John Tookey says the only way to increase the total number of houses constructed on land made available is to compel its rapid development and use ahead of the free market

John Tookey says the only way to increase the total number of houses constructed on land made available is to compel its rapid development and use ahead of the free market

This article was first published on AUT's Briefing Papers series. It is here with permission.

By John Tookey*

The Auckland housing market is a bubble. A bubble is ‘trade in an asset at a price or price range that strongly deviates from the corresponding asset’s intrinsic value1.  At the moment the fundamentals of Auckland housing as a whole very much demonstrate that position.

According to the last census, mean household income in Auckland was $76,500. The census also showed there are a fraction under 500,000 dwellings of all types in Auckland.

 Mean property prices in June 2016 were around $900k. That gives in Auckland housing an astounding $450 bln of notional capital value, as well as a greater than 10x multiplier on average earnings for the associated average mortgages. The proposition that in any market can sustain permanently a decoupling of asset values from average incomes is just plain wrong.

We know that whatever is the cause of the bubble, the only way ultimately we can get out of this situation is by making more houses available for purchase by customers. So how to achieve this?

What can be said is that recent concentration on the supposed failings of the building industry, foreign investors or any of the plethora of scapegoats presented to the general public, is all obfuscation. The fact is that the operation of the housing commodity market is the source of the problem, and will be at the root of the solution. Doing nothing about that underlying reality is an abdication of responsibility by government and planners.

What is not the problem

Immigration: The upward pressure on house prices is not – admittedly – helped by immigration. However, immigration is not the crux of the problem. It is a neat polemic explanation that can be rolled out to blame ‘others’ rather than ‘highly responsible’ society for its own behaviour. The bulk of the demand is coming from internal New Zealand sources.

Productivity: The reality is that productivity is not synonymous with affordability and never will be. Productivity is only important in affordability if a builder passes on the productivity savings to the customer directly. Efforts made to increase productivity actually only Increases profitability of construction companies. Rationally, will a builder pass on all savings to a purchaser? If a builder can sell a house at a higher price into a hot market why should they pass on any savings? Businesses – including builders – are not charities. Productivity is an input parameter which helps constructors improve or maintain margins but does not affect affordability per se.

Land supply: Land availability is an input parameter to the housing affordability problem, not an output parameter. The bare land to completed house process is relatively simple to understand.  However, there are very clear decision points and value additions that drive the sequence to ultimately deliver a house. Bare land has value as farmland, but the cost and rate of return is low from $5k/hectare to $205k/hectare for horticultural uses. However once the land has been flagged for house construction, value per hectare dramatically increases. Once buried infrastructure such as drainage, power and water is in place, depending on location, the value increases to around $10-16m/hectare in Auckland (based on current sections for sale in Pukekohe and Riverhead as examples). The construction element is, by comparison, a very small element of the price escalation. At each stage within that process there is always a strong urge to do nothing with the land, spend no further money on it and have appreciation taking place with zero further capital exposure. As soon as work starts on the ground for improvement and infrastructural additions, this represents attributed costs to the owner. It also increases the absolute need to ensure that any onwards sale more than covers the capital expenditure on improvements. This is the very simple reason why Auckland has seen multiple special housing areas (SHAs) announced that after years of development have relatively limited numbers of developed houses in place. Each year developers put in place infrastructure for just those properties that they know they can sell, plus maintain a market for the future. Most SHAs currently in operation release about 10-15% of the total number of titles – thus sustaining the value of the sections that would otherwise collapse if all the sections were ‘dumped’ onto the market at the same time.

Just making more land available by selling crown land, or permitting subdivisions, or easing green belt restrictions for development does not radically change the market. Nobody is compelling land acquisition. No one is compelling development. No one is forcing builders to build. The market cannot be forced to operate at a loss or at a rate of production it does not wish to, or for that matter sustain economically. Ergo very limited increases in total output (i.e. constructed houses) are seen.

The solution

The only way to increase the total number of houses constructed on land made available is to compel its rapid development and use ahead of the free market.

To do otherwise simply allows the market to settle at an equilibrium that sustains prices and values just at the very limit of what is supportable by the general public with access to low interest rates.

What that translates to in reality is that government needs to compel industry through the profit motive and economies of scale as they have in the past – i.e. building state, council and/or co-owned housing for low income households – to deliver large numbers of properties outside of the normal market delivery rate.

This means getting ahead of the demand that currently is attenuated by drip feeding properties into the market to maintain values.

We need to significantly boost house availability (thus affordability) by building large numbers of state-owned properties not subject to the housing commodity fluctuation. An artificial ‘glut’ of housing would force down rents in the buy to let property market throughout the city. Reduced rental yields coupled with a capital gains tax incremented according to the number of properties held, would make such investments much less attractive to property speculators.

