Bernard Hickey says the Government and Auckland Council need to agree on funding big new water and rail infrastructure to have any hope of addressing Auckland's housing shortage crisis

By Bernard Hickey

The Government is ploughing on with its supply-side only approach to dealing with Auckland's housing shortage, but it faces some tough choices about how far it can push ahead without stumping up a serious amount of its own money.

The land mine sitting under the surface not too far down that road is how to pay for the infrastructure needed to support all these houses the Government hopes will be consented for its new Special Housing Areas.

There are already smoke signals drifting up from the bowels of Auckland Council that it has reached the bottom of its barrel of funding for new infrastructure, including the pipes, roads, railways, footpaths and community facilities needed to go with all these houses. Its debt ratios are stretched and it can't fund too much more.

Earlier this month the Auckland Council's Development Committee decided in a confidential session to defer approving the consents on two Special Housing Areas 'pending greater certainty on provision of necessary infrastructure.'

Some in the development community are up in arms over what they say is a full suspension of consents for greenfield Special Housing Areas. This would be explosive for the Government's strategy, if true, given its complete reliance on more house building to solve Auckland's housing problem in the wake of its rejection of the Reserve Bank's call for demand side measures such as reducing tax incentives for landlords.

Sources within the Council itself say the deferment  approvals is for just a 'handful' of Special Housing Areas and Housing and Construction Minister Nick Smith remains bullish about the prospects for lots of new house building.

However, economists and the Reserve Bank are beginning to shuffle their feet over an apparent stalling in the growth of consents in Auckland. Figures for March confirmed the trend for Auckland consents has been falling since late 2014. The Reserve Bank highlighted that less than 8,000 consents were granted last year when more than 10,000 were needed to keep up with record high net migration, let along eat into the shortage it estimated at 15,000 to 20,000.

MBIE itself is estimating a shortage of 25,000 dwellings in Auckland by the end of this year, while BNZ Economist Tony Alexander said this week the shortage could be be as much as 76,000 if Auckland had the same number of occupants per dwelling as the rest of the country.

There may well be a shortage of houses and growing demand, but unless the pipes are laid and the water starts flowing the houses will not flow and the Government's strategy will be stuck as lines on maps while prices and rents go through the roof and endanger financial system stability.

Mr Smith is aware of the challenges, particularly around paying for the larger scale pipes and connectors needed to link whole suburbs together, rather than just the infrastructure needed to service the sections in the Special Housing Areas.

"Where it gets more complicated is where you have a new (water) main that doesn't just service one Special Housing Area, but maybe goes further along from that, and how we meet some of that cost," Smith said.

"That's a big challenge and it's part of the ongoing dialogue with Council," he said, adding however he expected Council rather than Government to pay for the big interconnectors, given the Government was already paying for motorways.

Here is the crux of the issue. Will the Government's entire housing strategy fall down the cracks opening up in the Auckland Council's balance sheet and be finished off by its own reluctance to fund anything other than motorways?

The Council is reluctant to borrow more and current ratepayers don't want to stump up immediately to pay for the really big pipes such as the NZ$1 billion Central Interceptor planned between Mangere and Western Springs. Talk of a 5.5% rates hike will go down badly with rateypayers. The Government is also reluctant to quickly fund the likes of the NZ$2.5 billion City Rail Loop, which would accelerate the growth of the inner city apartment developments called for by the Reserve Bank.

This infrastructure land mine needs to be defused with some hefty investment decisions by taxpayers and ratepayers in the pipes and roads and rails needed to support all the new houses

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A version of this article has also been published in the Herald on Sunday. It is here with permission.

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44 Comments

I don't understand why businesses don't shift out of Auckland so that they can have a workforce with cheaper living costs and a better quality of life. What services does Auckland offer that other cities can not in this internet age?

