Why aren’t we building more dwellings?

There have been a series of articles in the NZ Herald over the past week talking about dire shortages in rental properties in Auckland, particularly in the inner suburbs. This article in particular highlighted the shortage in available properties there are in places where people so obviously want to live:

The shortage was acute in the inner-city suburbs, she said.

“I don’t think there’s enough rental properties near the city … Most people will have to take their rose-tinted glasses off and say they have to live further out in the suburbs.

“Give me a million houses in Ponsonby. People love Ponsonby.”

Rental property owner Sue Beesley put up a listing for a central apartment overnight on Monday. By the time she checked online yesterday, more than 600 people had taken an interest.

“It’s a very busy time… A lot of people are trying to shift,” she said.

In some cases, prospective tenants are going to pretty extreme measures to get a place, as explained further in this article:

Desperate house hunters are sending realtors full CVs with photographs before viewings – which they turn up to with applications already filled out – and one renter says he has been up against offers to pay $100 extra a week.

You would think that with demand being so high for housing in the inner suburbs that we would be seeing more redevelopment here. But, for some reason it just isn’t happening – with building consents at a 46 year low, which is just staggering:

There were fewer building consents granted for new dwellings in 2011 than in any calendar year in 46 years, figures released by Statistics New Zealand show.

There were building consents granted for 13,662 new dwellings in the 12 months to December 31, down 12.4 per cent on the year to December 2010, and the lowest since the series began in 1965, Stats NZ said.

That included 1,156 consents for apartment units, which was up 23 per cent from 2010. Excluding apartments there were 12,506 building consents granted for dwellings through 2011, down 14.7 per cent from the year before.

Stats NZ said there was NZ$4.925 billion worth of residential building work in 2011, down 12 per cent from 2010 to its lowest level for a calendar year in 10 years.

While it’s positive to see the boost in apartments being built, clearly it isn’t enough – more housing supply is needed in the parts of Auckland where people most want to live: the inner suburbs. Another recent NZ Herald editorial attempts to join the dots together on the issue:

Normally in these circumstances the demand would bid up the price of houses too but that is not happening. Auckland house prices went so high during the last property boom that they far exceeded sensible affordability levels as a proportion of incomes…

…The only practical answer to high rents and unaffordable prices is to increase the supply of new houses.

If young adults today are to aspire to home ownership as their parents could, the building industry has to be expanded and governments must ensure that nothing stands in the way of construction of the type of houses these people want.

Their need is too important to be fodder for a political argument between land developers and city planners as to whether urban limits or land banking are aggravating the housing shortage.

The editorial seems to tentatively link this issue with the battle that’s currently going on over whether the Council’s spatial plan should allow more sprawl or not, but this seems to miss the point. The huge demand is in the inner suburbs. That’s where people want to live. That’s where we need more housing. Why isn’t it happening?

• Has the government’s changes to taxation of property (unable to write off depreciation and making tax avoidance more difficult) discouraged investment in residential development?
• Has the collapse of finance companies in 2007/2008 meant that developers simply can’t find the money to undertake redevelopment?
• Are council’s planning rules in these areas of highest demand too stringent, and are they making it impossible for developments to stack up financially?

As an example of failure to grasp the appeal of centrally located properties there may also be a problem in the banking sector as recent comment from Simon showed:

 I’m a case in point. I’m 31, single, I had a good year, scraped together a deposit and went apartment shopping. I didn’t much feel like leaving the inner suburbs. I found a really nice apartment I really liked. It had good light and a big balcony and a high stud and a big park across the road. It was built post-leaky, the price was right and I thought: yes. The bank wanted a 30% deposit, plus security over my parents’ place. I gave up and bought a house on minimum deposit in the suburbs.

Okay so the banks got burnt a little from their own over-enthusiasm on apartments during the bubble, but this looks like an overreaction and like they really don’t understand this market well enough to differentiate between good and poor properties.

One issue that needs discussing is whether we are in fact undergoing a big shift in housing patterns back to renting, perhaps as big as the post war growth in home ownership and suburban spread, that was actively incentivised by successive governments. There is plenty of evidence that this is happening here and it is consistent with changes in other OECD countries. More NZ Herald articles here and here:

Aucklanders who own their own homes have declined from 74 per cent in the 1986 Census to 58.7 per cent last year, according to Statistics New Zealand’s household economic survey.

The Herald of course doesn’t pause for a moment to consider whether a strong rental market could be part of a solution and not a cause for panic, quoting this authority [bizarrely discussing another issue]:

Prime Minister John Key said in 2010, when Chinese investors first sought to buy the Crafar farms, that he would “hate to see New Zealanders as tenants in their own country”.

And of course both articles above quote ACT’s productivity commission blaming the council’s Urban Limit for the problem, but does at least print an opposing view to this for the first time.

The council yesterday noted the commission’s concern that its aim for a more compact city would worsen the problem of housing affordability.

But its submission said the commission had failed to demonstrate that releasing more sections outside the existing urban limit was the solution.

This was likely to pile on significant costs for providers of water and transport services.

The council called for further investigation into interventions in the housing market to help developers cater for low- to medium-income groups.

So it does seem as though there’s some kind of market failure going on here and a political battle about it. We should be getting more housing, but we’re not – and the explanation doesn’t seem to be that simple. But it’s certainly an issue we cannot continue to ignore. But other than criticise the city council’s proposed plan, and boosting the demand at the top end of the market through tax cuts [as Bernard Hickey pointed out recently on Twitter, below], very little is proposed at the national level.

This of course fits with the default setting of the government, still a touching faith in the market, and a refusal to consider that it has any role in assisting the less well off in its policy settings. Isn’t it the case that markets are useful tools, but terrible masters and even worse gods, as we have recently so plainly seen?

The article above does also note that the decline in home ownership mirrors the removal of state policies designed to help people at the edge of  affordability into ownership [Does everything go back to the reforms of the 1980s and 90s?].

A shift in state housing policy further widened the divide. The right to capitalise the family benefit to buy a first home ended in 1986. State lending for home ownership stopped in the 90s.

Another change in 1992 allowed investors who owned rental properties through qualifying companies to offset losses on the properties, where the rent fell short of mortgage payments, against the owners’ other income. But they could still take the profits of capital gains tax-free when they sold.

Officials estimated in 2008 that the ability to deduct losses meant an investor would be willing to pay $25,000 more for a median-priced house than someone who planned to live there.

The Smiths borrowed the full cost of buying their two rental properties five years ago. “We have benefited from generous tax schemes,” says Anita.

Says Nigel: “We win either way. Either you are getting the tax break, or you’re winning because you’re getting enough rent to cover the mortgage.”

So yes I do think there are things that the council can do. Especially involvement with state agencies and private developers on specific redevelopments [Like the Melbourne Housing Commission?] and with planning regulations, especially ways of defining certain areas on the city fringe and on transport routes for higher density development with relaxed car parking requirements and where possible increased building height. However allowing expensive new homes way out in the country-side will provide no relief for all those people that want to live affordably in the city. And nor will distant tract housing on the fringes help for the same reasons while also condemning their inhabitants into transport poverty and employment inflexibility. Trying to force people out there is likely to end in market failures as well as committing us to insane levels of extended infrastructure spending. So isn’t this really is a way bigger issue and needs some leadership at the national level, including around the distortions in the tax system, despite the government’s determination to wash their hands of it and blame the council?

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