Shamubeel Eaqub says there is a failure to think long-term by both local and central government. Local authorities are not the only ones responsible for the housing crisis, but they can do a lot, he believes

Shamubeel Eaqub says there is a failure to think long-term by both local and central government. Local authorities are not the only ones responsible for the housing crisis, but they can do a lot, he believes

The following article is the ninth chapter from Progressive thinking, ten perspectives on housing, a Public Service Association (PSA) publication. Interest.co.nz is publishing all 10 chapters from different authors on various aspects of housing.

By Shamubeel Eaqub*

Land is the costliest part of a house. In places like Auckland, land can cost around two-thirds of a newly built home.

There are many reasons why land prices are so high. They are the same reasons house prices are so high.

The high cost of housing comes off the back of sustained excess demand for housing, both as shelter and an investment. Over time, the lasting issues are from excess investment demand and slow supply of new housing.

Slow supply of new housing is a major challenge and one that is squarely aimed at local government.

Local government is a key pinch point in land supply, because it decides how many houses, of what type, get built when and where.

Because of this pinch point, it also makes sense to land-bank if the investor has patient capital. Large financial gains can be made when changing land use from rural to residential.

Local government decisions on urban planning rules and infrastructure really matter.

Land zoned for housing without infrastructure is not useful. Local government is perhaps unfairly blamed for all infrastructure woes because they are bound by their ability to fund and finance expensive infrastructure. The costs of growth tend to fall on local government, but the fiscal benefits largely go to central government.

Planning

Planning has been a barrier to new housing supply. Minimum lot sizes mean we are forced to have large sections, rather than a variety.

Minimum site cover rules mean we tend to build larger, rather than smaller homes. Other minimum requirements like balconies for apartments add cost, but not amenity. Plans are often surprised by much faster population growth, creating an undersupply.

There are, of course, good reasons for planning rules and other restrictions on land supply and building proposals. Some of the rules are designed to protect the environment, or minimise actions by one property owner that could negatively affect others; other rules designate, for example, parks and other public amenities that would not be built if urban planning were left to individuals transacting in the market.

There are also the significant costs to density that the rules aim to mitigate.

The Dickensian industrial centres of northern Britain and the London of Sherlock Holmes were crowded, filthy, polluted, crime-ridden, and prone to infectious disease epidemics. The term ‘the Big Smoke’ – now an unremarkable cliché – was originally used to describe the intense pollution of Victorian era London.

Planning rules have therefore understandably aimed to limit what might be regarded as overly dense housing.

But new rules have accumulated over time, expanding the system’s reach and scope. They have widened to include things like green belts, urban limits, height restrictions, building designs, maximum densities, minimum parking requirements, historic buildings and character preservation, and many more.

Rules and principles originally designed to make cities better places, have now become the shackles that are preventing cities from reaching their potential. This is true for those wanting to live in the city, and for those living in suburban housing because they want space and distance from the city.

These regulatory structures are fairly uniform throughout New Zealand, although their local applications can vary greatly. This has not historically been much of a problem, because there has been little population growth to test the regulations that constrain growth. But in strongly or suddenly growing markets, like we are experiencing in Auckland and Queenstown, restrictions on land use are constricting the supply of new homes. This pushes up house prices until the market reaches a new equilibrium – one that prices many people out of the market.

Infrastructure

Local Government New Zealand, a body representing local councils, has highlighted the need to align three different pieces of legislation that impact on land supply: the Local Government Act, the Resource Management Act and the Land Transport Management Act.

In addition to the complexity of rules, the funding for infrastructure is not always straightforward. Large and long-term investments need to be matched up with long-term funding.

Often, transport assets are built and maintained by different authorities and there isn’t always harmonious coordination between them. Highways and bridges tend to be the responsibility of central government, while local roads and water infrastructure (drinking water, sewerage and storm water) sit with local government – and there are often fights about who should pay for what.

The regulatory complexity created by these acts and funding mechanisms means that it is conceptually and practically difficult to supply land quickly and easily. Until policy can be better aligned and streamlined, land supply will remain slow.

