By Bendon Harre and David Lupton*
Part one: The critique
That there is a housing crisis is now universally accepted. That an essential part of the solution is to liberalise the supply of land for development is gradually gaining credence. Labour’s housing spokesman Phil Twyford got wide support for his call for the Metropolitan Urban Limit (MUL) to be abolished. Commenting in the Listener (August 13 2016, P. 22) on the impact of the rural urban planning boundary envisaged under the Auckland Unitary Plan, Phil Twyford said that although the RUB is a more permeable “fence” around the city than the old MUL, it’s still a restriction that depends on council decisions as to when land should come onto the market, and therefore provides opportunities for speculation by land owners.
Unless and until the constraints on land development are removed, there is little prospect of land prices falling to a level that would allow the building of affordable homes. For that to happen we must allow cities to grow organically in response to demand with a minimal amount of supply restrictions. Yet it is also true that allowing organic growth will create problems for the provision of transport and other infrastructure. A package of measures is required so that where developers build outwards or upwards from the existing city, the full cost of the additional infrastructure required is internalised through road and infrastructure pricing.
The proposed Auckland unitary plan and the recommendations of the Independent Hearings Panel (IHP) place considerable emphasis on intensification as a means of increasing the supply of housing. Note - it didn’t specifically target achieving competitive urban land supply. It focused on requiring enough development opportunities be made available to allow for expected growth, in this way the IHP hope to create an over-supply of housing by 2040 that would put downward pressure on prices. Land use economic theory and empirical data indicates that the hoped for oversupply of housing in Auckland is unlikely to eventuate. In particular, the amount of housing intensification is likely to be significantly less than expected, while the prices will be greater. It is our strong recommendation that greater efforts need to be made to reduce restrictions for building our cities up and out.
New Zealand has long and laborious processes to increase its housing supply options. Local government District Plans, which create zoning maps, take years of consultation, submission and decision making.
A new group has formed to advocate for the Independent Hearing Panel version of the Unitary Plan rather than the previous more restrictive Auckland Council version. The group is call the Coalition for More Homes. It is a diverse group including economist Shamubeel Equab, Patrick Reynolds of Transportblog, Mark Todd of Ockham Residential, Leroy Beckett and Sophie Hudson of Generation Zero, as well as social agencies like the Salvation Army and Peter Jeffrey of CORT Community Housing.
We support the ‘build more affordable homes’ goal of the Coalition for More Homes, although we have concerns that housing affordability reforms need to be much broader and go further than one moderately less restrictive District Plan. We note that Auckland’s Independent Hearing Panel’s less restrictive re-zoning proposal doesn’t change the underlying planning philosophy that house building should be prescriptively rationed. Rationing means a relatively fixed supply of decent housing is allocated by price, which inevitably prices out the lower income groups. It is understandable why reasonable people would choose the less restrictive IHP plan over the more restrictive old Auckland Council plan, but unfortunately we have doubts the IHP plan will build enough houses, especially affordable homes which will genuinely solve the housing crisis.
Alongside our wider concern about housing continuing to be allocated prescriptively by planning quota, we have specific concerns that Auckland’s Independent Hearing Panel have not removed enough restrictions on intensification i.e. up-zoning to meet its target of 60% to 70% of new homes being in existing urban areas.
Bernard Hickey, author of an aptly titled article, Shooting for the Housing Moon, puts the Panels supply solutions into context. They are a set of zoning rules that will progressively give permission for the building of 422,000 additional homes in an expanded Auckland - both up and out - by 2040. In particular, the Panel points out there is already an undersupply of 40,000 homes and an extra 131,000 houses will be needed to be built in the next seven years to eliminate the supply shortage and keep up with population growth.
To put that in context, that is over 18,000 houses a year or more than double what was built in Auckland over the last year. As seen in the below graph it is significantly more residential construction than Auckland has built at any time this century.
Source: The Auckland Special Housing Accord: Success? July 30, 2016 by Donald Ellis
It is not just the quantity of housing which is challenging but pricing as well.
Modelling done for the Independent Hearing Panel predicts that only 15 per cent of new homes under Auckland’s Unitary Plan will cost less than $800,000, Leader of the Opposition Andrew Little says.
The majority of these houses will be out of the reach of most Auckland families. The modelling found that, of the 247,000 new homes planned within the existing urban area, 85 per cent will cost more than $800,000 and most will cost more than a million dollars.
