Bernard Hickey doesn't believe the plan set out in the housing Accord between Auckland and the Government has any chance of success

Key and Brown say it can be done, but Bernard Hickey has his doubts

By Bernard Hickey

The Auckland Housing Accord at the centre of this week's budget is what the Americans would call a Hail Mary pass.

Bill English and Len Brown have committed to issue 39,000 building consents over the next three years in a belated and increasingly desperate attempt to deal with Auckland's housing shortage.

The hope is a surge of new supply will cap the latest 10% plus surge in house prices that the Reserve Bank has warned could derail low inflation off its 1-3% track and trigger interest rate hikes.

Both the National Government and Len Brown now know their re-election prospects hang on the perception they are 'doing something' about Auckland's housing affordability and supply crisis.

But this 39,000 consent forecast is so heroic as to be barely believable.

A glance at the accompanying chart shows the scale of the challenge.

The forecast for 9,000 consents in 2014 would be the fastest in a decade and more than double what we've seen in the last five years. The 44% jump in 2015 to 13,000 consents would be more consents than has ever been built in any one year.

It would be higher than at the peak of the building boom in 2003 and 2004, which was before the doubling of land and house prices.

The explosion in 2016 to 17,000 would be astounding.

It is simply incredible, and not the amazingly brilliant sense. It's just not credible, given neither the central government or the Council plan to build those houses.

The assumption is that once it is easier to actually consent a new building, the buyers will be there with cash in hand, the developers will be there with cash in hand, and the tradespeople will be there with tools in hand.

This cannot happen given the current numbers of skilled workers in Auckland, the current land and construction costs, and the lack of development finance for developers.

The finance companies they relied on in the last boom in 2003 and 2004 are gone. The low land prices they relied on for that boom are gone. The lower construction costs necessary to tempt the buyers have disappeared. The tradespeople needed to build these houses have either gone to Christchurch or to Australia.

Brown and English are kidding themselves that if they consent them they will come.

The real problem is the 25% over valuation of the land and buildings. This will be magnified by the interest rate hikes widely expected over 2014 and 2015.

Until there is widespread reduction in the cost of land and buildings those consent forecasts are an empty promise.

Until there is a plan to create new home building companies, train more staff and build the infrastructure to support those houses this is a chimera.

Building those 39,000 affordable homes would be wonderful, but right now it's a promise in search of a credible plan.

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This article was first published in the Herald on Sunday. It is used here with permission.

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18 Comments

Bernard's right...it's not going to happen...but then it never was intended to...it amounts to pre election humbug.
Meanwhile it's a case of 'tarting up' old places and flogging them for fat capital gains knowing all along the banks will never let the govt off their hook.

Yep Bernard is right - very low levels of new house construction will be the outcome in Auckland over the next three years. Where Bernard is wrong is that there is no chance of  the inflation rate increasing over the next three years and therefore interest rates will not be hiked!
House price rises do not actually have much impact on the CPI 
http://www.stats.govt.nz/browse_for_stats/economic_indicators/cpi_inflat...
 
 

But this 39,000 consent forecast is so heroic as to be barely believable.
 
It is though consistent with the current budget's nominal GDP growth for 2014 at greater than 6%.
 
Heroic projections? No.
 
Deceptive? Definitely.

I have been queried on my "greater than 6% nominal GDP growth".
 
For reference:
http://www.treasury.govt.nz/budget/forecasts/befu2013/befu13-whole.pdf
 
On page 29 of 176, or Section B3 | 25:
However, a strong turnaround is expected in the March 2014 year, with nominal GDP expected to rise 6.4%. This will primarily be driven by an increase in the terms of trade, but also a levelling off in the exchange rate and a pick up in demand across the economy leading to greater pricing pressures.
 
The first seven weeks of the March 2014 year have already gone.

Colin, absolutely astounding Treasury chutzpah.
 
Further investigation of the document you referenced on page 136 of 176, or Section B.3 | 5: reveals Treasury forecasts 3.9% price inflation as the major component of the 6.4% GDPE growth forecast for the March year ending 2014.
 
Can the RBNZ Governor stand idly by his recent firm forecast:
 
“The CPI increased 0.9 percent in the year to the March quarter and is expected to remain close to the bottom of the target range this year. Weak near-term inflation prospects need to be balanced against our projection for inflation to gradually rise towards the 2 percent target midpoint.
 
“At this point, we expect to keep the OCR unchanged through the end of the year.”
 
Let's hope Mr Wheeler hwill not be misled by the less explicit publicity version  designed for public and media consumption.

One or both of Treasury and the RBNZ must be wrong.
 
A good question for the PM tomorrow might be which one he believes is more correct.
 
The RBNZ has effectively said it doesn't buy the government's 'return to surplus' line.

Surely its a cop out to blame the developers etc?  "here's 39,000 consents and the land but look no one took them up"
Its a can kick past the next election IMHO.
regards

Steven, I keep wondering what is IMHO? I c u using it a lot, but I can't deduce its' meaning from context alone... Help...?
Sincerely,
HGW

google can be your friend
 
As can urban dictionary
 
google "Urban Dictionary IMHO"

Are they  really stupid enough to think Auckland is the only city in the world that can keep increasing it's population without intensifying the housing?

You say "Preference always trumps policy" and go on like everyone wants to live in sprawl housing.
 