Solutions

There is a failure to think long-term by both local and central government. Local authorities are not the only ones responsible for the housing crisis, but they can do a lot. What follows is a short but not comprehensive list of solutions for local government’s role in the housing crisis.

Local authorities can plan for lots of population growth and make rezoning and infrastructure supply contingent on that, rather than the current situation where we don’t plan for the growth we have and end up with shortages.

Local authorities should also use targeted debt – something that could help transfer the cost of current investment to future generations who will also benefit from the asset.

The political reality is that borrowing is often unpopular, and many fast growing councils already have too much debt.

As a result, investment in infrastructure tends to persistently undershoot planned investment by local authorities.

Central government needs to return more of the benefits of economic growth to the place that generated it. Unless the costs and benefits of growth are shared fairly, there will always be an undersupply of infrastructure and housing.

Local government should use inclusionary zoning, where a set proportion of any new development has to be affordable housing held in trust for those in need, and the developer compensated through greater density.

Local government should reassess the best use of its land holdings. For example, Auckland Council owns the land for 13 golf courses, despite golf being a dying sport globally and there being an urgent need for social and affordable housing.

Local government may also need to evaluate which of its designated ‘heritage’ sites truly merit their protections and which ones can be built over. Buildings that can still be used should not be torn down, but not every functional building is worth retaining solely for aesthetic reasons.

Rules can encourage land (including vacant land) to be better used – taxing land (including vacant land) more heavily than structures, for example.

When taxes are much higher for land than structures, there is an incentive to make sure there are lots of income earning structures on that land to pay for that tax and maximise profits.


*Shamubeel Eaqub is an economist, columnist and author. He works at Sense Partners, a boutique economics consultancy. He lives in Auckland with his wife and son.

Note: The views expressed in Progressive thinking, ten perspectives on housing belong to the authors and do not necessarily represent the view of PSA members or the organisation.

The foreword is here.
The first chapter is here.
The second chapter is here.

The third chapter is here.
The fourth chapter is here.
The fifth chapter is here.

The sixth chapter is here.
The seventh chapter is here.
...and the eighth chapter is here.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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11
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"Local authorities can plan for lots of population growth" Why??
Surely in a sustainable world there would be no population growth, just improved infrastructure and restriction of the environmental damage that is inevitably associated with population growth.

No population growth? Restricted births?
And who is to say an increasing population isn't sustainable? If the amount of resources required per capita decreases it may well be sustainable. I doubt the current world population would have been possible 200 years ago.

If population is not controlled by social, political/cultural means(i.e. using our brains), then war, starvation and disease will solve the problem in a manner that will make WW11 look like a kids' party.
And who is to say an increasing population is desirable?

And who is to say an increasing population isn't sustainable? Basic mathematics...

Unless you mean it is sustainable till at least after you are dead and have finished collecting your pension?

I think a major challenge is that the public sector has no measure of the 'opportunity cost' of the land it holds. The issue of golf courses raised in the article is typical - if you allowed for the holding costs of land the subsidy of golf in Auckland is greater than the subsidy of public transport. In the same context, if Housing Corp had behaved like any other land owner it would have rationalised its land holdings over a recent decades rather than needing to come up with radical rationalisation plans now.

Keep your hands off the golf courses please. The politics of envy.
I don't play golf but having those open spaces is just wonderful. Trees, birds, no noise or pollution being generated from that land. Beautiful!
Have intensive housing developments if you wish, elsewhere.
But not on golf courses.
As an item of interest: the Ak council is casting its eye over every single thing on the North Shore it can get its grubby little mitts on. It has been eyeing up the golf course in Devonport: the place most exposed to a tsunami in Auckland. Madness!