We cannot leave matters to the free market and then continue to be stunned by the inconvenient fact that the market will act in its own best interests: land banking; rationing land release to keep prices high; and building large and expensive homes whilst ignoring demand at the bottom end of the market.

Developers, builders, house buyers and the public all act for their own best interests. All of these stakeholders will not act as charities pro bono publico. To think otherwise is naïve in the extreme.

1. King, Ronald R.; Smith, Vernon L.; Williams, Arlington W.; van Boening, Mark V. (1993). “The Robustness of Bubbles and Crashes in Experimental Stock Markets”. In Day, R. H.; Chen, P. Nonlinear Dynamics and Evolutionary Economics. New York: Oxford University Press. ISBN 0-19-507859-4.

Dr John Tookey is Professor of Construction Management at Auckland University of Technology and head of Built Environment in the School of Engineering, Computer and Mathematical sciences. You can contact him here. This article was first published on AUT's Briefing Papers series. It is here with permission.

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What a load of rubbish. At the current prices the profit motive would have people expanding supply left right and center if it wasn't so choked by regulation. Leaving all the restrictions on production of accommodation in place is a bad enough recommendation, but to say the government should embark on massive state-home building is worse!
You're right that it would push down rents, but that means even more of a reduction in private supply. The end result - a double shift in balance from privately provided housing to state-provided housing.
For all the arguments that could be made for it's necessity to supply the most needy, mass state housing has some major problems. The market is able to serve the >diverse< needs of New Zealanders in a way that no master-plan bureaucrat ever could.
These grand planning schemes benefit the few corporate developers with the scale and connections to win the juicy government contracts, to the detriment of the city and its residents. And they're touted by those with their own interests in the arrangement.

100% agree labcoat. On the supply side the price of land is the main issue, completely due to over regulation (both up and out). (There are other issues like cost of compliance, cost of materials, shortage of labour - but most of the cost of an Auckland house is actually the land)

well sort of... The supply wouldn't push down rentals resulting in a reduction in private supply. In fact the market has been disconnected from rentals because it is a speculative bubble, with little reference to income-generation by the property. In the same context, it is not a immigration driven because rentals would have gone up, which has only happened to a limited extent. The trouble with supply (IMHO) has been: restrictive zoning; reduced productivity in housing construction (possibly as a result of regulation as well); and the inevitable time-lag between supply and demand. I agree that the Government should intervene but through a market led approach where they work to: reduce construction costs by promoting effective construction practices such as modular construction; increase the supply of land (which has partially happened). They also need to follow market signals and remove from auckland such Government agencies that tie up resources there that cant afford to remain - such as the military bases.

"They also need to follow market signals and remove from auckland such Government agencies that tie up resources there that cant afford to remain - such as the military bases."

Add the Mount Eden prison to the list. Just what exactly a relatively large prison is doing on prime land is utterly baffling.

Good point - and the 200 hectares of golf courses that the Auckland council holds a mystery. Effectively the Auckland Council subsidies golf more than it does public transport.

Golf courses need to be retained for future generations, for open public parklands, not for golf. With 3 million people in Auckland ,on the forseeable horizon, it is silly to have them built on, or in closed ,fee paying usage.We will never get the open space back.

I think you are right about that, one thing I notice when I grit my teeth and take a trip to Auckland to catch up with family, is the lack of open space like that, here in Hamilton, there are cycling and walking tracks all over the place and plenty of places for the dog to have a real romp around. Walking and cycling is catered for in new public development. Long may it stay that way

Land Supply - you've described a cartel type arrangement where property developers can corner a restricted supply of land and then drip feed it into the market.

The solution is to break the cartel by opening up more land, so much land that guaranteed appreciation becomes unlikely. Everyone should operate knowing that if they don't develop their land, but several others do, that they will lose everything.

But you say, no. You say we should leave the cartel in place and have the rest of NZ taxpayers pay for everything at really high prices and make sure the cartel is protected forever. You have a great future in politics.

Why not just tax all land to encourage both brown and greenfield development.

Yes, but you don't need to tax all land. The ACC should introduce a rating differential for unimproved residential zoned land. Should have been doing it for years - would have solved all of their infrastructure funding problems - meaning the city could have opened up the lack-of-infrastructure-funding imposed MUL ages ago.

These rating tools have been available for decades.

The other benefit of a differential rating for unimproved land is that the rest of New Zealand wouldn't have to be suffering under the weight of Auckland's infrastructure problems.

If the owners of the unimproved land can't or aren't interested in raising the capital needed to develop their unimproved residential land (and don't want to pay the punitive tax/rate), they can sell. There will always be some other developer willing to pay the tax and hold as a gamble, or get on with capital raising and development.

Once again, these problems could have been avoided - the rating tools are and always have been there. It's political will that is lacking.

