Auckland’s housing supply and affordability crisis is proving devilishly hard to fix, partly because the high prices that should help solve the problem have found at least five ways to make the problem worse.
These feedback loops could be broken with the help of least five interventions proposed in recent months, but that is only possible with the political will to overcome the objections of those who benefit from sky-high prices.
First, it’s worth remembering that high prices are supposed to encourage new housing supply, which should in turn help solve the problem of high house prices. That’s what happens in normal markets where land supply for housing is plentiful and the development and construction industry mobilises to address a housing shortage.
Christchurch achieved a burst of new housing supply that has flattened prices since 2014, but only because the usual rules around consenting were relaxed and the central Government poured cash in to build infrastructure. It is the exception that proved the rule, and only happened because a natural disaster broke the business-as-usual rules.
Auckland’s experience over the last 15 years demonstrates how rapidly rising prices have perversely made it even harder to solve the supply crisis. Anyone doubting the extraordinary accelerations in Auckland house prices should look at this Economist chart showing New Zealand’s stunning out-performance vs Australia, Britain, Canada, the United States on a variety of house price measures since 1980, including price to income and price to rent multiples. That is all about Auckland’s two booms over 2002-07 and 2012-16, which have recently infected the likes of Hamilton, Tauranga and Whangarei.
Here are the five vicious feedback loops of the Auckland housing crisis:
1. ‘They rose too fast and it’s too risky to build now’
The problem with a market where prices rise 50 percent in five years and have trebled in the last 15 years is that is seems too far and too fast to be sustainable in the short term, which is important for property developers and home buyers.
They worry that if they borrow and buy at the peak, they could be caught in a downturn, particularly when the underlying measures of house prices to incomes and rents have also surged. That ‘too good to be true’ sentiment is showing though in a slide in building consent numbers in recent months and talk that many buildings for which consents were granted last year (particularly apartments) are not being built.
The end result is the housing needed to meet demand isn’t being incentivised by these higher prices and doesn’t get built.
2. ‘They rose too fast and it’s too risky for banks to lend right now’
Developers and home buyers are not the only ones who are nervous when prices rise this high and this fast. Banks also don’t want to be left holding the debt parcel when the music stops, which is one of the reasons why their lending to developers has dried up in recent months.
Regulators also worry that banks will get burnt if there is a sharp downturn from these nose-bleedingly high levels. The Australian Prudential Regulation Authority (APRA), which is the regulator of our big four banks’ parents, has told those banks to dial back their lending to residential property developers. The Reserve Bank is also taking a hard look at how much capital our banks put aside to back mortgages.
Again, the extra supply that should result from the feedback of these high prices does not come. Instead, it creates a feedback loop to potentially even higher prices.
3. ‘They rose too fast and too high for first home buyers to be able to afford to buy’
When prices rise in a normal market there’s usually some ‘fat’ for first home buyers to burn through when making their decision to buy a home. They can handle a slight and slow price increase and see the signal as an encouragement to buy.
But when the price rise is so fast and to heights out of their financial stratospheres there is a dampening effect on demand. First home buyers, who are propping up the bottom of the real estate food chain and are needed as part of the stimulus for developers to build new homes, simply give up.
The other feature of fast rising house prices for a long enough period is they start to translate through to higher rents, particularly when there is a persistent housing shortage. Rents have risen 25 percent in the last five years, more than outpacing the disposable income growth of first home buyers, particularly after student loan repayments are deducted. The rent hikes have degraded their ability to step up, even when the usual signals say they should.
4. ‘Housing costs are too high for construction workers to be able to afford to live and work in Auckland.’
Any housing supply response will need workers, but what if they can’t afford to live in Auckland because rents are too high and they can’t afford to buy a house?
The median rent in Auckland has risen 25 percent to $500 in the last five years, which chews up much of the after-tax and after-student loans incomes of apprentices and those joining the construction industry. Just when Auckland needs to be ramping up supply, rent already takes more than half the income of lower paid workers.
When the Christchurch earthquakes hit, rents for construction workers were around $300 per week. They did rise 30 percent to $400 per week between 2011 and 2014, but the starting point was at a much more affordable level.