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It is not the politics of envy - it is about 'middle class capture'. It is the fact that local government subsidies white middle class and male activities at vastly more than other activities. Any other sporting activity (eg soccer) would have playing fields that you can walk over when they not in use - but the Remuera Golf Course puts a large fence around the outside of 65 hectares of central city public land so that can't be used by the people who pay for it.
And this is not just about turning it into housing - wouldn't it be good if the 65 hectares could have playing fields, a school (given growing shortage of land) - and perhaps a retirement village so that we could free up another 1000 houses elsewhere.

I appreciate that many will criticise treaty settlements and other land uses - but work to protect the interest of very narrow socio-economic groups. I think that is why we continually elect white middle class mayors - after all whose interests are they elected to protect?

I'm pretty sure that the vast majority of local government revenue, come from middle class white males.
Indeed why play the politics of envy, when you can play personality politics of envy¿

Open spaces? Our local golf course has a big fence around it.
Yes the green space is nice - but it would be nicer without the fence and the golf balls.
Whether council owned green space should be used for housing is a completely different question to should it be used for golf.

The Devonport golf course is a public park so the public are legally entitled to walk on it at any time.

Just wear a helmet.

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Land is the costliest part of a house. In places like Auckland, land can cost around two-thirds of a newly built home.

There's the issue, right there. Land costs historically were a quarter or less of the total house+plot equation.

But how to get There from Here - in Awkland - there's the RUB (pun intended).

Let's not.

We elected Len Brown and Phil Goff to get affordable housing, and look what Labour did to Auckland.

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Unaha-closp you seem to have Bill English's belief that the housing crisis was caused by 20 planners in the bowels of Auckland City Hall who have taken the economy hostage by jacking up house prices. Bill has for years been using the hostage attack on Auckland Council argument.

In January, "English said local councils in Auckland had spent "many decades" trying to stop the city growing, and as a result the planning system couldn't cope with recent growth.

"We simply can't expect our lowest income households to carry the burden of arbitrary preferences exercised by people having a view about amenity value that can include everything from furniture layouts in houses that haven't been built, through to positioning of plants on a section. Really?

"All of these things drive up the price of land, drive up the cost of development - because it takes far too long...."
http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11807509

In a recent RNZ long form interview he made the same claims -although obviously in response to Jacinda generational change image, he put some spin on it by calling the issue of correcting Auckland's land prices a -'generational fix'. http://www.radionz.co.nz/programmes/leader-profiles/story/201854923/bill...

The problem with this belief is not that it is wrong, but that it is too simplistic. Auckland Council exists in a regulatory environment created by central government. Whether or not Auckland has infrastructure to cope with population growth is determined by central government. What resources they are given and what taxes they can use is determined in Wellington. Currently there is no way that Auckland can cope with 800 extra cars being added to Auckland's roads every week and this is just one infrastructure challenge that high growth is imposing on Auckland Council.

Blaming one party -Auckland Council -is dangerously naive. It will simply perpetuate the housing crisis with all its social and economic ills. The housing crisis demands change. Government in Wellington will have to change, Auckland Council needs to change and the private sector needs to change.

A social conservative politician who has stood by, with his control on the purse strings for 9 years and done nothing, is not the person to lead this change.

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And that was just the supply side. On the demand side. It is obvious that a small market like NZ's property market can easily be swamped by global finance. NZ, like other countries should protect itself from global capital. There is no need for NZ houses to be a globally traded commodity. It is difficult to find space for urban expansion. Making room for growth is not easy and when it is created -at some expense to the public purse in the form of public spaces and infrastructure -it should be for the benefit of NZ citizens only. This is another issue in which Bill English and National are in denial about.

Population growth is another lever controlled by Wellington. They get a lot of benefit from population growth -it gives a sugar hit to tax receipts. But the hangover is suffered by our biggest cities and their local governments -in the form of high house prices, congested roads, Councils approaching debt limits..... Again Bill English has overseen this, benefited from this and does not seem to care about its downside impacts on others. In this regard he is a poor version of John Key -we don't even get John's smile....

