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AUT Professor says the Government can't rely on the private sector to develop affordable housing in Auckland and will need to do it itself

Property
AUT Professor says the Government can't rely on the private sector to develop affordable housing in Auckland and will need to do it itself

One of the country's leading academics in the building sector says the Government needs to get more directly involved in housing development to solve Auckland's housing crisis.

Professor John Tookey, Head of the Department of Built Environment at Auckland University of Technology, said simply rezoning more land for residential development or for higher density housing was unlikely to significantly increase the supply of affordable housing in Auckland.

Tookey said there was already land in Auckland that was zoned for high density housing that wasn't being developed and simply increasing the supply of land wouldn't solve the problem.

"Builders and developers go to where they can make the most money and at the moment they can make the most money with the higher priced properties and that's all we're getting," Tookey told interest.co.nz in a Double Shot video interview.

"The apartments being built now are not affordable by any stretch of the imagination," he said.

Tookey believes the solution is for the Government to directly commission large scale affordable housing projects in Auckland.

However this did not necessarily mean ramping up construction through existing state agencies like Housing NZ.

One of the options the Government could consider would be the use of Housing Associations, which were common in the UK, he said

Under that model, a Housing Association would receive government or council funding to develop large scale affordable housing projects, and would co-own the individual dwellings with the people who lived in them.

People on low incomes could purchase a stake of 40% or so in their individual dwelling from the Housing Association, which would own the remaining 60% stake.

The residents would finance the purchase of their 40% stakes with a mortgage and would also pay the Housing Association rent for the share of the property they didn't own.

The residents would also have the option of buying the remaining 60% stake from the Housing Association if their financial situation improved, or of selling back their 40% stake if circumstances demanded it.

Tookey said one of the problems facing New Zealand's residential construction industry is that it's dominated by small firms that aren't able to generate economies of scale that would help bring prices down.

If government agencies, whether they be Housing NZ, Housing Associations or some other model, were to directly commission large scale developments, that would give bigger building firms a pipeline of work that make it worthwhile for them to invest in developing high volume/low cost construction methods such as using more prefabricated building technology.

Housing Associations, or similar organisations would also be able to form Public/Private Partnerships with developers/building firms to undertake large scale developments, with some of the resulting housing stock being sold on the open market and some being retained by the Association.

Amending the Building Code to allow three to four storey timber framed tenement housing would also help lower costs, Tookey said.

He also had a warning about the high level of investor activity in the Auckland housing market.

"There's an awful lot of investors who are, from a cash flow perspective, just covering their costs," he said.

"All it's going to take is a minor correction in interest rates, a minor upward upward tilt, and all of a sudden folks are going to be under water."

Tookey's comments come with Mike Greer of Mike Greer Homes calling on the Government to substantially increase its involvement in funding the building of tens of thousands of new homes in Auckland.

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93 Comments

No, but changing the RMA would make housing a lot more affordable. Let people throw up an apartment block in the middle of Ponsonby (as long as it meets building codes) and supply will respond.

Too many hoops to jump through and too many nimbys are the real source of the problem.

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Thank heavens for people like John Tookey,an academic willing to speak out and who is respected in his field and close to these issues .

He someone happy to state the obvious to our dozy politicians , and local councils who rort us for all manner of fees, levies , charges and are part of the problem and not the solution.

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He's right , rezoning more will not bring down prices ... especially when Watercare ( for example ) has increased the price of a water connect for a single dwelling from $5,000 in 2011 to over $14,000.00 in 2016 .

Inflation for the period was 2% per annum , and those horrendously over-paid public servants have increased the fees for a water connect for a new section by over 30% per annum compounded

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"There's an awful lot of investors who are, from a cash flow perspective, just covering their costs," he said.
That, is the most interesting thing that he mentions. If its true then the banks are not being prudent with their depositors money. You can be 100% sure that these loans will not be in the covered bond pools.

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Tookey said there was already land in Auckland that was zoned for high density housing that wasn't being developed and simply increasing the supply of land wouldn't solve the problem.

It is not being developed, because the cost of land is too high and when the cost of building is too high it does not get built.

Simply by increasing the supply of land, we will bring the cost of land down and that would solve the problem.

Tookey believes the solution is for the Government to directly commission large scale affordable housing projects in Auckland.

Tax-payers should never subsidise the profitability of Auckland land bankers. The land bankers have convinced Auckland Council to severely restrict land supply, so they can have ever increasing profits. Good for them, but as a result they have blasted through the price point at which most buildings can be built and are now into the highly speculative phase of the cycle. The last thing we as a country needs is for the government to step in and inflate the bubble further.

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"Simply by increasing the supply of land, we will bring the cost of land down and that would solve the problem"

Yes, yes and a million times yes. That really is all there is to it. And the Opposition parties and Auckland council have consistently opposed every effort the Government has made to do just that.

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It would if we didn't have almost limitless foreign money competing with us for it. Sorry, but until we divest ourselves of foreign buyers it wouldn't matter if cut the whole country up into 300sqm sections

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The place isn't that popular. Less than 2% of land is urbanised. Suggesting there isn't enough land is a cop out.

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I call BS on your first sentence.
Each person requires a certain amount of land, be it right under their feet or even in another country to produce the food they need, so you could stack people shoulder to shoulder and say you can fit x number into x sq km but you still need land somewhere to grow food.

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It is moot point if NZ is popular or not but such a low population is a bit of a hint. North Island is about the same size as Java and they stick 140 million in there. Global population growth rates peaked in the 1960's, the absolute number of babies being born has peaked. We've even passed peak 18 year old and average global age is 29 so quit fretting about food production.

It's sad how chicken little do gooders cost FHBer's opportunities. The not enough land excuse in a country the size of NZ is a joke. The reality is the vested interests know releasing a lot of land for housing development will crash the housing market and no one wants to carry the can - so tough luck FHBer's your timing was out.

"For several decades before the 1970s, the area of land used for corn cultivation in the United States declined absolutely, despite growing production.

...allowing for wild cards, we believe that projecting conservative values for population, affluence, consumers, and technology shows humanity peaking in the use of farmland. Over the next 50 years, the prospect is that humanity is likely to release at least 146 MHa, one and a half times the size
of Egypt, two and a half times that of France, or ten iowas, and possibly multiples of this amount."

http://phe.rockefeller.edu/docs/PDR.SUPP%20Final%20Paper.pdf

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While population growth rates might have peaked, they have not dropped to the point where it is not still increasing, and is now coming off a much higher base than before so actual numbers still high, percentages tend to hide that sort of thing.
It is only very recently since we have been experiencing pressure on our land and housing, it is not going anywhere but up.
And while there be enough land, the major factor is the ability to earn a living where it is, having to travel hours to get to where you do is counter productive.

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Well free up the up the land and let the FHBer's decide. I deplore we know best rent seeking vested interests. Think of how many business start ups there would be if you didn't have to fork out an extra 500k + interest to put some corro iron over your head. Where would you sooner see the 500k + int go - to a bank or into a business or a family etc. A least give FHBer's the option to choose!

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Jesus wept, it's not me wants to prevent them from buying I just don't think freeing up land is the only answer or the most effective one, demand MUST be dealt with first. I suggest you take a ride to Hamilton sometime and check what is going on here in terms of land and houses, springing up before your eyes, and guess where prices have gone and why. And just how much infrastructure do you think New Zealand people should pay for foreigner to buy here and help themselves to a bit of welfare money in the form of top ups? It is happening. All well and good being the fhb who could buy a $500k house, if they weren't outbid for them all the time.

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So your opinion that there is not enough land and we need land for food has gone out the window and you moved on to johnny foreigner and welfare bludgers. Sure freeing up land may not be the only answer but it is the simplist and fastest and doesn't require yet another army of public servants to monitor who has a foreign name and who doesn't. Keep it simple.

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The quickest answer is to exclude foreigners, it could be done tomorrow, there is nothing else that could be as quick as that, it's effect would be immediate, as it has been in Vancouver with the foreigner tax.
And what I said about land is that you cannot have people pushed further and further away from where they work. Things are being more and more centralized even though we thought a few years ago that would not be the case. It may still be the case in the future, but in the meantime if we push more and more people further and further away from their source of income, phenomenal amounts of money and time will be needed for infrastructure. Auckland is particularly bad for this because of its geography, it HAS to go up, just spreading further and further away without doing that first is just daft.
And so far, no one that argues the toss about foreigners in the market have ever come up with one single, solitary benefit they provide, not one.

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Mate it's hard to say if you are simply naive or running a false flag. Banning johnny foreigner is the simple answer that could be done tomorrow. Really. Take a trip to a place like Bali. Illegal for foreigners to buy land there but they do all the same via nominees, holding companies etc. That isn't even getting into the time consuming rigmarole of renegotiating international trade agreements etc.

