Rodney Dickens finds the council-controlled subdivision process, the RMA and increasing infrastructure costs directly contribute to high section prices, and these processes give cover for gouging by developers

By Rodney Dickens*

This Raving follows on from the previous one that criticised the government for not doing enough to get down section prices; with high section prices at the heart of the housing affordability problem.

I asked clients, contacts and other recipients of the Ravings for insights into why section prices have increased massively in the likes of Auckland, Hamilton, Tauranga and Queenstown over the last two decades. I thank the numerous people who supplied insights that identified a range of factors that have contributed to the surge in section prices.

The main problems are a slow, expensive supply response in periods of strong demand for new housing and downwardly sticky section/land prices in periods of weak demand. The council-controlled subdivision process, the RMA and increasing infrastructure costs directly contribute to high section prices. More so, the first two and insufficient new infrastructure to facilitate development give land owners that can include developers/builders excessive pricing power (i.e. they facilitate price "gouging"). They also contribute to section prices not falling much in weak markets.

In my assessment the slow, expensive and often torturous process developer have to endure is the single largest factor behind the massive increase in section prices in Auckland over the last 20 years. It is a similar story in the likes of Hamilton, Tauranga and Queenstown aided by Aucklanders looking for more affordable new housing and Auckland investors spreading the problem to other markets.

The government's Urban Development Authority is one possible response to the problem but it may not be a full response or the best one.

The combination of low interest rates and high net migration drove demand booms

A problem in NZ in the last two decades has been the Reserve Bank allowing low interest rates when there have been large net inflows of people from overseas (chart below). This mix drives booms in demand for sections that are aided by increased buying by investors who are encouraged by low interest rates and the prospect of capital gains.

However, lots of products will have experienced high demand as a result of low interest rates and above average population growth in the mid-2000s and again this decade; but most didn't experience massive price increases. For example, the large property price increases and economic affluence that resulted from the last two periods of low interest rates and high net migration will have boosted demand for restaurant meals, but the cost of restaurant meals hasn't behaved anything like Auckland section prices (next chart).

There will have been some differences in how demand has behaved on the section and restaurant meals markets but much more important has been different supply behaviour and different factors impacting on the cost of new supply. The restaurant meal market appears to have a health supply response to periods of strong demand.

In parts of the country and especially the likes of Hamilton, Tauranga and Whangarei part of the demand story is an inflow of Aucklanders and investors from Auckland bidding up local prices. However, the large increases in section prices still largely reflect the same supply factors that have contributed to the huge increase in Auckland section prices (i.e. a slow and expensive supply response to increased demand is also the largest problem in the likes of Hamilton and Tauranga).

We have only collected section for sale listings on since 2007 but the fall in listings in response to the latest boom in demand gives some indication of the insufficient supply response (chart below). The fall in for sale listings partly reflects a falling share of sections consumed in building being sold via real estate agents. But even allowing for this qualification the chart is still of use. An insufficient supply response to the boom in demand is a major part of the problem.

The factors that have inhibited the supply response have also contributing to new sections having much higher prices than those consumed in building. This is illustrated by the next chart that shows Bay of Plenty listing by asking price brackets.

In March 2014 53% of BOP listings had asking prices of $200,000 or less while by October 2018 this had fallen to 5%. This was the result of the cheaper sections being consumed in building and over time being replaced by much more expensive new sections.

The problem is partly a slow response of supply to higher demand that has allowed suppliers to ask higher prices. The problem has continued because of ongoing impediments to supply responding to demand that has facilitated price "gouging" and rising development costs.

Slow, expensive supply response is the main reason for super high section prices

The following insights are based on the feedback received from a number of people. In many cases the comments are quotes. A number of factors have contributed to the increase in section prices but it seems the largest problem is that the councilcontrolled subdivision process, the RMA and not enough new infrastructure have given land owners and in some cases developers/builders excessive pricing power (i.e. there is price "gouging" that adds lots to section prices).

Some examples of what looks like price "gouging" were supplied with gouging possible because of the factors behind the slow and expensive process of bringing new supply to the market.

In one major urban centre raw land costs were said to have escalated from about $700,000 per hectare five years ago to around $2.2–2.6m per hectare now. Land owners were said to do the math and take the developers' margin upfront. At 12 sections per hectare the raw land cost went up from just over $58,000 per section to $180,000-220,000 while section prices were said to have increased from around $180,000 to $400,000-470,000.

In a smaller but still significant urban centre it was reported that sections were rated for development contributions based on prices of $220,000-260,000 but ended up priced at $320,000-360,000 despite no apparent reason for the increase. This fits with another example of the developer rather than the land owner price gouging.

