The New Zealand Initiative’s Jason Krupp argues that Nick Smith should visit Montreal to see how shifting infrastructure costs can improve housing affordability

By Jason Krupp*

In the cut and thrust of politics it was no surprise that Environment Minister Nick Smith denounced the Labour Party’s new housing policy. After all, while it is the opposition’s job to oppose government policies, it is just as much the incumbent’s job to shoot down ideas coming from across the house.

Minister Smith labelled the scheme, which would require councils to bond fund housing-related infrastructure costs and service the debt through targeted rates, “creative accounting” and “fool’s gold”. His critique was that it simply spreads the infrastructure costs, which are currently paid by developers and passed in the final price of the home, across a homeowner’s mortgage and rates bill, as opposed to just their mortgage, as is the case right now. At the end of the day, the cost is still the same. That certainly stacks up in a static, back of the envelope, sense.

But unfortunately Smith may have written off this policy before giving it some serious thought. We know it works because similar policies have made Montreal one of the most affordable cities outside of the US.

In many ways Montreal should not be an affordable place to live. Land supply is limited, since the city is based on an island, and the population has increased from about 1 million inhabitants in 2000 to just over 1.8 million today. In many ways it is the classic Auckland problem, except that it isn’t. Where Auckland’s median multiple, a measure of how many median incomes it takes to pay the median price of a house, is 8.2, Montreal comes in at a respectable 4.3.

Nor is it a fluke of the global financial crisis. Figures from the Reserve Bank of Canada show that housing costs for bungalows and condominiums largely account for the same proportion of household income as they did in the early 1990s (40%). The proportion of household income spent on two-storey homes, which tend to be in the more desirable parts of the city, rose 10 percentage to around 50% over the same period. Still this compares favourably to Toronto where households spend close to 60% of their income to live in bungalows and two-storey properties.

Mario Polèse, a Montreal-based urban economist, attributes the city’s success to three factors. The first is obvious and something New Zealand is sorely lacking: flexible building regulations. The second is a tenancy tribunal where renters can seek binding redress for any rent hikes that are not related to inflation or improvements on the property. While economists generally agree that rent controls dampen property investment and ultimately work to hurt those they’re designed to help, Montreal’s fairly loose controls may have averted worse San Francisco-style controls. Third, is that it is municipalities who pick up all infrastructure costs, and recoup this through taxes.

The effect is that house prices are automatically lower because infrastructure costs are not captured in the sale price, and since prices are low, the amount of tax aid to government is also lower. It also means the costs of infrastructure are spread over the lifetime of the assets, and not frontloaded.

But that is just the headline effect.

Polèse believes that this set up opens the construction market to new entrants. Smaller firms, for example, can take on bigger projects than they otherwise would have if they had to have the capital capacity to deal with infrastructure provision, such as potable and waste water systems. This in turn allows smaller firms to grow into bigger firms, while still fostering a highly competitive housing market, and the city gains from a wider revenue base.

This kind of set up, albeit through targeted rates, could help bridge the housing construction sector capacity gap in New Zealand, which Minister Smith has given scant attention to. Auckland Council Chief Economist Chris Parker recently noted that productivity in the construction sector has been virtually flat for 30 years, and the industry is principally made up of small firms with few economies of scales.

Twyford’s policy, while no pill for curing this ill entirely, may nudge things in the right direction. This, along with Labour’s plans to ease urban boundary and height restrictions, will go a long way to putting affordable housing within reach of everyday New Zealanders, something the Initiative has long promoted. We know it works because we’ve seen in in action, both in Montreal and in places like Houston.

Back to politics.

The National Party’s seven years in government have often been characterised by gazumping the opposition by stealing plays from their book. Let’s hope this is one of those cases, and Minister Smith’s flat out refusal to consider parts of Twyford’s housing policy is just a smoke screen while he assesses the viability of it in earnest.

Personally, I’m doubtful. To date, the last seven years have been characterised by weak piecemeal workarounds (Special Housing Areas for example), while meaningful reform of urban development policy has been trapped in the minister’s quixotic quest to reform sections 6 and 7 of the Resource Management Act (RMA). In the time it has taken to draft and shelve two versions of the RMA a workable urban national policy statement could have been draw up and implemented already.

If Minister Smith is not willing to consider new ideas, at least there are others in the political process who recognise that if the tools you have at hand haven’t solved your problem by now, it’s time to consider new tools.

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*Jason Krupp is a Research Fellow at The New Zealand Initiative, which provides a weekly column for interest.co.nz. Krupp has recently been travelling through Montreal on his 2015 research trip.