The JLL report says there is now widespread acceptance of a seemingly undeniable fact: there simply aren’t the right number, type and tenure of genuinely affordable homes available in the places where they’re needed.
However, whilst 10 years of low interest rates and readily available credit have undoubtedly increased the scale of the challenge, there is no reason to believe it can’t be addressed.
On the moon
In 1962, President John F Kennedy announced the United States would put a man on the moon within a decade.
This ‘moonshot’ was a commitment which quickly extended the role of government from simply fixing market failures to co- creating new products and technologies; forcing new ways of thinking, driving greater entrepreneurship and focussing on the possibilities available through private-sector partnerships.
On 20 July 1969, Apollo 11, the first crewed mission, touched down on the moon’s surface, proving the seemingly impossible possible.
What if, like the US moonshot commitlment, there were innovative ways of thinking and working which might offer new insights on this seemingly intractable New Zealand housing problem?
- High median house prices. Median house prices are 8.3 times median household incomes.
- Large deposits required to purchase. A 20% deposit for the median home stands at $173,800.
- Significant time needed to save for a deposit. The median household needs 14 years to save a deposit for the median home.
- Best connected: Least affordable The least affordable places are connected cities and tourist destinations: Thames-Coromandel is the least affordable district in the country.
- Worst connected: Most affordable. The most affordable places are poorly connected, remote and rural: Grey is the most affordable district in the country.
New Zealand’s story is one of growth, both through immigration and natural change. Projections suggest the population is on course to exceed six million by 2043 and yet demand for housing already outstrips supply.
Even though 30% of the country’s homes have been built in the past 20 years, this has simply not been enough. A step-change is needed, which hasn’t yet happened.
The country has consistently under-delivered in terms of the supply of new homes. Approximately 568,000 homes were approved from 2002-2022 of which 474,000 were built.
Average annual housing delivery sat at 20,455 per year between 2002-2012 and increased only marginally to 25,491 over the period 2012-2022.
There is a clear market failure and the current model has proven itself insufficient to meet our needs.
Increasing demand for housing has created an upwards pressure on prices at the same time as historically low interest rates have fuelled their growth even further.
In the decade prior to 2022, the Reserve Bank of New Zealand (RBNZ) lowered its Official Cash Rate (OCR) and dramatically reduced the cost of borrowing.
The effect was that larger mortgages became comparatively more affordable: the average mortgage rose 68% within five years, from $205,666 in 2016 to $345,095 in 2021.
Winners and losers
Whilst inflation and rising interest rates softened the housing market last year, there are no indications of a long-term correction, either in terms of declining pricing or rising supply. In other words, there are no signs that the country continues as it is the affordability gap will close.
Rising rents and values have created ‘winners’ and ‘losers’, broadly aligning with those who own property and those who don’t.
In 2011, New Zealand’s median house price stood at $352,500 and was about 5.4 times the median annual household income. By 2022 the value of that same property had more than doubled to $869,000, outstripping earnings growth to sit some 8.3 times median household income.
The effects these changes have had on New Zealand’s housing affordability have not been felt evenly. Existing homeowners have seen a considerable rise in their fixed-asset wealth, improving their financial security and the resources available to be released if needed; for example, to support retirement or provide the deposit for an additional home. However, this same price growth has increased the cost of both renting and purchasing, limiting the ability of those who do not own their own homes to access the market.
The effects also contribute to a spatial inequity. Those living in the North Island face a far greater affordability challenge, in broad terms, than those living in the South Island. This is because affordability is an expression of the ratio between property price and earnings, for which reason the gap between winners and losers is often greatest in towns and cities, where there is the widest range of salaries and highest demand.
Whilst much attention has been focused on the extent to which the housing crisis impacts those in New Zealand’s core cities, the affordability challenge is, in fact, most acute in holiday destinations and tourist hot-spots. This is because these are the locations where wages are often lower and demand is high as local people face additional competition from second-home and holiday-rental owners.
Conversely, the most affordable areas tend to be those that are least accessible. In these often remote and largely rural economies, where demand is often limited and localised, the gap between wages and house prices is typically much smaller.
Planning all the same
The planning system and the market nonetheless continue to produce the same outcomes as they have done historically. Most homes remain standalone, detached houses on their own sections. Moreover, they’re large by global standards. The average size of a New Zealand home increased from 134m2 in 1990 to 200m2 in 2010 and then marginally decreased to 155m2 last. year.
Whilst there has been an increase in the number of high- density developments, this remains very geographically constrained. Apartments comprised only 17% of new consents in 2022 and constitute only a very small component of overall supply: 16% and 15% for Auckland and Wellington, respectively, in the past 10 years.
This represents an opportunity cost, both in terms of climate change adaptation and the optimisation of development land.
The first step forward is to stop treating the housing crisis as solely a housing issue. In fact it touches either directly or indirectly on every area of public policy.
The solution is to be found through effective coordination, engagement and creativity across the board. In this way, small steps forward have the potential to reveal new ideas which could bring big results.
Five potential options are as follows.
- Create liveable cities, promote high density and transit-oriented development
It’s time for the look, feel and function of New Zealand’s towns and cities to change.
