Do we need more regulation in the housing market? Probably not -- existing regulation may be inflaming the problem of lack of supply

Auckland’s median house price hit a new high in June - $755,000 - reinforcing the problems of demand exceeding supply, and leading to statements about unaffordability. The aim is enabling New Zealanders to live the Kiwi dream of house ownership. It could be argued, however, that there is already too much regulation in the housing market, and that the unintended consequences are inflaming the problem.


Building costs are high in New Zealand, and the typical Auckland house project wastes $100K. Researchers from Auckland University of Technology’s Centre for the Urban Built Environment have calculated that the average Auckland house price of $828,000 (including the section) was associated with $31,000 worth of materials being dumped and $74,000 in wasted labour. Ironically the builder makes $7500 profit on the waste because the project runs over time…. Jeff Seadon, Senior Research Fellow at AUT, suggests that 13% of wasted build budget would be similar throughout the country. This wastage comes on top of compliance and consent costs.


A report from BRANZ (Building Research Association New Zealand) in 2008 indicated that ‘Compliance costs such as building code changes, stricter health and safety, and more consent documentation and council delays have added significantly to new housing costs in recent years, amounting to about 16% over 5 years’. Scaffolding regulations alone added over $4500 to a standard build.


An update on pricing produced by BRANZ in 2013 identified costs for greenfield projects in North Shore as $93,332 per accommodation unit; for Waikato and Hawke’s Bay they were over $70,000. The report also showed that the average floor area for new houses had increased from just under 140 sqm in 1990 to approximately 215 sqm in 2013; a 56% rise. In addition, between 2008 and 2013, the labour index gained 12.6% and the materials index gained 11.7%. In contrast, profits decreased to approximately 7% from between 8 and 10% from 1994 to 2008.


BRANZ highlighted the results from a report from the Prime Minister’s Department (House Price Unit 2008) which identified the primary drivers of housing price rises as long-term structural factors (constrained land supply, increased regulation, population growth, tax advantages of housing investment) rather than speculation by investors. Recommendations for reducing growth in new housing prices included an increase in the land supply and streamlining of regulatory processes (RMA and the building consent).


These are all good ideas, and are trying to address the fundamental laws of supply and demand, but are focussing on only one part of the equation. Shamubeel Eaqub, Principal Economist at the New Zealand Institute of Economic Research, has highlighted several of the problems in housing with such catchy titles as ‘Generation Rent’ but it is his ‘Zombie Town’ label that should be the focus of attention. What are we doing to increase the demand for housing in areas called ‘not Auckland’?


Infrastructure is a big part of the attraction or disincentive. New highways have, for instance, enabled people to live north and south of the metropolis and commute. More is needed to attract people to rural towns and broadband is vital in this.

University of Waikato agribusiness student Glenn Weenink has investigated the benefits of rural broadband. Research overseas has linked the availability of broadband internet services to growth in population and employment in areas of lower population density. “As well as ease of education and doing business,” says Mr Weenink, “potentially, the most important economic benefit to rural communities as a result of the Rural Broadband Initiative is bringing together social and economic returns.”


Chief Economist at Trulia Real Estate Dr Jed Kolko suggests that employment growth is the economic response which leads to population growth in rural areas. His research has shown that employment growth of 6.4% was achieved in areas where broadband became available between 1999 and 2006, and remained a positive relationship above level of population growth over the same period. Increased property and ratings values were then expected because the desirability of rural lifestyles increases as a result of broadband adoption.


“The New Zealand Rural Band Initiative is a something of an incomplete solution,” said Mr Weenink. “Given what Australia is spending on rural infrastructure, New Zealand should be improving the Rural Broadband offering to ensure the benefits are enjoyed by all rural communities.”


Mr Eaqub has suggested concentrating resources on rural areas that have some hope of growth whilst allowing some struggling towns to close. The Government’s new regional research centres, co-funded by regional businesses, might be part of the rekindling in some areas, but only three centres have been mooted so far.

And creating vibrant rural economies based on more than the milk price will take time.