How is this for an alternative strategy, cashing in on hot Auckland values .... Choose to live on a lifestyle property on the outskirts of Cambridge, great place to bring up a family excellent schooling, with new motorway, 2017 1 hour to the Harbour bridge. Rateable value of say $800k, rates of say $2500 pa. Work in either Waikato or Auckland. If Auckland buy a nice Yacht say 40 footer say $300k keep it at Westhaven Marina total out goings r&m and berth-age say $1200 per month, this gives you a nice base in downtown Akl plus the obvious Hauraki Gulf playground.
This to me make good sense as a balance of work and lifestyle that is quite affordable. Works for me.

What happened to France, I thought you were living the Kiwi dream?

Had 3 years living in Southern France during the gfc, but you can't beat NZ for quality of life.

What even Cambridge?
Glad to have you back, I'm still in the States but moving to Cornwall UK for the summer and just seeing how we go.
The weather in HB is in a difficult cycle, makes it hard to farm there at present, I'm battling on and paying tax so must be doing something right.

How about 33% of the population! Any business that requires skilled employees or a large number of consumers is probably better off in Auckland. Most businesses that don't benefit from a large population on their doorstep are already based outside Auckland.

Easy - Put ALL of the cost onto Auckland ratepayers.

There are other places in New Zealand they can choose to move to if the price to live/operate in Auckland is too high.

So Auckland rate payers should pay for the governments decision to turn up the immigration tap? Surely if the government wants to increase GDP by increasing immigration they can at least help pay for the infrastructure required to house the immigrants.

My calculations show a shortage of 15,000 homes relative to 2001, 8,000 per year is enough to keep up with population growth, and 11,000 per year will get us back to 2001 levels by 2020. YoY consents are increasing, and so is the political and financial motivation.

Aucklanders are going to have to stump up the costs of the infrastructure, it's not even an issue worth squealing about, 35% of the countries work force lives there, while they only have 31% of NZ's population. So it's not as if they are less able to afford this then other districts. Rates is how you pay for this stuff.

Correction -Rates are how NZ pays for local government activities. Overseas Local governments have different revenue sources -half of my PAYE in Finland went to my local municipality for instance. In the US Local and State government have different revenue sources, such as the US equivalent of GST. Other countries transport taxes and charges go to local government.

60% of total government spending (local + central government) goes to Social Welfare and Health Care with the major benefit going to easing the dying days of the elderly.

Relatively little spending goes on nation building activities.

It is stupid that Kiwi Inc may falter because NZ cannot properly prioritise its public spending.

Every extra immigrant has already has had a part of their lives with no drain on our taxes but they are likely to spend the expensive years here as a greater burden than the amount they will contribute.
Think so called "family reunification"
Think arriving after age 55, never being employed and then collecting Superannuation for 20 or 30 years.

What is it with infrastructure costs these days?
Auckland (and most of NZ) had huge population increases for most of last century; wasn't a huge problem.
Aren't we supposed to be wealthier, smarter and with better technology? Why is it such a big deal to run a few sewer lines that local government can't cope. Perhaps we become too complex or the council spend all of our money hiring flash managers and countless drones and achieving bugger all.

government and bankers pocketing all most of the cash. But they don't see themselves as a business that provides a service like the rest of us - they see themselves as the creators of money and that the rules don't apply to them... so infrastructure is full of parasites and no real risk/responsibility for those involved. as long as someone else is paying for your ass to be covered in layers of paper, all's good.
Competence is the bane of such organisations and anyone with competence must not be allowed near the power structure lest the bubble collapse.

A lot of infrastructure degrades with time or in not to required standards.
Example is central Auckland combined sewage which adds a load to sewage volume and is very expensive to replace.
I recall that Vector originally was going to underground all overhead lines to a schedule that was very soon extended in time or has it been abandoned altogether?

Water Supply and Sewerage and Infrastructure

provision and capacity and degradation and upgrading and replacement

It has all been said before - nothing new

From July 2013
happiness is: Increase supply .. build more houses .. so simple
If it was simple it would be happening .. increasing supply is such an ill-considered, sweep it all away statement that defies logic ..

Where? How? Who? When?

