" for non existent jobs.

More to the point, Tony's "builder training" used to be called a "building apprenticeship" - and it was paid work.
 

Add a parking space to your new cheap house.... the world has gone mad!  http://www.nytimes.com/2013/06/15/us/two-boston-parking-spots-sell-for-5...

There is a problem, people don't want to settle for less, a lower dwelling. Our happiness is caught up in our materialistic mindset, almost a god that we serve. We will forever be chasing our tails if we are to serve this god of consumerism. If not houses, it will be furniture or new cars etc etc, things are not dependable.
I am quite content in a sleeping bag, free of addiction, free of debt, free of depression and anxiety......what are most important in life? money and stuff or our sanity?
 

I agree with some of the points, but not others. 
 
I beleive some states in Australia, do restrict people buying existing houses, if they aren't residents, which I can't understand why they don't do it here. I think they have to build a new house, if they want to buy one, which is a great idea.
 
Nz's system is seriously flawed, but by the time they fix it, will will likely be too late.

Probably a tad late to be placing a comment but....Tony Alexander has got a touch of 'genius' in him for sure...I've been following his commentaries for a long time now. He would have to be NZ's most unconventional economist by far...a lateral thinker who blends everything and all into a personal theory of how things should or could work in NZ, treating a lot of the mainstream 'boxed' thought processing with impunity. He's often right and down right visionary.
I would boil it down to his informed first hand experience of world macro-economics and how it relates and overlaps directly with NZ's 'isolated' niche-economy. He's definitely a breath of fresh air!
No for Prime Minister - Maybe Reserve Bank Governor!!
Either way Politics would spoil a great asset.
Cheers Tony, EN

The system is a failure because there are too many low skilled, impractical people with letters after their names formulating and then implementing unworkable, rediculous policies. These same low-skilled people with all the letters after their names have never done a practical job in their life and this is the biggest impediment to NZ and the NZ economy and the housing supply shortage.
 
Take a builder for example they used to submit 3 pages of plans and 25 to 30 pages of specs, they now have to submit around 15 to 20 pages of plans and 300 to 350 pages of specs for a house build for approval with Councils.
 
There is nothing to stop builders from starting their own Co-op similar to that of CRT now Farmlands and sourcing supplies and competing with Fletchers and Carters the Government certainly shouldn't get involved and form another Ministry or similar for the purposes of material supply.
 
Everyone in private enterprise has to keep one eye on their business and one eye on the beehive all the while watching their backs for their bureaucratic regime that has been unleashed.
The Government, the Councils and the bureaucrats need to take their foot off the brakes and let those who do the actual work (the highly skilled) get on with it. 

I think there are three main problems.
 
1) We dont have enough builders and we should be cranking up trades training. The Government and Industry can do something about that but it will take at least a couple of years to make a difference even if you took the post war approach with rehab training schemes.
 
2) It costs too much to build here. Not sure if that is material costs or building regulations.
 
3) There is no development finance any more since the Finance companies all bit the dust.
1 and 2 are long term fixes  but the Govt could do somethng about 3 pretty quickly if they wanted to by setting up a new DFC to fund development in housing hot spots.
I dont necessarily think opening up land on the far flung edges of Auckland will be seen to be a very smart thing in  a few years time when petrol is twice the price it is now. That will happen at some point and those sub divisions will be uneconomic to live in. If Auckland is going to grow it will have to do it within its existing foot print. That does mean higher density .

This list is inspired genius! It will never happen of course, but qdos to Tony Alexander for coming up with this plan (which will be ignored).