Monday, 7 November 2016

Does the NPS mean Affordable Housing?

The National Policy Statement that the government recently inserted into the RMA is designed to ensure our cities grow efficiently and effectively. The one thing it does not promise is affordable housing. Not in so many words anyway. So can we expect house prices to come back to sane levels? In most places the NPS will either be overkill or contribute to holding prices down. In Auckland it may be too late; we may need some other circuit-breaker before this measure has any effect.

As a matter of definition, affordability is an attribute of the whole market. Demographia defines housing affordability as a market where the median house costs three times the median household income. In Auckland that ratio is currently about 13. The problems caused by unaffordable housing do not go away when authorities insert a small number of "affordable" houses into a market (usually only affordable when compared to what everyone else has to pay). So we should be looking at the housing market as a whole.

Those eye-watering house prices in Auckland are not the fault of a taste for McMansions or inefficient construction or even a duopoly in the building supplies industry. It is purely because of how much it costs to buy developable land off someone who already owns it. A developer cannot survey sections, build streets and footpaths let alone sell sections for building without first buying a block of bare land. The problem in New Zealand is that there isn't very much of that land available so landowners in some markets have learnt they can hold out for a very high price for their land. Hold on, you say, there is open land as far as the eye can see. That is true but one property right you don't have is to convert your land for another purpose without the express permission of your local council. They specify very small areas where land is allowed to be converted from rural to urban uses. Unsurprisingly landowners within those tiny areas have discovered they hold all the market power and are happy to refuse to sell until they are offered top dollar. This is what the NPS might be trying to break.'

It would be great if the NPS did break that practice but there are some very high barriers:

  • existing expectations - whether farmers or professional land-bankers the current owners have deeply rooted expectations of financial return
  • the net is still not spread wide enough - Auckland has to have almost four years of developable land available at any one time; if not enough landowners agree to sell in any one year then the backlog will get higher and prices will be supported
  • demand will remain low - this is counter-intuitive but true. As land prices rise the cost of any house built on a section rises and the number of people who can afford them get fewer. Although there is a real demand for more houses out in the real world the actual size of the development and construction market is way smaller. This market is clearing and sustainable at current levels and it doesn't really care what happens to those who are priced out.
The chances are that both insufficient demand for bare land and high expectations among sellers will conspire to keep prices high.

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