If you have followed Kumbel's explanations you would understand the fallacy of that. If you followed David Chaston's article last week on "strangled supply" you would wonder where you would locate and achieve all this magic supply .. Chaston's tome conjured up images of 70 story apartment buildings (Hong Kong style) occupying the entire length of the eastern side of Jervois Road, Herne Bay .. overlooking St Marys Bay .. and then Kumbel comes along and says, whoa, hold on a bit .. it's going to take us at least 10 years to expand and "gold plate" the water supply and sewerage sytems that we "gold plated" just last decade .. and by the way we are going to increase your property rates from $4,000 pa to $10,000 pa for every property owner in Ponsonby and Herne Bay and Freemans Bay. Not just the additional, incremental supply. Brilliant. Genius.

Alternatively, if you believe in the user pays principle, the incremental costs should be borne by the occupiers of the incremental supply, then each new resident of each new apartment along Jervois Road will be paying $70,000 pa in rates. Is that your intention, or would you prefer to spread the burden over the existing residents?

Which introduces the principle of dis-economies of scale which are reached at a point beyond which the cost of each increment is greater than the standard unit cost - it becomes prohibitive - defined as the increase in long-term average cost as the scale of operations increases beyond a certain level. This anomaly can be caused by factors such as (1) over-crowding where the additional increments get in each other's way, (2) greater wastage due to lack of coordination, or (3) a mismatch between the optimum outputs of different operations. See also economies of scale.

And your solution is .. ?

http://www.interest.co.nz/node/65368/bonds#comment-744200

That was a conversation killer - yet here it comes back again and again

Death by a thousand small cost increases. In no particular order:

- civil construction costs have risen 50% faster than CPI over the last decade; some of it is stuff like energy, steel, plastics etc and some is the following
- Health and Safety in Employment Act got severely tightened in 2003 - some commenters here believe up to 20% of the cost of an infrastructure project goes just to HSE compliance (i.e. lots of orange cones)
- higher design and construction standards. Over the last 20 or so years standards for discharge of sewage and stormwater have been imposed on the whole country from central government via regional councils. Standards for potable water supply were significantly tightened in 2000.
- it's way more expensive to upgrade infrastructure in existing built areas than to extend to greenfields
- per subscriber I believe infrastructure serving densely built areas is more expensive than medium density areas
- ironically councils have to get resource and building consents the same as everyone else - nuff said

In general the public sector is about 20 years behind the rest of us so while what they are currently doing might have looked almost leading edge in 1995 in fact it will be about 2035 before they wake up to what the rest of us can see today.

If auck is such a super global city where home owners are prepared to pay 4x the amount to secure a property in the city; then it stands to reason they should be prepared to pay 4x the rates to pay for such an amazing city.

As it is they pay similar rates even less than smaller cities. Savings obviously down to economies of scale. hike rates by a tiny 5% instead of the 1 or 2% proposed and get on growing the city.

By comparison to Awkland , Christchurch is an unglobal city , and yet its rates are scheduled to rise 28 % over the next few years ...

... and just this week it was announced of the salary rises for Mayor Dalziel and her councillers ... rises which she described as unfortunately timed , but unavoidable ...

Just who is serving who , in this fine country ?

Lets just consider that most ppl work on rates per year and 5~6% is normal per year. So 20~24% over 4 years is "normal" Lets assume that the "extra" 4% rates is all down to the cost of EQ work or debt servicing.

Just what are the Councillors paid as a salary btw?

"serving who" yes that is indeed a very fine question, clearly many such as yourself are serving your own political agenda.

Exactly Simon. If Auckland is the economic powerhouse as much as they say, and has the jobs they say, and people want to go there and pay twice for a house as they would elsewhere in New Zealand. Then they should pay the rates to build the infrastructure. $10,000 pa rates are quite appropriate.
It's a lot of money, it hurts, and it's necessary.
If you are happy to take the gain when your house doubles in price to $2,000,000. Then take the small hit and pay $10,000 rates.

Auckland could implement a UK style "stamp duty" which is spent solely on Auckland infrastructure projects.

https://www.gov.uk/stamp-duty-land-tax-rates

This might slow the market down marginally and would probably raise a significant sum.