Less than 2 per cent will cost less than $600,000 and just one house is expected to be sold for under $500,000.
There are several possible reasons to account for these high price figures, firstly the Panels Auckland Council Development Capacity Model had to account for the rapidly increasing land and construction costs since 2014 when they had last estimated these figures (IHP Report, Overview of Recommendations -Enabling growth, E. Updates to ACDC Model v3.8, P.11). Another reason is the Panel recommendations only allow a minimal amount of some affordable housing construction types, such as terrace housing -they forecast less than 19,000 terrace dwellings versus nearly 175,000 apartments will be built in existing areas (P.17). Finally, supply shortages and the slowness to respond is surely a factor explaining high and escalating prices.
There were over ten thousand submissions to the Independent Hearing Panel. Any potential objector had more than ample opportunity to assess possible harm and submit on this.
Individuals who would benefit from additional housing were less easily identified, the future is uncertain and for obvious reasons many individuals and families do not know where their future homes will be. Due to this uncertainty factor, potential future beneficiaries cannot assess personal benefit from specific zoning changes and therefore do not make submissions supporting rule changes which would allow more house building (a fuller article discussing objectors vs benefiters can be seen here).
This reflects the inherently flawed nature of the local government processes of consultation, submission and re-zoning. The institutional setup means re-zoning objectors outnumber beneficiaries. There have been a few brave individuals, like the representatives from Generation Zero who try to speak for future generations needing affordable housing. But they have been shouted down, ridiculed and abused by the community consultation process. This video-clip recorded and commented on a recent Auckland local government Unitary Plan community consultation event -shows how feral this process has become.
Yet housing has risen nationally to the top of public’s concern. Housing affordability has been described as the government’s Achilles heel. The government has vacillated between unsuccessful attempts at fixing the housing market and ignoring it. There is a sense that tensions resulting from the housing crisis has risen to such a degree that something has to give.
Given the tensions between the local political environment and the wider national public concern about housing affordability and given the Independent Hearing Panel was appointed by the government (not Auckland Council) it was not surprising that they recommended a compromise solution. With regard to intensification, more up-zoning than anti up-zoning objectors would prefer, but not a wholesale up-zoning of all of Auckland’s inner city suburbs.
The Panel’s recommendations have a planned for oversupply of 5.5% by 2040, meaning 422,000 dwellings could possibly be built over the next 25 years, versus the 400,000 needed to meet expected demand.
We believe there is a significant risk the estimated oversupply will not eventuate. It certainly seems unlikely that 131,000 homes will be built in 7 years to balance supply. Leith Van Onselen an Australian based economist has publicly stated the planned for Auckland house building figures are highly unachievable. In particular, we have doubts about the achievability of the amount of intensification that is planned for. Actual supply tends to be a lot less than planned for supply, for the following listed reasons.
These reasons are based on the work of specialised land use economists such as Prof Alan W Evans and Prof Paul Cheshire. Local government and the planning community in New Zealand do not acknowledge these economic supply arguments which challenge their prescriptive urban land resource allocation philosophy. So although the Independent Hearing Panel undertook some economic modelling, using the Auckland Council Development Capacity model, it is doubtful that they fully accounted for all the difficulties in providing housing intensification. These include;
- Newly zoned intensification areas are still subject to other restrictive rules -like the outlook space rule still being 6 metres (Property Council asked for 4m). This means not all up-zoned sections will be of the right size or shape to allow intensification, or at least allow enough extra floor space to make the development economic. Matthew Paetz a planner wrote about this recently for interest.co.nz
- Because of the limitations of intensifying on a single traditional sized urban section, housing intensification will in many cases require site assembly of neighbouring contiguous properties. This is a slow and difficult process. There is a definite upward supply curve for this supply response -the faster and the more properties this involves the greater the price that needs to be offered to the original owners. For a more detailed analysis of the economics of site assembly see this article.
- Some property owners may not want to intensify -they value their network of local schools, medical centres, kindergartens, friends, family and other amenities. For them selling up to a developer at the prevailing price or rebuilding themselves is not worth it.
- Some property owners want to keep their intensification options open -if they build now they cannot build something potentially better later -this is especially true if there is the possibility for more commercially orientated development in the future.