Explain then why a $300K Hugh special suburban starter dream house - exactly what you want rents for $350 a week whereas a $300K centrally located apartment rents for $450 a week plus.
 
Clearly in the market affordable market there's a prefernce for living in better locations than to live in cheap fringe freestanding house.
 
(Cue: reference to cantubury.org and a long unrelated cut and plaste about Houston)
 

And if urban sprawl does create cheap houses then surely the sprawling city of Auckland should be one of the cheapest in the world?

Got to love them...
The government reserves the right to overrule the local government who in turn reserves the right to rule the a-dolt population who are always overridden by their children who are backed up by an anti-smacking law enacted by the overlords of all...
And the point is money, they all want money from the a-dolts!
HGW

A massive own goal for all concerned? This policy could cause rates rises throughout the whole country in 4-5 years time.
 
Bernard you are absolutely right that it doesn't matter what number they pull out of thin air or what lines Nick Smith draws on imaginary maps of Auckland, without the capacity to actually build nothing will happen.
 
 
But let's imagine that, by some miracle, there is substantive action. What will be the result? Developers, councils and government will all be competing for the limited supply of contractors. And this is not counting Christchurch, Roads of National Significance and business as usual everywhere else. The last time this happened - around 2004-5 - rates for contractors soared all over the country. The problem is that these rates then get incorporated into the "official" rates books like Rawlinsons that councils rely on when planning future works and when revaluing assets (which they must do every three years). 
 
A hefty rise in contracting rates will flow through to the replacement value of current assets. This in turn will give a kick to asset depreciation which is not only calculated every year but fully funded through rates. So there is a channel by which a political stunt in Auckland could cause the householders of, say, Gisborne, to pay more rates than they would have otherwise. The lag will be about 2 years after all the contractors actually get busy.

This number of consents equates to 260 consents per week, or 52 per working day. That's a lot of engineering reports, a lot of burro-crats to process the organics, and well...
Lest we forget the Council is on a mission to raise revenue...
HGW

The bubble will continue for another 3 years. Cheap credit, low rates = mega bubble

FYI from a reader via email:
 
Hi Bernard
 
For introduction, I’m a property developer in Auckland for 17 years. 
 
I agree with your article, the number of housing called for under the Accord Target would be wonderful – however ‘fantasy’ would be a more accurate description of the Accord Target.  Simply put, Council do not have the will, or commercial intelligence to decide and deliver the levels of service and infrastructure needed to build this number of homes in that timeframe.
 
Quite simply, Auckland’s underground infrastructure was designed largely for 1 million people, and now much of it is over capacity and in need of replacement.  Stormwater in particular is a massive problem across the region, and is not being handled expediently by Council.  Already there is land around Auckland that has been zoned some time ago for ‘residential development’ but no services have been built and in many cases when I enquire to Council, their response is that nothing is planned or budgeted for the area. 
 
Myself and others have walked away from multiple projects in the past years due to no services being available.  It does not matter if Council can miraculously start processing Resource Consents faster (they won’t), because the projects invariably will be stalled by lack of infrastructure in many cases. 
 
Further compounding this problem is that many public systems are in road berm, but often a public system can be within private property boundaries.  Private land owners can then refuse access to public systems, where a developer needs to connections to stormwater or sewer systems for the new sites being developed!  Recently I spent several months trying to contact an Asian property owner who was not in NZ, and therefore the development could not proceed because we did not have ‘Right of Entry’ to access a public stormwater system – which my company was upgrading and my cost, for the wider catchment. 
 
This is an absurd situation, preventing connections, delaying development, adding cost to the project, and stalling builders because sections can’t be completed.
 
Here are typical council processing times for developing a section, (to give yourself an idea of the time and subsequent cost of producing new sites to build houses on)
·         Resources Consent, for example a simple small development, perhaps 6 sites is typically 6 – 8 weeks to process the application.  A larger land development application can take many months or even years, and is not commercially viable in many instances due to the time frame, costs and ‘can’t do’ or obstructive culture of Auckland Council.
·         223C application and approval, simply certification from Council that the survey pegs are in the right place as per the Resource Consent for the project.  Applied for on completion or near completion of the development.  Council burn up 4 weeks for a relatively simple task.  (Council staff will comment they ‘have no statutory requirement to do it faster’)
·         224C application and approval, this is confirmation that all services/infrastructure are provided to the site and 224C certification is required prior to applying for new land titles.  Full documentation is provided by engineers and surveyors, at this stage all parties are well familiar with the project, however another 4 weeks is taken to process the 224C application.
·         Titles, can be applied for once Council issue the 224C.  Believe it or not, another 4 weeks is required by LINZ (Land Information New Zealand) to issue a title.
·         Finally builders can start, probably a year after the project was conceived.
 
As you will likely understand from above, the bureaucracy dribbles along for months.  Consider the cost of all this, remembering we’re paying all the way through these various steps for ‘service’.  A world class city requires world class efficiency, and a ‘can do culture’ within Council departments.  The above processing steps should each be completed within 5 days.  LINZ can provide a service so titles are issued in 48 hours, it can be done, they need to find such a solution.  Auckland Council and LINZ need substantial restructuring and review, and quickly to address service timeframes. 
 
Once again, thanks for your well written article..  I’ve simply tried to give you further insight here to the depth of the issues Auckland has in striving for more housing, (excluding the Unitary Plan).