Opinion: Houston, we have a (housing affordability) problem

By Hugh Pavletich The Christchurch New Zealand based architect Peter Beaven (now nearing a surprisingly sprightly 85 years), is a South Island identity, who over many decades has been a regular commentator on urban issues and an enthusiastic promoter of inner city living. John McCrone in a recent The Press article “The Inner City Conundrum” airs Mr Beaven’s views on inner city living and the leaky homes issue. His views (with other “inner city” enthusiasts) have had considerable influence on the local scene. Mr Beaven (a “social engineer” at heart, a common and often amusing affliction of the profession of architecture) is very keen on the idea, that people lives would be happier, if they could “connect” by living in dense inner city developments, rather than living in the suburbs. That reputable international research (and here)  proves otherwise, is beside the point. Unfortunately, it has not occurred to Mr Beaven and importantly The Press writer Mr McCrone, that the leaky home problem is a systemic one and a regulatory failure at both the national and local levels in particular. The Court of Appeal made this  clear with its recent North Shore Council decision (New Zealand Herald - Anne Gibson report). Mr McCrone and his fellow journalists throughout New Zealand, would be well advised to research and report on how the Building Industry Authority (BIA) and the individuals involved in particular got it so wrong and why, and how they succumbed to the commercial pressures to allow these obviously shoddy building methods and behavior in to the system. And further to this, ascertain the responses at the time of local authorities, via their lobby group Local Government New Zealand (LGNZ) and of course the Institute of Architects (NZIA) and Institution of Professional Engineers (IPENZ) through this process. Those with experience in the industry are acutely aware of the nonsense that went on. After all, Canada had already been through the “leaky home” experience. The Auckland architect Kevin Clarke in a recent New Zealand Herald article “ Govt can't escape leaky homes blame” summed it up when he stated –

“The leaky building epidemic did not happen by accident. It was primarily caused by government mismanagement over more than a decade”.

Within The Press article, Mr  Beaven provides his perspective on how the leaky homes problems came about and follows up with vague ideas on what he sees as the solutions required. Mr Beaven has had much experience now of leaky homes, as he has been the designer of many inner city dense ones in Christchurch. As he states, he is now a poor man because of these failures and is not prepared to have any further involvement in their design. He is understandably, particularly sensitive on the issue of “site inspections”. As is the case with most architects, Mr Beaven’s understanding of urban and development / construction economics is not impressive. Little wonder his suggested policy prescriptions are all over the place. The Annual Demographia International Housing Affordability Surveys have repeatedly illustrated for the past six years, the core problems of our major urban markets in New Zealand. This year’s 6th Edition, covering 272 urban markets of the Anglo world, shows that Christchurch, with a gross annual median household Income of $52,100 and a median house price of $319,200 (September Quarter 2009 data) had a Median Multiple (median house price divided by annual income) of 6.1. This 6.1 Median Multiple is rated “severely unaffordable” and well outside the performance of a normal market, where housing should not exceed 3.0 times annual income. It is clear that too many other architects and the staff of The Press and the Christchurch City Council, do not understand the significance and importantly, the consequences of this. On the Welcome Page of my website Performance Urban Planning, I clearly define the characteristics of a normal and affordable urban market -

“For metropolitan areas to rate as ‘affordable’ and ensure that housing bubbles are not triggered, housing prices should not exceed three times gross annual household incomes. To allow this to occur, new starter housing of an acceptable quality to the purchasers, with associated commercial and industrial development, must be allowed to be provided on the urban fringes at 2.5 times the gross annual median household income of that urban market. The fringe is the only supply and inflation vent for an urban market. The critically important Development Ratio’s for this new fringe starter housing should be 17 to 23% serviced lot / section cost – the balance the actual housing construction. Ideally through a normal building cycle, the Median Multiple should move from a Floor Multiple of 2.3 through a Swing Multiple of 2.5 to a Ceiling Multiple of 2.7 – to ensure maximum stability and optimal medium and long term performance of the residential construction sector.”

