By Bernard Hickey
Auckland's housing market seems possessed by some sort of wondrous and evil magic. It just keeps on going up and nothing and no one seems able to stop it. Graeme Wheeler and Bill English must feel at times as if it is some sort of dragon scorching the earth of large parts of the economy and the Government's finances, and that it cannot be tamed.
We've all lost count of the great and the good who have told us it just cannot go on like this, that it is unsustainable, unjustifiable and will have to return to earth for a breather at some point. Like many others I have shaken my incredulous head at this unstoppable beast and wondered what it will take to put out the fire.
"This 25% increase does look unsustainable," the Finance Minister said this week after the Real Estate Institute reported surprisingly strong volume growth and house price growth in September. It has been such a common refrain of central bankers and finance ministers for more than a decade now that it's almost a waste of time reporting it.
There have been plenty of attempts to slay the dragon. The Reserve Bank is on a second round of measures to force banks to slow their lending to home buyers. The first round in 2013 had some initial impact, but also unleashed plenty of collateral damage in the regions and for first home buyers. The bank then put up interest rates by 100 basis points in 2014, at least partly try to cool Auckland's house price inflation. It has since had to unwind almost all of that.
Mr Wheeler murmured again this week about how Auckland's housing market was an influence on his thinking on interest rates, which is a change in tone from his comments over the last year. Economists interpreted it as putting a floor under the Official Cash Rate to avoid pumping more fuel into the dragon's mouth.
The Government has also tried regularly over the last three years to try to dampen the fire, introducing Special Housing Areas legislation to try to nudge along new housing supply, imposing the new two year 'bright line' test to toughen up its existing capital gains tax on speculators, and even forcing non-residents to say exactly who they are when buying.
All, it appears, to no avail. Let's not forget that Auckland's median house price has risen 83% since February 2009 and rose another 2.5% in the month of September alone. It has risen 35% AFTER the Reserve Bank put up interest rates and restricted high Loan to Value Ratio lending and after the introduction of Special Housing Areas.
John Key assured us in August that things were cooling down and the Government's efforts to increase housing supply and tighten the tax laws meant the situation was under control. Nick Smith regularly tells us housing supply is surging into the market. Everyone thought the 2008 downturn had ended Auckland's exceptional performance and look how that turned out.
All these assurances from economic policy makers that they have Auckland housing covered have become a giant Tui ad hanging from the Sky Tower: yeah right!
It clearly is still out of control, and not just for this month or this year, but for decades to come if the noises coming out of Auckland's planning process are anything to go by.
Consider this little gem. At current natural population growth rates and migration rates, Auckland's population is expected by its planners to grow by another one million by 2040. That would require another 400,000 houses to be built over the next 25 years, yet the current settings in the Auckland Council's new Unitary Plan are likely to see just 183,000 houses built at the very most. Some of the forecasts suggest considerably less than that can be built. And remember there is already a shortage of 25,000 houses. That would mean a shortage of over 200,000 homes by 2040.
That's according to the so-called 'Topic 13' forecasts being done at the moment for the Independent Hearings Panel on the various proposals to build both outside the old Metropolitan Urban Limit and to build more densely inside the city boundaries. There are simply too many restrictions on the types and locations of buildings that can be built, even under the most recent more loose proposals on housing density put forward by the Council to the Panel in recent months.
The restrictions are legion, including on apartment sizes, balconies, building heights, building densities and carparks. There are also restrictions on the heights of buildings in the so-called volcanic 'view shafts' that fan out from Auckland's cones such as Mt Eden, Mt Hobson and Mt Wellington. These sorts of restrictions means it is impossible to build the many tall residential towers along the likes of Ponsonby Rd, Jervois Rd, Remuera Rd, Mt Eden Rd and Parnell Rise that would be needed to house the coming million. One study put the economic cost of the Mt Eden view shaft alone at NZ$440 million.
Towers along these ridges would avoid blocking the sea views of those people living on the flanks of these suburbs and would connect with the main arterial road, bus and rail routes already in place. But they are currently impossible from a regulatory and (most importantly) political view. The solitary towers currently on Jervois Rd and Remuera Rd are testament to that. No Mayor or Councillor would risk allowing more of these towers to sprout yet that is exactly what is needed.
