This is a guest post by Tamba Carleton. Tamba is a Research Manager at CBRE and her work focuses on the housing market.
A lot of people would agree that housing in New Zealand is unaffordable. Rents and mortgages cost hundreds of dollars a week, and deposit requirements are so large that people need to save them up over many years. As a result, they stay renting for longer.
There are lots of different drivers of house prices, but those sale prices occur because of open market transaction between a willing buyer and a willing seller. Someone, somewhere in that market is willing and able to pay that price for that property.
This is fine for households on above average incomes. Market priced housing is affordable for them. They can pay their rent or mortgage and still have enough left over for market priced groceries, utilities, transport, and leisure. However, thousands of Kiwi households struggle to cover their other costs after paying the rent or mortgage, and many of them are forced into unsuitable housing as a result.
Affordability in the Special Housing Areas
Special Housing Areas (SHAs) were created through the Housing Accord and Special Housing Areas Act 2013. This Act was interim legislation implemented while wider reforms to improve housing affordability were under development. The Act aimed to enhance housing affordability by establishing SHAs to increase land and housing supply.
SHAs were able to have their consenting fast tracked, giving them a faster pathway to being developed – saving developers time and money. In return, SHAs needed to provide affordable housing using one of two options defined by the Act.
The option most developers preferred was the ‘relative affordable’ option, and they had to provide at least 10% of their homes on this basis. ‘Relative affordability’ was defined as homes costing no more than 75% of the region’s median house price, with the median house price recalculated each year in September. The ‘relative’ benchmark kept jumping with the annual reset as Auckland’s median price was rapidly increasing at the time.
Usually, ‘relative affordable’ homes were achieved by including smaller units, such as studio units without carparking. Certainly cheaper than average, but also probably not too far off market rate for what was being offered.
Towards a Better Definition of Affordability
Providing housing for ‘cheaper than average’ prices fulfils a certain buyer niche, but it’s not necessarily affordable. More inclusive measures of affordability need to take people’s incomes into account. I like a quote by Wellington Housing Portfolio leader Brian Dawson:
“People are confusing affordable with ‘cheaper than average’. A $50 steak might be considered cheap if everywhere else is charging $75, but it doesn’t make it any more affordable for someone whose budget is maxed out at $30”.
Affordable housing accommodates households in a property that meet their needs, without putting them under financial stress. – A potential ‘soft’ definition
Affordable housing costs up to 30% of gross household income. – A potential ‘hard’ definition
As mentioned above, SHA developers in Auckland were able to choose two options for providing affordable housing. The second option was called ‘retained affordable’, and this one did use an income-based measure of affordability.
‘Retained affordable’ homes needed to have a rent or mortgage payment which did not exceed 30% of the Auckland median household income. Median incomes were recalculated each year, but of course they grew more slowly than house prices. Units were sold or rented to Community Housing Providers who then coordinated occupiers.
The SHA scheme showed that private developers can profitably develop new housing even when they are required to provide some units at below-average prices. The ‘relative affordable’ units were close to market rates for what they were; they were simply smaller and/or on the lower levels, hence had lower prices.
The provision of income-based ‘retained affordable’ housing was more difficult. In order to provide homes that met the needs of households priced out of the market, the units had to be subsidised to some extent.
What Can We Learn From Overseas?
Internationally, affordable housing providers are consistent in their thinking that income is the key driver of affordability. In New South Wales (NSW), housing is considered affordable if it costs less than 30% of gross household income. Affordable housing schemes are developed with some assistance from the government (local/ state/ Commonwealth) including: grants, planning incentives, land contributions, security against community housing providers’ current assets, etc. Affordable housing is owned by private developers/ investors, local governments, charitable organisations or community housing providers. They are typically managed by not-for-profit community housing providers, and sometimes private organisations.
In the US, there are approximately 5.1 million affordable housing units provided through an array of federal, state and local programs. Approximately half of those units, or more than 2.3 million, are the product of the Low Income Housing Tax Credit program. This program has been successful in obtaining private sector participation by providing an incentive to do so. In the past few years billions of dollars of affordable housing assets have transacted, and there are market participants who specialise in all aspects of this well-established sector.
We know that New Zealand needs more affordable housing too. The demand is there, but we lack the incentives that could drive participation in this sector. The first step is to reach agreement on how affordable housing should be defined. The main point is that ‘cheaper than average’ is not necessarily affordable. Although we’ve seen that developers can include some ‘cheaper than average’ homes when required by legislation, those homes aren’t necessarily suitable or affordable for households.
Let’s hear in the comments how you think affordable housing should be defined.