Auckland needs to ramp up its house building by at least 50 percent to meet demand, which means a big increase in the number of construction workers, but the starting point for rents makes that difficult – unlike in Christchurch.
5. ‘High housing costs have degraded the quality and number of potential home builders’
One of the great tragedies of rapidly rising rents that chew up much of the income of those in low-paid jobs or benefits is that they force high levels of transience and the social dislocation that goes with it.
Teuila Fuatai wrote at Newsroom earlier this month about the problems many South Auckland schools are having with transience, whereby kids are bounced from school to school because their parents have to keep moving to find affordable accommodation, or because their private landlord or Housing NZ keep moving them on.
This has been going on for more than a decade, which means those young South and West Aucklanders born in the early 2000s are often struggling with a variety of social issues that make it difficult to get or hold down the apprenticeships needed to unleash a building boom now.
So those are the five feedback loops making it difficult to fuel a building boom that might deal with with unaffordable house prices and rents.
But what the are five potential ways to break this logjam and reverse those feedback loops to start lowering land prices and house-building costs, or at least stopping them from rising?
1. Impose a land tax or targeted rates on land values to pay for the infrastructure needed for housing.
The current Government’s 2009/10 Tax Working Group considered a land tax to change the incentives for land ownership, particularly of land banking. The Government thought it would drive land prices down too much and decided against it.
The Productivity Commission has just recommended councils start charging targeted rates on the land values of new developments so councils have some extra revenues to pay for the roads, railways, parks and pipelines needed to support new housing. It would encourage land bankers to develop new homes and break the funding Catch 22 that is currently stopping growth councils like the Auckland Council from opening up new land for development.
2. The Government could pledge to build 5,000 houses a year in Auckland for the next 10 years.
The Government and the Auckland Council are the largest land owners in Auckland and have plenty of land they could build houses on.
If the Government was to pledge to use its lightly geared balance sheet and its land to flood the market with supply, that would convince land owners that easy and endless capital gains on bare land are no longer a sure thing.
It would also have the ‘Christchurch effect’ of adding supply to match demand in a way that would at least stop prices from rising and allow wages to start catching up with house prices.
The Government has the borrowing capacity and the procurement scale to order such a pipeline of house building that might encourage many ‘factory’ home builders to create the scale needed to start lowering building costs and improving the building industry’s woeful productivity.
Some Government politicians worry that any short term drop in the market would force the Government to recognise losses on its land values, but that is short-term thinking for a Government with a multi-generation time horizon and a highly rated borrowing capacity.
3. The Government could impose a stamp duty on foreign buyers to reset expectations
The British Columbia Government did this last year and had an immediate effect on rapidly rising house prices Vancouver, while similar moves to ramp up existing stamp duties on foreign buyers in New South Wales and Victoria have also had a dampening effect.
Former Prime Minister John Key said previously the Government could consider it if necessary. It would reset expectations and suck some of the demand out of the demand/supply equation.
If the foreign buyer component is as low as some in the Government say, it would not have a major impact and would not hurt that many buyers.
4. Slow down the landlord borrowing that is pumping up prices and rents
The Reserve Bank could be allowed to limit debt to income multiples for landlord mortgages to the level of 4.5 times income, which is the threshold that the Bank of England used. Most mortgages have been lent in recent years at over six times income and bank executives have said many loans to landlords are being done at over nine times income.
Cash buyers have been active in recent months, but removing the leveraged component from buyers would take some of the juice out of the demand that has pushed prices to stratospheric levels.
5. The Government could enable short-term worker accommodation and incentivise apprentices
One of the reasons Christchurch was able to rapidly ramp up house building was the quick creation of worker accommodation complexes. The Government helped provide some of these and provided the land for others.
It could do the same in Auckland, and could also help pay employers an upfront or lump sum grant to encourage them to take on apprentices so they can ramp up to supply the 15,000 houses a year needed in Auckland. New Zealand has 91,000 young people who are not in education, employment or training.
Last year less than 10,000 houses were consented and less than 8,000 were built as some developers delayed using their consents and construction times blew out.