This is a guest post from reader Brendon Harré. It was originally posted on his Medium blog.
“We shape our buildings; thereafter, they shape us” – Winston Churchill
Renting in New Zealand is bad — is how I have written about housing in the last few months. Nobody disputes the narrative. New Zealand’s housing market has become so farcical it is an object of satire. Getting on the property ladder is like joining the landed gentry class in a Jane Austin novel, and mocked for it — Pride and Property, an Austentatious tale.
These kinds of stories cast landlords as a villain in the nation’s story. There is a legitimate beef too — landlords did not pass on lower costs to their tenants. At the start of Covid the Reserve Bank slashed interest rates to protect New Zealanders from a teetering economy. Property investors did not share this benefit with tenants — the data shows rents rose — instead investors used their improved financial position to expand their property portfolios by buying up existing houses.
Landlord greed and first home buyers ‘fear of missing out’ drove up house prices 23% in the last 12 months. Housing has caused the otherwise successful ‘team of 5 million’ to fracture into groups of greed, fear and for those with no hope of ever buying a home — despair.
Given the way landlords collectively behaved it is not surprising the government decided to remove some of their financial privileges. Extending the bright-line test for assessing capital gains to 10 years for residential property investments whilst also progressively removing the ability to deduct mortgage interest costs for tax purposes over the next four years.
There has been much squealing and threats from landlords. Claiming they will hike up rents and make tenants homeless. I doubt this will change the governments mind. Partly because the threats make no sense (why would rents increase due to the loss of interest deductibility when they did not reduce when interest rates fell?), and partly because this sort of intimidating behaviour just reinforces the villain narrative.
Financial experts who have run the numbers show tenants shouldn’t worry about rent increases coming from the housing changes (they should worry about lack of housing supply though).
Also the government by restricting property investors ability to debt-leverage house purchases means they have remove demand from the highest marginal buyer in the housing market — so they are on sound footing with the claim they are removing demand that has most recently hiked up house prices.
The government have firmly indicated that those landlords who invest in build-to-rents will retain the ability to deduct mortgage interest costs, with Prime Minister Ardern saying at her recent housing announcement.
My message to investors. We have a need here in New Zealand, work with us, invest in new-builds, that will take the pressure off the rental market, grow the number of houses being built in New Zealand, that is a key part in how we have designed this package.
Landlords should take Ardern’s message seriously. They can do this by supporting the narrative that the real villain in New Zealand’s housing story are the rules that add needless expense and restriction on building housing near employment and amenity.
For landlords with an investment commodity perspective if house price increases are slowing then their best course of action is to realise the gains made (by the same logic forest owners harvest their wood when growth slows to a rate under alternative investment returns). Perhaps by sale, but for some landlords the better opportunity is to construct new houses. Many landlords will be in a situation where they can replace a single household rental with a far bigger building, that can accommodate many households.
An example of this would be the below single house in Mt Albert, Auckland.
Which was recently transformed by the construction company Ockham Residential into a 32 unit build-to-rent apartment called Modal.
This transformation was enabled by the 2016 Auckland Unitary Plan which was much more permissive than previous district plans. The government has further removed unnecessary building restrictions last year with its National Policy Statement on Urban Development. When implemented by Councils this will remove car parking minimum requirements and allow buildings six stories high within walking distance of rapid transit and frequent public transport.
This change in the built environment reflects a diversification in consumer demand in what is considered a ‘dream home’. For the postwar middle-class the dream was a big car outside a suburban home. Now, for many, it is multifamily housing and good restaurants in mixed-use, walkable neighbourhoods.
The underlying political theory for why central government is involving itself in urban planning is given by the maximum — “if you can’t solve a problem, enlarge it.”
Japan is the best example of the power of “enlarge it!”. It’s system of regulating housing has always been simple, uniform, and markedly more welcoming to homes of many sizes and types than are other nations’. In recent decades this national control has grown stronger and this is the secret for how cities like Tokyo and Osaka have been able to build at a far higher rate, to keep housing more affordable, than most other comparable sized cities internationally.
In Auckland there are about 500,000 residential property titles — mostly stand alone housing — reflecting past provision of the egalitarian housing dream.
Auckland’s upward build potential is massive. For every 0.1% of Auckland’s housing stock that makes a Mt Albert type transformation then 500 houses become 16,000 apartment units. That is more apartments than the number of multi-unit dwellings consented nationwide in any year of the last decade.
About two-thirds of New Zealand’s housing stock is owned by people who own two or more houses. Many of them being ‘mum and dad landlords’ who own one (13%) or two (6%) houses in addition to the family home.
So future Mt Albert type transformations will frequently involve houses owned by property investors.
Investors should be working with the government on how to streamline this process. Ardern’s call to “work with us” is sensible. You can see in the above bar graph that New Zealand is ramping up the build-rate of diversified housing types, but this transformation is still in its early stages.
What would help?
The best approach would be for government and the investor community to talk to each other in a constructive manner (like good teams do) to identify the most pressing issues.
From the authors perspective here are some issues that could do with some further work.
More planning rule liberalisation — perhaps issues like balcony requirements, viewshafts etc. Are the benefits of these sort of planning rules worth the cost? RMA reform is coming so there is an opportunity to make further changes.
New Zealand may need more low transaction cost legal mechanisms to manage upzoning effects between neighbours. For example, I suspect the above Modal apartment build gained permission from its neighbour to breach the district plan recession plane rule. A 2017 amendment to the RMA allowed this sort of negotiation. The general concept is called hyperlocal-upzoning.
Assistance with financing may be required. A property financier has suggested the government underwrite development loans to increase housing supply. New Zealand governments as far back as the intensification of wool estates into dairy and lamb farming units have used credit advances as an economic tool (Government Advances to Settlers Act 1894) so there is precedent for making this request.
Another option would be to give tax advantages (exemption from the bright-line test?) to property owners who undertake the Mt Albert type transformation where they exchange ‘flats-for-land’. Something like 20% of the new-build flats in exchange for a buildable plot of land — so for the Mt Albert example it would be six flats.
The flats-for-land system has been successful overseas in improving apartment building supply (details here, here and here). It reduces the capital requirement barrier and because the build contract is ‘enforced’ by the original landowner then the developer is held to account for the quality and speed of the build — drip feeding the market is not possible. These factors could improved elasticity of supply for residential construction. For New Zealand which is prone to the small market — lack of competition problem, the flats-for-land approach could improve competitiveness.
More work is needed on reforming insurance for the construction sector. The leaky buildings saga should not be repeated. Yet some change is needed to address local government being risk-adverse because the current joint liability system meant they were the ‘last-man-standing’.
Multi-story and multi-unit buildings are more likely to be built from reinforced concrete due to the greater amount of structural strength required for taller and bulkier buildings. This is problematic for New Zealand meeting its climate change targets. Fortunately engineered wooden constructed apartments which sequesters carbon are now possible — in fact, if innovative wood products are used more frequently it is estimated New Zealand’s new building stock can achieve carbon neutrality by 2025. The positive externality achieved by sequestering carbon in the built environment should be incentivised in some manner.
Business journalist Patrick Smellie in an article titled — Six things to help fix the building timber shortage — makes the case for the government to get a move on with the Industry Transformation Plan for Wood Processing.