Restoring housing affordability

This cost of living problem has a huge impact on the ‘average Kiwi’, says the New Zealand Initiative in its Prescription for Prosperity document it will give to an incoming Government after the October election.

The Initiative says the country stands at a precipice. Persistent inflation, a cost-of-living crisis unaffordable housing, a ballooning public service, students leaving school system with declining literacy and numeracy, Waiting lists in the public health system expanding, the domestic crime wave sweeping across the country are increasingly polarising voters and threatening social cohesion.

Unaffordable housing hits the poorest hardest – it is a cause of poverty, the independent public policy think tank, supported by the chief executives of major New Zealand businesses, says. It limits labour mobility. And it creates social division by splitting society into property owners and those permanently locked out of the market.

The housing affordability crisis is not a new problem. When the Initiative was formed in 2012, the housing crisis was the topic du jour. After 11 years, it has only become worse.

The fundamental cause of housing unaffordability is supply – not enough homes are built. The Initiative’s research has identified three underlying causes:

1. Planning restrictions make it difficult to increase population densities within cities.
2. Cities are also prevented from growing out  because of rural-urban boundaries.
3. Any new development requires infrastructure investment, but councils find it onerous to finance such investment from new rates revenue. Consequently, councils face perverse incentives to oppose housing growth.

The first two problems are rooted in the planning system. The third stems from the limited tools available to local government to fund new infrastructure – roads and water infrastructure – for housing.

Another stumble, is Environment Minister David Parker’s proposals to reform the Resource Management Act (RMA). Rather than alleviating housing affordability, it will compound it.

The Initiative recommends:

Local government incentives

The GST or tax revenue generated by new housing and commercial buildings accrues solely to central government. Diverting this revenue to local councils would give them incentives and resources to facilitate and fund development infrastructure and other services required by growing populations.

New infrastructure funding tools

The incoming Government should legislate to create new tools for local infrastructure funding and financing. Long-term infrastructure bonds, backed by specified revenue streams and without access to council’s main balance sheets, would enable costs to be spread over the usable life of the infrastructure. Issued by councils, this approach would provide a stable and predictable source of funding for infrastructure, making it easier to plan and finance development projects.

Abolish rural-urban boundaries

Over the past decade, it has become easier to build new apartments and townhouses. Building up for cities has become much easier, but building out has not eased. The Infrastructure Committee funded a study looking at the cost of bare land on either side of the country’s rural-urban boundaries. The study showed land inside Auckland’s main urban boundary is valued at almost $1,300 more per square metre than land just outside the boundary, or more than $600,000 for a 500m2 section.

The price premium for zoned land at the city’s fringes more than doubled between 2010 and 2020. The problem is not confined to Auckland, although it is worst there. Urban land is typically the most expensive downtown, where commutes are short and amenities are near. Land prices ease as you move further away. This urban land price gradient emerges as people decide how much they are willing to pay to avoid commutes and developers turn houses and townhouses in desirable places into apartments. Restrictions on building at a city’s fringes then don’t just make new subdivisions a lot more expensive. They also make apartments and townhouses less affordable by making urban land far too costly across the entire city.

Central government has laudably directed councils to enable more housing within cities. It needs to do the same to ease zoning at rural-urban boundaries.

The 2017 Labour-led Coalition Government pledged to “remove the Auckland urban growth boundary and free up density controls. It subsequently backed away from this and Labour withdrew it as a campaign promise.

The incoming government should revive the commitment. Rural-urban boundaries limit the amount of land that can be developed and increase the cost of land within the boundaries.

Removing these boundaries would increase the supply of land available for development, lowering the cost of land and making housing more affordable.

Abolish height and density controls

Height and density controls should be abolished. These controls limit the height and density of buildings, which can lead to a shortage of housing in areas with high demand. Removing these controls would allow developers to build taller and denser buildings, increasing the supply of housing in areas where it is needed.

Repeal the Natural and Built Environment and the Spatial Planning Acts

At the time of writing, the legislation on natural and built environment and spatial planning was before Parliament. If not passed prior to the election, they should be discarded by the incoming government.

If passed, they should be repealed. The reforms proposed in these two Bills are deeply flawed. Instead of replacing many of the problems of the RMA, they perpetuate them. And they introduce a number of new threats to housing affordability (and to development and growth more generally).

Instead, the incoming government should amend the RMA to:
• introduce a presumption in favour of development in the legislation; and
• confront objectors to planning applications with the cost to the community of the foregone use of privately owned property by compensating property owners for regulatory takings involved in refusing planning consent. This would incentivise development and ensure that property owners are fairly compensated for any losses resulting from planning regulations.

New national planning framework

The Initiative supports the Government’s proposal of a national planning framework defining zones, with councils able to paint those pre-set zones onto their district maps. This approach would provide a consistent national framework for planning and development, making it easier for developers to navigate the planning process and reducing uncertainty.

Caps and floors on restrictive zoning provisions

The final short-term recommendation is to introduce constraints on the proportions of land in the least permissive (caps) and most permissive (floors) for councils with affordability problems. This would ensure councils are not overly restrictive in their planning policies, which can lead to a shortage of housing and higher prices.

Replace RMA

In the longer term, the incoming government should replace the RMA with a new planning regime that respects property rights and tackles externalities from development using market mechanisms.