The National Policy Statement on Urban Development (NPS-UD) was introduced in August 2020, supporting schemes of over six stories in urban centres.
This was followed by the Resource Management (Enabling Housing Supply and Other Matters) Amendment Act 2021, which introduced new Medium Density Residential Standards that would enable three homes of up to three storeys to be built on most residential sites without resource consent.
Whilst appropriate for smaller settlements, there is a serious risk this will result in failures to optimise sites in well-connected locations while reinforcing existing, unsustainable patterns of growth in those which are less connected.
The link between infrastructure investment and densification should be explicit. Future reforms should focus on encouraging further densification while increasing control over the location of new development.
The emphasis should be on a brownfield-first, high-density and transit-oriented approach which encourages densification in those locations where the infrastructure exists to support a larger population.
Urban development corporations or further urban development agencies could be introduced to effect large-scale transformations within existing towns and cities at pace; with clear and immediate opportunities existing to facilitate the extension of light-rail in Auckland and its introduction in Wellington.
- Improve access to finance, support economic transition
There’s an opportunity to diversify the market whilst supporting the transition to healthier homes and a greener economy. New Zealand’s house-building industry is heavily oriented towards small and medium-sized enterprise (SME) builders.
Of approximately 17,500 registered residential construction companies in the country, only 34 have sales revenues above $20m per year.
For these organisations, access to finance is key to ensuring they can do new developments.
A government accelerator bank could act as a broker to raise awareness of products on the market, linking firms with the best options, reducing the cost of finance and helping unlock opportunities which might otherwise be stuck.
This has been successful in the United Kingdom, where the British Business Bank has helped arrange over £8.5 billion in finance through their core finance programmes since being established in 2014.
The government budget could also be used to align lending to small builders and housing projects with other key priorities such as green energy and manufacturing initiatives or modular construction.
This could support innovation, increasing demand for factory-made housing; which typically has fewer defects, can be assembled quickly, and delivered at scale.
- Help people onto the ladder by introducing shared- ownership product
Getting onto the first rung of the housing ladder is often the most significant challenge to ownership. The Government should support new routes to ownership to help first-time buyers access the market through the introduction of shared ownership products, particularly within its own schemes.
The shared ownership model enables those who do not own a home to purchase a stake in new build properties, typically in the region of 25%, at open market value.
This makes both the deposit and mortgage repayments more manageable, as well as enabling the buyer to benefit from any capital growth on their interest.
A reduced rent is payable on the balance, and the buyer is able to purchase the remaining amount at the open market value over time.
This has already been trialled successfully in New Zealand by organisations such as Tāmaki Regeneration Company (TRC), providing an indication as to how the model could be used nationally.
A format could be created where the developer would also have first right of refusal to acquire fully owned units when sold back to the market, meaning that they could regain control of the property as first time buyers move on and thereby retain the ability to offer a shared purchase opportunity to others in perpetuity.
- Promote renting, create a national build-to-rent fund
Safe, private and healthy homes are not predicated on occupier ownership.
Rented homes have equal potential to provide affordable, secure, flexible and high-quality places to live. In Germany, for example, 54% of households rent and many people have no aspiration to ever own.
Reform and destigmatisation of the rental sector will have a key role to play in reducing pressure on home ownership whilst also improving overall quality. One way this could be achieved is through the creation of a government-owned national build- to-rent (BTR) portfolio.
This should focus on the delivery of apartments in large-scale, purpose-built schemes (i.e. 250+homes), which can be rented at affordable levels on the market.
As a long-term stakeholder, the Government is uniquely positioned to take advantage of the BTR sector and could also leverage this to explore potential public-private partnership models.
Not only would this help to increase the overall supply of new homes, demonstrate what can be achieved and ensure that rents are stable, but it could also create an income stream which can subsequently be used to support either maintenance and a wider roll-out or top-up pensions and other public services.
- Create balance through a whole-nation approach, devise a national spatial plan
House price growth is driven by demand and the ability to pay.
Some parts of the country remain comparatively affordable for the simple reason that these pressures have been experienced differently.
The North and South Islands have had different historic experiences in terms of both housing and employment. A national policy of spatial rebalancing would reduce pressure in key settlements by tempering excess demand and redressing the imbalance which too often exists between the location of homes and jobs.
This could be achieved through the introduction of a national spatial plan, which would provide the platform to direct future growth and investment.
In setting out a basis for spending and economic decision making, this would ensure that prosperity is shared across all sections of society and parts of the country.
If it were to focus on stimulating growth outside Auckland and Wellington, across both the North and South Islands, it could enhance demand elsewhere and breathe new life into these communities.
This would, in turn, mitigate the need for larger settlements to require ever larger investments in infrastructure, reinforcing the pressure upon them to grow.
Where new growth was anticipated, local growth fund packages could be introduced to devolve finance to local authorities to support this and spend how they wished.
Alternatively, bespoke city deals could be introduced to enable local authorities to raise capital and invest in skills.
Such steps would strengthen local governance and accountability whilst helping communities attract and retain new people, reducing demand in core settlements and ensuring that prosperity was shared equally.