So what would happen if nothing changed to the current city planning, tax and migration settings?. That includes the lack of a long term capital gains tax and the bi-partisan target of 50,000 new permanent migrant approvals every year.
The old saying is the definition of madness is trying the same thing over and over again and expecting some different outcome. So what would happen to house prices if nothing changed? That's aside from the current tinkering by the Reserve Bank and Government since 2012, which coincided with another 35% rise in house prices.
House price inflation averaged over 7% per year in Auckland over the last decade, while average wage growth has averaged just over 2%. That doubled the house price to income multiple in Auckland to 10. If those sort of growth rates continued through to 2040 because of continued high migration and chronic under-building, then Auckland's median house price would be NZ$3.4 million and the house price to income multiple would be over 23. To service the debt on that sort of house price with current interest rates of 4.5%, a household would have to spend 110% of its income on interest payments. Or the interest rate would have to be 2%.
Clearly that's not sustainable, but we would have said the same thing a decade ago of a median house price of NZ$771,000 and a price to income multiple of 10. Yet here we are with exactly that.
What's needed is some truly blue sky thinking about Auckland housing, including some coordination around migration and planning rules to limit the former and unleash the latter, or preferably some combination of both.
Yet where is the political will to debate a genuine attempt to slay the dragon? Until we see a mayor or a cabinet minister propose the likes of a lower permanent resident target or the removal of those view shafts then we can look forward to many more of patches of economic scorched earth, including unnecessary interest rate hikes and the Government spending NZ$2 billion a year subsidising 60% of rental housing.
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A version of this article first appeared in the Herald on Sunday. It is here with permission.
25 Comments
Here goes Bernard.
What about taking away the deductability of interest as a business expense and putting GST on interest and rent.
GST is supposed to be a goods AND services tax after all. Rent and interest are services. At the moment GST selectively disincentivises producers as against rentiers.
This is a fundamental change and would need a tax reduction elsewhere to compensate, plus there would be unintended consequences (not getting re-elected for the next 20 years, for instance), but it seems a plausible solution.
Don't cha think it's just a bit premature to judge the effect of rules that are only just being implemented? While I totally agree with the philosophy of using a mouse to sink a boat, you probably need to at least let the other animals on first, then wait for the mouse to get on before observing the impact of said mouse.
I said it before, when the rules were first announced, you wont notice the impact, until Christmas.
'What's needed is some truly blue sky thinking about Auckland housing, including some coordination around migration and planning rules to limit the former and unleash the latter, or preferably some combination of both.'
That penultimate paragraph says it all.
Plan as much as you like but migration is the answer and it can start to be fixed at the stroke of a pen with a little bit of help on the 'funny munny' side.
No one in Auckland cares about anywhere else in NZ. If they did, they might see some innovative approaches elsewhere. Here in Queenstown, the Council has got rid of reserve contributions in existing urban areas, already has discounts for multi unit development, has freed up densities, got rid of minimum balcony requirements etc. Not necessarily silver bullets but a good start, and at least the Council here is doing things, Auckland just seems to talk and publish reports.
I agree.
The government has sat on its hands on the migration issue and not been willing to budge. Yes it is addressing some of the longer term issues but in the meantime the bubble just blows bigger.
We could have had lower interest rates & a lower NZD had the excess demand from migration not been there.
The ball is in the Governments court. It could have managed the 12 month rolling migration rate to keep migration at a rate NZ can handle. Best we can hope for now is that the Government acts to do so and manages it so that the nominal house prices go sideways (real prices down) for a long period rather than crashing.
Personally I'd rather the RBNZ be given the migration rate as a macroprudential tool. The government has shown that it is incompetent in managing it.
Bernard there have been many solutions discussed here before that the Government won't go anywhere near, and a few that can be copied from elsewhere. Requirement to be at least a resident here before able to buy residential property (TPP be blowed), rent controls to stop the taxpayer subsidising unaffordable rents based on capital value, crack down on money laundering through property investment, tax the sale of any home that is not the family home at full business rates, legislate against land banking and so on. No Government has been interested in doing the really hard things because the money (as opposed to the people, who might actually benefit) starts to cry foul. I doubt that the pollies will grow a set any time in the near future, but good luck anyway.
