Apartment development in Auckland often seems to be caught in a Catch-22. When we build cheap apartments, they’re criticised as a blight on the city – “shoeboxes” that nobody would ever want to live in. (Never mind that many people do live in them, and value the fact that they are an affordable way to live near jobs and universities in the city centre.) When we build high-quality but pricey apartments, some people claim that they prove that apartments aren’t a solution to Auckland’s high housing costs. (Never mind the fact that they allow more people to live in desirable areas.)

great north road apartment plan
Proposed apartments on Great North Rd – too flash to help affordability?

Over in the San Francisco Bay Area, they’re having a similar debate over how to plan for growth. The Bay Area has more severe affordability issues than we do, as the tech boom is placing pressure on both housing and office space. In San Francisco, new condos for wealthy geeks are frequently criticised as out-of-keeping with the city’s unruly liberal character.

Moreover, fragmented local government means that there is no coherence in regional planning – every city is effectively assuming that their neighbour will accommodate the growth that they won’t. This is the result:

Asking Prices Relative to Units Built

SPUR house prices vs new builds chart

Even though Manhattan and LA have more expensive neighborhoods, San Francisco is far and away the most expensive metro in the nation. This is due to the small number of units built each year relative to demand.

In Berkeley, a university town in the East Bay, residents just voted down a (binding) referendum that would have prohibited the construction of new dwellings in the downtown area. Local writer Zach Franklin reviews the state of the debate on the measure. His point about expensive apartments is particularly important:

Some “progressives” don’t believe in supply and demand. I’ve heard this at parties and online – people who say “the new condos are just for rich people”, or think that pro-development policies are a front for greedy real estate interests. Then there are the folks who have pet theories about how housing economics really work, which can feel eerily like talking with climate deniers. It’s actually pretty simple Econ 101 stuff – the rich folks will be at the front of the line no matter what, and if you don’t build the condos they’ll just take over middle-class housing. Build more housing and at least the line gets longer.

This is absolutely essential to understand. Economists have all sorts of arcane ways of describing this phenomenon, but the principle is simple: If you try to push down growth here, it will pop up there instead.

Preventing people from building new homes in a neighbourhood won’t simply make them go away – they will stick around and compete with each other to bid up the prices. (Some will lose out, of course – they’ll have to go to somewhere else that’s less convenient.) Here’s how this works in practice:

  • We regulate to make it difficult to build new homes in inner-city areas which offer the best access to labour markets
  • Upper-income people bid up prices for old villas and flats in Ponsonby, Mount Eden, and Newmarket
  • Middle-income and lower-income people can’t afford to pay these prices, so they move a bit further out, and bid up prices in Avondale, Three Kings, and Onehunga
  • The people who could formerly afford to live in those areas go even further west or south, driving up prices in Te Atatu and Otahuhu
  • The people at the bottom of the income ladder are thoroughly rogered – they’ve got a choice between paying heaps to live in overcrowded, unhealthy houses or moving so far out that they can’t access jobs or education.

The end outcome is residential segregation and unaffordable housing. A casual look at Census data on household incomes suggests that this might be happening in Auckland. The map below shows the share of households in individual Auckland suburbs that had low incomes in 2001 and 2013. (I used a higher threshold for “low income” in 2013 to account for the fact that average household incomes increased over this period. This is a pretty cursory analysis – I’d welcome ideas on better ways to present or analyse the data!) Areas coloured in darker blue had more low-income households, while areas coloured in yellow had relatively few.

As you can see, the Auckland isthmus and many coastal suburbs have become yellower over this time – which suggests that low-income families are being priced out of these areas. Many other areas – especially in west Auckland and Manukau – have gone from blue to green. Meanwhile, some pockets of blue in south Auckland have become darker, which suggests that low-income households may be crowding into those areas.

Notably, the city centre, where loads of apartments (both expensive and cheap) have been built, has a greater share of low-income households now than it did in 2001.

Auckland low income households 2001-2013

This is not a good outcome for Aucklanders, especially those on low incomes. By comparison, building lots of apartments, even expensive apartments, in desirable areas means that some of the well-heeled people who want to live in that area will not bid up prices on the run-down houses down the street as a second-best option. As a result, the affordable houses in the area can remain affordable.

Supply and demand – how does it work?

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  1. Would like to see some nicely designed but affordable (under 600K) townhouses in New Lynn or Mt Albert. But it never happens. Unfortunately the merchant quarter townhouses sold like hotcakes.