Why not price control land for residential development? The article mentions that land value per hectare goes from $5k - $205k to $10 - $16 mil when it gets marked for residential development. Right there is the problem!

Regulate the speculation and all of a sudden costs come down.

Taxation is a much better mechanism than price control. It is a win-win in that the tax earned can be put to resolving the wider infrastructure problems (such as traffic/PT) that allow for further development. Those that don't want to pay the tax have options - sell at market price, or develop at market price.

It's a solution where the only losers are those with intentions to landbank unimproved land for untaxed capital gain. Hence it makes the rates (tax) more efficient and equitable in placing the tax burden more closely to where the costs of growth/development are incurred. Were the tax sufficiently high - Development Contributions could be done away with where greenfield development was concerned.

Housing has become a financial asset, which means an assets that demands a yield. The only way to break the housing bubble is the break the link to the yield and remove it from the list of financial assets. Dumping a surplus on the market through state intervention would certainly be one of the few ways this could be achieved, so on that basis it is a well reasoned argument.

But I suspect that the method for dealing with the problem is to keep inflating it until it breaks.

Housing has not become a financial asset, as the article observes the windfall financial gain is made when land is zoned for housing. Land for housing has become the financial asset. Constructing a glut of state housing is the complete opposite of dumping a surplus on this market.

To have the state to enter the Auckland property market, purchase land (at elevated prices) and build houses - will inflate the land bubble This is a request upon taxpayers to subsidise the land for housing, making the problem even worse.

Quite right that it's all about land. And you have rightly pointed out the main thing that Tookey has not got right in this article. Although I think that the time is well past for any subtle measures and that the only way to break the current price levels is for the government to intervene directly there is still the problem of where they will do this. And Tookey skates over the fact that the government can only build houses if it has some land to build on.

The only legal way for them to build lots of houses - apart from repurposing their own land of which there is not nearly enough - is to pay the going rate for land whether on the market or through compulsory acquisition. If they do that too close to Auckland then they are planning to take a financial bath on behalf of all taxpayers when prices do come down. Or they build a satellite city outside of Auckland's RUB and over-ride the AUP and commit to some serious transport infrastructure. And hope that the expenditure is not a white elephant.

Given that the Nats only purpose in life seems to be to get the government budget in surplus and pay down debt the chances of the government breaking the land-banking cartel is zero.

Article's spot on.Building coys are simply not in the game of fast build of affordable homes ,in their view 'rational' market behaviour is ensuring a steady build of high price homes to maximise value of the available land 'footprint'. Theprofit margin per home built is what matters to shareholders.

Article's spot on.Building coys are simply not in the game of fast build of affordable homes ,in their view 'rational' market behaviour is ensuring a steady build of high price homes to maximise value of the available land 'footprint'. Theprofit margin per home built is what matters to shareholders.

Article's spot on.Building coys are simply not in the game of fast build of affordable homes ,in their view 'rational' market behaviour is ensuring a steady build of high price homes to maximise value of the available land 'footprint'. Theprofit margin per home built is what matters to shareholders.

Will do anything to save foreign buyers.

Will do anything to save foreign buyers.

I can promise with 100% certainty that NOTHING will be done to change the status quo until you get the National party freak show out of parliament.

Typical of the Ph'd bunglers who blather on about economic outcomes with not a thought given to unintended consequences. The biggest driver of raising house prices and all assets, has been the decades decline of interest rates allowing greater sums to be borrowed. Additionally the structure of the banking sector has encourage rent seeking behaviour, distorted investment from productive assets to real estate and driven down productivity. Its a problem not unique to NZ.

If the government goes ahead with a large scale build project they will drive up the cost of construction unless there is a surplus of construction capacity available to fill a government manipulated demand. We will end up with much fewer houses built for our tax dollars and inflation in household maintenance costs.

The best thing the government could do is stop the Central bank from manipulating the economy and operate as a lender of last resort to the financial sector only. The decades of current idiocy on behalf of central bankers will be painful to undo.

Very naive real problem is council and then supply of good builders Etc. I have spent over 300k in court cases and planning consultants for last 6 years to build one house and still at the plan submission stage

This article should be titled " Another Political Advertisement from the Left Wing"......let's pick this apart.....A Professor who's income is reliant upon teaching on the subject matter...."Construction Management at Auckland University of Technology and head of Built Environment in the School of Engineering, Computer and Mathematical sciences" maybe much responsibility for housing supply shortages sits squarely on the Profs there any tax payer funding going to this particular institution and department? Then there are the fee paying students who run up large debts being taught the industry that these left wingers want so they can keep the gravy train going........

Did this writer with all his credentials even stop for one moment to understand what the free market is meant to be, because if he did he would not call the current model a free market so this is a severe failure on the behalf of someone who is an apparent academic........