In Auckland the main problem appears to be land owners taking advantage of the situation created by the slow and expensive process of getting new subdivisions and brownfield projects to the market. Wealthy individuals and companies with strong balance sheets are reported to have bought up land for future development and to be only drip feeding it onto the market. This is partly possible because of poor existing and insufficient new infrastructure which means a slow increase of section supply even in well signalled, growing urban limits.

The following are the sorts of mainly council-related issues pointed out by respondents:

• Council's don't plan sufficiently for growth and there is insufficient infrastructure to accommodate growth so section prices surge when demand increases.

• The RMA hugely slows down how quickly development can occur and adds to the cost of development.

• A shortage of residentially zoned land in some places because councils have very conservative, environmentally-minded and inexperienced staff.

• A complex and drawn out process of consulting with councils (can be local and regional), NZTA or other transport agencies and Iwi that greatly adds to the time and cost of development.

• Some councils are heavy handed, veer on the ‘safe side’ and put so many conditions on developments that often by the time consent has been processed the cost of complying with the conditions means that it is unviable.

• Some council planning officers can be uncooperative and treat developers as the enemy instead of trying to assist and progress applications.

• This occupation was said to draw young people with a fierce environmental bent. They want to save the world and feel they can make their mark by opposing any new development which may pose any risk or change the current environment in any way. They achieve this by writing very negative reports and imposing so many onerous and punitive conditions on consents that many developments become uneconomic.

• Competent planners are often snapped up by private companies leaving councils with inexperienced staff who too often have an unhelpful environmental bent. Time means nothing to them and when you complain or ask for progress they often put you on the bottom of the pile and there is nothing you can do to get things moving.

• A lack of trained council staff, being given incorrect information and costings then having the costings arbitrarily changed (i.e. increased).

• Protracted negotiations with NZTA or the Auckland Transport authority with regular revisions of what they require.

• Protracted consultative process that allows those opposed to any development lots of opportunity to oppose it while most of those in favour of it don't make submissions.

• Increasing development contributions.

• Rising cost of water infrastructure.

• One person pointed out that GST added a huge amount to section prices especially now they are high (e.g. $75,000 to a section for which the pre-GST price is $500,000).

Downwardly sticky section prices when demand falls due to supply constraints

Auckland section prices fell as a result of the 2008/09 downturn in demand but they remained high compared to prices in general (chart below that is repeated from page 2). And now section prices are so high compared to prices in general even a severe downturn like that experience in 2008-09 wouldn't fix the problem.

The slow, expensive development process plays a part in the downwardly sticky behaviour of section prices. Developers who have paid high raw land costs and still face high development costs won't rush to cut section prices because doing so would make them fail. The same is true for building companies that own much of the existing section stock in the likes of Auckland and increasingly in the likes of Hamilton and Tauranga. Land owners don't rush to cut asking prices for land because most can survive downturns and it makes more sense to withhold supply to try and support prices and to wait for demand to improve.

Equally, the large increase in supply of sections in Auckland that resulted from 154 Special Housing Areas hasn't resulted in lower section prices; it didn't even stop huge increases in section prices. It did nothing to solve the problems around rising fees faced by developers and price gouging even if it did speed up development and slightly reduce costs.

Two case studies give some insight into the extent of the problem in Auckland

In 2009 a reasonably standard subdivision in Albany was offering sections mainly sized from 540-700 sqm for $300,000-375,000 (i.e. around $600 per sqm). Today I found nine sections for sale in Albany in one development with sizes of 118-264 sqm and asking prices of $382,500-$534,400 (i.e. most over $2,000 per sqm). Albany isn't such a good case study because to some extent it has been built out, but it is still broadly reflective.

In Manuwera in 2009 there were sections for sale with sizes of 430-652 sqm for $150,000-320,000 while now the two for sale with asking prices on were 448 sqm with an asking price of $419,000 and 449 sqm with an asking price of $479,000. This is a better example.

Rising infrastructure costs, increased council fees, a more drawn-out and more expensive approval process and general inflation have contributed to the huge increase in section prices shown the two case studies and in the adjacent chart. But the largest factor appears to be that the slow council subdivision process, the RMA and insufficient infrastructure via enabling price gouging. As one person put it, the system is broken.

The solution seems to be straight forward:

• Allow developers to buy land in areas where prices aren't already inflated.

• Support this with a new approach to building and funding infrastructure like the MUD model in Texas.

• Adopt a much quicker and less expensive approval and development process including a process staffed by experienced, balancedminded people.

