THIS JOINT ANNOUNCEMENT by Prime Minister John Key, Housing Minister Nick Smith, and Auckland Mayor Len Brown is more a parody on how Auckland Council and The Beehive ought to work together than an announcement that delivers a real solution to Auckland’s housing crisis. Why? Because their announcement is short of a solution to a multi-tiered complex problem.
I’m talking about the National-led Government’s bold announcement that it headlined: Housing supply and affordability addressed in Auckland Accord.
After the announcement Nick Smith said the Auckland Housing Accord was agreed to by he and Auckland Mayor Len Brown to urgently increase the supply and affordability of housing in Auckland.
Smith said: “This Accord will help deliver thousands of new homes for Auckland by streamlining the planning and consenting process and getting Government and Council working more closely together on housing development.” And added: “This balanced and pragmatic agreement addresses the economic risks to New Zealand’s economy of an over-heated and supply constrained Auckland housing market. It is good news for Auckland families wanting access to more affordable houses to buy and rent.”
He said the Government will introduce legislation at its Budget next week to relax Auckland’s metropolitan urban limit to enable the creation of Special Housing Areas: “The Accord sets a target of 9,000 additional residential houses being consented for in Year 1, 13,000 in Year 2, and 17,000 in Year 3. This is a huge boost on the average 3,600 homes that have been consented each year over the past four years and the 7,400 a year over the past 20 years.” For more, see Nick Smith’s statement.
But does the Nick Smith solution go far enough? And are there enough “affordable houses” among the sum total of 36,000 new homes set to be built over the next three years? No, the plan permits freedoms where only five percent of new constructions be defined as affordable homes.
Does the Accord create an opportunity though?
Well yes as mayoral candidate John Minto has pointed out land speculators and property developers are the major beneficiaries of the National Party’s ‘solution’.
Minto said: “We can expect windfall profits from today’s [Friday’s] announcement for fast-track approval of housing developments. The plan is unlikely to deliver a single affordable home.”
He noted how Auckland Mayor Len Brown made a plea for developers to provide ‘a component of affordable housing’, but that plea in real terms is founded on hope not requirement.
Minto said: “Firstly property speculators and developers should be required to pay the added value on the land rezoned for development into a council fund for affordable housing. This is what happens with overseas developments in similar countries where the ‘value uplift’ – tens of millions of dollars – is at least shared by the community rather than taken as an unearned windfall profit by the speculator/developer.”
He has a point. This National-led Government has made an unashamed practice of distributing massive packets of wealth to the most wealthy, whether via tax cuts for the rich, or providing conduits where taxpayer funds flow to private social service providers (both offshore and domestically owned) – this Government has a talent for turning a challenge into a win for its wealthy stakeholders while those caught within the vice of low socio-economic status are contained, compressed, and cast.
When you peel this Nick Smith solution policy bare it unmasks clear opportunity and flow-on benefits not for burgeoning first time home-owners but rather for property developers. You wont find a statehouse among the 36,000 new constructions. In short this Accord is a masquerade verging on a parody dressed up as a solution.
Are real solutions possible?
Before we get into this, let’s define the crisis and let’s begin stating it simply as: The cost of Auckland homes are too expensive.
It is all about supply and demand. Simply there are too few houses for the number of people and businesses wanting to buy them.
The causes are an under supply of housing stock, and an ever increasing pool of people and businesses demanding the buy homes. To stereotype the demand is risky but it goes like this: a mixed bag of home buyers mid-to-late-career professionals or established home owners wanting to cash-in on increased equity and leverage up their family home asset; those returning to New Zealand from high-valued-currency offshore economies wishing to return home to raise their families; professionals relocating to Auckland from the Capital or Christchurch; and speculators, investors, land-bankers.
Cause and Effect: With the exception of KiwiBank and TSB, the vast majority of home loans are financed by lenders and banks owned by offshore financiers. This causes a big-picture problem for New Zealand. It contributes to a current account deficit that is concerning the International Monetary Fund (IMF) where foreign debt has reached 72 percent of GDP – a staggering amount totaling NZ$150 billion. This creates the risk effect potentially pushing up interest rates for both government and home loan borrower.
Compounding the problem is the ease with which borrowers can secure loans against the forever-increasing-value of Auckland’s housing stock. Lenders know that a house with a market value of $700,000 today is likely to reach a market value of $770,000 in twelve months time. As long as the bubble does not burst, all is sweet for the lenders. But the forever upward spiral of home market values pushed opportunity of home ownership out of the reach of many.