If you think "excluding foreigners" is a quick fix you are going to be disappointed. Freeing up land is transparent for all to see and free from potential corruption. Banning foreigners is a license for more bureaucrats, lawyers, nominees etc. It will just be a another unproductive cottage industry that is difficult to quantify.

Politicians love "ban foreigners", wars on drugs, tough on crime crap cause they know almost impossible to measure so will never be held to account but it makes for great sounds bites. If some dude wants to buy property here they will find a way. The quickest way to flush 'em out is open up some more land and drop prices 40% - problem fixed. Unfortunately for FHBer's will never happen - the voting majority don't see a problem or rabbit on about running out of land, foreigners or any other side show to keep the capital gain train running.

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Perhaps 100% confiscation will sort a few cheaters. Opening up more land will take YEARS for any effect to take place, far too late. Sorry, but I will stick with dealing with foreigners, they have no business coming here and buying job lots of houses and renting them back to us, I bet that's not happening in Bali!

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Years? Yeah right. Rapidly increasing land suppply would crash land bank values overnight. Simple. Transparent. Feeds immediately into FHBer's pockets so they can get on with business, life and not be forced to support the status quo. Perhaps you're too vested to lend an ear to the simple, transparent option perhaps? Keep chasing those foreigners, then you can move to chasing the nominees, holding companies and their local support teams. Log on to Air BnB and see how many foreigners you can rent a villa off in Bali - I suggest you don't make any bets.

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Plenty of academic papers out there on "the decentralisation of employment and the stability of commute time in expanding cities". The idea that everyone works in the city centre and expansion causes longer and longer commutes is simply ignorance. Los Angeles and Wellington have around the same average commute time even though LA is 28 times larger. Wellington is on the high side for a small city because it is a global outlier in having retained 35% of regional employment in one CBD; the average is more like 15%.

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Land by itself is no the problem.

People don't necessarily want to live miles away from work/school/family/friends. There needs to be infrastructure. What use is a paddock with 500 homes in it, if there are no schools, shops, transport links, etc....

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Land by itself is the problem, because people don't want to live miles away from work/school/families.

The idiocy of Auckland "planners" is immense.

Auckland actively expands Wellsford, Warkworth, Kumeu, Silverdale, Pukekohe - virtually paddocks in the middle of nowhere are all that Auckland allows.

However we are forbidden from building on the Clevedon/Ardmore plains - where there is existing infrastructure, transport, schools, families are all that much closer.

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What city in the world that has kept housing affordable by expanding, has done so without expanding in roughly balanced proportions of housing, business and amenities? There is no excuse to perpetuate a racket that ultimately costs all future generations of home owners, several times as much in housing costs as what should have been spent on infrastructure and amenities. The expanding cities (mostly in the USA) will own the future, and a lot of shallow thinkers will be baffled "why".

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Those cities went up before they went out, Auckland needs to do that first as well.

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That is not strictly true. If cities have been there long enough, what they all had back before the automobile was invented, was very high population density. Building "up" has not in fact ever been the cause of increasing population density. Manhattan's population halved over the decades that its floor space increased tenfold - simultaneous with New York urban area spreading out at low density for tens of miles in several directions.

The densest ever inhabited location was Kowloon Walled City, an illegal slum in Hong Kong, and it was denser than the surrounding areas that had the skyscrapers although it was around 5 stories high max. Google it - it is like a horror movie set. The densest cities today are Dhaka and Lagos - which is not because there are a lot of skyscrapers there.

In fact building "up" has occurred during the same phase of economic development that people became more mobile, and frequently both expansion and building "up" occurred simultaneously, with floor space per person being increased massively by both. Now I suggest something counter-intuitive but supported by the evidence: without outwards expansion, which is what flattened the urban land rent curve, LESS building "up" occurs. I know people blame "height restrictions" for London's housing crisis and the fact that Manhattan, its most significant "global city" rival, permitted and got skyscrapers that London did not. But the fact remains that for decades, Plan after Plan in London has increased allowed heights and intensities for thousands of sites and there is only ever a pathetically inadequate redevelopment response. Obviously in the face of a screaming housing shortage, something other than regulations is preventing the market from responding with supply via this channel. The answers are to be found in NZ's own Arthur Grimes and Andrew Aitken's 2010 paper which finds that "the profit potential from redevelopment is impounded in rising site values". See my longer comment elsewhere on this thread for more explanation.

There are cities that have never done much building "up", and it has been mostly "out". There are cities in the USA with 4 to 7 percent of total urban area employment in their main central CBD, including Los Angeles. Ironically the US city doing the most building "up" and intensification today, is Houston, followed by Dallas - proof that this occurs most efficiently when the urban area is also expanding and keeping the land rent curve low and flat, so that "profit potential" is NOT "impounded in rising site values". This was the beneficial reality in New York when most of its skyscrapers were built; but now that its freedom to spread has been restricted, it is starting to have the same problems with upzoned sites remaining undeveloped and the values skyrocketing without any landowner having to do anything but sit on their backside. What gets tall buildings built, is when the profit potential is in providing floor space in response to true market demand, at equilibrium prices that maximise up-take.

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Again, the earnest Prof has a fraction of the answer.

Building construction methods also need to change substantially:

  • More modular designs
  • Design statement: Fast, warm, small, cheap
  • Robotics and CNC instead of occasionally drug-tested hammer hands
  • Built inside factories, to sub-millimetre tolerances instead of clonked together in the Awkland weather and then left to mature uncovered, like a fine cheese
  • Factories need volume to cover amortization of capital, so the Prof is quite right about the volumes needed to be stuffed through them
  • It's the poor and FHB's who need the houses (the well-off, unexpectedly, seem to cater for themselves quite well) so that's where the housing design and tenanting needs to concentrate in the first instance
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One problem with making structures more cheaply, is that in a rigged land market, land prices will merely rise to take up any slack in consumer's available funds. It is incredible what capitalises into land values in rigged land markets. Lot of things should have beneficial consequences, but don't, because of the rigged land market. Low interest rates used to just boost things like housing construction and home ownership, as did subsidies. Now it all gets sucked into the land-rent black hole. Accommodation supplement likewise has been turned into land-rent fodder. Middle class welfare ends up there too. Tax cuts will, and so will any increases in incomes. Zoning for higher density just increases site values and nothing ends up "affordable".

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Agree, Phil.

As Dylan noted some decades back:

"power and greed and corruptible seed
Seem to be all that there is"

Blind Willie McTell.

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Pay for it with stamp duty and vacant land tax. Build targeted housing for high demand public services in Auckland like Police, Teachers and Nurses as well as social housing for middle income earners with capped rents. By product may be a reduced demand to buy and thus help to curb house prices.

Dozens of 400m2 section over the fence from us sold for $260K to building companies. They can only build 160m2 houses, but are asking over up to 770K for house and land packages. There must be at 40% margin in that. Just seems like price gouging to me.

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Thanks for your comments one and all. Although I notice that the easy way of laying a passive-aggressive 'slap down' on a academic is to label the individual 'earnest'. Needless to say is I was more upbeat and humorous in the assessment then I would be 'flippant' or somesuch. Whatever. Obviously I am deluded and naive as an academic. However, when I talk about the behaviour of the building industry it is built on substantial experience and speaking extensively and at all levels to participants in that industry - both constructors and developers. If you actually take the time to speak to builders, you will find they are more concerned with planning for the next bust period of the boom-bust cycle rather than playing altruist and building affordable homes at a lower unit profitability. Builders do that by not taking on board any more work than they can cope with. Why build themselves out of a job more quickly and more rapidly bring about the bust they fear? Most I speak to think in terms of between 3-5 years until the good times stop for these guys. I would invite anyone reading this to go and speak to a builder for the truth of this. Even at the top of a boom market you see construction companies going bust. Why? Their risk profile is appalling and their profitability is marginal even at the top end. Nor is their capacity scaleable as I said in this interview. Whilst land supply is a factor it is not THE ONLY factor at the root of the problem. i.e. the assumption that more land, released and consented more cheaply and rapidly, equals more housing more quickly is fundamentally flawed. This is only true if the capacity of the industry can scale up rapidly to demand and the market operated as a 'perfect' economic model. But it does not. In reality we do not have a large amount of surplus capacity to offer in either Auckland or NZ as a whole. Arguably the problem is multiplied by the twin crises of Auckland housing and the CHCH rebuild. Our industry is fundamentally skills constrained - ask any builder. We cannot readily absorb additional demand increases with transient skilled labour. 2000 Polish plumbers are not likely to be on the Kiwi equivalent of Eurostar and rock up in central Auckland at the drop of a hat. Also our industry is largely (around 98%) made up from small, one man band, ephemeral companies that subsist from invoice to invoice. Builder’s merchants are referred to as the builder’s banker – the 30 day credit terms of whom keep the small builders going. The risk profile of these small companies is such that they spread their effort over several projects at any one time to keep the money turning. These small players that make up the bulk of the industry have no realistic ability to scale up production without taking on more staff and loading up their risk – hence the cost to build things climbs in high demand times. In addition they are inefficiently organised, having minimal bargaining power compared to the larger group builders.

