By Alex Tarrant
If you blinked, you may have missed it. But Finance Minister Steven Joyce last week came very close to saying the National government wants all Auckland property values to become much lower than they currently are.
Not in those words exactly, but that’s how I’m reading through this line put out on Thursday: “We must keep a strong focus on land supply so that section prices become much more reasonable.”
You might not think it’s much, but I’m going to put it out there: This is the closest we’ve got to a senior National or Labour politician saying it would be good if New Zealand property values fell, rather than just banging on about improving affordability while ignoring the secondary question of, ‘how much would you like prices to drop by?’
It might have been a public relations accident. Joyce might have meant to say, ‘so that new section prices become much more reasonable’ and then do an Andrew Little by saying he only wants new properties coming online to be below average prices, while the values of existing properties remain stable (and definitely not falling).
He might have meant to say he wanted ‘some’ sections to be priced more reasonably. This would allow for a get-out-of-calling-for-prices-to-fall card of saying this wouldn’t necessarily impact the values of average existing properties, as ‘other’ sections might come on line priced less reasonably to balance things out.
But he didn’t. The quote as it stands relates to all sections. Now, take a look at your latest council rating or homes.co.nz valuation – you’ll see your section/land accounts for the majority of the value of your property as opposed to the ‘improvement value’ of the dwelling you have on it.
So, when the Minister of Finance starts talking about wanting section prices to become much more reasonable, that’s news. And by the way, we’re talking “reasonable” in the sense of inexpensive, affordable, cheap, moderate, economical and equitable.
Joyce’s comment came in a press release extolling research done by Sense Partners economist Kirdan Lees on the impact of New Zealand’s land use regulation on property prices. Headline: Regulation regarding what can be built where may account for 56% of the cost of an Auckland home. (See David Hargreaves' article on it here.)
The main gist of the research indicates our land use regulation is not sufficiently flexible to accommodate increasing demand for land in particular areas. “Most areas in the cities we study have failed to accommodate more people,” Lees says.
Let’s say people moving to Auckland earmark Ponsonby as an extremely attractive place to live. Initially we’d see a rise in values as they compete to buy existing properties people are willing to sell. Rising prices would catch the attention of other local property owners, who might then consider subdividing to capture that increased demand. The increased supply would take that upward pressure back off prices.
But what if you weren’t allowed to subdivide? Lees talks about land use regulation as a tax that raises the cost of a house. “This could include a multitude of land use regulations, such as height restrictions, urban growth boundaries, minimum lot sizes, minimum parking requirements and heritage restrictions. Moreover, these regulations are often a function of the broader urban planning system, including infrastructure funding.”
Lees cites some previous research of his showing that, aside from inner-city apartments, most suburbs in Auckland (and elsewhere) accommodated very few new residents between 1996 and 2013 (the point to which the research was current to).
“We conclude there is in general only a small relationship between density and prices, certainly much smaller than if the response to high demand were sufficiently flexible to encourage large inflows. This is consistent with the findings of the other methods that there are severe regulatory restrictions that characterise most cities as type 3 cities that fail to accommodate much demand,” he says.
“Our results show prices in most cities were expensive relative to construction costs in 2012 and have only increased. Moreover, our estimates that compare the price of land with a home to the extra value from a backyard suggest land use regulations are preventing sufficient supply response to meet demand. When a house with 400m2 of land is not much different in price from a house with 800m2 of land, we can use land more effectively to produce cheaper houses.
“There are many potential welfare costs arising from such high house prices, including labour markets distortions and inhibiting productivity and resource allocation. Well-functioning housing markets with flexible supply in high-demand locations should produce a strong correlation between prices and density. We expect supply to adjust and accommodate more residents and some extra demand to push up house prices a little. But our results suggest only mixed and modest relationships between density and prices. Only a few areas, such as downtown Auckland, are accommodating more households with new dwellings accommodated on the periphery of the city.”
The recommendation: “If policy advocates are interested in reducing housing costs, they would do well to start with zoning reform.”
Joyce argues the government has made movements on that front: “The new Auckland Unitary Plan, the latest RMA reforms, the National Policy Statement on Urban Development Capacity, the Crown Building Project, the Housing Infrastructure Fund, Special Housing Areas (SHAs) and increasing the availability of Crown land for housing, are all helping to increase land supply for housing.”
So all good then? There has been some recent good news. Prices in Auckland are slowly dropping. But what if after the election that turns around again (let’s say the current coalition can reform a government)? What if the onus falls on government to do more to ensure section prices actually do become much more reasonable than they are now – as Joyce has said he wants?
Will Joyce and Social Housing Minister Amy Adams commit to greater government-led or government-financed house building work, or central government overrides of local authority zoning rules with the express intent of causing section and property values to drop into 'much more reasonable' territory? I’ll leave that for you to decide.