  2. In Hamilton there is a mixed bag of comment in Hamilton’s district plan on the value of higher density
    This post on Hamilton Urban Blog, Shows the split between older, wealthier, dwelling owners, and Younger, less wealthy, tenants.
    If you added population density map, you would find areas with the highest investment in rental property are in the area of highest population density. Suggesting the people with money to grow is thinking higher density areas are worth investing in.

    1. I quite liked that post… excellent use of Census data to triangulate on something that’s inherently difficult to measure! Some other (forthcoming) research I’ve done suggests that there are some interesting spatial disparities in rental yields. This could, in theory, result in a situation where property investors seek rental properties in areas where they wouldn’t consider living.

      Not sure what sort of social impacts we’d expect from this.

  3. The other useful map for illustrating the problem is population density. As of the 2013 Census, the four highest density census area units in Auckland were:
    Auckland Central East, Auckland Central West, Grafton West, Eden Terrance — all with high-density housing. The next five were Burbank, Favona South, Harania East, Onehunga NW, Clendon South — where the density implies a lot of crowding.

  4. The problem isn’t about whether or not you build cheap or expensive apartments. No one wants cheap apartments. Why would we build “homes” that are uninsulated, small, ugly and very shoddily built? The problem is the refusal of government to recognise market failure. When land is expensive, private developers will seek to maximise their returns by building “luxury” homes as cheaply as possible. In New Zealand, we end up with “expensive” homes and apartments built to the shoddiest standard the builder can get away with (for example, I was at a friends brand new, “luxury” six bedroom house in Flatbush a few months back and a door had already come off it’s hinges, the hot/cold taps had been installed the round the wrong way, the food insinkerator collapsed through the sink because it had only been glued in place, and they had to get a leaking toilet fixed).

    The solution to this market failure is for the government to intervene to make “expensive” apartments more affordable by building them properly itself, then providing cheap credit to home buyers via some sort of reincarnation of the old state advances corporation to allow ordinary people to buy them.

    1. Uninsulated and small are no longer permitted, minimum size is 40m2 (Hamilton DP)
      Ugly is opinion (not to have ugliness is to have dullness), shoddily and build cheap is more about your fiends willingness to inspect or pay.
      The solution from government way be to start with Housing WOF.

    2. Who built the “Luxury” home?
      First guess is that it wasn’t an established company with a reputation.
      If somebody wants a quality build, there are plenty of companies to choose from.
      This is not something the government or council should be involved with.

      Hot & cold taps mixed up and no insulation shouldn’t have passed building inspection.
      Shoddy, ugly, etc., is a combination of taking a risk on an unknown architect/builder or paying a premium for ac ompany with a guarantee you can trust.

      The drop in central city average income may be an indicator of a larger number of students and housing NZ tenants.

      1. Did I mention insulation? The biggest problem these days is no one is building or buying a home anymore, they are building and buying a tradable asset so to hell with quality, everyone is flicking it on to the next muggins for a tidy mark up in a couple of years anyway. The days of building a durable home for a couple to raise a family in over fifty years are past.

        The point I am making is the finish is terrible, and shoddy finish is endemic to all construction companies big and small in NZ, for market failure reasons pointed out. And anyway, what makes you the expert? I’ve at least had the advantage of knowing four new builds in the last two years and all have had the same issues with finish, or worse. The market failure is the need to build as big a house as possible even in an urban sprawl location (and a small section relative to their house, I have to say) in order maximise the return. Surely the point of building so far the centre is affordable housing? The market isn’t interested in affordable, it is interested in profitable. In the are of Flatbush I looked around almost all house purchased (at least half to two thirds) seem to be by foreigners and have Indian or Chinese tenants to absentee landlords – pure speculation in other words. That’s a failure of the market as well. I guess though a ban of foreign purchase would collapse the Auckland housing bubble, and that is how you lose elections.

        1. “The market failure is the need to build as big a house as possible even in an urban sprawl location (and a small section relative to their house, I have to say) in order maximise the return.”

          That is not a market failure – it is a regulatory failure. Density restrictions (such as a maximum of 1 dwelling per 500 m2) combined with expensive land create an incentive to build large houses. If you can only build one dwelling on a large expensive piece of land then it makes sense to build the biggest / most expensive house possible.

          Regulations prohibiting construction in central suburbs together with the rural urban boundary, mean that land in outer suburbs is expensive.

          The answer to a failure of regulation is not more regulation.

        2. Good point about foreign absentee landlords. Unfortunately the single simplest thing to take the hot air out of the bubble (banning sales to non residents) will never happen due to the multiple home owning MPs on both sides of the House.

          I also wonder why there’s no mandating that a certain % of apartments in every development should be “affordable”. That way at least some of the poor will not be forced to move to the outskirts. I wonder why AC doesn’t do this when so many other big cities insist on it? Poor planning?