Land is just a type of ‘material’ of the process – just one factor of production. Is it important? Yes. However, availability of material does not in itself imply higher rates of production. Thought experiment: Imagine Toyota got an additional million tonnes of sheet steel dumped outside one of their factories at zero cost. Will that inevitably lead to more cars in circulation? Maybe but not likely. Toyota may up their production to a point, however their brand is more quality focused. Consequently they are likely to increase it to the optimum rate of the of the factory. But they are also not likely to want to undersell their brand. Are they likely to build a new factory because some cheap materials are available in the short term? Probably not – unless this newly available factor of production can be guaranteed. This is analogous to the current situation with regard to land in Auckland. The industry has finite capacity, is fearful of a bust period and is planning for the future – hence the apparent volume constipation.

The structure and technology of the industry. High density affordable houses are more expensive to build (per square metre) than larger properties. This is at the heart of this particular piece. Ask any house builder - they will tell you. Typically ‘affordable’ homes are two or more storey and attached rather than detached. The scaffolding required (thank you H&S act 2016) plus other constraints on construction lead to a cost of around $3k/m2. By contrast larger single storey houses are $1800k/m2. The result? Affordable homes are affordable to the end purchaser, not the builder – who in turn are not likely to altruistically build lower margin housing for the benefit of the purchaser. Furthermore for the same reasons new commissioners of construction tend to specify the largest possible house on the sections that they purchase in order to lock in the maximum residual value. You may wish to consider the following articles and wonder why SHAs are not building their affordable quotient. Try looking at these sources.

http://www.stuff.co.nz/auckland/local-news/manukau-courier/79872411/otar...
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1169...
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1154...

Affordable houses that the market is crying out for are 2-3 bedrooms. As a result of this series of constraints and issues we build too few houses of an inappropriate size (4-5 bedrooms) to address housing affordability concerns. Compare the dwelling bedroom numbers proportions in the census from 2013 and the trends demonstrated. Note the increase in 4-5 bedroom dwellings.

http://www.aucklandcouncil.govt.nz/EN/planspoliciesprojects/reports/Docu...
http://www.google.co.nz/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&cad=rja...

A further aspect of industry structure is related to the numbers of land development companies in operation. Practically it is a hard industry to get into since there is a need to invest in substantial amounts of expensive equipment - fixed capital investment that makes the business much harder to turn a coin compared to a jobbing plumber or similar. The reason that you do not get every man and his dog setting up is that the kit required and the risk they take on (anyone who deals with geotechnical engineering risks will understand this) implies substantial companies with significant capital investment. Doubling the amount of available land will not in and of itself double the number of land developers or the capacity to deliver developed sections. Again these same players were burned in the last boom-bust cycle and play the game conservatively. They do not take on board more risk than they have to. Maybe they lease a new grader. Maybe a couple of backhoes. However they will not dramatically increase their capacity since they will stoke their overheads accordingly.

Anyway – I could go on but will not. The bottom line is this. More land does not equal more housing in any meaningful way to address the housing crisis. It is a contributor, not the only game in town. The industry is not scalable to cope with demand expansion – infinite capacity it most certainly does not have. Investment in the industry is low since the long term scale of the industry is such that investment in capacity continues to be seen as a waste of money with a looming ‘bust’ just around the corner. The industry is inefficient since it is primarily constituted by micro enterprises with little buying power. The market is what it is. If there is any genuine interest in sorting the problem in a reasonable timeframe then it will require government intervention to incentive or compel outcomes not inputs – period. In the final analysis we are in a mess. We need new thinking. Einstein said “We will not solve the problem by using the same reasoning that created the problem in the first place”. By contrast current thinking in society regarding land availability is the equivalent of Abraham Mazlow's (the hierarchy of need guy) observation who said "if the only tool you possess is a hammer, then every problem becomes a nail. Land release is not solving the problem in any meaningful timeframe since outcomes are not compelled through 'use it or lose it clauses etc. We need to think bigger.

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Wow what a response!
"Affordable homes are affordable to the end purchaser, not the builder"
Exactly. This is why (unless someone is throwing away money) I think that affordable homes will always be old "do-ups" houses in less expensive suburbs. To expect new houses/ apartments to be affordable is unrealistic. But people (politicians mainly) keep saying that large numbers of new builds should be affordable.

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Thank you for that. This was not a quick knock off response though. I am minded of the George Bernard Shaw quote "I often quote myself. It adds spice to my conversation". Actually I replied similarly to a previous thread when I was quoted in truncated form on the site - http://www.interest.co.nz/opinion/83521/john-tookey-reviews-impact-prod…

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Thank you for sanity, Everywhere in the western world affordable housing is provided by regulation, local, central,quasi government agencies or the church but not by the "market". I think the fundamental problem was the "state house" and the consequent-less universal welfare state which so closely linked self interest to political affiliation it inexorably led to the rise of the entitlement complex. The result is the current neoliberal laissez-faire counter reaction.
Shelter is a human right and must be core to a civilised society, but this does not mean that it is a birth right without responsibility. So yes housing associations with a suitable distance from central politics have a lot to commend them not least of which is that they would not be used as a political bribe

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I did really appreciate the article - er - earnestly!

My point remains: construction methods need to change to closer to those used for boats, planes, caravans, cold rooms etc: structural insulated panels, modular design, yada yada.

I repeat the design criteria: small, warm, fast, cheap.

The current response to precisely these criteria are Tiny Houses, which suffer exactly the woes of Large Houses: they are still clonked together from a mound of bits, by relatively unskilled hands (even if said hands are those of the owners). It's tolerable because the issues also scale down, but it's not a realistic response for volume or livability. The other response by consumers is what we've seen" cars, vans, old moist caravans, and (just spent a week right there at Frankton/Queenstown) trailer parks/motor camps.

This required style of volume construction, of course, is not gonna be usefully staffed by the outputs of the various ITO's as currently constituted. Unless they start CAD and CNC apprenticeships. Earnest as they are, they are fighting the last war, not the present one.

Which is, to be clear, decent housing conditions for the poor and for FHB's. Them's the market.

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Someone is going to have be made to cut up land without harsh covenants on it, won't they?

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John have you studied the housing production industry -from bare land or the existing intensifiable urban area to the constructed/saleable end product in affordable markets in places like Texas, Germany or Tokyo where housing is affordably provide? Housing associations might help but they have't provided a stable long term solution in the UK.

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Interesting question. Specifically no as part of the day to day research. However using a 20 minute window, let us look at the conditions of each.

Tokyo – megacity (18m+ in the city and prefecture) with a history of taking a macro approach to perceived civic developmental issues. Post WW2 infrastructure boom with large scale social housing introduced in order to address the needs generated by allied bombing. Widely accepted mass transit systems in place or in active development ongoing (bullet train and local rail are the way to go and in continuous development and expansion….). And yet property bubbles grow and burst on going. For example see here http://www.bloomberg.com/news/articles/2016-01-28/japan-s-quiet-propert…. In addition the nation of Japanese property has been massively overpriced with multi-generations handing on mortgages over 100 years - https://www.justlanded.com/english/Japan/Japan-Guide/Property/Introduct…. When we talk about housing affordability we have to think in terms of being able to pay off a mortgage (interesting fact – ‘mortgage’ from the French for ‘Death Grip’) in a reasonable timeframe, no? I do not think 100 years is such an approach, although construct ‘affordable’ at low interest rates.

Germany – post WW2 infrastructure boom with large scale state directed development of social housing introduced in order to address civil need. Widely used and accepted mass transit options as a principal method of transport. Similar to Tokyo in many respects. Actually trending towards increased private ownership of property against a history of largely rented property rather than owner occupied. It is interesting that they are going the way of NZ from a speculation perspective (https://www.bloomberg.com/gadfly/articles/2016-03-23/german-property-is…) as people see the opportunity to profit from an asset bubble in the context of immigration trends. Long term prospects? Not ideal to be frank. Angela Merkel’s open door approach to immigration with the low skills / low prospect / poorly educated is not a great concept. If you are a cynical investor the trends are great for the country though. Who was it who said that living in a slum seems to be a crime but owning one is good business?