As the New Zealand Herald reported:
Properties purchased as recently as 2011 are selling for hundreds of thousands of dollars above their valuations, despite no renovations being done. More than 50 properties in the region sold for $4 million or more in the past 12 months.
This situation stifles opportunity for those whose passion is to own their own home. It also creates an imbalance in the New Zealand domestic economy. The cumulative affect of high demand has fast transformed Auckland into a city that floats on a sea of high debt and lean equity.
Then there is the metropolitan urban limit boundaries that ring-fence Auckland within a residential territorial boundary.
This contains the supply, assuring investors and lenders that supply will not overlap demand. It gives them confidence to borrow and lend and in turn keeps demand well ahead of supply. But it places stress on the city’s infrastructure as more people move in and developers build upward.
If the metropolitan urban limit is contained, an increasing population applies stress to an already overloaded public transport system, roads suffer under a perpetual gridlock, schools bend under pressure, hospitals run huge deficits during the winter ills period as more people catch more illness off a high-density environment, and commerce is forced into lower economies of scale as, thinner margins, as the city and its people struggle to maintain the costs of their own borrowing. The extreme end of this scenario is New York City in the 1970s-80s. If mishandled, is this where Auckland could end up? A city broken down, ill, a providing a miserable existence for all.
Ack! Let’s climb out of that dark visionary hole, while accepting what Bernard Hickey said in Friday’s New Zealand Herald where: “the average price could hit the $1 million mark [up from the current $735,692] in three to four years if it continued rising at a rate of 10 per cent a year, a lack of new homes remained, migration rose, investment rates stayed at 5 per cent, and the Reserve Bank did not restrict high loan-to-valuation loans.”
While borrowers can afford to pay the mortgage, and the real estate market continues its upward hike, Auckland continues to tick along. But the cautionary tale above is real. Overseas experience suggests, if something gives, like it did in the United States in 2008, then things can go wrong very quickly. Think about a house of cards. You pull out the 2 of spades and the lot comes crashing down. And that scares the Government to its core.
The Solutions: If we consider the above, solutions must target multiple problems creating change at a pace the market can cope with while providing opportunity and sustainability for those who represent a broad socio-economic matrix.
In response to the Nick Smith Solution, John Minto insists “every development of more than 10 homes should be required to provide at least 20% as affordable homes”. He said: “Again this is typical of housing developments in similar countries overseas.”
But we should seek solutions beyond the terms of Nick Smith’s debate.
In my view a community-first response is overdue. This must be achieved through central government investment tagged to solutions that first address the needs and wants of those captured by low socio-economic status.
As Chris Trotter has argued, a political solution is required where a courageous government must implement a state housing construction programme that addresses the immediate needs of New Zealand’s poor. This would also ease the demands of limited supply, especially in the outer South and West/Nor-West precincts of the Auckland supercity. The construction projects would produce trade-led and retailer benefits, regional growth and employment opportunities similar to what Christchurch would truly experience should the government get its act together.
My view is that a state housing project must also factor in cost-benefit analyses that calculate the economic savings achieved through erasing over-crowded housing from being part of the New Zealand way. Humanitarian and economic benefits are mutual beneficiaries of progressive economics. Community stability, positive health status, improved educational outcomes, localised employment opportunity through sustainable micro-economics should all be factored into a government’s solution toolbox.
The Labour Party’s affordable housing policy extends similar benefits by increasing the housing stock supply for those preparing to enter into home ownership.
But I believe it is time the Labour Party and the Green Party analyse the benefits of shared equity solutions found within the banking sector, such as the BNZ’s total money solution where partners, siblings, parents, extended family members can tag together the shared value of savings accounts to create an equity that can be offset against debt. This has enabled thousands to enter into home ownership and to minimise their debt ratios against fluid savings.
Imagine the benefits of a Government policy that takes a practical approach to ensuring a real reduction of low-equity risk for first home buyers.
This approach does require further analysis, development, and robust costing, but, as a rudimentary idea, imagine a Government working with aspiring home owners on a shared equity plan, where government invests in the property alongside the new homeowner, the government’s contribution offset against its proportion of the asset and the home-owner’s current deposits and future compulsory Kiwi-saver savings. On a calculated scale, the government acquires a return on its investment and eases out of the equity share while the home owner’s equity grows to a proportion where debt-risk is minimal and where debt repayment is sustained.