The problem with NZ housing supply is too many academics who have allowed their personal political prejudices to cloud their they are not true academics but rather henchmen with pursuits.

This left wing propaganda reminds me of the biblical story when a seemingly harmless snake coerces Eve to chomp on the apple!!

Are you saying that the current model is not a free market because of planning controls?

If so, it's an interesting point to ponder. If we had no planning controls and anyone could build anything, anywhere - those land parcels without connection to public infrastructure would still be unable to be developed - and the land value would reflect that. Then what you might get is an element of behind closed doors decision-making with respect to where public infrastructure would next be developed. That opens up the potential for corruption in public administration.

Not saying no planning is not an option, but it does come with it's own set of market distortions.

Of course it's not a free market. No land-owner is allowed to do what they want with their land. Even if you want to build a family home smack bang in the middle of a 5,000ha farm you still have to apply for and get a resource consent in case it violates the rural character of the zone.

You have fallen into a common trap worrying about public infrastructure. There is no legal requirement to connect to public water, sewer, drainage at all. After all we have tens of thousands of farms already that provide for themselves. It is already cost-effective for some residential developments to largely go it alone. The main problem is transport.

Personally I think we are overdue the separation of public infrastructure provision and planning processes. Planners should stay focused on mitigating externalities and stop designing the shining city on the hill. Engineers should do what they have enough money to do. Let developers work out how to deliver what the market wants given those two constraints. After all the developers take the risks; if they get it wrong so what?

It is already cost-effective for some residential developments to largely go it alone.

Really? Do we have existing residential sub-divisions built in this manner (i.e., not connected to public reticulation of services)? Community owned and operated water and sewerage schemes, for example?

Yes, I agree, roads are also of course a big issue - and yes, they in a plan-less world would become subject to that potential for corruption of public administration. I recall complaints that the government paving rural roads was often subject to such accusations of corruption (i.e., political favour) in the past.

Your last paragraph sounds good - but do the developers take the risks (i.e., incur the full cost) in relation to the connection of infrastructure to the "gate" or entry to the new sub-division? If they do, then what's the argument about?

A few. Mostly rural-residential in peri-urban districts. So 1 acre or bigger lots and self-sufficient for water and sewer with drainage not usually a problem with a bit of judicious bunding. Pegasus was originally designed as self-sufficient although later it became more economic to join up to community schemes.

In my opinion councils discourage developments from going it alone primarily because they don't like the almost inevitability that they will have to take over the schemes one day in the future. That's why legal MUD's are a good idea because the takeover is built in from the start even if it is 40 or 50 years out. That way councils can influence what is built and how it is maintained.

And yep in pre-1990 days rural seal extension was a total boondoggle. Its amazing how many sealed roads there still are in the country where the seal stops right outside a former councillor's residence. The practice ceased some years ago.


Yes, I understand the concept in respect of LSBs, but that's not a community (i.e., developer-developed and owned) reticulation service - just an individual owner-installed type of infrastructure provision (in my experience). And that land is not residential zoned, but rather rural-residential zoned.

So I think what you are saying is that you know of no such schemes that exist for a residential sub-division (assuming Pegasus never implemented their self-sufficient infrastructure plan?).

Yes, MUDs would offer an alternate, but even then I doubt many developers would take on a 40-50 year time frame of maintenance/service responsibility. And even if they were prepared to, the bond that would have to be paid to the LA (in case of early default/abandonment) might make the idea even less attractive from a profitability perspective.

Much as going it alone on infrastructure via a MUD sounds good in theory (and I hear it is done successfully in the US), I don't see many developers lobbying government for them - and that says something - they're quite happy waiting it out, getting the capital gains and lobbying for more ratepayer funded infrastructure development.

No I've seen a couple where the developer put in community infrastructure, started selling lots, managed the schemes until they had completed the development then handed it all over to the owners. Who, of course, infarcted and asked the council nicely if they would take it over. I've never heard of one that is attached directly to a larger urban area.

The point about MUD's is that the developers do get to walk away but there is put in place an intermediate body little different to a body corporate in an apartment complex. MUD's have a legal status in Texas that allows them to rate and recover arrears etc but once the developers leave presumably it is residents who sit on that board. As I understand it MUD's have a limited lifetime and are designed to amalgamate into the nearest local government structure once they are fully established.

And yes they are being lobbied for hard. Phil Twyford has been on record for over a year as seeing that the concept has merit. So anything could happen.

Phil Twyford isn't an Auckland developer / land holder. A bit like the SHAs - if the landholders aren't crying out for it, nothing will change. No sense in introducing the legal entity/concept in law if none of the landholders take it up. If/when the big landholders start lobbying directly, I'd take more notice. Presently we just aren't hearing from them.