Texas – large US State of growing population size. Growth funded to a substantial extent by the growth of oil exploration in the late 90s and early 2000s. Once again the model is not great - http://www.forbes.com/forbes/welcome/?toURL=http://www.forbes.com/sites… Similarly http://www.businessinsider.com.au/oil-crash-hits-texas-housing-market-2…. I guess there is an irony in that the market there has sought the capitalisation (exploitation? Surely not….) on Chinese capital flight since it sounds much like certain aspects of the Auckland market – (http://www.texasmonthly.com/the-daily-post/texas-is-the-number-three-re…).

In short the conditions in each is unique unto itself. The modus vivendi in each domain is unique with its own particular drivers. In each domain the notion of personal and capital worth is different, so to draw direct parallels is problematic in the extreme.

Currently we sit in an economy that is largely agricultural in basis (a fundamentally medium to long term worldview), laissez faire in politics (short term and individually focused) and capitalistic in economics (generally short term, ROI driven). There are structural contradictions inherent, no? Politics wise our electoral cycle tends to preclude big ticket promises since politicians are driven by a 3 year cycle. Until there is a step up, there is a situation no change.

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John I think there needs to be a long term focus on infrastructure in NZ and this needs to be guided by the state. I am less convinced that housing necessarily has to be part of that component. I have no massive objections for some state involvement but I am not a fan of 100% government planned and built cities -it certainly didn't work for the Soviets and their are lots of examples from elsewhere where it didn't work too.

I think a mixed economy of government doing what it does well and the market doing what it does well is the way to go.

P.S I think your links for Japan/Tokyo were pretty light weight. Our Michael Reddell -former Reserve Bank economist I think has a more complete picture. https://croakingcassandra.com/2016/08/05/perhaps-there-is-an-example-af…

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1930s Britain compared to NZ would be an example of this thinking. Britain built infrastructure -such as a big expansion of the tube and allowed the private sector to build houses. There was less planning restrictions because this was pre Town and Country Act and as the below article describes the houses were affordable. Britain also got a good build response which helped them escape from the Great Depression http://voxeu.org/article/escaping-liquidity-traps-lessons-uk-s-1930s-es…

New Zealand did something similar but it wasn't the private sector which built the houses but the public sector -state houses.

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Personally my preference for the development of new housing is most certainly with the private sector incentivised through a intelligently conceived PPP arrangement (combined construction of private homes in conjunction with Housing Association type offerings). The combination of both public and private aspects of which need to contractually time bound though. Otherwise nothing happens.

However what I feel is much more likely is further procrastination resulting in nothing much. Perversely the global machinations of currency flux, international strife and a potentially impending GFC2 (GFC1 never really went away at its base.....) are likely to create the sort of correction in which these discussions become moot. I guess the political calculus works at present along the line of how much longer will society as a whole accept 'no change' as a solution? Which happens first - National change position / labour and green move in to form a government or GFC2?

Notwithstanding which, as I said previously, the specifics of Tokyo / Texas and Germany situations were not high on my priority list. Hence not my best references. But the points remain.

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I think Brendon meant you to find evidence that Japan, Germany and Texas somehow all manage to be building much more affordable housing of the types that we claim to want. All by different approaches. But it is absurd that Auckland, NZ, should have more expensive like-for-like apartments than Tokyo, Berlin, Hamburg, Houston, Dallas and Austin. Thinking Auckland is some kind of outstanding Nirvana globally so as to justify outlier-high housing costs, is just Walter Mitty delusion on a mass scale. Your rushed investigations really were not in the right direction.

For all the cyclical problems that Japan has had, imagine if NZ was that densely populated - would our urban planning approaches have had less volatile or more volatile outcomes? It is interesting how commentary about some other cities around the world do a lot of agonising and hand-wringing about their "bubble prices" and so on - and they are not even out of the nursery compared to Auckland. Japan had one significant peak 2 decades ago at which time some absurd stuff like 100 year mortgages happened, and maybe they have never sorted these out like they should have since. The long term trend since, has been in the direction of healthy supply response to demand, and prices far more affordable than Auckland, for like-for-like units. Even Demographia picked up on this in their last annual report. But the factors that cause this are too complex to put in a comment here, and certainly no-one with any influence in NZ is even trying to get their heads around it.

Germany likewise has a range of policy and cultural factors that mesh together to result in significantly better-value like-for-like renting options than Auckland.

In Texas, the cause is as simple as "allowing cities to expand". I don't see what is your point about the Oil industry's role - if we had such a thing it would be used as an excuse for our bubble. Texas has resource booms and population growth booms, and it does not feed into property prices. This is what you should be noticing and learning from. We contrive to have a property bubble even as our main export commodities / terms of trade are in the toilet and our tradables sector and productivity trends, likewise.

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I agree, we need to seriously look at a 4 year, or even 5 year term.
3 years is way too short to accomplish anything in.

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Yes, everything you say is true, if you are happy to live with the present system.

And that is why your solutions will not help, as they are a continuation of that dysfunctional system.

I mean, looking to the UK for answers. Seriously? The UK, the country with the smallest new house size in all the EU, the country that has the same size unaffordable medium multiples as NZ.

We should not be looking to places that have the same problems as we do for answers, if they had the answers, they would not have the problem to begin with.

The old developer adage about ‘if the land is wrong, then everything else is wrong’ is true. And this is includes the availability of land which determines what price it can be purchased for, followed by the availability of infrastructure and how it is financed.

And you missed the mark on using Toyota as an analogy. Toyota are successful because they have a system (the Toyota Method) that allows them to ramp supply up and down almost in real time to match demand, without having to immediately increase or decrease their infrastructure.

They have capacity without extra cost. If they get an increase in demand, they don’t use this as an excuse to increase prices, they just build more to cater for that extra demand, knowing of course one of the reasons for the demand is because of the present price.

But your Toyota example does point a way to a solution.

Just as it is not economic to produce cars in NZ anymore, nor Australia from 2017 on, maybe NZ is not the most economic place to produce houses (I know it’s not).

A greater proportion of housing materials is produced overseas anyway and we should be looking at bringing in more prefab’d components from overseas as well, from countries that can do this at scale, and use our limited labour force for the what can only be done in NZ.

But even this is a waste of time until the land is sorted as until that happens any savings on the construction side will all be capitalized into the land price, as it does now.

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Awesome response and clarification. Thank you very much

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John, the situation you describe is not a historical norm for NZ or indeed most of the first world. We, and most of the first world, did have systemically affordable housing markets for decades, and we did a pretty good job of building new houses in healthy quantities. Have you read the NZ Initiative's "Free To Build" report from a few years ago, which described the historical background? The current situation has arisen BECAUSE OF the distortions introduced by land rationing.

As Grimes and Aitken (2010) explained regarding planners assumptions of housing supply by way of intensification, usually intended to substitute for greenfields expansion, all the profit potential from redevelopment of existing urban property, is impounded in rising site values. The developer has to carry increased site acquisition costs over the time of the development and make more slender margins, even as the end consumer of housing is becoming stretched in their ability to buy. Developers, like car importers in the 1980’s in bidding wars for import quota, are just as likely to go bankrupt if they beat their competitors to the purchase of sites, as they are to gain market share. Meanwhile, property owners and investors willingness to sell is reduced precisely because the value is rising anyway, so why cash up the investment? Better to try and acquire more property still and make capital gains on that also.

Planning in the UK has been proving this reality for decades, Plan after Plan; housing supply assumed to come by way of intensification, never materializes, and the housing shortage is now millions of homes that would have been built in an undistorted market. Every new Plan that upzones more aggressively (‘to make sure this time”), merely results in even larger “development potential” capitalized into property values and a further reduction in investors willingness to cash up – sell the property or develop it themselves.

Cheshire and colleagues at the LSE have done some estimates over the years, of the likely factor of inflation of land prices in UK cities since the 1947 Town and Country Planning Act, relative to unconstrained-growth benchmarks. They found by 1984, the factor ranged from 100 to 325 according to different locations (London being the high end). We are just getting going, with our factor still down in the mere "tens". Reform of the land supply aspect is not just something we could get around to discussing eventually once we have tinkered with immigration, credit availability, state involvement in housing supply, more liberal density regulations, capital gains taxes etc etc. It is of central importance.

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Great article well worth the read. The problem is John Keys government is unlikely to even lift a finger to solve the issue......

For 8 years they have sat back and pointed the finger so why would they act now ?

They blame supply yet dont help to improve it by encouraging new builds.
They completely ignore the elephant in the room , foreign buyers students and temp workers.
Solution:
1.Cut demand by bringing in a vancouver purchase tax 15% on investors and foreign buyers
2. Allow new builds to be exempt (thus encourahing supply)
3. Classify foreign buyers correctly so include foreign students + temp visa
4. Tax vacant homes like canada is.