Some will say government is not in the business of home ownership, but these times require a new mindset, where government, community, and enterprise need to advance a new way. Beyond this, the Labour Party, Green Party and New Zealand First all agree the Reserve Bank must use all the tools at its disposal to increase the proportion of money banks and lenders must have in reserve as proportioned against what is lent. This policy, should this voting block have a shot at government, will address problems associated with the current practice of low-equity loans and the ease of acquiring proportionally high-debt mortgages and credit.
But caution should also be in evidence here as the policy potentially can swing the pendulum too far the other way where banks become too risk averse, as was the case under the Muldoon years when home loans were too hard fought and hard to come by. Should that occur in 2014-17 home ownership will come at high interest rate costs and become even more the opportunity for the rich and privileged. And that would hardly be what voters would expect from a Labour-Green Government.
In a strike of irony, if a government did move too quickly to cool down the Auckland housing market, if it quenched the flame that drives demand (freely available credit) too far too soon, those who have borrowed with lean equity percentages set against high-proportioned mortgages could find the market pulled out from underneath them.
It happened in the United States. There in 2008 the market value of millions of homes sunk beneath the value of mortgages. In the US many of these people gave up. They locked their front doors. Popped their keys into an envelop and dropped it in the letterbox for the repossessors to find.
At the end of the day, what was the National-Led Government’s supposed solution really all about. Was that all they had? After five years in office? Is that all?
What PM Key and Nick Smith delivered – after striding forth to centre-stage with the unsettled duo of Auckland’s mayor and deputy looking uneasy at the rear – is far too simplistic in that it only addresses a predictable relaxation of Auckland’s metropolitan urban limit.
It has created a relaxation of containment so as to allow the market to increase supply.
Is it a start that will help? Yes, as long as that Nick Smith does’t get too excited by a Wellington-styled political points-scoring-opportunity and force his personal vision of chainsaws, emissions, and steamrollers forever free-sprawling while creating an urban existence from Meremere in the south to Ruakaka in the north. As Green Party co-leader Russel Norman said yesterday: “Building new developments a long way from the city just piles on extra transport and infrastructure costs and keeps Auckland sprawling. While the accord is a first step, no one has asked the question of who is going to build these affordable houses; that needs government leadership.”
Indeed, a real solution needs to be centrally directed. The free market cannot be relied on to deliver a practical and pragmatic response to a complex problem.
In his statement, Norman provided a link to his party’s plan: Green Party Home for Life discussion paper. It is worth checking out.
Labour’s leader David Shearer said: “This [National’s] announcement is woefully short on detail. It talks about ‘clear requirements’ for affordable housing, but is silent on how many affordable homes will be built and how much they will cost. Currently just 5 per cent of new homes built are in the affordable range. There is nothing in today’s [Friday’s] announcement that will change that.”
Labour proposes to build 10,000 affordable homes a year right across the country, and cool the housing investor market down through establishing a capital gains tax.
Regarding National, some of the more cynical amongst us may suggest the party’s private polling, via Curia and others, has revealed it is bleeding support in Auckland. Why else, they may say, would John Key suddenly appear on Campbell Live over the GCSB; why else would Transport Minister Gerry Brownlee also front on Campbell Live to talk about why he believes Aucklanders are wrong to want an inner city rail link? Why in March did Nick Smith bombastically teleport into Auckland hellbent on whacking Aucklanders into shape, where he insulted the city’s cumulative intelligence with his easy vowels and born-to-rule small-town ideas. Why when Aucklanders rejected his pomposity, causing him to return to Wellington, he fell silent for a month. So why did he return with his leader at his side if not to placate us?
In reality, why are they bothering? Because it is their job? Because they care? Because they are concerned? Because their advisors are telling them a storm is coming and no one is battening down the hatches? Because of self interest? Because the Labour Party came up with an affordable housing solution that the public thought had merit? Because this National-led Government has solutions? Take your pick. Their motivations do not matter. If they present solutions that are practical then well and good.
But this National-led Government has done little to support the sustainability of Auckland’s residential cumulative asset. However, it does appear Nick Smith’s ideological mindset harbours a reticence to address the root causes of what could be catastrophic region-wide economic collapse and the disestablishment of a progressive real estate market.
At the end of the day, without real solutions that tackle the the multi-tied root causes, what is lost is the opportunity for people to get ahead and to find a security in these insecure times. And that is unacceptable.