Simplified maths: assume Auckland had a flat population then roughly 2% of houses would need replacing each year. Now add a 2% annual population increase and twice as many houses have to be built but half of these new houses will also need sewers, roads, extra public transport, schools, hospitals, etc.
It can be done - for example Brisbane grows as fast as Auckland - but it does skew finances. Who should pay the extra money Auckland council has to spend just for growth? More debt? All NZ taxpayers, Auckland ratepayers, the Auckland businesses that employee the new comers, the new-comers themselves and how could that be done fairly?
I've no answer. Much as it goes against the grain to say anything positive about Auckland Council and its undemocratic structure and its squad of PR spinners, they do have a big problem. No wonder we grumble.

'On the demand side. It is obvious that a small market like NZ's property market can easily be swamped by global finance. NZ, like other countries should protect itself from global capital. '

You nailed it right there Brendon.

'On the demand side. It is obvious that a small market like NZ's property market can easily be swamped by global finance. NZ, like other countries should protect itself from global capital. '

You nailed it right there Brendon.

Auckland Council (LAB) and the NZ Government (NAT) are both to blame.

The Auckland Council is an example of the Labour Party in power and it sucks. Electing the Labour Party to solve the Auckland Housing Crisis from Wellington would be pointless as they have a track record of not delivering whilst empowered to do so for 8 years in Auckland.

Thankfully we live in a multi-party democracy, so when the government sucks and the opposition sucks we have multiple choices.

All been stated before, on a number of occasions:-

Central Government has total control over the migration numbers while Auckland City Council bears the cost of accommodating the largest proportion of 300,000 new arrivals from the past 5 years.

Because Central Government refuses to require non-citizens to build new then those new arrivals are not naturally creating new ratepayers

20 faceless planners in a star-chamber can do nothing other than permit increased density and move some lines on a map - but that does not result in new arrivals building on the outskirts and it certainly does not compel anyone to build apartment buildings or new homes

Some countries sell citizenship - I read St Lucia is the leader.

What they actually do is ban building on the outskirts and make the Auckland too costly to build houses or apartments.

Auckland Council is constructing sprawl more aggressively than almost anywhere in the world.

You may stand by and applaud, thinking of sprawl as the best and most efficient use of capital. But sprawl normally delivers low cost land, just not in Auckland.

Auckland Council is spending billions on sprawl and forcing land costs upwards. Planning so awful it defies classification, beggars belief.

I shed a tear for the Ratepayers but then I saw somewhere that the grandiose transport plans were only costing the ratepayers $180 per annum, doesnt sound much to me.

I strongly suspect that their are vested interests at work within some councils that have manipulated the processes to engineer land shortages and high prices. I seem to remember that Britain at some stage created a law where councils were required to zone sufficient land so that there was always available two years worth of the required number of sections. I am presuming available meant actually on the market.

Based on the Unitary Plan debates I'd argue that wasn't the case in Auckland. The Council staff were pilloried for up-zoning areas without due process, as some still say . The problem, if you see it that way, is that a swathe of non money oriented owners didn't want density changes near them. Those looking to profit from their properties or develop land had a pro density approach. Overall, in my area I'd say the Nimbys won big time.

I suspect that whilst Auckland Transport was accepting bribe money, they found the way to maximise the Auckland Transport budget was spreading by Auckland far and wide. Maximise the sprawl dispersal, use land supply inefficiently and suddenly the transportation requirements are ginormous.

What other reason is there for tripling the size of Warkworth, whilst slashing land supply to Auckland?

Um yeah it's 10 years worth of land generally in NZ, councils rezone to residential, land bankers snap it all up and drip feed to market at monopoly set prices.

More false facts, see Brendon's comments above for an explanation.

I would add to what Shamubeel says, by including Lowell Mannings' view on the impact of money supply growth on land prices.

I thought it was a brilliant article... I agree with him.

http://www.interest.co.nz/opinion/64724/lowell-manning-says-problem-hous...

I believe what Lowell says, added to what Waymad and others say, gives a more complete view of the issues.