- Some property owners have a speculative, land banking, capital gain investment model and will not waste capital on building when they can get a greater return by sitting on their property investments. These property owners could ‘hold-out’ for large increases in price before they release supply onto the market.
Overseas experience shows that actual housing supply is significantly less than planned for supply. In London actual building rates have been roughly half the rate of planned for building. See page 6 of the following report.
To be fair to the Panel, both it and the consultants which did the housing supply capacity modelling have made statements in their reports that the housing supply figures are indications of travel and should not be used as a forecast or an exact indication of growth enabled (IHP Report -Enabling Growth, A -Background, P.1, Footnote no.3). The Panel saying it “simply does not have available to it the necessary information or a recognised method to attempt to match with any confidence the supply of urban land with its estimated demand across the Auckland region over the next ten years -let alone for thirty years” (IHP Report – Rub rezoning and precincts, P.11).
The idea of urban development capacity modelling seems to be to experiment over time to make the modelling more accurate. In the meantime, to release more development capacity periodically -in response to what exactly? -inadequate construction, excessive price increases, political pressure? The Panel specifically mentioning that capacity modelling will line up with the governments National Policy Statement on Urban Development Capacity (IHP Report -Enabling Growth, A -Background, P.1, Footnote no.1). The IHP did not explain how this will work.
If local government planning processes in New Zealand are inadequate and there are risks that the government appointed Independent Hearing Panel in Auckland have been unable to go far enough to address the housing crisis, should other processes be tried?
Wholesale inner city up-zoning has precedent overseas. Houston in 1999 went through a city wide planning reform debate which led to a decrease in its minimum section size to a little over 100sqm and a removal of side setback and shade plane rules for the area within its inner motorway ring -an area larger than Auckland’s isthmus. Here is a nice set of architectural slides showing how traditional standalone housing suburbs were gradually transformed into higher density suburbs with the sort of affordable ‘missing middle’ developments which Auckland lacks -terrace developments, three story walk-up apartments and the like.
Tokyo offers another example where freedom to build in the city was recently given, meaning property owners are now free to demolish and rebuild at higher densities. This has kept house prices in check. In 2014, Tokyo with a population of 13.3m built more houses than England, which has a population of 54.3m. H/T Michael Reddell of Croaking Cassandra for the below Financial Times article.
“During the 1980s Japan had a spectacular speculative house price bubble that was even worse than in London and New York during the same period, and various Japanese economists were decrying the planning and zoning systems as having been a major contributor by reducing supply,” says André Sorensen, a geography professor at the University of Toronto, who has written extensively on planning in Japan……
As bad loans to developers brought Japan’s financial system to the brink of collapse in the 1990s, the government relaxed development rules, culminating in the Urban Renaissance Law of 2002, which made it easier to rezone land. Office sites were repurposed for new housing. “To help the economy recover from the bubble, the country eased regulation on urban development,” says Ichikawa. “If it hadn’t been for the bubble, Tokyo would be in the same situation as London or San Francisco.”
Transportblog also discussed the Tokyo example of affordable intensification. Readers’ comments about their personal experiences of Japanese urban environments was particularly interesting.
There are other examples of cities and countries trying to address the problem of over dominant Nimbyism driving up house prices. The Economist magazine reviews some examples here.
The Labour party, the traditional New Zealand party of reform, were the first to break the urban planning status quo thinking. They have started a conversation about alternatives to our existing urban planning system, in particular, by announcing a proposed urban development National Policy Statement for the Resource Management Act in May. The government responded with a proposed National Policy Statement on Urban Development Capacity (NPS-UDC) in June. Labour’s announcement is written in clear language -basically saying house building restrictions should be removed. National’s statement is less clear, but seems to indicate if house building capacity is inadequate, then further tranches of greenfield land should be approved for development. This seems similar to status quo prescriptive planning thinking which has drip-fed planning approval onto the market, making it easy for land bankers to corner supply.
There has been a vigorous argument amongst the various politicians about the governments proposed National Policy Statement, again demonstrating the rising importance of housing affordability, Minister of Housing -Nick Smith at the end of this short news video-clip argues the government’s Urban Development Capacity proposal is a buttress to support Auckland’s Independent Hearing Panels Unitary Plan recommendations.
