By Bernard Hickey
Last weekend I appeared in a discussion on TVNZ's Q&A programme about housing affordability with Productivity Commission Chairman Murray Sherwin.
The debate and Sherwin's fresh comments in favour of boosting housing supply helped spark a fresh flurry of political comments. Alex Tarrant reports here on the latest back and forth from Labour and ACT on the acommodation supplement, which Labour has lablled a subsidy for landlords.
Housing affordability is certainly a problem for home buyers on anything like median incomes in central Auckland, parts of Wellington and for undamaged homes in Christchurch. Find out more on home loan affordability in our Roost Home Loan Affordability reports, which show the percentages of after tax incomes required to buy homes in areas around New Zealand.
Sherwin and I had a good discussion about some of the issues around affordability, but didn't talk much about the possible solutions, apart from generally saying we needed to build more houses. Auckland is currently short of at least 10,000 to 15,000 houses, Sherwin says. Depending on which forecaster you believe, Christchurch needs 5,000 to 10,000 new homes.
Here's 6 ways I think affordability could be improved around New Zealand, and in Auckland and Christchurch in particular.
1. Build lots more houses - Somehow, someone needs to quickly build a shed-load more houses in Auckland and Christchurch. That's easier said than done, given current restrictive policies around land availability, the high cost of land and the high (and rising) cost of construction. The market is obviously not delivering the extra houses we need. The combined cost of sections and a new home is simply too high for most home buyers, relative to their incomes and their ability to service debt, assuming, of course, that interest rates don't stay ever lower forever.
Somehow, section prices need to fall and the construction costs, including consents, need to fall, or at least stop rising. One way to reduce section prices to add a lot more supply, particularly in Auckland where the Metropolitan Urban Limit artificially inflates land prices, particularly near the fringe. See more here from Athur Grimes on Interest.co.nz
2. Open up more greenfields and brownfields land - The new 'Super' City of Auckland needs to open up a lot more land on the fringes and inside the city for residential development. The twin drivers of the status quo being maintained are the usual NIMBYism of existing property owners and the self reinforcing conservatism of land bankers able to drip-feed land out at ever rising prices to make (tax free) capital gains on the land.
Of course it's not as simple as just plonking down more suburbs and in-fill housing. The infrastructure of schools, roads, motorways, railways, shops and playgrounds around these new houses needs to be planned and invested in and built. This isn't easy or cheap. For whatever reason it's not happening at the moment. It needs to, and pronto.
If the 'market' and the Auckland City Council is failing to deliver these houses and the associated infrastructure then central government needs to intervene. Auckland's housing market is the biggest in the country and sets the trends. The Reserve Bank missed the development of the last housing-led consumption boom that drove inflation higher and some fear it is about to do the same again, or it may react to a supply-driven housing boom that damages other parts of the economy. Either way, the nation's monetary policy and economic performance need an intervention.
3. Build state houses on government land - One form of intervention would be a massive state house building programme on government land in and around Auckland and Christchurch. The biggest need for new housing is at the bottom to middle ends of the market. Few affordable homes are being built because the incomes aren't there. Rents are rising fastest in Auckland because of a lack of new supply and continued migration (both from other parts of New Zealand and from overseas). Reducing demand for lower rental private housing would put a lid on rents and could be partly funded by a reduction in accomodation supplements to landlords.
The Productivity Commission rightly pointed out that just 5 companies in New Zealand produce more than 100 houses a year. Somehow, we need more companies building more uniform houses in a mass produced way that reduces building costs. That may mean more 'cookie cutter', smaller and more uniform homes, but it will at least mean they get built. One way to create such a firm is for the government to build one for a mass house building programme in Auckland.
4. Impose a land tax - This is one obvious way to reduce land prices across the board. The proposal to the Tax Working Group in 2009 by Arthur Grimes suggested a 0.5% land tax on land worth more than NZ$50,000 per hectare would reduce land prices by 15%. See more here from our 2009 report on that proposal.
5. Impose loan to value ratio limits and limits on loan servicing ratio limits - The Reserve Bank has said it is looking at ideas such as loan to value ratio (LVR) limits, but has done nothing yet. Late last month the Bank of Canada tightened its rules so the maximum LVR was cut to 80% from 85% and the maximum debt service ratio was set at 44% of income. The Canadian government also banned the use of government-backed mortgages for properties worth more than C$1 million.
So far both the Productivity Commission and the Reserve Bank have been reluctant to cite easy credit as a reason for the unaffordability of housing. They should, as the Bank of Canada, the Hong Kong Monetary Authority and the Monetary Authority of Singapore do.
6. Train the living daylights out of our jobless youth - A major reason why constructions are so high and New Zealand has been so inefficient at building new homes is apparent shortages of low cost (but skilled) labour. The complaint is that as soon as a brickie or a chippie or a sparkie or a plumber is trained they jump on a plane to Australia for higher wages. That may be true, but one way to try to solve it is to train masses of young people in these jobs. The demand from Australia may be slackening off soon as the mining boom slows down and the housing market over the Tasman cools down.
In the meantime, let's train these kids up and put them to work. Again, that large national house building firm would be the place to do mass apprenticeships.
These are a few thoughts to help seed the debate.
I welcome your thoughts below.