The Urban Development Authority being set up by the government will overcome some of the problems outlined above but it won't fix all of them. I am concerned that the UDA will focus too much on brownfield development and not enough on clearing the roadblocks to greenfield development that will be required if major progress is to be made in getting down section prices and fixing the new housing affordability problem.

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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IF there is any price gouging by landowners and property developers it is because there are not enough sections and homes coming through the pipeline to satisfy demand...More competition sorts out pricing.

Dealing with councils is difficult, expensive and unpredictable which then strikes out developments from going ahead. The RMA has become more and more complex, handing power to NIMBYS. It's very ironical to me that the same people namely the politicians who made the rules are now sidestepping them via the new HUDA agency yet still force all us numpties to comply.

Also GST. Easily amounts to over 100k on a less than decent newbuild. The government is actually earning billions of dollars GST every year from new housing.

Less need to consult and grounds for NIMBYS to appeal, much like what huda is proposing, will make a huuuuge difference to getting more development. Surely council can impartially review various proposals and ask for expert reports and then make decisions. That's what we pay them for

Good Work

I think some of these arguments are a bit simplistic. There is a finite amount of land within a reasonable commute of most jobs - that land will always increase in desirability and price as a city grows. The given example of Manurewa highlights this - it has gone from being pretty much the end of the city to now being reasonably located. At one stage Mt Eden was probably considered to be poorly located.
Also it seems the solution you are proposing is endless sprawl. But do we really want this? And is it possible with our car centric ideology and with very limited upgrade options for our motorways? Could we really add another 500k more people to the end of the southern motorway?

Why is it always "can we keep adding sprawl" and never "can we keep driving up the costs of living to the point where people in middle class careers who have been born and raised here can't afford to live here?"

You can talk down sprawl all you want, but don't pretend that limiting land supply doesn't have real, financial consequences.

Auckland Council have found a way to do both - marrying mega-sprawl and unaffordability in one stupid package. The Auckland Council has created almost unrestricted land over supply at every little town in the region - as a result a sprawl is occurring outwards as exurban growth. Auckland Council has placed draconian restrictions on land supply to Auckland City - prices in the city have soared.

... it's not hard. Get the population growth under control.

Why we are letting our politicians turn this country into a sprawling overcrowded mess is beyond me. The stress levels of your average Aucklander must be going through the roof trying to manage a life up there - and it's on track to get worse and worse and worse.

All of the spending going on is just going to slow the increase in worseness, not make it better.

Botany town centre will be home to some 40,000 pop.
the section prices doubled over the last year but the sizes halved.

Demand and supply the old story.

The Ak unitary plan has increased the number of properties which are able to be subdivided. The land associated with these sections will have increased in value just at the time that these properties should have been decreasing in value due to the bottoming out of the mortgage rates, the increased costs of development, building costs, insurance and council rates.

Land is the most expensive part of this housing cluster duck, so I agree it needs addressing..
But more sprawl is not cost effective.. Auckland needs to go higher and denser to lessen the land value.
So the council needs to start bulldozing the bungalows and villas and make it easy to build large apartment buildings.

The council needs to stop letting areas with gold-plated public transport wall themselves off from the rest of the city when they live ten minutes from Queen St. "Character" "Historic" and "Preservation" are just fancy names for "keeping the poors out"

Agree - although I’m not sure where this gold plated public transport is?
“Historic” and “preservation” should only apply to genuinely historic buildings - not just a dime a dozen villa. Maybe when there are only a handful of villas left those could be preserved. I don’t think they are anywhere near extinction yet.

I think it you look at history the poor have never lived in the Parnell or Herne Bays of the world. In fact I would go as far as suggesting the poor in NZ enjoy a better standard of living than most of their equivalent groups in history.

Correct, and it’s pretty easy to see with the preserved housing. The leafy suburbs never had the poor in them, just surrounding them. Probably the biggest changes were due to the mass destruction of tenements when the motorway etc was put through the inner city and the advent of transport allowing working class suburbs to be built further out.

Ponsonby was built for and occupied by the poor for a long time

Could Ponsonby be described as a leafy suburb though?

My understanding is that Ponsonby was once an upmarket suburb of Auckland but fell into disfavour in the 1950s and 1960s becoming almost slum-like. My parents were warned not to buy there in the sixties when we first arrived. We went to Mount Albert instead.

Look at the size of that bubble (section prices) - that could be bitcoin!

Here’s a good way to reduce land prices.

Government should run a deficit instead surplus.

Yep worked for Greece.

Yep - Greece...lalaland indeed.

