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Andrew Bydder: Housing crisis is all about land and how councils regulate it

OPINION: Which is worth more: a million-dollar section with a $100,000 house or just a million-dollar section? The answer is the million-dollar section and the reason is capitalisation. 

Anyone buying the section wants to put a big flash house on it, not a small, simple one. 

A $100,000 house isn't going to cut it, so the buyer will have to spend $10,000 demolishing it before building their dream home. The section was undercapitalised.

Back when I was at university, land was cheap and the guide for good capitalisation was to spend two-and-a-half times the land value on the house. A $20,000 section (millennials won't remember those) needed a 100-square-metre $50,000 building for a total property value of $70,000.

Since then, land price (I was going to write value, but in real terms, the value hasn't changed) has gone up faster than incomes and inflation. Capitalisation rates are approaching one to one. At a glance, this may suggest smaller, cheaper houses are needed, but the reverse is true. The $400,000 entry-level section in Rototuna needs a 200-square-metre $400,000 house to justify the land cost. According to analysts from PWC accountants, that is nearly double Hamilton's affordability point.

The current housing crisis is actually a land crisis. Yet New Zealand has one of the lowest opulation densities in the world, so there is more than enough land. What limits the land supply for house ections is the councils.

Rules on subdivisions, property developments, city boundaries and zones are set by council planners. The process is complicated, expensive, long-winded and risky. Hamilton City Council's own figures show it takes one to five years to get through it from application (when most of the background work has already been done) to issuing titles. This means only large, well-funded developers get to make the big bucks out of land.

The council's Futureproof Housing and Business Market Indicators Quarterly Monitoring Report September 2017 (that's a mouthful of a title and I wonder if councillors actually read it) states "regulations may be constraining development capacity and adding up to $113,500 to the value of a typical section in the Hamilton area".

The National government generally tried leaving it up to the market (which is just people like you and me) to sort it out. The free market works extremely well, but very few markets are truly free, and council regulations make the land market inefficient. National recognised councils as the problem and tried to get around parts of the planning process by creating Special Housing Areas, which are now a key part of Labour's Kiwibuild programme.

National needed to do much more, but it did arrange the $280 million infrastructure loan to Hamilton, because developers simply were not able to take the investment risk to kickstart the Peacocke suburb. The first significant project, Amberfield, has just been pitched to council, which will eventually provide 862 sections over seven years.

But since committing to the project, the owners now face a doubling of development contributions and a new government intent on cutting immigration. Interest rates will probably go up over that time frame, and the resource consent process has only just begun. The risks are real, the stakes are high. Uncertainty may put others off – in fact, several leading developers have already said they will cut back. The land shortage will continue, prices will rise and affordability will worsen.

Builders have turned in droves to urban intensification, with 54 per cent of new builds in the last year being infill housing. This is where affordable homes are being created as the land value of an existing section is being divided amongst two or more townhouses and apartments. Much of it has stemmed from a handful of basic rule changes in the council's district plan after unpaid lobbying by me and other groups. But many of my proposals were not included, and the trouble developers are currently having with these types of projects could have been avoided.

I recently submitted on the Waikato District Plan, which is currently under review. The draft proposed plan has been released for further consultation (you can see it on the WDC website home page). I am relieved to note they have included three of my recommendations (I will write a column on the ridiculous arguments I have had over what they defined as a house!) but overall, little has changed. I would encourage everyone in the building industry to look at submissions, but I already know most people have lost faith in the consultation process and have given up already.

If we are ever going to get serious about housing affordability, which is desperately important to so many of our most vulnerable residents, then councils need to listen to us and make changes so the process is easier. We are not asking for cuts in development contributions, subsidies, or higher profits. Targeting risk reduction in time frame and uncertainty, reducing regulation around how people choose to live, and smoothing the process is sufficient to get the property market using the land effectively and working for the people again.




 

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