If they are to work MUD's need a bit of statutory backing. The point of MUD's is that they can then bypass the incremental staging of urban development. If a developer thinks they can go a bit further, buy land cheaper, develop cheaper sections and still make money good on them. We need to bypass or jump over the land bankers if we are to bring house prices down. MUD's are one way. Kiwibuild could be another. There are still a few options that would work. The combo of the AUP and SHA's is not on that short list.

We need to bypass or jump over the land bankers if we are to bring house prices down.

Only a couple of ways to bypass them - that being state-building (i.e., Kiwibuild, as you have mentioned) but I'd rather just put a "holding" tax on them - one that works for them as well, given it funds the new infrastructure they want. Point is, they want it from the collective ratepayers, as opposed to one (a tax) directed specifically at them.

A differential rate for unimproved residential zoned land is perfect. It doesn't interfere with market mechanisms, rather it places the incentives for growth and development more appropriately in the hands of those who control (i.e., own) the resource that is so highly valued and needed in respect of solving the crisis. And the thing is, it only need be implemented by LAs who have a problem .. the rest of the country can just carry on as is.

I am firmly against a broad-based land tax - but a land tax on unimproved residential zoned land that isn't being brought to market fast enough ... in that case, I'm all for it. This manner of staged release of land within larger parcels of land all under a single ownership is a developer's haven. That's what we've been faced with for years and years now... i.e., slow release land banking. The more valuable/sought after the land, the slower the release.

I have a problem with the compulsion element. Remember with fringe housing the city has spread out to envelop what was once rural land. We know that some people have bought some of that land purely for the purpose of holding onto it until they can extort the highest possible price for it. But can you identify in a manner that would satisfy the courts who those people are? The rest are people who wanted to live in the country or who farm the land. But all these targeted rates/land tax "solutions" actually take away the right of these people to enjoy their property.

If you go down the path of drip feeding rezoned areas into the AUP and then tax the bejeezus out of the owners of the newly rezoned land you might as well go the whole way and compulsorily acquire all the land.

Kate and Donald what do you think of this discussion about cities being free to grow up and out as long as all the costs are internalised?

Phil Twyford
Julie Anne Genter
David Parker

A. the links don't work
B. you know me: I want to know the excruciating details of what you mean by "internalised" before I will pass comment


Fixed the links. Especially watch the David Parker videos to get the idea. But I think it is measures like fuel taxes, targeted rated and congestion charges to increase the price of things that are not wanted and to accurately capture costs rather than the blunt instrument of zoning which attempts to achieve the same goals but does more damage than good.

All the wrong type of taxes - fuel taxes and congestion charges - for example, mainly capture those with large commutes into the center (i.e., center/s of employment). Much more appropriate to tax those living in, or in near proximity to the center who are not utilising their residential land to its maximum efficiency via a targeted rate. This measure relates to the intensification problem (as opposed to the greenfields development problem which Donald and I were discussing above).

This intensification targeted rate could be in a form which I proposed on this site earlier (but can't find it now). It would mean then there would be no need for any residential sub-zones relating to intensification - intensification could happen anywhere, or not. The closer your land to a center of employment, the higher your intensification targeted rate if you want to remain a single residential unit lot. If you live in a multi-unit complex near a center of employment, the land has a very low intensification targeted rate (the more units on the lot, the lower the rate goes). If you live on a single residential unit lot far away from a center of employment, you end up with a very low intensification targeted rate. The formula I wrote, could just plug into a GIS system and be auto-calculated.

Not sure that answers your question!

As for David Parker's idea of a National Policy Statement - waste of time to my mind. It's a matter that can be far more easily and effectively sorted via the LGA and rating mechanisms - just like the greenfields (land banking) problem.

Found a better explanation of the proposal on a link you provided elsewhere. It was explained like this:

Labour's Phil Twyford has long supported one very sensible change to zoning: abolish rural/urban growth boundaries and instead put in place transport corridor designations for future growth and infrastructure funding provisions based around recouping through tax some of the uplift in values that comes from being next to the designated corridor.

Being next to a designated transport corridor isn't what really makes property valuable. Being close to a center of employment does. Look at Wellington's commuter train corridor for example - the further down the line you are, the lower the land price. Commuters are already financially worse off for having to pay the cost to commute - you hardly want to tax them more heavily just for the pleasure of sitting on a train or in traffic just to get to work.

In an ideal world, we'd all rather work was within 10 minutes from home. Better for the family, better for relationships, better for your diet (as you have time to prepare a decent meal after work) :-).

Instead of taxing the poor commuters, tax those folks that want to live on a large lot all to themselves within 10 minutes of their work (i.e., within close proximity to large centers of employment).