This also goes back to HC and MC, ie as long as ppl think they are making money they are spending which keeps up the Govn tax income...ie they were afraid to pop the bubble before it got out of hand. The problem is now its about the only way ppl are making money and that means losing votes. BTW can individuals use the TPP to sue our Govn? I didnt think that was allowed/possible?
Land banking can be mitigated by a land tax by the voter wont vote for it. Indeed I find it interesting that we the voter want more and more free stuff but wont pay for it via tax.
Kind of retarded IMHO.
It is beyond me how housing prices in a country with a population density comparable to the Sahara desert can skyrocket like they do in Auckland. There is only one reasonable explanation for this: there is a deliberate strategy behind it.
If the powers that be seriously wanted to stop the Auckland housing bubble and redirect the flow of migrants to other parts of the country, there's an easy way to do it:
1) Create a special economic zone somewhere in the middle between Auckland and Wellington
2) Establish a world class communication and transportation infrastructure in that zone
3) Provide tax incentives for local and international companies to settle there
Since a second international airport on the North Island wouldn't hurt purely from a redundancy perspective, include that in 2). And when I'm talking about tax incentives, i mean a reduction of 50% or more.
New Zealand as a whole would greatly benefit from such a long term strategy. I have seen this work splendidly in several countries, including Switzerland, where I'm originally from. However, it's a long term strategy, and that's where the problem starts with short sighted NZ politicians.
New Zealand relies far too heavily on agricultural exports - normally, that's something third world countries do. Hence it's about time the government comes up with strategies to strengthen the other sectors and reduce the debilitating cost of housing at the same time.
The (Tory) home secretary in the UK gave a speech about mass immigration a few weeks ago after record immigration figures (which they don't have total control over due to the EU).
http://www.bbc.co.uk/news/uk-politics-34450887
The key points were that mass immigration has no net economic benefit, makes a cohesive society impossible and makes it very hard for infrastructure like housing, schools, roads and hospitals to cope and that there is no case in the national interest for it.
Now here's the kicker. Per capita immigration to New Zealand is running around THREE times higher than the UK. But the National government tell us to bend over and take some more, because at the end of the day its good for "New Zealand". While the housing and transport are woefully inadequate to cope and social cohesion is thrown out the window.
It seems that its more fashionable to scream racist at each other and to play partisan politics than to discuss sustainable growth, to plan properly for the future and ensure a good standard of living for more than a select few of the citizens.
About 10 years ago decided that prices were going to rise - fundamentally because planning controls were increasingly restricting opportunity for development in the right places. At the time most people were blaming anything/everything else (tax, landlords etc.etc.). Thankfully I put my money where my mouth was.
The PAUP is probably best hope to provide more affordable housing - but the days of relatively big/cheap sections for freestanding houses close to the CBD are gone forever.
(Recycled from almost exactly one year ago, see http://waymad.blogspot.co.nz/search/label/Housing).
TLA's are oblivious to two aspects: UOMI and CG created by lines on maps
There are, RMA reforms apart, two lines of action available to start to effect the needed changes.
1 - impose a UOMI calculation and reporting regime on Councils. At present (and quite apart from the injection by TLA's of direct cost into e.g. land subdivision via DC's and other levies) there is no measurement of the economic costs TLA's impose by the injection of Time into processes. Most land development involves significant, early costs, and rather extended timeframes. So, as a thought experiment, a land purchase of $10M on Day 1 of a seven-year process, at a commercial WACC of 10%, is going to double that single cost by the time the seven years are up. Land $10M, interest on that another $10M.
TLA's are oblivious to this rather basic Time=Money equation.
It's time they were made to think it through, measure it, report it and (another delicious thought) be taxed on it.
2 - It is a truth universally acknowledged that a squiggle on a zoning map creates CG out of thin air for owners on the right side of said squiggle. The Productivity Commission puts the ratio (measured a few clicks either side of a MUL/RUB) at 8 to 10 times. So a rural raw land price of $50K/ha transmogrifies into $500K/ha.