Labour state that the Government should rule out any possibility of an urban growth boundary in Auckland Council’s Unitary Plan if it is serious about fixing the housing crisis. With respect to intensification boundaries, the following statements are revealing.
“Freeing up growth on the fringes needs to go hand in hand with allowing more density – so people can build flats and apartments in parts of the city where people want to live….”
Labour back in May asked the rhetorical question of what to do about Auckland’s plan.
“Are you saying the Government should override Auckland’s Plan?
Restrictive land use rules like the urban growth boundary and density controls are a major contributor to the housing crisis that is locking young people out of home ownership. It is entirely appropriate that central government should have a say on behalf of them and future generations.”
So clearly a future Labour government believes it should alongside other housing reforms act to remove restrictions on intensification.
The question is -what specific restrictions should be removed? It is doubtful that the Labour Party has the appetite to do a “Houston” or “Tokyo” and allow all property owners in Auckland the right to rebuild at higher densities, regardless of neighbourhood concern.
If the status quo risks undersupplying the market -thus the continuation of New Zealand’s current housing woes. What other measures are needed and specifically what intensification national policy statement would be workable?
We will give our suggestion in Part two of this paper, titled: Intensification Solutions.
Urban Economics and Urban Policy: Challenging Conventional Policy Wisdom by Paul C. Cheshire, Max Nathan & Henry G. Overman, 2014
Economics, Real Estate & the Supply of Land by Alan W. Evans, 2004
Part two: Intensification Solutions
In Part one we laid out a critique of current New Zealand planning processes which in our opinion means actual supply of housing will be a lot less than expected supply. In Part two we will argue New Zealand needs new urbanist tools and a removal of some planning restrictions, in particular we want to focus in this paper on ways to allow for a better housing intensification supply response, so that people can build in parts of the city where people want to live.
Our first suggestion would be to increase the height limit to 3 stories -still much shorter than many trees which any property owner has the right to plant. But to keep the existing setback and shade planes rules -which will limit building height and bulk in any case. Note a setback is the distance a building must be constructed from a boundary. A shade plane is an angle going inwards, which building height and bulk cannot exceed. It is taken from a certain height directly above the section boundary -2.5 metres in the below diagram. The angles vary depending on whether it is a northern, southern or east/west boundary.
Our second suggestion is a little more complicated. We think New Zealand should adopt a system where neighbours can reciprocally agree to drop the shade plane and set back restrictions along their common border. So in the above diagrams, if there was a section to the north or south and if the two property owners agree, then they both would have the right to build up to their adjoining boundary - utilising the appropriate building code for firewalls etc. If other adjoining neighbours disagreed, then on those boundaries the standard setback and shade plane rules would apply.
This proposed national policy statement would be written in a way to minimise transaction costs -two neighbours being able to lodge this variation on their property title records for a small nominal fee. The national policy statement would mean this reciprocal intensification process would not require an RMA consent.
Of course there would be many property owners who wouldn’t want their neighbour building right up to their boundary. But some would see the advantage in co-operating so they have the option of building more floor space. Making this reciprocal intensification right a choice option eliminates the major criticism of up-zoning. Being, up-zoning dictates an exchange of a property rights to sun, views and privacy for the right to intensify. Some property owners believe they will be worse off if this exchange is enforced by local government zoning dictate.
If reciprocal intensification rights were spread across a large enough area - say the entire Auckland isthmus, then we think this would give the opportunity for a lot of intensification -in the form of duplexes if two neighbours agree and European style terrace housing if many neighbours agree.
The main benefits of this reciprocal intensification property proposal are;
- It decreases transaction costs for contiguous housing developments. Note, it could also apply to mixed use residential/commercial development areas.
- It gives greater housing supply options for building types with construction costs per square metre comparable to stand alone housing. This will lower the median price and increase build rates for the new build market, benefiting the middle and lower ends of the market. David Chaston from Interest.co.nz has compiled the statistics showing that apartment building in 2016 is no longer supplying the smaller more affordable end of the property market.
- It allows housing supply to respond to locational demand. Jason Krupp from the NZ Initiative has written several articles, most recently with Alex Voutratvis from the Property Council arguing there is evidence that with the increase in service sector employment, the proportion of inner city (such as the Auckland Isthmus) employment versus peripheral employment in Australasian cities is rising.
