Housing affordability and inter-generational inequity

This post is a bit different to a lot of what I have posted on in the past few months on this blog. It isn’t a bunch of photos from a trip around Auckland showing some latest public transport development, it isn’t an analysis of some transport policy document, or another rant against Steven Joyce. It’s going to be (I hope) a bit of a stream of consciousness that will relate back to transport on a few occasions, but will probably be largely a chance for me to put my thoughts together into something fairly coherent on the matter.

Basically, this is about housing affordability in Auckland. Most Aucklanders have a good understanding of what has happened to house prices here over the past decade – in that they have increased quite dramatically. Over the last year there has been somewhat of a correction, due to their extremely high value at the November 2007 peak, but also due to the wider effects of the worldwide recession. However, signs seem to be emerging that the housing market is likely to pick up again in the future, and that perhaps we’ve ‘hit the bottom’ of this particular downturn. Perhaps in the next few months we will see prices head back up again, and – as hoped for by real estate agents – the last year will just be a blip on a long-term trend of increasing house-prices. And we’ll all just pretend that 2008 and 2009 didn’t happen.

While that may be a good outcome for real estate agents, and for those who bought during the boom times (particularly at the end of those times), I do question whether a return to the housing boom times of the last decade is really in the best interests of Auckland as a whole. Perhaps my opinion on the matter is slightly biased, as someone who doesn’t currently own their house and who would benefit greatly from a significant decrease in house prices, but I can’t help but feel that I do have a justifiable gripe. My gripe is that in just two years time I will be at the age my parents were when they bought the house that I currently live in – and they didn’t even need a mortgage. Now I am sure they saved incredibly hard over the few years before they were able to buy that house, and I am forever grateful that they did, but the fact of the matter is that housing was just so much more affordable then than it is now. I am not quite sure what the comparison of average wage level and average house price back in 1980 would have been, but I am absolutely sure it would have been significantly less than it is today.

It does seem rather strange, unfair even, that even though I have a pretty good job, no student loan, no other large debts or anything of that kind, I really can’t consider actually being able to afford to buy a house any time in the next decade or so. On the up side, renting definitely has its advantages at this stage of my life – it means I can fairly easily hop from place to place, checking out what various parts of Auckland are like to live in. It also means that I’m not hugely in debt and at risk of being totally screwed if I was to lose my job or if mortgage interest rates were to skyrocket (anything is possible in current economic times in my opinion). However, being locked out of home ownership also has some significant disadvantages. I am excluded from the significant wealth gains that occur when house prices go up, the rent I pay each week is just money the disappears into paying for someone else’s mortgage rather than me slowly acquiring my own asset, while there are a whole bunch of other things like the chance I will have to find another place to live if the landlord wants to renovate and that I can’t choose what colour to paint the bedroom if I so pleased.

There are obviously a variety of reasons why house prices have increased so much in the last decade, but as I am a planner I will focus on the issues relating to land-use planning that I think have contributed significantly to this reduction in housing affordability. In 1999 the Regional Council released the Auckland Regional Growth Strategy, which changed the nature of how Auckland would grow in the future – away from urban sprawl and towards a more compact, intensified, city. I am a big fan of what this growth strategy intended to achieve, and I do wholeheartedly agree with the purpose of it – which is to reduce urban sprawl. Urban sprawl creates automobile dependency, which has a myriad of problems associated with it – most particularly that it’s wildly unsustainable environmentally, economically and socially. I addressed this issue in a lot of detail in my Master’s Thesis. One aspect of the Regional Growth Strategy – perhaps the most important aspect, and the biggest tool in fighting against further sprawl, was the imposition of the metropolitan urban limits (MUL). The MUL basically drew a line around the city and said that it couldn’t spread beyond that line – except for a few designated greenfield development areas like Flat Bush, Takanini, Hingaia and Albany.

One rather unintended (I suspect) consequence of the MUL is that it created a significant choke on the supply of land for additional housing. Land outside the MUL could no longer be subdivided into urban sized lots, so the supply of land was decreased – leading to that land becoming more valuable. This has contributed significantly to house prices increasing over the past decade – and there are some interesting studies from American cities that seem to show that urban limits do lead to higher house prices and lower affordability. This argument is used by people such as Owen McShane to promote getting rid of the MUL, which I am strongly opposed to on the grounds that allowing further sprawl would lead to pretty horrendous effects on Auckland. We should look for other ways to improve affordability.

While it is inevitable that limiting land supply through an urban limit will lead to higher land prices, that doesn’t mean that those higher land prices have to filter through to being higher housing prices. Quite simply, to improve housing affordability we need to build more houses, and if we’re not going to build more houses outside the current city limits then we need to build a lot more houses within the current city limits. So the only way that I think house prices are ever going to reduce by any significant amount is if we provide for significant intensification – basically if we actually carry out the other half of what the Regional Growth Strategy said was necessary and rezone parts of the city to allow for higher density development.