Cui bono?
- The landowner on the urban side of the RUB.
- Via revaluations, sales, hearsay and pure osmosis, every existing landowner in (in order) the vicinity, the suburb, the city gets an unearned CG kick on the land value alone.
- The Council, via rates levied on the now increased values
Who pays?
- FHB's
- To the extent that value increases factor into rates and then rents, Renters
Who mostly comprises FHB's and renters? The lower deciles.
So, a Re-distribution of said CG would seem to be in order. But as a CGT on property-holders seems politically out of the question, complex, easily avoidable (e.g. by never selling), why not head to the Source of the CG: the TLA map-spigglers?
Tax away, from the Councils who create it, the CG their MUL's, RUB's and Zones create.
- Make it a Deemed value, using e.g. a Productivity Commish-style annual survey of current market rates to avoid the 'realised increment' loophole on a CGT. So, those Volcanic View Shafts should be a nice little earner.
- Use the taxed-away CG to pursue policy that actually assists FHB's: multi-proof consented factory builds would be a good and do-able start.
This action will, and possibly quite rapidly, significantly alter the incentive structures around TLA's, their Plannerators and Zonerizers, and several useful outcomes might even come to pass:
- Zones, MUL's, RUB's cease to be attractive and the drawers-up of these economic distortions - the hundreds of planners and consultants - could be released to real productive work: factory builds for FHB's for example.
- Environmental effects can be handled by the RMA - that's why it is worded the way it is. A Build-Anywhere-Appropriate ethic would soon arise, and drive away the current 'Build-Anywhere-We-Unelected-Staffers-Tell-You-To schtick.
- The judicious re-distribution of the Confiscated Council-Generated CG's (perhaps we need a new acronym: CCGCG?) to Worthy Causes would soon arise: politicians are if nothing else, expert at sniffing out the best electoral results for a given dollar.
- The taxed Councils, meanwhile, would after the initial shock passed, quickly realise that rating so as to penalise the land-bankers who are sitting on perfectly buildable land, to recover that tax just levied, could be a useful spur to getting it built on....
Now this is all just a rough draft, but what's not to like in the general concept?
Read the latest from Michael Reddell about Auckland housing targets.
Note the last paragraph
"(And, of course, we could get to the goal – and beyond – much more quickly if the target rates of inward non-citizen migration – being reviewed by Cabinet now – were materially reduced. That could be done quickly and easily – and it has worked previously. It might buy time for a considered reassessment of the planning rules, in a rather less-fevered, less threatening, environment.)"
Why should we accept continued growth and pressures on our infrastructure? We don't seem to be getting a whole lot in return?
Tauranga and Whangarei ports should take over Auckland ort business - main Auckland businesses are now service providers, anyway....port can be phased out, ships are getting too big for the gulf, now, anyway.
Invest in rail to and from Tauranga and Whangarei, those centres will grow, and good and fast rail connections will mean people could choose to live there and commute to Auckland (if required).
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I think the blue sky thinking should really be promoting the regions, instead of getting denser and denser suburbs in Auckland.
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You say that the property market is unaffected by the new rules. How come then, that it is widely reported that the Chinese buyers have disappeared, that auction rates are way down and that Bayleys itself is saying that there is a cooling in the market? They say that September was a busy month because people were getting in before the new rules. Maybe investors' strategy remains unchanged, but it's the traders who hopefully will be affected. Also the people who were onselling after a few days!! One property I looked at had been sold three time since April but had the same settlement date! Very fishy. No Chinese buyers, much lower auction rates says something is changing. We can only hope.
What would happen if nothing changed in planning, tax and migration settings? Its simple. The highly arbitrary population projections on which expenditure city plans are based won't materialise. That doesn't just mean international migration slowing down. It means that the exodus of Aucklanders out of Auckland that is currently underway (and has been going on since 1986, by the way) will continue to gather pace.
At that stage splendid new investments in large scale infrastructure will begin to look a bit sick. and so will the city's finances.
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