- It allows housing supply to respond to housing size demand. There is evidence that the market place is over supplying 4-5 bedroom homes and under supplying 1-2 bedroom homes.
In some ways this reciprocal intensification property right proposal is the generic application of a specific proposal (and this too),which Brendon Harré made for an alternative way to provide residential housing in Christchurch, following the earthquakes destroying much of the CBD.
The below pictures give an idea of what Brendon was thinking, with each unit being owned and developed by a different property owner, whilst complying with some common design themes.
The reason this form of intensification is cheaper to build compared to high rise apartments is their low height means they can be built as a walk-up unit, requiring no expensive elevators, mechanical ventilation, sprinkler systems, underground parking and expensive structural engineering.
Ockham Residential an Auckland building company specialising in medium density residential construction, have long argued for planning rules to be more favourable to this type of intensification.
Ockham Residential would like to see the final Unitary Plan enable the development of homes that meet the social and demographic needs of current and future Aucklanders, at price points they can afford, in places they want to live. Achieving that in our view means maximising the established suburban areas of Auckland which permit three storey structures, unlimited density (measured as dwellings per 100sqm) but with a minimum of 40 per cent retained green space.
It is possible that as city residents become more familiar with intensification and in neighbourhoods where there is a high degree of trust and co-operation then bigger and more elaborate voluntary land reallocation and adjustment schemes could be attempted. For example, a large segment of a traditional suburban block could be reconfigured so that say 10 title holders with 10 houses were replaced with 40 dwellings on 40 titles. In the process section sizes and shapes could be rearranged and reallocated amongst the original property titleholders and common areas like laneways could be provided for.
These larger schemes may require additional legislation similar to Body Corporations or the Municipal Utility District idea discussed in David Lupton’s earlier article to provide financing and manage common areas and facilities, such as car parking, communal outdoor spaces, pedestrian/bike laneways and other options like centralised hot water heating schemes or centralised electricity generators -such as solar power. Some common areas such as laneways may benefit the wider public and the Council might therefor contribute financially into such a scheme.
There is a criticism that Auckland may be uniquely unsuitable to intensification, due to the low amount of public space it has provided for roads and intersections, meaning Auckland is prone to congestion and gridlock. This being based on a UN Habitat Report comparing various cities allocation of street space. We believe the best way to manage this risk is with variable road pricing as already discussed by David Lupton. But in some cases public laneways in conjunction with intensification schemes may assist in making Auckland suburbs more porous for active transport modes like walking and cycling. This might help increase the catchment areas for more space efficient public transport services.
We believe reciprocal property right intensification and neighbourhood voluntary land reallocation schemes will be driven by both supply and demand. Demand will come from urban areas with high amenities -like proximity to employment, easy public and private transport access, cycle-lanes, markets/shops, entertainment and desirable natural environments like beaches, parks and forest.
Many Aucklander’s have commented that not all the high amenity areas of Auckland have been up-zoned in the recommendations made by the Independent Hearing Panel -so there is an opportunity for reciprocal property right supply to increase housing supply where there is a demand for it.
Reciprocal intensification property rights and neighbourhood voluntary land reallocation schemes will not be enough by itself to encourage intensification. Other intensification restrictions such as minimum section sizes, minimum car parking requirements, landscaping site coverage rules, height restrictions, viewing shaft restrictions, absolute dwelling density per hectare limits, outlook rules, heritage restrictions ... may be as or more significant in the way they restrict the supply of housing intensification options and should also be reviewed by affordable housing policy makers.
The demand for housing may be so intense that voluntary intensification proposals like ours need to be considered alongside state run building agencies -Urban Development Authorities -who may need to utilise the power of compulsory purchase to combat the land banking hold-out problem. Labour, National and local government have all made recent announcements about this. The fact they believe this intervention is needed, indicates despite whatever else they say, that they believe existing local government planning processes will be inadequate to supply the market with affordable housing.
Building affordably upwards needs to be considered in conjunction with building affordably outwards so that the entire urban land supply market is free from pressure cooker land price increases. In particular, policies need to address land banking and speculator incentives to hoard development opportunities with a capital gains focused business model.
New Zealand is at an important turning point in the evolution of its cities. We hope New Zealand takes a constructive, brave, future focused approach.
Brendon Harre is a reader and commenter on housing issues in a number of forums. David Lupton is a transport economist with experience in transport planning and operations.