Very basic stuff indeed for most people – and I make no apology for the repetition. This “repetition” unfortunately appears necessary, as it is clear  Mr Beaven and The Press writer Mr McCrone have yet to appreciate the significance of these basic structural realities. Affordable solutions The well known property industry economist Rodney Dickens recently reviewed this year’s Demographia Survey and the solutions proposed to restore housing affordability, within “Is a solution in the wings?”. He provided links to fringe new starter housing in affordable North American markets. Christchurch with a median household income of $52,100, house price median should not be exceeding $156,300 (not the astronomical September Qtr ’09 figure of $319,200) and new starter house and land packages on the urban fringe, should be going in at a Median Multiple of 2.5 or around $130,250. Christchurch fringe sections / lots (if one can find them) cost near double this. Simply because the Christchurch City Council artificially strangles the normal supply of them. The Christchurch City Council is simply in a pickle with its infrastructure financing and management. Financing unnecessary bureaucratic growth has been the real game – thanks in large measure to docile governance and a lack of real media interest. To hide these failures, it employs the Orwellian term “smart growth” (which in reality is “no growth”) or forced urban consolidation, to mislead the media and public, that starving fringe land supply and artificially creating housing bubbles is a good idea. The reality is of course that New Zealand has oodles of land supply for normal urban growth requirments. New Zealand has had near 30 years of this “playtime planning” nonsense, while the United Kingdom has experienced 60 years of it. Little wonder the New Zealand residential construction performance has been degraded, to the extent we are currently paying double what we should be per square metre. The British are paying some four times as much. I covered this issue within an article two years ago “How Urban Planning Degrades Housing Productivity. Increase prices? Running true to form as an architect, Mr Beaven within The Press article has obviously convinced himself that the “core problem” is that inner city apartments do not cost enough. In essence he states that they are “too cheap” at $250,000 to $300,000 and that if they were cranked up by another $150,000 to something north of $400,000, well……. somehow this would solve the problem. He is to be commended for being “straight up” with his perspective of the numbers. Assuming that these “shoebox” inner city apartments are 100 square metres – Mr Beaven is obviously of the view that all up development costs per square metre of $2,500 to $3,000 per square metre are not adequate and that they really need to be at $4,000 per square metre. Or possibly he has the “British shoeboxes” of which he is so fond of in mind. If this is the case, he must be of the view that $5,260 per square metre  is required to solve the problem. The average size now of a new residential build in Britain is 76 square metres (and falling) and the average age of a first home buyer is 38 years (according to UK Shelter). Britain’s annual build rate per thousand population at 1.6 (California an appalling  1 / 1000 during 2009) is a shocker and well below normal replacement. If New Zealand was building at the current British rate, just 6,800 new residential builds would be put in place on an annual basis. Not enough new building According to Statistics New Zealand information, the annual volume of residential consents is currently running at around a paltry 15,000 units and with its population of about 4.360 million, this represents an annual new residential consenting rate of about 3.44 per 1000 population – way below where it should be. This is simply because local authorities, such as the Christchurch City Council, currently do not allow affordable  housing of an acceptable quality to be built. To allow for normal (a) replacement (b) population growth (c) reducing household sizes with increasing affluence (where second homes are required as well) between 25,000 to 35,000 new units should be consented annually. Local authority mismanagement is currently suppressing the residential construction sector production to about half speed. Houston we have a problem Rather surprisingly, The Press writer  did not draw the veteran architect’s  attention to the latest Houston Association of Realtors Monthly Report, where in the month of February the median family home sales price was $US147,000, with the median price for a townhouse / condominium being $US128,000. Condominium / townhouses in Houston are of course substantially larger than their British and New Zealand counterparts. It seems likely the total development costs of these are well below $US1,000 a metre – possibly in the order of $US700 per square metre all up (land and building). I was in Houston a couple of years back as part of a housing study tour. At that stage, 235 square metre new fringe starter housing on 700 square metre lots, was being put in place for $US140,000. These comprised a double garage, 4 bedroom, master with ensuite, separate dining room and ducted air conditioning. The serviced lot cost was $US30,000 and the actual housing construction cost $US110,000. The construction cost for the 235 square metre house worked out at $US468 per square metre – all up development costs (land and building) for the 235 square metre house with 700 square metre lot - $US595. Manufactured housing of 160 square metres on large lots was being put in place for $US73,000 - $53,000 for the manufactured house and around $US20,000 for the serviced lot. $US331 per square metre manufactured unit construction - $US456 per square metre all up (land and manufactured house). And they don’t leak Mr Beaven. This crystal clear evidence is staring us in the face. No wonder young Texas families with their mortgages of around $US130,000 (and likely