This whole nonsense is coming to a head, here in Hamilton already water restrictions are being applied. We have allowed the population to increase far, far too rapidly without adequate infrastructure being put in place to cope with it. I cannot believe how utterly stupid we are about all of this.
I see that Paerata Rise being promoted now and was gobsmacked to hear that it takes up about 300 hectares. We simply cannot keep doing this. Auckland needs to go up, no more concreting over growing land, but I guess no-one who can make a buck out of doing just that is going to give a flying $^&*

"...I guess no-one who can make a buck out of doing just that is going to give a flying $^&*"

And why should they give one pocketaces ... if you were in a position to take advantage and make money I know you wouldn't say "it's against my principles"

Its the fine leaders of nz you should be talking to about the mess they are creating. Solve one problem of housing shortage by creating another haha

No I would not seek to concrete over the food basket, why would I do that when I believe it is the one of the most stupid things we could do. Just because you would happily do it does not mean others would and people like you should be prevented from doing so

"people like you should be prevented from doing so"
Exactly my point PocketAces....we are on the same page with this...
"Its the fine leaders of nz you should be talking to about the mess they are creating."
Including the very fine Fool Twyford

I have been, have you?

Oh and Twyford is not the only one responsible for this mess!

So what's the solution? Are people expected to pay $750K for two-bedroom apartments with no outdoor space and raise a family in them?

Maybe something like that, although $750K/2bed/no-outdoor is certainly in most people's minds not a good living standard.

How about a target like 3Bed/Balcony + shared green space/$600K, plus 3min walk to small supermarket, transport stop, local childcare.

It is possible, exists (varying $ amounts) all over Europe, sometimes but not always 'pretty'. I think its much more promising than attempting to emulate a nice spacious suburb at the limits of current sprawl.

'Concreting over the food basket' is nonsense. As the Red Zone in Christchurch amply demonstrates, concrete can be removed and, voila, there's Dirt underneath which Grows Stuff.

Concrete is not permanent......

1) Reduce the immigration rate to something sustainable. Give it to the RBNZ to manage which gives it 2 levers - short term interest rates & population demand. Objectives - price stability and maximising gdp/capita growth

2) Global low interest rates - this pushes up asset prices. There is little we can do except limit the leverage with the LVR & potentially DTI. (Its a balance - if you cant buy then you have to rent & there are risks of having too much rental demand pushing up rents which is worse for the poor in society)

3) Reform local government into unitary authorities only. Some are currently uneconomic & two local layers are unnecessary for a population of 5m. Require business case assessment on all local government spending.

4) RMA - 10 year sunset for every existing rule. New rules can only be at the national level and must require regulatory impact assessments (including business case). New rules to be effects based and per the original intent of the RMA, not land zoning based which is the old Town & Country Planning Act.

5) RMA - Central government to also issue a number of minimum national standards - e.g. a national transport infrastructure standard etc

6) Get rid of developer contributions - use targeted rates, MUD etc - its the users that create the demand.

7) Break up the building supplies duopoly.

8) Land Tax - stop the TWG now and direct them to implement a land tax including the family home (rather than the complex capital gains tax being proposed). Make adjustments to tax and benefit rates to offset the effects on the poor.

9) Introduce congestion tolls in Auckland and possibly Wellington (means fuel excise tax can be reduced) which will drive land use densification & efficiency

I have written a plan that would allow Greater Christchurch urban development authority to keep ahead of infrastructure supply curve. Variations of this model could work elsewhere.

This approach combined with some new bottom-up intensification tools which I have previously written about for this website should gradually make land and housing affordable.

I recently read a comment from his worship the mayor stating "the market has failed" in regards to housing. What Mayor Goff failed to mention of course is the rather large role the Council has it restricting supply and, thus, section prices go up as demand increases. Let alone building consent and other regulations. If we really want to reduce house prices then we need to release supply and that includes the suburbs close to the city. I don't care about villas when people live in garages.

So, it is very sad that people choose to live in garages in Auckland over other places like houses in Wanganui or Invercargill.
Because of this you want to destroy our beautiful city?

Why stop at a beautiful city, when you can destroy a beautiful country?

I assume if you were here 150 years ago you would have said it's sad that people don't want to live in Sydney or Melbourne. Because of this you want to destroy our beautiful forest?

I am saying let people who own the land decide what they will do with it rather than sticky beaks who want to control the lives of the others. Central planning has caused this problem - more central panning will not solve it

You're the one being a sticky beak NoFax. The people who own and live in villas in central Auckland don't want high rise apartments being built on their streets and have been consistently opposed to it.

