One of the National Party’s principal objectives since coming to power in New Zealand has been to address that nation’s terribly deteriorated housing affordability problem. Deputy Prime Minister Bill English explained the problem in his Introduction to the 9th Annual Demographia International Housing Affordability Survey:
“It costs too much and takes too long to build a house in New Zealand. Land has been made artificially scarce by regulation that locks up land for development. This regulation has made land supply unresponsive to demand. When demand shocks occur, as they did in the mid-2000s in New Zealand and around the world, much of that shock translates to higher prices rather than more houses.”
In the largest markets (Auckland, Christchurch and Wellington), house prices had doubled relative to incomes over the past two decades, as land prices were driven up by urban containment land-use policies (Note), that severely restrict the supply of land available for new housing. Across New Zealand, this rationing of land has led to the destruction of the competitive supply of land the Brookings Institution economist Anthony Downs says is essential to maintaining housing affordability. The relationship between urban containment policy and higher house prices is documented in a large body of international research. Economists Richard Green and Stephen Malpezzi succinctly summarized the issue:
“When the supply of any commodity is restricted, the commodity's price rises. To the extent that land – use, building codes, housing finance, or any other type of regulation is binding, it will worsen housing affordability.”
On September 5, the government took an important step toward improving housing affordability, with the enactment of ground-breaking land use regulation reform. In the Parliamentary debate, Housing Minister Dr. Nick Smith expressed the imperative for passage by describing the regulatory situation in Auckland, the nation’s largest city (metropolitan area):
Auckland has just 1,300 sections (lots) currently available for housing. That’s a third of what it had 10 years ago.
We need 13,000 each year just to keep up with population growth.
We’ve got a rigid Metropolitan Urban Limit (urban growth boundary) prohibiting any new housing developments beyond the artificial line drawn 15 years ago.
We’ve got a few lucky land owners sitting on the last few parcels of developable residential land holding prospective homebuyers to ransom.
Section (lot) prices have trebled and gone up by more than any other part of the housing cost equation.
We’ve got a convoluted RMA (Resource Management Act) planning system where it takes an average of seven years to get a plan changed by the time you get through all the consultation and appeal processes.
And even when you get a plan change, it takes an average of another three years to get a consent for a greenfields development and a year for a brownfields development.
We’ve got a constipated planning system blocking new residential construction and this bill is a laxative to get new houses flowing.
The passage represents an important step in the campaign by Dr. Smith and the National Party government to improve New Zealand’s housing affordability.
According to Dr. Smith: “The increased land supply will help take the pressure off the over-heated Auckland housing market and help the economic recovery. It will enable tens of thousands of kiwi families to realise the dream of owning their own home.”
Housing Accords and Special Housing Areas Act
The new Housing Accords and Special Housing Areas Act permits the government to establish special housing districts that permit bypassing expensive planning regulations. Initially, the Act will be applied in Auckland, where an urban growth boundary (the “Metropolitan Urban Limit”) has been blamed for driving house prices to more than double their historic relationship to household incomes. Smith indicated that the Act would “over-ride Auckland’s Metropolitan Urban Limit” and that ”…it would enable low-rise greenfield developments to be consented in six months, when they previously took three years, and low-rise brownfield developments to be consented in three months, when they previously took a year.”
Smith also noted that support for the act was based on advice from the New Zealand Productivity Commission, the Reserve Bank of New Zealand (the central bank), the Organization for Economic Cooperation and Development (OECD) and the International Monetary Fund (IMF), which have indicated that “increasing supply is crucial to addressing housing affordability.”
The government intends to move quickly, according to Minister Smith:
“The main initial focus of the new law would be to enact the Auckland Housing Accord through which it is planned to build 39,000 new houses in a three year period in the Auckland region. Housing Minister Nick Smith says he expects the Auckland Council to approve the accord next Tuesday and is talking about having special housing areas approved by Christmas that would be able to cater for 5000 houses.”
Housing Affordability in New Zealand
The housing affordability crisis problem is the most severe in Auckland. The most recent Demographia International Housing Affordability Survey reported that median house prices were 6.7 times median household incomes in 2012 (this is the “median multiple”). This price to income ratio has more than doubled since the early 1990s. This is a particular problem because housing cost is by far the largest element of household budgets in New Zealand (as well as in Australia, Canada and the United States).
The extent of the problem in Auckland is illustrated by the fact that across the urban growth boundary, values are one-tenth per acre for comparable land, according to research by Dr. Arthur Grimes, Chairman of the Board of Reserve Bank of New Zealand. In a competently governed market, there would be little difference.
The higher land prices of urban containment also encourages builder “up-market,” to achieve competitive returns on the required larger investments. This is illustrated in New Zealand Productivity Commission research by Guanyu Zheng for the New Zealand Productivity Commission found that the higher prices generated by Auckland’s urban growth boundary were more severe for lower cost housing: “…when the supply of land on the urban periphery is restricted, the price of available residential land rises and new builds tend to be larger and more expensive houses.”
High house prices are not limited to Auckland. Like in the United Kingdom, where exorbitant house prices occur from depressed Glasgow and Liverpool to dynamic London, house prices are high from the top of North Island to Invercargill in the South, irrespective of the economy.
The provisions of the Act will also be applied in other more expensive markets in New Zealand. The Minister said: “The Government is also having discussions with other councils in high cost housing areas on how the tools in this law can assist in addressing the housing supply and affordability issues in their communities.”
The extent of New Zealand’s housing affordability problem has been known for some time and has been cause for serious concern.
The long-time Governor of the Reserve Bank, Donald Brash wrote in 2008 that “the one clear factor that separates all of the” affordable and unaffordable housing markets “is the severity of the artificial restraints on the availability of land for residential building.” Later, Brash zeroed in on the cause., which he characterized as the extent to which urban containment policy “has pushed the price of residential land well beyond the reach of far too many New Zealanders.”
For the last decade, Christchurch’s Hugh Pavletich (co-author of the Demographia International Housing Affordability Surveys) has been drawing attention to the problem: “We are currently paying near double per square metre build costs because of this…”
More recently, Governor Graeme Wheeler of the Reserve Bank of New Zealand raised concerns about house price increases and implemented stronger loan qualification requirements to cool the market. Similar action was taken by the Bank of Canada last year, though monetary policy is severely limited in reigning in bubbles in the face of regional policies that drive up land prices.
By these reforms, the New Zealand government has given priority to the quality of life of its households over the more peripheral issues of city form and how people travel. In an increasingly globalized and competitive world, this sends an important signal.
Wendell Cox is a Visiting Professor, Conservatoire National des Arts et Metiers, Paris and the author of “War on the Dream: How Anti-Sprawl Policy Threatens the Quality of Life.
Note: Urban containment is also referred to as “smart growth,” growth management,” “compact cities” and other terms.
Photograph: Downtown Auckland (by author)