        3. I thought the proposed Unitary Plan included such provisions?

          And in the context of this thread its worth pointing out that there’s little evidence they improve housing affordability.

          It’s equivalent to requiring car-makers to produce “affordable” cars. Nonsense.

        4. Unlike Stu, I think that provisions to require a share of developments to be composed of affordable housing can be useful. However, I think they’re best implemented as part of a quid pro quo – i.e. where council allows a developer to go “off the plan” and build more dwellings in exchange for providing additional affordable housing. In such a case, they effectively allow developers to build more (resulting in higher profits) in exchange for investing some of those profits in low-cost housing.

          Without such a quid pro quo, the only impact will be to reduce the profitability of large developments subject to such rules. This means:
          * Fewer large apartment buildings will be constructed overall (resulting in constrained supply)
          * Subdivision developments will be done in smaller chunks, reducing the potential for economies of scale in construction (resulting in higher build costs).

        5. peter- that’s exactly my point, currently there’s no quid pro quo.

          The new Turing building on GNR is profitable at four stories, the new ones on the same street are being allowed six stories, even seven if Ludo really loves it.

          The return to the developer- massive.

          The return to the community- nil. Affordable housing units created- nil.

          This should be changed. It is manifestly unfair to all in the community.

    3. How is your friends problem evidence of market failure? It is what happens when people don’t do inspections and hold the builder to the contract. Market failure is when supply and demand doesn’t achieve an economically efficient result due to price controls, quotas, market power like monopoly (or monopsony in Auckland council’s case) or assymetric information or some other impediment to free trade. You seem to be arguing that because a property wasn’t inspected properly then the Government should build houses. Do you really think a government department would do a better job of inspecting a building?

      1. Arguably it’s a case of asymmetric information – the builder knows he’s done a shoddy job but it’s not something that’s easily accessible to the buyer. Or you could analyse it as a principal/agent problem.

        1. Yes. If it is then the usual fix is a guarantee or maybe a rule but not lets get a government department to build houses or cars or whatever the goods are. Seriously does anyone think getting a salaried government employee who isn’t going to live there to run the job would result in a better outcome?

        2. Yes, I think it possibly would. Before the old government departments were corporatized and set up to run like profit-orientated private companies, many staff and civil servants worked loyally and with pride in their work. This was not just motivated by pay, but a sense that working hard for the betterment of society brought reward in itself. Thus I believe it is entirely possible that a government-salaried building inspector or project manager could do a better job than some of the cowboys around today. Unfortunately that proud-public-servant ethos has all but been lost under the current erroneous philosophy that money is the only motivator and that the private sector will always do things better than the state. This is a myth.

    4. I think the “cheap construction / expensive house” issue is largely related to land costs. Essentially, the high cost of land in Auckland – which is an inevitability in any large, successful city – means that builders and buyers have to cut costs elsewhere.

      The best answer to this, in my view, is to economise on the amount of land per dwelling by building up. Constructing mid-rise and high-rise apartments will allow home-buyers to pay less for land and more for quality construction and good locations.

      Of course, doing that will require an enabling planning framework and a development sector that’s capable of financing and building apartments. We’re probably a little behind the curve on those fronts, but hopefully improving.

      1. A good analysis Peter. Converting your graph to NZ terms takes the highest USD600/sqft figure to roughly NZD9000/sqm (600x11x1.3), which is entry level in Auckland. Achieving the NZD1500/sqm equivalent of USD100/sqft would be well-nigh impossible even in the suburbs. While land value is obviously a significant factor, there must be other components, eg material costs or planning issues. NZ labour costs are low so not an issue. Do you have any thoughts as to cost factors other than land value and construction volume?

        1. See this thread from an earlier TB post, and my analysis of the cost breakdowns.

          Lots of people clipping tickets is the main reason for costs to balloon.

        2. Yikes… it’s a bit alarming to see that graph converted to NZ terms.

          I can’t claim to be an expert on the construction sector, but the available data (much of which was summarised in the Productivity Commission’s 2012 report – http://productivity.govt.nz/inquiry-content/1509?stage=4) shows that NZ suffers from:
          * Relatively high unit costs for building dwellings
          * Relatively low (and slowly growing) labour productivity – which are, as you noted, associated with low incomes for builders
          * High costs for materials – there are anecdotes of people saving 20-30% by flying to California, loading a shipping container with materials, and shipping it back
          * Many small firms that build a small number of bespoke dwellings – thus losing out on the gains from mass production.