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Yes agreed and I think the whole world is finally waking up to the damage that foreign buyers can do in regards to decoupling a housing market from peoples wages and how damaging that is to a cities population and business infrastructure.

Here's yet more evidence from the BBC: Chinese investors pay A$88.88m for Sydney property
http://www.bbc.com/news/business-37491989

Foreign investors drive up prices

According to Swiss bank UBS, the housing market in Sydney "has been overheating since the city became a target for Chinese investors several years ago".

The bank's annual housing bubble index looks at real estate markets around the world to spot the ones where the price rise is "out of touch with fundamentals" and "out of proportion to differences in local economic growth and inflation rates".

"Increasing supply and further tax measures to reduce foreign housing investments may end the price boom rather abruptly."

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John Tookey I think you should consider these points.

1. Buildable land -either peri-urban greenfield land or intensifiable land within an existing urban area is a basic production element for all new houses.
2. Land is the biggest cost component of new houses in Auckland.
3. Buildable land prices are inflating at a faster rate than construction prices are in Auckland.
4. Prices of new houses has a direct influence on the price of existing houses.
5. If Toyota car prices rise due to market restrictions such as import quotas then the price of existing cars would also rise.

These facts indicate you should consider the factors which affect the production process of buildable land. Because these factors are as or more important than the factors which influence the actual construction of the houses themselves.

As I said in a comment further up the thread, you should look to some places which have successfully managed this production process. Affordable buildable land + affordable construction =affordable housing. There is some links in the below article.

Land supply is not the only factor in Auckland's housing crisis equation -but to say or imply it is irrelevant shows a degree of economic naivety. An Aussie economics website last weekend published a joint article by me and a colleague explaining the simple economics of why removing restrictions on the production of buildable land is important. http://www.macrobusiness.com.au/2016/09/urban-growth-boundaries-cause-m…

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Brendon

As I have commented above, I am not saying land supply is of zero consequence. I was responding to individuals who consistently bang on about it being the panacea for all the issues. Anyone who thinks it is the only game in town is a fool and guilty of the naivety that you imply here. Release of land is important. No Question. However releasing the land is not developing the land for construction - no-one is compelling its development therefore landbanking is inevitable. Similarly, developing the land for construction is not the same as building housing. Each time you perform an operation on the land it adds an actual cost rather than realising a potential profit. Therefore we need to recognise that at each step there is a brake and a lag effect on the process from bare land to finished dwelling. Someone has to 'step up' and gamble that the next investment stage is going to produce surplus value that can then be sold on to a customer. The drag and lag effects of funding and revenue make each step a calculated risk.

Thought experiment. You buy a piece of land that has been developed sufficiently through ground stabilisation works and drainage etc that you can build on it. Costs have been incurred through purchase and work. Now it has a notional market value of $800k in its site in Remuera (Ponsonby? Parnell?..... wherever). You have had to borrow money to purchase the place from the previous owner. Now you have the choice. Are you going to speculatively build a house(s) on it and then sell it on to someone? Or are you going to sell it on with a mark up as is? The former option may potentially make more money if you guess the right size, features and design. But to do that implies sitting on this for the next 8-10 months while that happens. Of course, the latter option allows a quick turn, buy and flick on with lower risk. Are you going to shoot for the big number? Or take the easy 'low hanging' fruit? Superimpose the impending correction that many builders have been dreading for several years. Which would you do? Remember at this stage we are talking about the hypothetical. If real money was at stake, with a real debt exposure, how much do you REALLY believe that market is on the upward tilt for the foreseeable future?

The development game is brinkmanship - particularly in the current environment. Auckland needs new dwellings more rapidly than the market is providing through its current mechanisms. To assume that builders who are thinly capitalised, risk exposed and not scaleable in their capacity will step up in the public good, shoulder the additional risk, accept the lower unit profit and deliver the affordable homes that the society actually needs is........ let us say optimistic.

I have no problem accepting that additional land helps. But solving the problem it will not do rapidly.

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John the landowner in your example that has land which he could build on in Parnell or Remura or somewhere similar (perhaps it is an existing house which due to upzoning can be replaced by more than one house) has a basic decision to make. Will they get a greater return from sitting on the land and waiting for capital gains or by building on it now?

The answer is they aren't going to sell it to a builder or build it themself until the rate of return from the expected capital gains is lower than the expected rate of return on alternative investments.

It is like harvesting trees -you wait until the tree growth rate drops down below the alternative rate of return -then you harvest.

Of course if land owners knew that land supply (both up and out) was being opened up by planning reforms and by a large infrastructure build -perhaps with some state built homes - then those expected capital gains would evaporate and more land and intensification options would be offered to the market.

Once the market is convinced their is a super abundant supply of urban land available -then the speculation dynamic is no longer a factor. Land price inflation stops and normal supply resumes.

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Yeeees. But the logic of your counter argument example is that if there is an abundance of land then individuals will no longer bank it and develop it...... in order to make less money per section or subdivision? No - I think not. And taking your tree example further, how are commercial forestry blocks maintained? Sections are planted out for a period and there is wide window where the manager seeks to figure out if it is worth selling or sitting on it for a few more years. Even then it is a guess since the process of harvest exists in a wider commodity market (just like housing development) subject to fluctuation and speculation. There is no absolute requirement to sell the product onto the market if it will succeed in driving down wider selling prices. Remember a couple of years back when wine producers were literally throwing wine down the drain in order to sustain prices? Moreover following harvest of timber what is driving the delivery of a target outcome product - furniture / housing or firewood for that matter? Is the market receiving the product compelled to make the products we want or the ones that they can most profitably deliver? Obviously in the free market the latter is the reality.

So we turn it full circle. What is the market going to do to deliver on more affordable homes of 2-3 bedrooms? Not much. They are supposed to pro bono publico make a lower margin per unit, on a more risky product, that the purchasers of are more likely to pull out of at the drop of a hat since they are more financially leveraged. To coin a phrase "yeah, nah".

As I said in a previous response there are a limited number of

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There are a few others lurking around on this site, refusing to acknowledge opening up or re-zoning land is not the only solution.

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John, a quick question, do you think that the removal of the requirement for developers to deliver 10% of a development at 75% median price (the so called affordably priced houses), is a good or a bad thing?
.
I can accept that, due to regulatory constraints, an affordable house is not more affordable to build, and thus an impediment to a developer. But how then best tog et affordable houses built?
A government building department?
Government subsidies for houses like this? (which they will recoup in hopefully less social problems down the line, if low income families are housed)
How to stop these houses being flipped for huge profits once they're built?
.
Or are state houses the only answer?

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Personally I think the removal is just a recognition that the tariff of so many affordable homes to build in a particular SHA just is not workable. As I have previously said, developers and clients will elect to pick the stand alone sites first since they are quicker to mobilise to and demobilise form. By contrast high density housing is multi-unit and multi storey. Up front costs are higher (scaffolding etc) with a longer payback tail. It becomes obvious that it does work when you see areas not being developed that are tagged for multi-unit left open.

As far as control of 'quick selling' profiteering - not easy outside of big stick approaches such as covenants etc. Are council houses the only way? No. As I said in the interview PPP schemes with co-ownership of equity etc could work. Freeing land for development helps.... but only if the land has to be developed rapidly after consent granted. Let's think 'use is or lose it' clauses in council consent. Let's make reapplying for consent so expensive that companies and individuals sitting on land with resource are incentivised to sell to someone who will develop rapidly. How about incentivising multi-property owners to sell some of their properties into the market - it would appear that the total number of houses is close to about right for Auckland but there are more people who want to buy than to rent - we need to vire housing between ownership types. Lots of things to do - even council houses or schemes like Singapore.

Come what may we need to leverage outcomes (completed housing of the 'right' type, size and price) rather than trickling down a lot of input (i.e. more and more land)..

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Thanks, I'll read up on PPP

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But the logic of your counter argument example is that if there is an abundance of land then individuals will no longer bank it and develop it...... in order to make less money per section or subdivision?

Two points:

If there is an abundance of land supply the rate at which land goes up in cost is very slow. With our current restrictions of land supply (thanks Len Brown) the rate at which land costs increases is very fast. If you hold on to land in a time of land abundance you will not make money.

Auckland's current market conditions are such that people willingly pay a unit cost $1,000,000 for a house. A small number of houses are being built on land that unit costs $700,000 with $300,000 development pricing. If there was a land cost of $350,000 (like Brisbane or Melbourne), I think the development pricing would be $650,000. I think $650,000 is bigger than $300,000 and that the developers will make more money if land costs less.

No - I think not.

Could you explain your logic? You're saying that they would hold the land to make no profit, instead of developing the land to make twice as much money as could today. Not sure I'd agree with you.

