Auckland Housing crisis – all the wrong assumptions and information

Auckland from he HarbourI read a lot or articles about housing affordability over the last few weeks. New articles in newspaper, the radio and various magazines are popping up. Most are written by real estate agents, or politicians that are real estate agents. Go figure!

Jamie Whyte has written an article for the NZ Herald about the uselessness of a capital gains tax and how good – or at least not bad – high prices are. While I agree that demand and supply dictate the price, I do not tend to agree that this is any good. It’s just a commercial fact in our economy. He is also right in saying that investors are only buying because it is a buoyant market. I do not agree with most of the rest of the article however.

Fundamentally we should separate speculators from investors. Speculators are buying because their tax advantages over owner-occupiers are enormous; investors get the same advantages, but could be seen to be doing a socially useful thing by investing their money into a development that will positively affect the community. A capital gains tax (CGT) would rather be hitting the speculators buying and selling the same property within a certain time frame.

Clearly speculators are currently setting the market price as they have access to the required funds, and a CGT will reduce numbers of them, depending on the level it is set at, freeing the market up for owner buyers. What it does is is levelling the playing field a bit, reducing the demand and as such the price that can be asked. If there is no demand – prices will drop. The demand by owner-buyers is very much capital driven, so a lower asking price will create the demand, a higher price will reduce the demand.

I could not find exact information as to how many speculators are from overseas – it is a widely accepted assumption that many are. The capital gain will go exactly there and the local economy will not benefit from it.

Young families and first home buyers cannot afford to buy a house any more in Auckland. Many couples go without children because they have to work too much to afford their living and pay the rent. Demand on full day childcare is increasing.

An early childhood educator says many people are losing confidence in how to be parents because they now see their role as going back to paid work as soon as possible after having a baby.

The median house price in Auckland is now at $750K, a number that our family would probably struggle to afford with us two parents working in well advanced positions. I believe we would be unlikely to get a mortgage without a decent deposit. And where should the deposit come from while rents keep increasing as well?

The usual solution put forward is to free land up for development. I find it hard to believe that a shortage of land is the issue. There is plenty of land in subdivisions around Auckland, most of them not sold. They do not sell because they are too expensive for people to buy.

Buying a complete package may seem be easier in terms of payment, however you will find that there is extra cost on top to pay – after all the developer wants to see a return of investment as well and is not going ahead with a zero deposit and free loan.

More land will not get away with the issue of unaffordability. No seller would be willing to sell below what he could sell it for and anyone is trying to make a profit. This is again economic reality. Land is not like food that you cannot sell any more after some time, it is not going bad. The opposite is the case and hence developers will continue to ask for the prices they do.

The government came up with the Special Housing Area idea (SHA) around the outskirts of Auckland. While some of those have to be below the median house price and are deemed to be affordable, this is only a very small amount. The other sections are selling for the normal market rate.

But chief executive Ashley Church said “affordable homes” only meant lesser quality and the rest would be “priced at whatever the market is demanding” once they were built. Any new housing was welcome, but the project would do little to address house price inflation in the medium term, Mr Church warned.

While there is enough land available to build on, we seem not be finding the buyers for it due to cost. Another factor is that we do not seem to have the labour capacity to build the houses. It will take many years to build on the land that is available right now. I have been watching various subdivisions out West in Riverhead and Huapai and it took a few years to build infrastructure, create the lots and another few years to get the first houses on. Most land a few years later is still bare.

At the same time, the labour shortage is also creating high prices – a plain economic reality, again it’s the supply and demand. Which in turn leads to over-committed builders, seemingly not doing their work as well as they are supposed to. Auckland is increasingly struggling with housing quality issues.

Dean Kimpton, the council’s chief operating officer, said in his view 1000 building consents a month was not currently possible. “You only have a certain number of developers … it is not just about land supply and ability to process consents.”

Many statistics quote the number of granted building consents, however there seem to be hardly any statistics for completed building having achieved code compliance. Talking to a local builder, he stated that only 10% of granted consents last year were actually built and completed. Whether the information is correct or not, it opens up a very interesting statistical question and uncertainty of how many houses we actually build and occupy.

It is a fact the the occupancy density in Auckland houses decreases. It used to be 2.7 a few years back is is now at around 2.4. Predictions are that it will continue to fall as less people will be able to have kids as before mentioned and the population is growing older. At the same time, house sizes have been increasing. Since the 1950s the average house size in NZ has increased from 120m² to 230m². Many new floor plans for house and land packages are now at the 280m2 mark.

So we actually building larger houses with less people in it and complaining about the cost.

The reason behind this may be very simple: why develop 4 houses @ 100m2 when one can develop 1 at 300m2 and make more profit? Larger houses are relatively cheaper to develop compared to the resale value in terms of land use, design, consenting and construction.

However in an absolute perspective, larger houses need more land, more material, more energy, more maintenance and subsequently cause more cost while the average New Zealander is already struggling to afford a house in the first place.

However finding a small piece of land and building a small house on it virtually impossible. This is restricted by various laws and covenants. The unitary plans usually calls for minim section size, maximum height, maximum density and maximum impervious area etc. Maybe it would be time to exactly reverse this approach and have maximum section sizes with maximum house sizes, minimum height (ie two or three storeys) and minimum density. Covenants should also not be allowed to call for minimum floor area, materials to be used, colours to be used etc. All this makes for a unaffordable, sterile, uncreative, non-resilient neighbourhood that is protecting the interests of the others and the investor.

The “tiny house” movement is gaining a lot of momentum as many struggle to afford large houses on large pieces of land.

“There is no need for our homes to be expensive – we can construct quality, affordable homes. But, it will take councils and developers to work together so that sections can come to market quickly at a price that allows the building of homes at an affordable price”.

The above quote from the New Zealand Productivity Commission report says it all. Under current legislative framework, affordable houses will simply not happen, not even with more (unaffordable) land supply.

However, it is also time that we realise that Auckland is the biggest city in New Zealand and that it is unrealistic to want the kiwi quarter acre block with freestanding house within half an hours driving distance from the Auckland CBD. Try the same in London, Munich, Sydney, Melbourne, New York, Paris etc and see where you get to.

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