Kate I have no problem with a land tax or unimproved capital value rates to give incentives to building up -because the land not the building is being taxed. But I don't think it will have a big effect unless it was really punitively high, then you would get perverse effects like forcing elderly people from their homes before they are ready to leave, disrupting a lifetime of established local supports. But as one measure among many at moderate levels it would help at the margin.

I think to achieve more intensification -carrots may be better than sticks -removing restrictions like parking minima, having proposals that allow neighbours to more readily co-operate to intensify.

That sort of thing....

Neat set of slides on that link. Carrots and sticks are best - so no reason why both relaxed planning controls AND a financial incentive should not be used.

In terms of the elderly argument - the targeted rate for those that are asset rich/cash poor could be deferred until the home is sold - the mechanism already exists in law to do that. As long as the tax owed is cumulatively below the value of the tax free capital gain that has accrued over time it is not punitive - rather it is equitable.

I think your concern relates to an area of land that was previously zoned rural or rural residential, which has since been re-zoned residential. My experience is that whenever such zoning changes have occurred, they have usually occurred at the request of the landholder.

But, let's say they did not request such re-zoning, they then would likely have objected to it when a plan change was proposed. And if their land has been substantially improved (i.e., it's a working farm with requisite farm infrastructure or an owner-occupied LSB) and the owner-occupier owned it prior to the re-zoning - then it's not unimproved land, so wouldn't be subject to the tax.

But if it's simply residential land which is being leased out for grazing, and/or the improvements (e.g., dwelling/s) are rented out (i.e., not owner occupied), then it would be subject to the tax.

One would likely need a means by which rating disputes could be assessed / arbitrated but that's easy enough as well.

From what I gather at the moment there is enough residential zoned land in the AUP to meet projected growth requirements for the next 10 years (a plan life) - so no need to drip feed any more land (one can still respond to private plan change requests) for quite some time. What needs to happen is development on that vacant land already residentially zoned needs to speed up.

Planning controls are but one area that places constraints upon a free market.........the fact is most people don't seem to understand exactly what a free market is and therefore fail to recognise the factors which are an impediment and then wonder why all the problems arise......None of us would be debating the housing supply or affordability issue if we had a true free market........Government, Councils and bureaucracies would not be the bloated organisations that they are if there was a free market their size is a reflection of the disorders they have created!!

Common Constraints on the Free Market

All constraints on the free market use implicit or explicit threats of force. Common examples include: prohibition of specific exchanges, taxation, regulations, mandates on specific terms within an exchange, licensing requirements, fixed exchange rates, competition from publicly provided services, price controls and quotas on production, purchases of goods or employee hiring practices.

Read more: Free Market Definition | Investopedia

........ "What you might get is an element of behind closed doors decision-making with respect to where public infrastructure would next be developed" you not think that issue exists already? Maybe sit around a Council boardroom from time to time........Councillors get faced with problems.....someone has brought the said problems to their attention......member of the public or an administrator etc??? Who writes the report suggesting this is how the problems are going to be resolved???? It is generally those administrators sometimes external consultants but even if it is the latter everyone on the inside has had time to take action..........Reports tabled at next Council meetings....a few tweaks around the edges and finally passed by Council.....this process leaves plenty of room for administrators to have manipulated behind the scenes.......there is no process for all people working in the public arena to declare an interest.....a voted in member of Council will have to notify any conflict of interest but do the employees of a planning department or any other department for that matter have to declare a conflict of interest?

There are no mechanisms in place to capture corruption in the public system but the market distortions are clear indicators of the level of the corruption that is taking place!!

Maybe sit around a Council boardroom from time to time

I do/have - lots - both CG and LG. Sure, employees do have to declare conflicts as well. Recent example in Q'town where the CEO did such as he had ownership in a parcel of land being considered for a SHA.

I don't think there is a great deal of corruption in LG. There is not as much transparency as there should be (for example with respect to advertising and letting of smaller dollar value contracts/consultancies) and Council's these days are using public exclusion WAY too much to my mind. Also, many elected representatives are committing to projects that are not supported by the wider ratepayer base (i.e., Ruataniwha Dam project), but that's more poor participatory approaches and bad decision-making, as opposed to outright corruption or "graft".

Don't get me wrong, as there are so many ways that governance could be improved at a LG level. The quality of a Mayor being a very important element of that. If the Mayor is an inexperienced push-over, the CEOs will run the show instead - and (oddly enough) few CEOs (and many senior/executive managers) don't necessarily have the long-term interests of the local community at heart. Many aren't actually locals themselves - just immigrants for a spell, looking to move up the nationwide government bureaucracy ladder.

I agree with you - we don't live in a "free market" world in the pure sense of it. Far from it. But I can't see that ideal ever eventuating. The capitalists themselves don't want it (e.g., look at the capitalists lobbying for longer patents... clearly a detriment to free market ideals).