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Historically, back when mobility was lower, there was de facto oligopolies in land able to be developed within practical functioning distance of urban economies. But automobility gave rise to the phenomenon of "outsiders" leapfrogging the land banks and this did deflate urban land prices dramatically over a couple of property cycles. The Great Depression was the last of a series of very volatile cycles, and the previous regular bubble reflation of urban land prices never got going again until it got going in the places that land supply became constrained, mostly by urban regulation. The UK is the outlier early-reverter that proves the point.

You are assuming that there will be no "outsiders" willing to break the de facto oligopoly, therefore we might as well leave the regulatory enabling of the oligopoly, intact. By the way, there is a common assumption that a market is "competitive" if there are a multitude of owners of the main resource, eg urban land. But unless you have "freedom of entry of suppliers able to access superabundant quantities of the resource", what you actually have is "monopolistic competition", and prices do become extractive. Truly competitive markets supply products in which there is consumer surplus, and housing was trending this way for decades. Our ancestors commonly had to spend 50% of their income for the rent of a tenement. We progressed from this to the quarter-acre dream. If it was possible then......? What enabling factors have we lost?

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John I fully accept the property market as regulated in NZ is flawed. Further that there is peculiarities in the property market in general, like contiguity, which make property different from other factors of production. Check this link out for a discussion of this sort of market failure https://makingchristchurch.com/why-land-contiguity-is-causing-market-fa…

So the property market is not perfect. In fact all markets have imperfections -that is one reason why we have governments -to regulate to improve markets where it can and to replace a failing or absent market where needed.

So John I agree with you the property market is a mess. I think it can be best improved by better regulations -in particular less restrictive planning and improved infrastructure financing. Any direct government role should be in a supportive role or to assist those vulnerable people who the market will always fail. John a full government takeover of the market is not tenable -we both know that the market as it exists today provides too few 1-2 bedroom homes -but is the solution market reforms along the direction of the Unitary Plan and my proposal of reciprocal intensification and so on -see this article http://www.interest.co.nz/opinion/83082/brendon-harre-and-david-lupton-… - or should the government step-in and direct through PPP schemes etc where all future 1-2 bedroom homes will be built?

As Phil Hayward says there are plenty of places around the world with different approaches to how they regulate property which achieve more affordable housing than what we are doing in NZ. Government provision of housing is not the only possible solution.

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'Each time you perform an operation on the land it adds an actual cost.'

While it is true that opening up supply alone will not guarantee more affordable housing, it doesn't as per your quote above, ADD COST.

The point about opening up supply is that it in fact either stops further increases in land value, especially at the raw land stage, or even better for new entrance into the market, land price is lowered. This lowering of land price of course is problematic for those that already own overvalued land, or anyone that owns land that needs the rate of super inflation to continue.

Further, costs need to be defined as either value added or non value added. Taking land through development, building a house is in most markets adding value. Creating monopolistic shortages that force the price up m\by sitting on it and doing nothing, is a non valued added cost to the next purchaser, but of course is a super speculative profit to the present owner.

First principle is that you cannot just add cost, especially non value added, and expect prices to get more affordable.

I see builders struggling to make houses more affordable, having paid so much for the land, by stripping out as much as the law will allow them, in value added components. Making our houses not only very expensive, but built to low standards by international measurement.

If land prices were more affordable, some of those savings would be available to provide the extra margins and comfort for builders to provide more affordable housing at a better quality, and of course housing would become more affordable across the board.

The main difference I see in your argument with those of us wanting to open up land supply first, is you think that your solution can come before or instead of stopping land price speculative inflation, where as I say that until you stop/end the ability to land bank for speculative gain, then any of yours/mine/others best efforts to introduce other beneficial changes will only be further capitalized into the price of land.

And further, if the price of land was sorted first, then many of these other Govt. initiatives, which are heavily subsidized, would not be needed.

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Land is not an input to the construction process and a lot of confusion arises from John's seemingly plausible suggestion that it is.

If you quietly ignore the requirement to service land for the moment consider what a section in an urban environment is. It is nothing more than a legal right for the owner to put what is inside their boundaries to a lawful use (whether that is nothing, building or growing flowers). That right is perpetually assigned to the current owner and their heirs and successors. In that sense a section is more like a building consent, a legal prerequisite before the construction process starts. The economics of that legal right are quite independent of the economics of construction.

More to the point the price of land is determined by asset market mechanisms not the usual markets for manufactured items like plasterboard.

I totally accept John's argument that more land won't automatically lead to more house construction but that doesn't mean that prices for existing stock wouldn't come down if land was more freely able to be used for residential building. The current prices for undeveloped land around Auckland are not based on any fundamental analysis. They are built on expectations about the future. If you puncture those expectations then it is likely prices will fall regardless of whether construction ramps up or not.

Obviously houses will still be in short supply so prices won't be able to fall as far as they might but i don't think you have to wait for the robust construction industry that Auckland so desperately needs before you could see a downwards movement in prices.

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Yes, exactly. One thing we should not under-estimate, is the potential for young people, possibly with parental help, putting up multiple cheap new homes on lifestyle blocks. And the knock-on potential for prices as the word gets around all the other young people.

In fact there was a legal battle a few years ago between Auckland Council and a bunch of Buddhists who wanted to do just that. The Council said that allowing it "would create a dangerous precedent".

http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11138332

“A Buddhist trust wants to build a Tibetan temple on a South Auckland rural lifestyle block - with 28 affordable homes for followers.

But objectors say the project will break planning rules and is inappropriate for the location.

A senior Auckland Council planner has also warned the council that allowing the Alfriston subdivision could start a run of religious groups trying to provide affordable housing for their members on cheaper urban-fringe land…..”

My gut feeling is that it hardly needs "developers" to rock the boat "at scale": freedom to convert rural land to housing use could alone do it. In fact what we are used to at the moment in terms of "industry size", it wouldn't need that many Kiwis with a bit of initiative, importing kitset homes from Canada (say) and it would end up bigger than "supply" under the status quo.

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Good point, Phil. It is well known in planning circles that the market will get its way eventually. The only question is how long councils can put off the inevitable and how expensive they can make the journey.

So many of these planning restrictions are futile exercises in pointlessness.

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John Tookey,

Really?

"Our industry is fundamentally skills constrained - ask any builder. We cannot readily absorb additional demand increases with transient skilled labour. 2000 Polish plumbers are not likely to be on the Kiwi equivalent of Eurostar and rock up in central Auckland at the drop of a hat."

We are in common market with Australia. When there was a mining boom over there last decade thousands of Kiwis went over there for higher paying jobs and if we were to offer higher paying jobs here we would get thousands of people going the other way to build homes. Australia is much bigger than us and has 1000s & 1000s of builders/plumbers/electricians ready to go. Australia is also having a property boom at the moment - Brisbane and Melbourne are building at a rapid rate. Brisbane and Melbourne are going to have a housing surplus in 2018, whilst Auckland is looking at maybe mid 2040s. This progress in Brisbane and Melbourne demonstrates there is no fundamental skill shortage across the Australia/NZ Single Economic Market (SEM)

So let's compare these three markets within the SEM:
- labour costs are marginally higher in Australia.
- H&S uptake is more mature in Australia.
- consenting costs are relatively similar, but possibly slightly higher in Auckland.
- median land costs are 200-300% higher in Auckland.
- population growth rates are relatively similar.

Can you spot the disproportionally high cost associated with the Auckland market?

The reason we do not have a lot of high volume, low margin building firms in Auckland is very simple - land costs too much. Anybody who wishes to undertake high volume. low margin construction can make much higher profits on lower risk in other places.

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Unaha-closp

Yes really.

Transient labour does not tend to come this direction since our pay rates and pension terms and conditions are not attractive to jobbing labour. Fact. As far as your facts and figures are concerned I would hesitate to say that the 200%-300% difference in land valuations. Australia has a lot of the stuff, true. However if you did a like for like summary of section prices in metropolitan Sydney (probably the best analogue to Auckland) within relatively easy commute distance (also bear in mind the effects of train transit systems to spread populations and take pressure off the centre) the figures may be higher for Auckland but not 3 times higher. No way. Rolling all of the outback into the mix along with cities that are not constrained by harbours etc is a false equivalency.

It still does not matter what you think, feel or hope is true. Lots of more land consented for construction does not - in any meaningful time period for those currently desperate to own their own home - equate to more homes rapidly built. If it did then you would have huge surge in volumes of finished houses over the last few years since we have created so many SHAs, right? Again - yeah, right.

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If you are interested here are the residential land cost medians for Australia. Melbourne $265,000; Brisbane $230,000; Sydney $410,000.

http://www.corelogic.com.au/news/residential-land-costs-keep-rising

What is Auckland's? Try $700,000 plus.