A 'infrastructure' stamp duty on non residents/citizens that goes to Auckland supercity would help by decreasing demand and increasing the supply response. As would converting rates from capital valuation to land valuation. As would giving Auckland Supercity a broader tax net to incentive them to work with not against economic generating (therefore tax generating) activity.

That's fine but keep in mind the council are elected. What existing home owner is going to vote for higher rates to help pay for infrastructure for new home owners? Especially the elderly who are already struggling with current rates payments.

Its debt ratios are stretched and it can't fund too much more.

And should AKL Council act without prudence in this regard, a number of other LAs go down with it.

http://www.lgfa.co.nz/about-lgfa/history

investors in LGFA are supported by a joint and several guarantee from participating local authorities and an initial $500 million liquidity facility from NZDMO.

With massive overpopulation in our country, no wonder there is clearly a housing shortage. Why, I was talking to a chap from Te Aroha just the other day, he wasn't expecting anything to change anytime in the near future, it used to take me 3 minutes to drive to work, he said, but since this massive wave of immigration hit, I now take a shortcut round the back of the bakery, which saves me about 20 seconds.

Quite a bit of the debate here is based on who should pay. Some of the debate needs to be around who will pay, if at all.
Almost certainly if the current residents were asked if they would willingly pay extra rates so that their city could be even more crowded, the transport more clogged, housing types that many do not want added, those residents would vote overwhelmingly to not have the extra housing/residents/crowding and so on.
So then it is a game of chicken between Auckland residents, their council (who may or may not want this extra development) and the government, who presumably do want it to meet their economic growth goals, and to not otherwise have to tamper with immigration and capital controls that they rely on.
If the answer is that no-one is willing to pay, and the development doesn't happen, that is fine with me.

Auckland's full.

Put up the no vacancy sign.

Mass migration hasn't done anything other than evict NZ born citizens from Auckland.

It hasn't helped the economy or made the average Joe who doesn't own Auckland property any better off.

Auckland needs a good few years of net emigration for the property market to recover. Encouraging unproductive migrants to leave and not allowing any but essential foreign migration would be a cheaper option than spending billions on infrastructure to rebuild a city which would work fine if it wasn't for mass migration ...

A serious question :-

Are there any Auckland-born old-timers still around, still living in Auckland, have stayed living in the same house for the last 30 years who haven't been sucked into the property-investment casino

Would like to hear their opinions

Is Auckland a better place for you today than it was 30 years ago

Exactly - we are all moving the deck chairs around here - the big issue is demand. The government is trying to be clever making out they are doing something about supply while they are dead scared about talking about demand. While they are grabbing their ankles we are being invaded. Housing, traffic, health, education - watch them all get swamped.
It will be interesting to see Key's comments on the new housing taxes introduced in Australia. Please not let him say " at the end of the day we are two different countries..." followed by that sh@t eating smile.

..I've said it before..how can you satisy demand when it's coming from China, India and the like? No way in the world we can build enough in Auck to meet that demand. So the supply debate is a nonsense..Key needs to answer that one.

Exactly - we are all moving the deck chairs around here - the big issue is demand. The government is trying to be clever making out they are doing something about supply while they are dead scared about talking about demand. While they are grabbing their ankles we are being invaded. Housing, traffic, health, education - watch them all get swamped.
It will be interesting to see Key's comments on the new housing taxes introduced in Australia. Please not let him say " at the end of the day we are two different countries..." followed by that sh@t eating smile.

Hmm, our economy has gone from an absolute shambles in the 80s to the envy of most the world now - don't you think some of that could be put down to immigration?

.. we're only the envy of HSBC , Paul Bloxham in particular ...

Most of the world does not even know we exist ...

... unless you're a Lord of the Rings tragic ....

Every new build pays 15% GST. On a build of $1/2 million that is $75,000. I think that would not be far off a national average figure but land plus build costs would be more in Auckland.

There is roughly 20,000 houses being built a year. They are generating approximately $1.5 billion for central government. Currently 1/3 of those new houses are being built in Auckland, 1/3 in Canterbury and the remainder in the rest of the country.