These problems have been decades in the making , but have come to a head, in terms of affordability.

actually a very confused article based on a poor understanding of how property is valued

Ex S... Can you elaborate..? Maybe I'm missing something

( from a Macro perspective , I pretty much agree with Lowell )

Property is not valued on land plus cost of house. It is valued on the basis of what the combination of land and house would sell for. Land value is then estimated on the basis of 'capital value' minus the cost of building - with the land being the residual. Therefore when house prices go up faster than the cost of construction the land value (difference between capital value and cost of construction) goes up most.

You didn't miss anything.

I think Ex Socialist is confusing the micro and macro functions.
What he Ex Socialist says is correct - land is valued that way for (micro level) assessed value purposes. The author even states this.
However, the argument of the author is that land value is a function of money supply in aggregated terms.

You are right - I responded too quickly to the first page of the article. Having reread the second half I am not won over. It all feels a bit too "social credit" to me. I would agree that monetary policy impacts prices more than demand, which is why the RB is focused on price (rather than employment). However, I think the housing market boiled over because too many people thought price increases would go on forever.

Thank you for that most excellent link Roelof. That is the best article I have read on the subject and provides the mechanism that explains what I have been fumbling towards, namely that house prices are caused by money supply and demand, not physical supply and demand. Housing shortages are due to physical supply problems.

Basically if money is flowing into New Zealand as capital from overseas it must push up asset prices.

so take it one step further - ask why the money supply tap is not being turned off if its just creating bubbles...
Answer; It cant or commodity prices would tank further and reveal the whole system as bankrupt.
ie all commodity producers are actually no longer viable. Their inputs are costing too much (in energy terms) to now viably allow us to service debts and grow the economy.
Debt growth MUST continue .. but in the absence of real growth it has to keep pouring into asset prices. Until return on capital approaches zero and capitalism cant be said to exist.

Excellent article . What it does not seem to factor in is the cost ( financial , effort and time ) imposed by zoning rules. The article looks at the outcomes ( the numbers of permits issued etc. ) but does not directly account for the exuberant cost of the process.

Good grief, so much wrong.

Auckland Council takes land supply away from Auckland, then doubles it's size whilst moving it miles away to the middle of nowhere (Warkworth, Wellsford, Huapai...). So far Auckland Council has cut land supply to Auckland City in half and caused a housing crisis.

But this not a pinch and it hasn't been due to a lack of infrastructure. Total land supplied to the Auckland region is currently about 150% of the area needed for a city of Auckland's size. Infrastructure costs associated with this cumulative over supply of land are probably 200% of requirements.

It has nothing to do with golf courses, or a lack of tax, or even immigration. It is just offensively inefficient planning.

Short of running completely roughshod over existing property owner rights they had little option with zoning.

My plot of land is over-valued. It's only 750sqm and land value is $1.8M how is this possible?

Simple. It must have an utility that those with the money are willing to pay that much for it, whether that is geographic location, aspect and/or the number of dwellings that can be put on it.

We have low interest rates and D-GZ is in a great central geographic location. The City has slashed supply of moderately positioned land whilst opening up vast areas of poorly positioned land. Auckland people in the market for moderately positioned land (that no longer gets offered) have been forced to compete for centrally positioned land. This has raised the cost of centrally positioned land to create windfall short-term gains.

The problem is that having such high cost land reduces the number of dwellings that can be put on to it over time. Thus the long term utility value of the land is much reduced as other cities grow faster than Auckland.

Central Auckland has seen phenomenal short term price increases but will eventually see long term retardation of value.

By that argument land has been 'overvalued' in New York, London, Tokyo, etc for decades now.

I suppose greed can be one explanation for a humble-brag.

Double GZ , ask yourself how much was your land worth in 2005, then ask yourself what has REALLY changed from then to now, if your answer is , well not that much except the overseas investors came to town, then I would be worried if you are the one left holding the bag, the wise ones sold and left the hole and brought a Nicer house in Tauranga with 3 rentals, owell if you like the place, overseas investors might be back one day by the thousands and super low interest rates at the very same time and a immigration mad government, not much to ask

O4N this is my home and where I live so it is priceless. Not even $100M would buy it...how can you measure the intangibles in dollar terms such as memories and happiness?