          Obviously, solving these problems is challenging as they are the result of many peoples’ choices. My view is that the government can play a role in fostering scale and efficiency in the building market – e.g. through an urban development agency or an SOE like Housing Corp. (I previously commented on the proposed Development Auckland here: http://greaterakl.wpengine.com/2014/12/01/an-urban-development-agency-for-auckland/)

          One other thing that doesn’t often get a mention is that NZ firms tend to pay quite high interest rates, which affects the viability and cost of development. This is a difficult issue to overcome, but past and present governments have brought down interest rates via state-financed developments, state-subsidised loans for buyers or builders, or loan guarantees.

    5. “No one wants cheap apartments.” Rubbish. Everyone wants cheap apartments. They also want cheap inner city villas and cheap housing anywhere/everywhere. No one complains if they got a cheap Metropolis penthouse or a cheap Ponsonby villa.

      What you mean is no one wants the apartments that are at the lowest end of the market. Except that’s also rubbish. The cheapest apartments in the CBD have the lowest vacancy rates while the most expensive sometimes sit empty and unsold for years.

  5. Orakei Bay Village has opened up the selling on Stage 2 of the development saying that “public demand” has forced their hand to release the next stage early.
    As most of the 1st stage was a mixture of expensive “waterfront” apartments, and 3 level 4 bedroom townhouses has all but sold out (up to $2m for some apartments there).

    Prices there for the 24 2 bedroom apartments on sale in the Stage 2 development building currently on sale are from $655,000 – $1,005,000 (see http://orakeibayvillage.co.nz/gordon-apartments/), spread over 4 of the 5 floors with retail/carparking on the bottom 1.5 floors.

    So yes, there is a market for the upmarket stuff.

    My biggest concern about this development would be that they seem to keep putting back construction start dates and they seem to have had/be having a major bunfight with KR over the enclosure of the Railway tracks and who will pay for making that part of the development over the railway up to “explosion proof” standards. which is something you would have thought would have been settled a long time ago.
    And the local resident is refusing to budge from the site he has a 20 year lease on, and so is putting a huge spanner in their plans as well, meaning the full development won’t complete as envisaged for over 20 years.

    So any apartments you buy there today may not actually get built for some time yet.
    But if you can afford to have a large deposit sitting in their trust account and be bound to a contract to purchase the completed apartment over a longer than usual time, it would probably be a good deal.

  6. A good analysis. It doesn’t matter what price range the new buildings are in, more housing stock should lower prices across the board. All a fixation with “building affordable housing” does is reduce the incentive for developers and deliver windfall gains for a lucky few. However the big cost in Auckland is the land. The same simple supply and demand argument says if demand is growing but land supply is fixed, the price of land will increase. That is precisely what is happening in Auckland. The urban growth boundary limits the supply of land and forces the price up. If it were an option, middle income car owning families would move further out to cheap land rather than bidding up prices in Te Atatu. Not everyone is unhappy about rising land prices – some people do very well out of it thank you. So you hear all sorts of reasons why we need to limit urban growth. But if you want to have affordable land that people can build on, you need to break the stranglehold on supply.

    1. Careful you don’t over simplify this David, urban growth boundary is not the only source of dwelling supply constraint, density limiting rules do the same thing. Furthermore the price spread shows that in fact many people are not as happy as you suggest to be at the end of the m’way compared to much closer on. All property is not equal; location is always a large factor in value.

      1. An oversimplification maybe, but this is not the place for a 20 page report. The simple message is that planning controls that restrict supply drive up prices. This applies just as much to building up and building dense as it does to the urban limit. If a limited number of designated areas are opened for higher density, all that happens is that the increased value is captured by the current owners. Prices will only come down significantly if there is a competitive supply of additional capacity.

    2. Thanks for the thoughtful comments David! The MUL is certainly a factor in limiting supply, but I think that it’s received a lot of attention from researchers in part because it’s easy to measure its impact. Research from other jurisdictions has shown that other rules, such as building height limits, minimum parking rules, and density restrictions, can play an equally strong role in limiting development opportunities.

      Remember: there is no fixed relationship between supply of land and supply of floorspace! Technological changes (steel framed buildings, structural concrete, elevators, internal plumbing, etc) have freed us from the tyranny of horizontality.

  7. thank you for writing this article Peter, which has been rolling around in my head for, oh, about 6 months.

    More housing of any type, in most parts of Auckland, will tend to reduce property prices generally. The market appears to be fairly fluid and inter-linked from a supply/demand perspective, i.e. demand is now shifting into areas that were only 5-10 years ago considered by snobbish-minded folks to be “undesirable”.