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Since we need a laugh.

What do you think, feel or hope is truly the median land cost in Auckland?

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Transient labour does not tend to come this direction since our pay rates and pension terms and conditions are not attractive to jobbing labour. Fact.

And, land costs are much higher in Auckland. Fact.

So we can compare the two. Brisbane and Melbourne with their higher labour costs will have a surplus of homes in 2018. Auckland with the high land cost is not going to have a surplus of homes in 2018. Some would suggest there will be a meaningful time difference.

Here is the potted history of Auckland land supply. The Super City formed and cut Auckland land supply by 50%. The SHAs happened and added back 10%. Then the IHP added back another 15% to Auckland. Today we have a Unitary Plan which restricts Auckland to about 25% less than it needs.

Clevedon Valley (dead flat), the Kumeu Valley and Albany hill, Whitford hills - this is the land that surrounds Auckland. These are all easy places to build and all that land is dirt cheap. We are not allowed to build on it.

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SHA's are NOT remotely equivalent to abolishing a growth boundary. They are a classic illustration of what happens INSIDE a growth boundary or land quota system, in terms of everything capitalising into higher site values and changing all the incentives in a perverse direction - making site owners "hold" and developers "hold off". All we are doing is re-running the Poms dismal failed experiments of the last few decades. Hopefully we learn from the failures several property cycles sooner than what it is taking them.

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The SHAs have turned out to be a great natural experiment that tell us all we need to know about the pathology of land supply in Auckland (and the rest of the country).

I respect Prof Tookey's knowledge and insights but my problem with pieces like this and his previous ones have more to do with their context than their content. Land supply is the one ring that rules them all. More prosaically it is the meta-problem that feeds into many other problems. I fear that air-time for problems in the construction industry, immigration, capital gains taxes, LVRs etc simply rob attention and focus from the root problem of land supply.

Run the numbers on Auckland. Make construction 20% more efficient (a big ask) and the median house price might drop from $1m to $950k. Free up land supply so that land-bankers are easily by-passed that price might drop to $800k or less with no change in either capacity or efficiency in the building industry. Tackle both and you might drop below $500k. In that last scenario we stop talking about immigration, LVRs, CGTs altogether because there is no longer a problem that they would fix.

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Actually I am surprised nobody looked at the Singapore model. It has 90% home ownership rate. The HDB builds homes that are then sold to Singaporeans.

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Yeah but the government retains ownership of all land. This does avoid "land rent" economics. Some things like absence of "rights" to own your own land, are a concession to the privilege of living in a small semi-tax-haven powerhouse city-state. The entire world cannot be like Singapore, and there are plenty of land-rich nations good examples for NZ to follow.

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Me too. One benefit for Singapore is its RUB (ocean/Malaysia urban boundary) is relatively fixed (other than land reclamation). It doesn't have the option of sprawling infinitum; hence high density and efficient urban design. I guess the HDB or something similar is the only way to achieve this.

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HDB? But what you are saying, is that Singapore has valid reason to have 100% socialised land ownership, and it is a pity we don't also have such a reason, because the outcome would be so much more efficient?

Thinking the entire rest of the world would be more efficient if it could all be like Singapore, is like saying that the entire global workforce would be more efficient if we were all finance sector traders instead of doing what we currently are doing. In fact ALL the creation of real wealth in the global economy - as opposed to consumption and transfers - takes place in messy, big-footprint, resource-utilising locations. Even Silicon Valley, which creates high-value, low-weight products, is low density. The lowest densities of all are of course in the sectors that produce that essential resource, food. Insisting that all "industries" should be crammed into Singapore-model cities would only be slightly more absurd if you insisted that all farming should also be done in skyscrapers. There is a full spectrum of "industries" requiring more or less land space at more or less cost, between farming and "global finance".

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The Singapore 90% home ownership model consists of tower blocks with common corridors and central lifts, and which are cleaned twice a day by lowly paid 'foreign workers' on work permits, who are Bangladeshi, Myanmarese etc. This works well for law-abiding Singapreans who mostly live peacefully in such close groupings. Also, their flats have gained in value. It is excellent social policy in a country that has vast differences in wealth. But I can't see individualistic Kiwis making this work, especially if Housing NZ has flats within a block. And for many other reasons. Note also, the Singapore govt gives a $40,000 grant to first home buyers of these govt tower block flats. That makes for accessibility, and also pride of ownership.

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Don't forget that the government in Singapore owns all the land. This removes a key component in "asset value" volatility. It is far easier to control cyclical volatility in the prices of actual housing units by means of supply, than it is to control economic land rent and avert the numerous unintended consequences and distortions that result from central planning of LAND supply with private property still a central concept.

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Besides what I have said above, another lesson that needs to be learned from the UK, concerns the assumption that “social housing” is a solution. The problem that has been identified long since, is that the cost of the market distortions from urban planning, have to be thrown onto someone. That “someone” is households who do not quite qualify for the social housing. Those who do qualify, due to lower incomes or joblessness, end up better off than many of those who do not qualify. The incentives to self-betterment are perverse, because an increase in income that results in loss of one’s social housing is more than obliterated by the cost of paying one’s own way in the still-distorted housing market.

By the time Margaret Thatcher became PM, fully 1/3 of the population were in “social housing”, the government was “running out of other people’s money” to pay for this, and the inequitable burdens of the distorted housing market were still landing on those not quite as badly off as the 33% who thus far qualified for social housing. The real tragedy is that Mrs Thatcher wound back the social-housing experiment without reforming the urban planning system, so that the predictions of her opponents have come true: the social housing sold on generous terms to tenants at the time, has long since passed out of the ownership of the less fortunate members of society per se and has been absorbed into an overall housing market marked by dire shortages and unaffordability.

In the case of the government merely getting involved in the market as a developer, there are two problems. The first is, as has happened so far, the government might act in the same way as private sector site owners, and price-maximise, particularly to maximize the revenue from sale of its own land holdings. The other alternative, where the government presumably does end up trying to pull the market downwards by selling truly affordable housing (and the definition keeps getting revised upwards, doesn’t it?), some mechanism, such as a lottery, needs to be used to sort out who will be the lucky buyers of the artificially cheap housing. The rest of the market will simply carry on dealing with those who are not the lottery winners, on the same old price-gouging terms. And ultimately the lottery winners will be capital-gainers; presumably there will be prohibitions on early resale of the homes concerned, and maybe even capital-gains clawbacks. But the problem remains, that the urban land market itself is not competitive and can easily segment itself to avoid any spillover affordability effects.

Ultimately affordability might be achieved if an unintended oversupply of housing in a distorted, bubble-price market, results in a more severe and prolonged crash. This is hardly an optimum solution, and depends on particular conditions to induce speculative frenzies to spill over into actual construction, as in Spain circa 2000.

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We know but tell the government. Supply is important but by initself is no good. Have to act on demand side also and can start by controling non resident buyers and tax.

If given free hand to speculators than what ever extra supply u may manage will only give more stock to speculators.

Power corrupts and absolute power..............

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It is a QUOTA system that will always be gamed by speculators as its quantity is increased. Total liberalisation on the other hand, is what enables free markets everywhere to flatten the prices of anything and everything. We have learned this about most consumer goods and services but we are very slow learners about land for housing.

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A question for John Tookey

What about leasehold land ?

What if Auckland council made land available to low income households on 99 year leases ?

The council could recover a return on the cost of funds as a rent .

So the establishment of a section costs say $20,000 and the raw land costs say $180,000 , thats $200,000

They make 1,000 sites available each year so the cost is $200 million

Council l then funds this through a 10 year bond issue at say 3% and charges the lessee $ 500 per month for the section to recover the interest cost

The lessee erects a pre- made new relocatable on the land for say $200,000

He gets finance at 5% per annum or $850 per month

Total instalment would be under $1,500 per month , or around $ 400 per week

Problem solved ?

I know its over simplistic , but surely its got some merit .

It has worked in Singapore and London ( for centuries) very well

Why not here ?

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I've often wondered if something like this could work for the most disadvantaged who would like to have some sense of pride of place and security. I think it would have to govt or council run, not private investors. I believe the way we rent property in this country has been no small contributor over the last 30 or so years, to the breakdown we see in society, people with a stake in the ground and ownership tend to be more stable.
We've really botched things up where housing goes and it is going to take a great deal of will on our part to try to resurrrect things.

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The only problem is, that it is only a solution for the lucky winners of whatever selection process is used to determine who qualifies for the artificially cheap housing. If the overall market remains distorted because land supply is subject to regulatory quotas, then there will still be unjust consequences for the cohort at the bottom of the "rest of society who did not qualify". This was one realization long ago in the UK, that justified Thatcher's winding back of "social housing". Sadly, she did not reform the planning system, so things continue to find their own level with severe injustice on the bottom quintile, the young, etc.

