Housing Infrastructure Fund

Will the government's Housing Infrastructure Fund finally make a dent in New Zealand's housing crisis? Probably not. It has elements of being a step in the right direction but, overall, it is way too tentative and doesn't solve the real problem anyway.

The underlying problem

If houses in Auckland were as affordable as they are in the Greater Tokyo Area (the world's largest metropolis and one of a handful of truly global cities) then the median house price would be in the region of $450k - $500k.

The main reason that they are actually double that price boils down to insufficient land being made available for development. What little is available has been bid up to astronomical levels reflecting the incredibly short supply. Unfortunately a speculation bubble has also formed on top of the normal price rise in response to the short supply.

Without going into all the ins and outs, any policy response to the high price of residential housing has to deal with two, inter-related problems: (i) there aren't enough dwellings to house the population of the country and (ii) speculators will keep bidding land and dwellings up out of the reach of normal people as long as they are convinced that authorities cannot or will not make it possible for enough dwellings to be built.

If building restrictions are just lines on maps then why don't councils simply allow more building? That was the theory behind Special Housing Areas. But fast-tracking permission to develop land for housing means nothing when there is no supporting infrastructure. You simply are not allowed to even start building a house in New Zealand unless you can demonstrate that basic services can be supplied.

The fact is that councils cannot find enough funding through normal channels to build enough basic infrastructure to get ahead of the demand curve for development. This is well known to the land bankers who can rely on council funding constraints when assessing the risks of land speculation.

The Housing Infrastructure Fund

Will the HIF break this log jam? Unlikely. Some of the reasons why:

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.

Urban Development Capacity 2016: A First Look at the new National Policy Statement

The current government has struggled for years to come up with a meaningful response to the housing crisis in Auckland. The latest attempt is the issuance of a National Policy Statement ("NPS") to form part of the Resource Management Act. In effect it tells councils to get ahead of the curve in terms of ensuring enough land is available for residential and commercial development in the short, medium and long term.

At first glance what's not to like about this? Some councils are notoriously slow at rezoning land or, instead, for promoting development in areas where the market doesn't want to go. Setting councils' first priority as housing their population over the prettiness of their city is not a bad idea.

At the heart of the NPS is the requirement to ensure that sufficient "development capacity" exists to meet predicted demand. This capacity includes not only land zoned for (re-)development but also "the provision of adequate development infrastructure to support the development of the land".

It is that last bit that will cause no end of problems.

Providing infrastructure is not a function or responsibility of a council under the RMA. In fact, as far as I can tell, it isn't a statutory responsibility of a council at all. We are used to the idea that councils operate water systems and roads but, technically, they do it voluntarily. All over New Zealand you can find examples of properties that opt out of those systems and there really isn't a rule that says that councils must be the provider.

So this NPS seems to be imposing a statutory obligation on councils that doesn't currently exist.

Minister Smith placed great weight on a decision of the Supreme Court (EDS v NZ King Salmon) to legitimise the use and power of an NPS. The majority opinion certainly reinforces the power of a NPS to "over-ride" the RMA. But I suspect that he glossed over para 88 in which the Court allowed for the possibility that an NPS can be invalid or unlawful. In this particular case that possibility was never raised.

Not being a lawyer I will have to leave it to others to speculate on the validity of the NPS. But it is possible that, like Minister Smith's idea to develop housing on Crown land in Auckland already promised to others, this idea will be a non-starter.

Update 13:38:

I have had some feedback from public law experts who assure me that this is all perfectly kosher. None of the lawyers who submitted on the draft NPS raised any questions of validity. 

Strangely, I am more worried now than I was. Before, I thought the whole thing could get struck down in court; now it seems the Minister for the Environment has wide-ranging, self-granted powers to intervene directly in our councils' core business. And this process sets a precedent for further unilateral controls being imposed over local government in the future in which Parliament will have no say.