So, my thought is, we have to aim for a more ethical, moral, equitable capitalist (as we know it) society.

Normally I don’t get involved in discussion groups. However having had several ad hominem statements made I thought it would be appropriate to respond. The piece that you read was an edited extract (about 1200 words) of a much longer discussion piece of around 6000 words. The editor cherry picked elements to generate a reaction – which it most certainly did. So a few additional words of context and explanation may be pertinent.
Firstly I am not a ‘wishy washy liberal left leaning academic’ (aka a “Ph’d [sic] bungler” Robo47) that would appear to be the mindset of some. My PhD is in Engineering, not the social ‘science’ of the social justice warriors that apparently you think I am part of. Nor is it a “Political Advertisement from the Left Wing” notaneconomist. ‘Personal political prejudices’? Good grief. In common with the majority of former army officers my politics are more to the right of centre than the left as a rule – indeed I voted blue last time for the record in the absence of any sensible ways ahead from anyone else. The motives for writing the original piece are not financial, or indeed political, they were to explore the issues at heart of what in effect is a national crisis. When the Minister for Housing declares on national TV that the housing market situation is out of control – note the minister saying this after being ‘in charge’ of the policy and strategy levers for so many years – that is a discussion that needs to be had. There is no point in blaming the other side in this case.
Secondly, 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. 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. They 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 5 years – I would invite any who have contributed here 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 scalable. Look at the assumptions that both multiple respondents in this stream as well as government make about the supply of land being the root of the problem. i.e. More land, released and consented more cheaply and rapidly, equals more housing more quickly. This is only true if the capacity of the industry can scale up rapidly to demand. In reality we do not have a large amount of surplus capacity to offer. Our industry is skills constrained. 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. Availability of material does not in itself imply higher rates of production. 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 focussed. 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.
Thirdly the structure and technology of the industry. High density affordable houses are more expensive to build (per square metre) than larger properties. 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.
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.
A further aspect of industry structure is related to the numbers of land development companies in operation. This is not about cartel arrangements unaha-closp per se. Practically it is a hard industry to get into since there is a need to invest in substantial amounts of expensive equipment. 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”.

"Normally i dont get involved in discussions groups?" I never get this statement by authors wanting others to acknowledge their own opinions on such matters. Its a two way street IF you believe in democracy. By all means get involved.

Really appreciate the additional contribution, John. Extremely useful insights.

This says it in a nutshell for me:

More land does not equal more housing in any meaningful way to address the housing crisis.

The greenfield SHAs are some evidence of that.

It used to be that new sub-divisions came on track - sections were sold to individual aspiring homeowners - who could hire a budget firm like (then) Beasley Homes, or who could move an existing house onto the section, or who could hire an architect for a design-build... all without any covenants as to what can/cannot be built on the sections.

It seems to me now that title covenants are one of the major impediments to the building of affordable homes.

I'd be interested in your take on that.

I'm a planner, and I agree - we are in a big mess.

Within RMA law, the governments (central and/or local) could choose to refuse covenants as part of sub-division consenting. I wonder whether this might help on the affordability front.

I am totally fine with engagement in discussion. Not a problem at all. All academic publication involves peer review. It is what we do.

In case you're still around - another 'outside the box' thinking from me - this time on the intensification/NIMBY (as opposed to greenfields) issue. I mentioned it above but have now found the formula I wrote earlier. My issue is, I'd rather we did not use planning mechanisms (sub-zoning) as the means to "solve" this problem, as the social choice mechanism of public administration will always be arbitrary and inequitable to a degree.

So, my thought was .. if only we could find a market mechanism to solve the problem - and a Targeted Rate under the LGA might be one option.

The Intensification Targeted Rate would be calculated as follows:

Distance Factor (of a residential lot to a main centre of employment)
Size of the residential lot in m2
Number of residential units per lot
Intensification score x a fixed dollar value (say $1.00 for ease of analysis)

Where I increases with the inverse of the number of dwellings per lot rather than in proportion to it.

So that's: D x S x N = I x $1 = Targeted Rate

Main centres of employment are broken down into Distance Bands (DB), where DB moves inversely with distance in km, not proportionally, say assign:

A factor of 1 for all distances >30 kms
A factor of 2 for all distances between 29.9kms and 20kms
A factor of 3 for all distances between 19.9kms and 10kms
A factor of 4 for distances between 9.9kms and 5kms
A factor of 5 for distances < 4.9 kms

Main centres of employment are also broken down into Number Employed (NE) bands, where NE increases with the numbers employed; say assign:

A factor of 1 for main centre employing <250 people
A factor of 2 for main centre employing between 250 and 999 people
A factor of 3 for main centre employing between 1000-4999 people
A factor of 4 for main centres employing more than 5000 people

Where D = DB x NE in the above.