Those that live in garages still won't be able to afford living in these places anyway. What's wrong with building out at the end of the North Western motorway or similar?

Those that live in garages still won't be able to afford living in these places anyway. What's wrong with building out at the end of the North Western motorway or similar?

That's simply untrue. It's not very expensive to live in apartments in Auckland (especially factoring in transport costs), and the volume that could be fitted in the same space (plus the knowledge one component of a shortage of land has disappeared) would also affect pricing.

There's nothing wrong with building more intense housing / buildings closer in to the centre. That's part of being a global city. What - return Manhattan to single-level houses instead?

Instead of old, hard to heat villas I would favour new medium rise apartments in central and inner suburbs, located around existing amenities.

How am I been a sticky beak??? I am saying people can do what they want on their land; their land. You are the one saying a person has rights over someone else's land. The person that owns a villa may not want an apartment built next door. But that villa owner does not own the land next door - he is sticking his/her beak in.

You are right, a person that lives in a garage will not be able to afford an apartment in Ponsonby. However, the person that is currently just priced out of Ponsonby goes to Grey Lynn, and that pushes people out of there and so on till it gets to the point that places like Otara and Mangere are priced out of the market completely for the poor.

If you really have to ask what's wrong with suburban sprawl then I think you aren't serious in the discussion.

Well, the billions of dollars in lost productivity from congestion because central Aucklanders have things like Link Bus services and Hobsonville has a bus service and a ferry that only runs at peak time and not on weekends.

But sure, feel free to keep pushing everyone further and further out. Just don't be surprised when your kids and grandkids don't want to live in Auckland anymore because Mum and Dad both have to commute 90 minutes to work and back each day to keep up with mortgage and families start falling apart.

They aren't making more land, houses - yes, people - yes but they aren't making any more land. Land prices will not fall.

Land prices never have bubbles then fall, right? *cough* Ireland, Spain, US after GFC, Sydney and Melbourne right now, Japan after the 80s bubble *cough*

Where did the land come from on Auckland waterfront, Narrow Neck, Lyttleton, half of the Netherlands, much of Singapore, Hong Kong harbour? It was made. And you can make more land for houses by changing zoning.

One aspect that Rodney, in an excellent article, touches upon but does not follow to its economic effect, is that of the time value of money.

By injecting Time into any process, whether that occurs by the dopey TLA, the land-bankers, or whatever, the opportunity cost goes straight up. Take a simple, rule-of-72 case:

  • Developer buys land for the subdivision - let's use the Productivity Commission figure of $500K/ha - 10 times the raw rural value because of the clueless TLA RUB and general zoning, but leave That aside.
  • Assume a WACC of 10%
  • Total elapse of time between purchase of land, and release of titled sections is 7 years.
  • The opportunity cost alone has just effectively doubled the raw land cost, let alone the time-value of money increment caused by the development expenditure itself.

My tongue-in-cheek suggestion to reslove this was to make TLA's subject to an IRD UOMI rate of penaly, for every day they take any process - consents etc - past a national average. That would make the time value of money suddenly loom large in the brown cardies' crania, and would perhaps expedite decisions.

But that's just a thought experiment - the safest kind.

To get anything done politically takes intellectual horsepower, vertebrae, and cojones. These are as rare as rocking-horse poo, so it will be a Long March indeed.....

Land banking for speculation is part of the issue. Rates certainly help force the pace of development. Smart money is busy collecting the new high rise zone land that still has 1940s timber housing on it. Their costs is the rating bill which is set at it new use.

There always seems to be a million reasons when asset prices are expensive in a bubble, and often help to justify it as the new norm. Global historically low interest rates pushing up asset prices, for 10 years!, is certainly a huge one and not to be underestimated! It's not just real estate that is overvalued now because of this, if you look at stock markets (although most are down or almost down this year finally), the international art market, and property markets in NZ, Australia, Canada, Hong Kong, and other places that didn't experience the huge drops other places did during the GFC. We've just delayed it with various measures, not avoided it. Central banks have certainly helped cause this, and in NZ the Nat govt encouraged the house price inflation, even repeatedly claiming that it was not a bubble. It helped them stay in power so long. The Australian and Canadian bubbles are starting to deflate. I don't see that NZ will be different. That will get land prices down, and eventually construction costs as well.

Labour got the ball rolling. People care less about being taxed 39c in the dollar on income over $60K if they're millionaires, even if it is on paper.

I wonder how many sections in New Zealand have been bought on finance and are sitting there costing owners interest on the speculation of appreciating asset value? Lots would be my view... these will be the first things to be offloaded in the year ahead and land prices will plummet.