Pn has a new district plan that prevents putting a garage in front of the house as they recon it doesn't look nice. There goes a massive chunk of subdivisions as this is a common way of meeting the equally strict 2 car parks per dwelling mixed with the 36sqm of open space attached to at least 2m of a living area, the space being on a north facing side!. Add the fact nothing can be rezoned to residential as it's all flood prone or fertile farm land and you can see why it's a case of land land everywhere but nothing for people to build on

Blenheim is another place with, land, land everywhere but nothing to build on too. Vineyards come right up to the edge of the town and once the land is successfully converted to vines then the land value is such it is not economic to use it for housing.....

And the basket case - Auckland. The council lets suburbs be built almost everywhere - resulting in the huge sprawls of today. Auckland Council infrastructure will be provided to any location in the Auckland region within only one discernible criteria: where it makes the LEAST economic sense.

Where suburbs make the MOST economic sense, there development will almost certainly be banned.

New sections in the suburb of Rototuna ,new opened up are 480k.
500K house and your away.

Plots in Christchurch start with a '1':

Here (Ravenswood, 25 kms out) https://www.ravenswood.co.nz/sections-for-sale/stage-1/

Here (Rolleston, a satellite city in its own right) http://www.realestate.co.nz/residential/search/prices_max/200000/propert...
and has work right across the road at IZone http://www.izone.org.nz/ where the pitch is 'low rates and no DC's'

Here (Lincoln, 12 km from CBD) http://www.realestate.co.nz/residential/search/prices_max/200000/propert...

Here (Pegasus, 25 km from CBD) http://www.realestate.co.nz/residential/search/prices_max/200000/propert...

The world is trying to tell ya something, Auckland.

Plot prices need not be 10x median household incomes.....

Nothing original here. The elephant in the room is the deliberate tax moves over the last decade by the National Government to discourage investment in housing into more productive enterprises. Eaqub was a great supporter of that move. Now we have millions more cows with a milk flood and not enough houses. Those tax changes added an average of $60 a week rent. An extra $3000 a year gross cash flow when capitalized (what investors do) equates to $150,000. Sure horrible council planning rules need to be freed up but the simple numbers of tax have a bigger impact.

Eaqub never ever says immigration is an issue, to keep this simple
if you require 1000 houses a year due to replacement and population expansion then you end up with a workforce and sector that is designed to construct this number of properties, but if you increase immigration so that you now require 2000 houses a year then you have to double the capacity of the construction sector to produce the number of housing units required. Such increases in supply take a certain period of time, it takes 3 years or so to train a builder etc.... The sector may decide that if immigration returns to normal levels it will have over supply capacity (to many builders that have been trained) and this could be costly and it may decide not to respond. If demand is managed (population growth) then supply can be managed.

It's an average article from Eaqub.
And as you say, he consistently dismisses or at least downplays the role of high immigration and foreign investment.
In fact I would go further and say that he seems inherently sensitive about the issue, and biased, in that he himself is an immigrant. He cannot accept the notion that a debate about the levels of immigration does not imply an 'anti immigrant' position. He gets far too emotive about things like this - as an economist, he should be objective.
He also falls into the trap of thinking that planning de-regulation is a magic bullet. It is not. It will help, but much wider initiatives on the demand and supply sides are required.

There was a senior national party minister who was involved in getting his immediate family member off a child abuse charge a while back. He was from the south island.
Michael Woodhouse is a complete stuff up, hes wrecked the country with a reckless immigration policy.
National should have just washed their hands of him.

'Local government should use inclusionary zoning, where a set proportion of any new development has to be affordable housing held in trust for those in need, and the developer compensated through greater density.'

As an economist, he should be aware (there's plenty of research) that inclusionary zoning has generally been an unsuccessful policy internationally. In fact it can be counterproductive, in that it can kill the feasibility of projects - therefore acting as a handbrake on supply.