In my opinion, the primary reason why house prices have increased so much in the last decade is that the councils of Auckland have done a damn pathetic job in rezoning sufficient land to provide for intensification. For example, Auckland City’s 2003 Growth Management Strategy identified a number of ‘development nodes’ around which intensification would be focused – typically town centres that are served by rail. The planning behind the Growth Management Strategy has been pretty sound, and the approximately 20 development nodes were to rezoned in stages to the new “Residential 8 zone” – which would provide for significant intensification but at the same time require high urban design standards to ensure that the intensified development was done ‘nicely’ and effectively. The problem is that barely anything’s ever happened. We’ve seen some of Glen Innes rezoned, a tiny bit of Panmure, some of the Mt Wellington Quarry area and that’s basically it. In a whole six years Auckland City has rolled out only a tiny little fraction of the rezoning that was necessary to compensate for the development that hasn’t been allowed to occur due to the MUL. Furthermore, most of our planning regulations are still stuck in the 1970s – with their assumption that single-detached housing with lots of carparking is great and everything else should be viewed with the greatest amount of suspicion ever. So even where land has been rezoned for intensification it often ends up being extremely expensive and time-consuming for a developer to actually opt for that kind of redevelopment.

Another problem is that developers are unlikely to really look too kindly on developing houses to the extent that prices start to decrease. They want to make a profit of course, and finding any way possible to maximise the amount they can sell the houses they build for is part of their business – and quite rightly so. Furthermore, the booms and busts of the property development economic cycle seem more related to how easy it is for those companies to obtain credit than it is related to the actual demand and supply of housing. Otherwise we would be seeing a pretty big housing boom at the moment, as net migration is up quite significantly and the population of Auckland is increasing at a pretty rapid rate. Of course we’re not seeing that, because developers are struggling to find money to build anything while they are also waiting for – in their opinion – the inevitable return of house prices going up and up forever. Finally, it is difficult for developers to get involved in significant intensification projects because property ownership in the inner-suburbs or around the town centres where most of this intensification is supposed to happen, it just too fragmented. They need to buy out perhaps 10 or 20 different landowners to get a site large enough to do something half-significant on. What if one of those landowners refuses to sell, or asks for double the going price of their place? The whole viability of the project disappears. Compare that to the relative ease of buying a farm, splitting it up into small sections and selling off each of those sections. It is little wonder why developers are so keen on sprawl.

So, assuming that we don’t want Auckland to keep on sprawling forever, and that we are concerned about improving housing affordability so people in their 20s and 30s aren’t forever locked out of home-ownership, what can we do about this predicament? Having looked at this problem I can’t see any solution other than getting government – either at a local level or a central level – back into housing. Local government in Auckland has done everything they can to get out of housing provision in recent years, while central government’s involvement in housing is limited to providing subsidised housing, through Housing New Zealand, to those in the most dire need. Essential: yes, having much effect on improving affordability to those on median income levels: not really. What we need is for our government organisation to start buying up significant tracts of land within the highlighted growth nodes of Auckland – the town centres and the non-heritage areas in the inner suburbs – and actually go about redeveloping these areas to higher densities. Perhaps the government organisation would need to have “requiring authority status” so that it could compulsorily acquire any strategic sites (giving a slight premium to landowners over market value for the inconvenience). Then the land could be redeveloped – hopefully to excellent urban design and architectural standards, and subsequently sold to the general public. As the housing would be quite intensified, a mix of apartments, townhouses and terraced housing I hope, hopefully enough additional housing provided through this method would result in house prices starting to come down.

There is even the potential for government to make some money out of this, as land development is clearly a profitable business in the long-term. As the government development organisation would presumably be able to borrow money at a fairly low interest rate, and the need for profit wouldn’t be quite so great as for a private developer (for example the opportunity cost for spending the money on this project) one would hope that affordability would be further improved. Of course, there are enormous other benefits from this kind of approach to urban redevelopment: most specifically in that you are getting development where you want it and how you want it. By focusing growth in the actual growth nodes identified by various planning documents you are supporting the public transport system, you are contributing to creating more lively town centres and reducing automobile dependency by providing a wider range of land-uses within walking distance.

Of course, the biggest problem with this kind of approach is its political acceptability. Most voters do own their houses, and the last thing they want to see is house prices crashing back to earth – even if they have a nagging feeling at the back of their minds that the current value of their house is quite unreasonably high. One of the largest voting blocks – the baby-boomers – would be particularly reluctant to adopt such policies as much of their wealth has been created by the growth in the value of their houses, and their used that growth in equity to buy the SUV, the boat and the beach house. They even manage to reduce their tax bill when the rent they get from their investment property doesn’t quite cover the mortgage. This is just too good a deal for them to ever let it go.

Which creates a huge inter-generational equity issue. Those baby-boomers were the ones who got their tertiary education for next to nothing, whereas people of my generation often have student loans in the tens of thousands of dollars. The baby-boomers also started out in the workplace during a time of near full employment, and as a result managed to work their way up the career ladder into fairly safe positions by the time any recession came along and bumped up unemployment. And finally, they managed to buy their houses back when they were – by today’s standards – almost unbelievably cheap. So, while I am sure many people around the country recognise how big a problem the reduction in housing affordability has become over the past decade, I just can’t see there being the political will to ever do something significant about it. Which means I’m probably going to be renting for the next couple of decades.

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