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Even banks have selection processes for who does or does not get a mortgage. It's not insurmountable. Just reading through your comments and having a bit of a look on line, you seem to be an advocate of carte blanche, anyone can do what they like with land, and appear to have no truck with town planning, but I can't seem to find anything (haven't done a thesis on you or anything, mind) on how you address the issue of infrastructure, given that we have moved beyond long drops.

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Infrastructure costs, ongoing, might range from $1,000 per householder per annum to $2,000 per householder per annum depending on the standards desired and the efficiency or inefficiency of respective approaches. The LAND cost distortions are costing every new-entrant householder from here on, in present dollars, several times as much as the difference. What we are effectively doing is claiming to avoid costs, and landing ourselves with much higher ones. The costs we are avoiding at least would have obtained something, such as more roads. The higher costs we are landing is like a de facto tax paid to a well-connected rentier class. We get nothing in return for it. This is not clever, except that it is very clever of the rentier class, if they have anything to do with influencing the policy process.

But in any case it is far from clear that infrastructure costs are being saved under the "rationing" model. First, there is no spare capacity in a lot of the existing infrastructure, and expanding it in existing built, congested, high-cost locations is NOT cheaper than doing new stuff on greenfields. It would be different if there was rights and way and corridor protections based on foresight that expansions would be needed. But there are not. Second, the current model largely involves centralised monopolies on infrastructure provision, when the world is moving on and "best practice" might now be something different. One of the best illustrations is that someone proposing an ultimately sustainable, off-grid master-planned community outside the planners boundary, will NOT get permission. Not at a legal cost that keeps it viable.

This whole subject is riddled with insincerity, false pretences and vested interests. In fact the secret that the Council is hiding, is that they have failed to accumulate rates money to do necessary upgrading of existing infrastructure and now they want to entrap developers into being the fall-guys to pay for it under the pretext that "the developments create the need for added capacity". The policy, and your argument, is based on the false claim that "we can avoid infrastructure costs by simply using what we already have, for the added population". The barefaced falseness of this is exemplified by the steep development contribution charges that are then rocked on on every developer doing what the Council is forcing them to do, "adding dense housing to existing areas".

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Am surprised to see that how some community can go to extreme to buy house at the cost of family

http://m.nzherald.co.nz/property/news/article.cfm?c_id=8&objectid=11719…

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In the real world .... as soon as PAUP is operative I'll be turning my $1.2M property into 3 x $700K properties.. As $700K properties are cheaper than $1.2M properties the average Auckland house price will be lower - and purely as a result of rezoning.

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Bob will you build as soon as the Unitary Plan becomes operational or will you wait for even higher house prices? 3 x $700K is more than $1.2m but 3 x $750k, $800K.... would be greater still.

What influences property owners to use surplus investment capital to build more houses rather than acquiring more urban land (land banking and buying existing housing due to the expectation of future price increases) is a key point in this discussion.

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I have the Resource Consent application sitting on my desk waiting to submit the moment PAUP is operative. I hate being a landlord - it's hard and risky. Only got into it as working in consenting 12 years ago I could see a huge shortage coming as Council made getting Consents increasingly hard and it seemed best way to get rid of my mortgages. It has payed off far better than I expected, but once PAUP operative supply potential will be huge. So I certainly won't be waiting an I don't expect prices to keep increasing in that segment of market (sub $1.0M properties in Ithsmus)

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What all of us who think the land price is too high are worried about is reinvestment/new investment. We think excruciatingly high land prices are barrier to new investment and your 12 year investment cycle is more the norm than the exception. Hence why Auckland has such a slow building rate.

You are about to become cashed up on the Auckland property market and will have acquired a skill set in property development. You are the sort of person we want to reinvest in our town.

Where will you invest next? Auckland where you have to expend much more capital to re-enter the market and land prices are higher than Sydney? Tauranga where you can acquire land for much less capital and get a much higher rate of return on your investment?

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It's only a 12 year investment cycle because it was so hard. Started trying to add a second house immediately - 12 years ago - but gave up after 5 years dealing with current District Plan and sat on it knowing value would increase due due supply shortage.

If PAUP comes in it all changes. In terms of reinvestment I'd never do Australia and outside Auckland don't like the risk. As I think PAUP would have big impact on prices (construction costs would become main issue, rather than density limits) I'd be tempted by shares or something outside property OR more expensive property like central Single House Zone as this will be the market with limited supply. Sub $1M property will have so much supply potential available I can't see why prices would continue to increase.

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The cheapest housing in Auckland is in the CBD where there are no density limits and relatively generous bulking rules. In CBD development feasibilities big issue is construction costs. Land value per unit is a negligible part of the equation - often same as Council fees. As construction costs are biggest element with developers balancing construction metre rates and price point the big complaint is always about small dwellings. Outside CBD feasibilites are driven by land cost per unit allowed by density rules. Construction values are not so important so size doesn't matter therefore complaint is that dwellings are often too big. Under PAUP construction costs will become more of a limiting factor on how cheap dwellings can be than land cost per unit so the first people to build under PAUP will do best.

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Thanks for the honest answer Bob. Lets hope that all the others with intensification/building options as a result of the new Unitary Plan exercise that option. So far with the SHA's etc that hasn't occured. But maybe the unitary plan was a big enough increase in potential supply to do it. My viewpoint though is the evidence indicates the supply response will be too slow compared to demand, new house will not be affordable enough and the lucky few landowners will have plenty of land banking opportunities.

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Bob - Brendon has made an excellent point. In fact here is what happens.

Ten thousand $1.2M properties are upzoned. You turn yours into 3 X $700K properties. So do 99 others. That is 300 new $700,000 properties. The value of the other 9,700 $1.2M properties rises to $1.5M + reflecting "development potential". The median / average price just went up $290,722.

Decades of rinse and repeat of this phenomenon in the UK, has led to steadily declining "new housing unit" sizes (so that the average is now the smallest in the OECD, even smaller than Japan's) but the overall system-wide affordability has refused to improve. The most expensive commonly available properties are the remaining undeveloped 1930's single family homes with backyards. Ironically, the larger you go up on the scale of "section" size, the higher the value per square foot, a clear signal that there is a screaming shortage of "space" available relative to demand for it. It won't be long before the same applies in Auckland - as more and more billionaires try and "assemble sites" for their large mansions and grounds, out of 20, 30 or more adjacent suburban properties with a harbour view....

The irony is that if you just left 1/4 acre minimum section size mandates in force everywhere, affordability would probably be better. Atlanta apparently has an average section size of 2/3 of an acre, yet its median multiple remains down around 3. Boston is similar but with de facto constraints on expansion, which results in a median multiple of around 6. Yet other cities that upzone as a matter of routine in efforts to "restore affordability", end up with median multiples much higher than 6, even if they do have much higher density (every UK city is an example).

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Phil I think that up-zoning can help restore affordability -both Houston and Tokyo have much less restrictions on building up than Auckland does -the new Unitary Plan was just minor tinkering compared to what they allow. The secret to effective up-zoning is to create a super abundance of new entrant opportunities so no property owner has monopolistic pricing power -so that prices do not rise to reflect 'developer potential'. The easiest way to provide the super abundance of new entrant opportunities is by removing the restrictions on the city building out at the same time as restrictions on building up are eased.

Note just because a city builds up doesn't necessarily mean population density increases. Economics tells us that as incomes rise people want more space. So for instance population density 120 years ago was much greater in Manhattan then compared to now, even though building height and total floor area is much greater now. Of course the last century was a period of massive income growth and this century income growth will likely be less -so this income factor may be less important. We are unlikely to get the income changes that took inner city New Yorker's from tenement dwellers to 'Friends' apartment residents.

P.S I think the Unitary Plan and SHA are just tinkering with minor improvements to potential supply which will quickly be taken up by land bankers and the speculation dynamic -it is in no way large enough to provide superabundance of supply -freedom of entry that is consistent with competitive markets. Unfortunately the likes of John Tookey see this as evidence that extra supply doesn't work, the market has failed and therefore the only solution is the government to provide what the market can't, rather than considering that further planning reforms are needed.

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Exactly - but people like us get dismissed as "overly focused on a single solution". But what you are pointing out, is how 180 degrees differently approaches like "intensification" WORK when you don't have the land-rationed market and "monopolistic competition".

What we are talking about is not "one solution among many", it is like a "factor" outside the brackets in a mathematical formula, where everything else is inside the brackets. In fact it is more complex than that, it is more like an exponential chain reaction consequent on a binary on/off switch. Why wouldn't intelligent people focus on it?

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