often much less) filled the cruise ships leaving Galveston through the Caribbean. I was pleasantly surprised just how relaxed and tolerant people are in Houston, a dynamic city of 5.8 million where near 90 languages are spoken. Their counterparts of the tiny 360,000 population rural service city Christchurch, New Zealand (6.2 percent the Houston population), with their grossly excessive mortgages and generally poor quality housing, would be lucky to see the beach at Sumner – if they could afford the bus fare or gas to get there. On the “tolerance front” and to digress for a moment, I will never forget the experience of an Albanian taxi driver in Houston, who’s English was poor and knowledge of Houston’s streets was pretty much on a par with the writers Albanian language skills! The hotel clerk went out of her way to run a Google map off the computer and patiently went through it with the taxi driver, so he  would more likely get us to the destination. He did. How Houstonians responded to the New Orleans Hurricane Katrina disaster, was another humbling and instructive experience in human decency and generosity. It is disappointing both Mr McCrone and Mr Beaven didn’t check out the residential development performance of the affordable North American urban markets, identified within the Annual Demographia Survey’s, prior to rushing in to print. There are 103 affordable North American markets identified within this year’s Demographia Survey – 98 in the United States and 5 in Canada. Atlanta, Dallas – Fort Worth, Kansas City, Memphis, Minneapolis – St Paul, Tulsa, Corpus Christi, St Louis – just to name a few. Both these individuals should have also checked out the respective building industry performances of California and Texas on the United States National Association of Home Builders website. It would no doubt come as quite a shock to them that Texas (population 25 million) gets way more dense type (multi unit) development in than California (population 37 million), the “basket case” of the United States and epicenter of the Global Financial Crisis. Artificial strangulation All forms of development (whether they be inner city or suburban)  benefit in soundly governed and regulated markets, where land is at its true market value. Artificially strangling the fringe land supply and blowing land values through the roof, is massively destructive – in economic, social and environmental terms. People with an ounce of market sense (something too many economists and architects are unfortunately devoid of) would know now, that if we are to solve our systemic residential development industry problems, the political cowboy culture nonsense, with its foundation of infuriating “"sun rises in the west" research, must stop. A disciplined commercial culture must be allowed to re-emerge, with a solid foundation of sound governance and regulatory administration. We use to build affordable housing of an acceptable quality – it’s a matter of relearning how. And learning from the affordable North American markets, particularly with respect to the financing of infrastructure (Municipal Utility Districts) and zoning mechanisms. Houston is the only major city in North America with just a sprinkling of zoning but mainly deed restrictions instead. These other affordable North American markets are “zoned”. A “disciplined commercial culture” is one where a business operators major asset is its reputation. It is not a government employee or consultants scrap of compliance paper or written contract signifying nothing – as leaky home victims are currently learning the hard way. If you can’t deal with people on the strength of a handshake, they should not be dealt with. Only if they can pass that simple test, should a written contract be even considered. 'Wipe out the shysters' In an open and competitive market, where consumers are respected and provided with adequate choice and sound information, the shysters soon get wiped out. Competition is the best way – indeed the only practical way - of stimulating honest and fair dealing. This is far better than attempting the “bottom of the cliff” approach, untangling messes through the Courts, with messy Government intervention later – as the unfolding leaky homes saga is illustrating. New Zealand’s major metro housing is sitting up at a severely unaffordable  5.7 times annual household incomes overall, with near 90,000 leaky homes and a finance sector where over the past few years, 48 firms with around $6.1 billion impaired, involving 187,000 deposits, have gone to the wall as I explained recently. Within days of the release of this years Demographia Survey, the New Zealand Government announced it is starting on this path (my comments) of addressing these problems, with the Environment Minister Nick Smith’s Urban Technical Advisory Group Report due for completion March 31^st. Provided this report is sufficiently robust, it should provide the foundation, for New Zealanders to work together in getting sound solutions in place. The National Government has been constantly reminded of its political management failures in getting the Resource Management Act properly bedded in during the early 1990’s. Constructive evolutionary improvements (it’s at least a 10 year process to sort this huge mess out), can only happen in an environment where people are adequately informed of the issues to be dealt with and are allowed and encouraged to participate in working through solutions. It is to be hoped that following the release of the Environment Minister Nick Smith’s Urban Technical Advisory Group Report shortly, The Press and other media, will play their important role in encouraging community discussion in exploring workable solutions. The Press’s Fairfax colleagues in Australia are doing a good job as illustrated by this recent article by Adele Horin in the Sydney Morning Herald, in discussing some aspects of this broad issue -  "Mums and Dads adding to great Australian nightmare". Hugh Pavletich runs Performance Urban Planning