    1. You’d better start writing faster, Stu!

      One note, though: I’m hesitant to argue that building more will *reduce* prices on the whole. In theory, that could happen if the removal of a regulatory constraint managed to push the marginal cost of the next dwelling far below the current sale prices. Could it happen in practice? Hard to tell.

      As a result, I’m more inclined to say that building more dwellings (at any price point) is likely to constrain future price increases.

      1. Nawwww same thing really?

        When I say “reduce prices” I’m implicitly comparing to a counter-factual where the additional supply was not brought to market.

  8. I have to say, I agree with Sanctuary. The rich can and should build whatever houses they like, wherever they like. And the state should facilitate the construction of houses and apartments in a range of sizes and locations, of an acceptable price and quality.

    The de-facto state of expensive and only moderate quality is a choice, based on high construction costs and an inefficient market set up to please investors. We can choose to be Vancouver, or we can be Hamburg.

    1. I think the best way the state could “facilitate” the construction of “houses and apartments in a range of sizes and locations, of an acceptable price and quality” is to reduce regulations that prevent apartments and units from being constructed.

      Seriously, my (kiwi) friend in Amsterdam lived in an 18 sqm apartment and was perfectly happy. IKEA sells 25 sqm apartment fitouts that are better than anywhere I’ve seen in NZ.

      Meanwhile Auckland Council considers it reasonable to regulate for 40-50 sqm apartments and large balconies. I don’t think so …

  9. The reason you need expensive apartments is to make the smaller apartments also desirable. The slums on Hobson ridge are a perfect example. The apartment design itself is fine as the smallest 2 bed layout in a complex with lots of different layouts, including executive penthouses. Just look at the small apartment sin the Heritage or metropolis complexes.

    1. can you point me to the evidence that apartments on Hobson Street qualify as “slums”?

      Can you also clarify why cheap apartments are bad in the context of a city that has crippling issues with housing affordability? I’m sure the apartments rent for a lot less than apartments in the Metropolis, for example. I mean we can’t all afford to rent in the Metropolis can we?

      1. Isn’t the Oaks on Hobson. A 12 story apartment with only one lift (currently broken) and 40% housing NZ. Not sure if this is one wih a breeze way like many of them.

        As I said, it isn’t the apartment themselves that are the issue, it is the density of low quality small apartments. Introduce a good mix and the perception of slum will go away.

        1. One of the nice things about apartments, relative to low-density suburbs, is that if you put 200 low-cost dwellings together in a single apartment building, it can still be in close proximity to lots of other dwellings that cater for different income levels and different types of people. (And jobs and schools and all that good stuff.) Whereas if you spread those same 200 dwellings out over 20 hectares, you can easily get a large area full of people who are cut off from jobs and amenities and where “respectable” people wouldn’t consider setting foot.

          One apartment building alone won’t turn an area into a slum. But one subdivision can easily become one.

        2. UN-HABITAT defines a slum household as a group of individuals living under the same roof in an urban area who
          lack one or more of the following:
          1. Durable housing of a permanent nature that protects against extreme climate conditions.
          2. Sufficient living space which means not more than three people sharing the same room.
          3. Easy access to safe water in sufficient amounts at an affordable price.
          4. Access to adequate sanitation in the form of a private or public toilet shared by a reasonable number of
          5. Security of tenure that prevents forced evictions

        3. And some define poverty as living on less than $2 a day.

          Slum maybe the wrong word but while they do provide cheap housing, the dense amount of low cost apartments creates undesirable areas where shops, cafes, restaurants aren’t attracted too.

        4. sounds like the primary issue with the apartments on Hobson Street is Housing NZ’s tendency to concentrate their properties into just a few buildings. I suspect that’s a consequence of a broken social housing model, rather than an issue with those apartments per se.

          Personally my negative perceptions of those apartments relate to the way they look from the outside (architectural qualities) and the way they do not integrate with the street (urban design qualities).

          I don’t mind that they’re cheap and/or small – that indeed is what is required to deliver affordable housing. Again, we can’t simply regulate low-income households out of existence.

          If you wanted to help these people then a tax-transfer model would be much more effective than simply imposing high regulatory burdens, IMO.

  10. I believe one method to combat the housing crisis would be for central government to provide more of an incentive for investors to place their money into businesses or other financial opportunities, rather than into property. This would remove some of the demand from the purchasing market so that first home buyers don’t have to compete with relatively more cashed-up property investors.

    The risk in this is that such a policy could cause a sudden drop in housing values, leaving those who have previously purchased at low-equity ratios at risk. The benefit is that investment in business may prove to be a greater stimulant to the NZ economy than investment in property.

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