Housing affordability involves a multiplicity of issues
The government have now added their “two pennies-worth” to the question of affordable housing and the Auckland housing crisis, after the Productivity Commission report from earlier this year. The critics clearly feel that the government’s response is at best another example of “kicking the can down the road”, rather than grappling with what amounts to a massive strategic issue for this country.
There are a multipilicty of issue around affordable housing and the housing crisis facing Auckland primarily. The issue of affordability is not solely about cheaper land to build cheaper homes, it is equally about improving the income of the working population so the wealth of the country improves. This in a way speaks to the very foundation of this issue – our future as a country.
Put simply we as a country risk irrelevance on the global stage if we cannot grow. Grow our wealth, grow our people, grow our economy. To do this we have to attract and retain the best and the brightest talent to make NZ a home from which they can engage with the world. To achieve this we have to build the infrastructure – that is all about housing as primary infrastructure (not just roads, utilities, amenities) all else follows where people live or want to live.
The land issue
Yes we need more land – Auckland has to build 400,000 new dwellings in 30 years to meet the expected growth in population. There is a spoiler alert here which we should not ignore – if we don’t build what people want in terms of housing and enough of it at the right price, and then this incremental population may not eventuate in Auckland. This natural increase in population coupled with inbound growth may end up being dissipated around the country and thereby alleviate some of the problem and as consequence we may actually not need 400,000 new dwellings!
The current Auckland plan calls for 300,000 of the 400,000 new dwellings to be built within the current boundary of the city. If built at the density of terrace houses / low rise developments (25 dwellings per hectare) this would require 12,000 hectares of land – that is 120 square kilometers. The current land area of Auckland is 559 square kilometers, hopefully we can all now see the issue. If we tried to build single family homes instead to meet this need for an incremental 300,000 dwellings we would need 250 square kilometers (12 dwellings per hectare) – that’s close on half of Auckland land area! Impossible.
We have to adopt and embrace urban quality intensification. We have to grow up and realize that Auckland is not just a bigger version of Palmerston North. It is a city. It wants to be, and we want it to be a globally competitive world city, for that it has to stop thinking about single family homes. It has to remove the phobia of height. It has to build quality new developments of medium intensity – that means 3 to 5 levels. Think what defines other world cities, it is density, not in one area, but in many areas. Auckland sprawls and adding to the sprawl by opening up greenfield developments to single family homes will not do anything to sort out the issue – it is more than likely to have catastrophic effects.
Its not all about ownership
The other issue to address is home ownership – the fact is current ownership is around 65% - city dwellers of the future are probably less likely to be owners. For many reasons not least of which is costs, mobility, and convenience. It could be the case that in the future over half of all the new Aucklanders we need to house may be tenants, may actually want to be tenants – they may actually see renting as a viable long term solution – why not? when so many other cities have abundant tenanted properties.
This is where the issue of the housing crisis lurches to a whole new area that I think needs examining – our current attitude and incentives to rental property.
More than two thirds of our rental housing stock is owned privately and managed privately, typically comprising an investment portfolio that is judged to be the personal nest-egg for a large number of kiwis. I judge that this is actually a root cause of the housing issue. This form of investment has for too long been disproportionately icentivised. However this is not a viable model to deliver 200,000 rental properties in the future. We need scale and we need patient investment capital.
Imagine if you will a development of new apartments or low rise town houses as part of the Auckland of the future. All owned and managed by an investment fund (not a finance company, but superannuation investment company focused on long term value). This development was built for and designed for the long term – 50+ years, it is environmentally and economically efficient. It was built leveraging scale, using modular design and built with negotiated contracts of materials and labour that could never be achieved by individual builders.
The properties are rented, not with a 90 day notice period, but tenants are open to have longer tenancy right – 1 year, 3 year, 5 years. The key here is the tenant has the right to occupy and the right to vacate. The property is maintained and rated to recognise the use of services and required infrastructure. All parties are catered for – the investment owner has a long term surety of the building and the value of long term tenants, they built at a cost that is lower per dwelling and per m2 than traditional buildings by leveraging scale. They think to the future to lower operating costs by investing up-front in design specifications.
So does this cut out the private investor? – no, investors can buy shares in this investment company as part of a balanced portfolio. Certainly they can continue to gear their investment, not at the ridiculous levels of 5 to 95 as has been the case with residential property investment in the past, but at more appropriate levels that demonstrate better financial prudence. This will allow property to be better judged as an asset class not the only asset class.
I think our approach to rental property is actually a key component of our approach to building and housing and a core part of the future strategy for our bigger city – our global city of Auckland.