But so will fixing the Auckland housing market.


In his July 2014 discussion paper on housing affordability, Mr Eaqub suggested various reforms along the lines recommended by BRANZ. He also suggested reform of lending regulations, removal of tax advantages of real estate investments over other investments, and reform of rental policies.


Mortgages have been tightened, and the decrease in the OCR has resulted in a drop in mortgage rates, but borrowing money in New Zealand is still more expensive than in many countries from where house buyers are coming.


Capital gains tax on real estate investment has been debated for some time, but without clarity on effect. Eurostat gives New Zealand’s home ownership rate as 64.8%, bracketed by Australia (67%), United Kingdom (64.6%) and USA (64.5%). Australia has had a capital gains tax since 1985: 50% for Australian residents for non-personal assets owned anywhere in the world. Finder.com.au has helpful advice on how to avoid paying the tax:  ‘If you invest in property, capital gains tax (CGT) will raise its head when you're at your happiest - when you make a profit from the sale of a dwelling. But there are a couple of ways to make healthy profits from real estate and avoid paying CGT. These include extending or renovating your home and then selling it (making use of the main residence exemption explained below), buying a property through your self-managed super fund (SMSF), or renting out your home and then selling it.’ The UK has an 18 or 28% Capital Gains Tax, depending on income, and the USA is similar. Implication – Capital Gains Taxation doesn’t affect home ownership… while acknowledging that there appear to be loopholes in the system that websites can identify.


For Generation Rent, there are no easy solutions. Part of the problem is that they aren’t thinking about saving. A Nielsen Global Survey of Consumer Confidence and Spending intentions released in May this year proclaimed that ‘saving was key for most in Q1, but millennials outpaced the global averages for spending intentions’. The report identified that the spending intent for discretionary activities for respondents in the 25-29 age exceeded the global averages by as much 10%. Although the authors suggested that many of these consumers are just starting their careers and do not yet have families to support, which often give them more freedom to spend, it might be this laissez faire attitude that has caused at least some of the challenges.

A rethink of housing supply and demand, and house ownership is certainly required – but a new focus on creating demand outside Auckland, while reducing wastage, compliance and consent costs everywhere, could ultimately be cheaper and better for New Zealand than the current plan. Roading and broadband are part of the answer; so are research centres for education and innovation. Generation Rent could turn into the generation that revitalises the rural centres, banishing the concept of Zombie Towns to the twilight zone.

Comments (3)

by Katharine Moody on July 17, 2015
Katharine Moody

The report also showed that the average floor area for new houses had increased from just under 140 sqm in 1990 to approximately 215 sqm in 2013.

Not sure whether the report went on to attempt to explain this trend with respect to new builds? But my observation is that a lot of that 'growth' (in size and hence cost) has to do with developer covenants placed on greenfield subdivisions. The developers require minimum house sizes and other design elements that mean affordable homes simply cannot be built in these new subdivisions. Perfect example here;

http://www.stuff.co.nz/the-press/news/69607255/controversial-travis-coun...

A government that cared about affordable housing would outlaw such covenants to allow people to build what size fits them, as opposed to the developer and subsequently, the neighbours.


by Chris de Lisle on July 18, 2015
Chris de Lisle

Why should home ownership be the goal?

On a long term social level, if we are going to continue gravitating towards urban centres (and surely rural broadband could only alleviate that trend, not reduce it?), then a separate one story home for every family is not a sustainable way to live in the long term.

And on the short term individual level - if it is true that not saving to buy a home enables more spending on discretionary activities (and saving for other things?), then why not do that? 

by Charlie on July 19, 2015
Charlie

With the exception of Christchurch (a special case because of the earthquake) only Auckland is seeing significant house prices inflation.

Conclusion: It's purely an Auckland problem.

The city can grow upward by allowing multistory development or it can go outward by relaxing artificial boundaries. But the current council has done neither.

Solution: Get a new council.

 

 

 

 

Post new comment

You must be logged in to post a comment.