Size of the residential lot in m2 - Use the raw lot size as the factor

Number of residential units per lot

A factor of 5 for a single unit dwelling per lot
A factor of 4 for a two unit dwellings per lot
A factor of 2 for a three-five unit dwellings per lot
A factor of 1 for 6+ unit dwellings per lot

What the $ value needs to be would be determined by just how much of an incentive for densification one wants to provide via the targeted rate. You then need only one Residential Zone - along with a height to boundary rule - and mutli-unit complexes might start popping up everywhere. Point being, those close to the main centres enjoy all the benefits of the concentration of public infrastructure (universities, libraries, museums, hospitals, CG HQs, LG head offices, etc.) but don't pay the requisite rates/tax associated with their enjoyment of those benefits. Perhaps it is a kind of more equitable land tax on those close to centres of employment (and hence centres of public infrastructure concentration).

It needs GIS modelling - as I have no idea whether the numbers I've proposed would do the trick. But, you'll get the idea.

Hi Kate

Thanks for your comment. I am not a planner but have seen these sorts of models in the past. Do they work? I guess it depends on what you are trying to achieve. The issue in the Auckland market is related to scale, time and inertia. The concept that you propose will take years (arguably decades) to start making a significant impact on the market. The basics of seeking to build the largest permissible property, to the lowest legally acceptable building and environmental standards will still drive behaviours. By introducing prescriptive rezoning as suggested opens up a substantial market for appeals and argument since there will be a material impact on the fundamental value of existing properties and thus rateable valuations. My sense is that it will not substantially affect either the scale of the continuing problem, or the rapidity of the solution. Normal entropy – i.e. inertia – remains, as evidenced by the reaction to the original article.

We are entering a phase of the housing bubble here in which key workers (police, fire, ambulance, nurses, teachers) are being priced out of the market, to all intents and purposes, permanently. Even the professional end of the market at the beginning of their career (e.g. lawyers, academics, doctors etc) are at a point of not being able to afford accommodation. Over recent years I have worked hard to grow my department and school dramatically to address the national deficits in engineers – in particular construction engineers. It is an education to understand what skills we need as a society and what we pay for those skills. I have early career academics, all highly capable PhD qualified individuals and our typical pay scales are barely higher at the bottom end than a graduate engineer that they will train. At the top end it is not even close to what a principle engineer will do. Have a look at the links below to get a flavour:-

The take away is this – by all means study or indeed immigrate to NZ. But by the way do not expect to earn enough money in anything like a sensible timeframe to be able to purchase where you live. We are pricing skilled people out of the market that can add huge value to the economy as a whole; in terms of services our critical quality of life enhancers – such as healthcare workers will not be able to viably exist in the city. I guess it is ironic that the mindset previously expressed of shifting ‘useless governmental facilities’ out of the city to create yet more land for housing development (and thus investment opportunities) would not include these hospitals that staff can no longer afford to work in? Go figure.

The issue of immediacy of the problem is the critical aspect here. We as a society have a macro problem that has taken some time in being created in its current form. Government by contrast has continually sort to solve said macro problem with micro (individual home owner commissioning individual houses in a piecemeal manner in the context of amended development and planning regulations) solutions. Practically that will not work in a societally meaningful manner in the absence of a major catalysing event or act. I hope this occurs as the result of robust decision making in the direction of the original article. All bubbles burst. The choice is whether it can be deflated in a controlled manner or explosive decompression. I fear current we are increasingly in danger of the latter.

It is an education to understand what skills we need as a society and what we pay for those skills.

I hear you on that, for sure. My outside the profession impression is that the erosion in our local market valuation of the civil/mechanical/materials/electrical etc. engineering professions seems unbelievable for a country with the physical and social characteristics of ours.

The links you provided are telling - take the average salaries for:

Mechanical Engineer: (start) $55-65K; (exp'd) $65-115K
Civil Engineer: (start) $45-60K; (exp'd) $85-220K
Urban/Regional Planner (start) $61K (exp'd) $77-103K

Someone should do a comparison with respect to the growth in the employment of engineers vs planners in local government from 1980 (the decade before the RMA) to now. I'm guessing one would find we replaced engineers with planners and the number of planners now vs the number of engineers then is likely more than five-fold.

It seems nuts - given infrastructure provision and construction capacity is one of the major hurdles facing the growth-challenged local authorities. Local government doesn't have a boom/bust (i.e., conservative employment approach) to employment. LG is generally a comfortable, secure and above average paying employer.

On whether tax incentives (such as an intensification targeted rate) would effect change - tobacco taxes are a good example. It takes time but most certainly from a generational point-of-view it will be effective. Hence 15-30 years from now, Auckland would be the medium/high rise center that would massively benefit new entrants to the housing market then. Such financial incentives would just about guarantee it - the present planning rules will not.

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