If Auckland and Canterbury got to keep that money for their infrastructure needs then this debate would go away.

But if central government has other priorities for that tax then there could be problems.

GST is on everything, simple. No end of ppl would like that spent elsewhere...

There would be no change in GST rates. The only change is that GST related to land/urban development would go to Auckland Super city or the equivalent regional body.

All it would take is for the GST payer to tick a box saying the GST activity is adding value to land and tick another box saying which region that land is in.

The IRD then forwards the GST to the relevant regional body rather than the consolidated account.

It's time for the government to pee in the pot or get off.

For ninety years central government has been quietly keeping the lion's share of transport funding for itself. It has a monopoly on motorways and gets to choose what of local government transport planning it will subsidise and what it won't. In other words it controls all land transport in the country either directly or indirectly.

This matters because cities only work when transport works. The days of a major city being walkable are a hundred years behind us.

Right now there is a massive battle going on around Auckland over its urban form. Auckland Council are actively working to make the city compact while the government is steadily building roads that will enable it to spread further.

They can't both be right. Given that central government has all the powers in this situation it is time it acted.

Kumbel this is the best post here.

I would like to add that I am not necessarily certain Councils want a compact urban form. What they want is a choice in transport mode provision and housing type. They are reflecting what their urban residents are telling them. But because central government only wants to fund motorways that only provides the motorised vehicle transport mode, that only works for the double garage stand alone housing type we have a stand off.

Coucils can't provide the sort of transport, housing and urban development that they and their residents want because central government controls all the purse strings so they fall back to the default 'compact city' option.

Central government doesn't want to fund 'lefty' urban development and only provides motorways.

Nothing gets built and everyone blames someone else.

For instance is this sort of comment by Patrick Reynolds at Transportblog -a big advocate for 'lefty' urban forms about compactness or choice wrt transport mode and housing type?

http://transportblog.co.nz/2015/05/04/the-interim-transport-programme-a-...

'Acting' in the situation Kumbel describes, inevitably means Either:
- CG giving further taxing powers to TLA's
- CG giving higher contractually obligated fractions of CG revenue, to TLA's

Neither is highly palatable to a CG whose books are already spattered with too much red ink.

It is a pity, because, as Brendon notes, offshore taxation systems much more suited to the sort of infrastructural development tasks noted above in the thread.

Multi-layered tax (e.g. city/state/federal) is a commonplace, as is the notion of destination-based taxes (e.g. based on the delivery address for goods and services). So a seller in CA has to calculate, account for and remit, taxes to TX or VA if that's where the goods go.

If Awkland had a 1-2% local sales tax, problemo solvatio.

It will, however, be a cold day in Hades before we see an NZ Gubmint offering That sort of localised taxing power. TLA's have not distinguished themselves by demonstrated financial prudence, either. Examples: the infamous Mangawhai sewer scheme http://joelcayford.blogspot.co.nz/2012/03/mangawhai-bankrupts-kdc.html , the Hamilton V8 race saga, and the fact that, propelled by the Four Well-beings of yore, TLA's generally have ratcheted up spend to the point of political no return, and now find themselves stranded with high rates, high spends, and aging/failing infrastructure.

This doesn't induce CG pollies to offer them Yet Mo' Moolah.

Just like the battle between the different camps arguing the toss about single-helix-DNA and double-helix-DNA, it took many years for Crick and Watson to win the war and be proven right.

We have had a battle that has raged for 6 years now between the supply-siders and the demand-siders

The supply-side promoters and lobbyists have lost. Their solution hasn't worked, isn't working, and can't work. In the meantime, while these promoters have held sway, look at the damage they have allowed and enabled

Because

The supply-side is a long term solution that takes time, while demand can be controlled quickly

In order for the supply-side to work in the long-term, the demand-side needs to be temporarily crushed

... the Indonesian solution ?

At the next property auction arrange for a firing squad to shoot any prospective buyers who turn up ...

Sounds like a plan