To fix housing, you need to blow up housing planning

So, a political party promises to build an enormous number of new affordable houses in their first term --- "affordable homes, social housing and new towns, with planning reforms to stop nimbys blocking building."

Not, this is not Labour's Kiwibuild -- this is the UK. But no matter. The points made there by the Adam Smith Institute help explain the failure here. First:

We, of course, would be delighted if there were 1.5 million more homes. We’d probably mutter that if there were that many new ones then they don’t, in fact, need to be affordable nor social. For if supply is increased that much then all homes will become more affordable. Rather the point of the exercise we’d hope.

Building new homes makes all existing homes more affordable, all else being equal. Building many new homes, if you can, would make them all that much more affordable.

But there's another point. Perhaps even a problem:

Given the current planning laws there is no possibility whatsoever of gaining that amount of new housing [even] in one 5-year parliamentary term. For it takes about 5 years from gleam in the eye of a builder eyeing up a green field to the removal vans arriving with the new furniture. Which means that substantial reforms to the planning process are required to be able to do this.

Fair point. And there's an even better corollary:

But if there are substantial reforms to the planning process to enable this to happen then the problem is already solved - we’ve reformed the planning system so that large volumes of new housing can be built. Huzzah!

That's what didn't happen here. And maybe still won't. 

Over there (Britain) the Adam Smith Institute reckons the planning "reform" most urgently needed is to blow the system up! 

I reckon the same is needed here.

Blow up our planning and buildings laws so that spec builders can make a profit again -- as they were when they were building the houses that still shelter us all -- and in no time they'll be able to build enough houses to make them all more affordable again.

But that would require politicians without constituents wedded to rising house prices. That is to say, it would take a government with real courage.

Do we have one?

3 questions for Labour's housing minister

In August 2017 Labour's Phil Twyford and his boss Jacinda Ardern told an electorate "fired up about housing issues" they would "remove barriers that are stopping Auckland growing up and out."

Labour [said Labour] will remove the Auckland urban growth boundary and free up density controls. This will give Auckland more options to grow, as well as stopping landbankers profiteering and holding up development. New developments, both in Auckland and the rest of New Zealand, will be funded through innovative infrastructure bonds [said Labour]. … 

Eight months on there has been no action on either of these very important fronts. There is apparently, no urgency now their feet are under the Treasury benches.

Instead, the only action at all on the housing front has been  a xenophobic and ultimately destructive anti-immigrant ban on buying existing or funding new housing. Which was announced with an unseemly degree of urgency.

You can ask yourself what that says about this Labour-led Government's values. ("On this one," says one commentator who has answered the question for himself, "they have out-xenophobed Trump by miles.")

So there are three quetions that need to be answered urgently by this un-housing minister:

Q1. When are the Auckland Urban Limits being abolished ? 

Q2. When is bond financing for infrastructure to be introduced nationally ?

Q3: When will you remove your xenophobic and patently destructive anti-foreigner housing policy.

I think we should be told. Urgently.

[Hat tip Hugh Pavletich]
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The ingenious Phil Twyford

The new minister for housing and transport has found a way to pay the unaffordable bill for Auckland's new public transport infrastructure, and that's to help make Auckland housing even more unaffordable.

What could be more ingenious!

He'd already signalled that Labour's faithful promise to voters neither to raise taxes nor to introduce a capital gains tax was going to constrain him -- he'd already announced plans to get around that simply by raising the 'bright line' period for paying National's own tax lie (the 'capital-tax-in-drag' introduced just because lying governments can) from two years out to five. Because there's no politician like a money-hungry politician, is there.

And with Auckland's council having already borrowed way beyond what it can reasonably repay (in political-speak this is known as the Council being "up against its debt limits," as the new minister is quick to acknowledge) and the new Government having no spare cash to throw around after funding all of their promises plus those of Winston and James, Twyford now has the job of filling the $6 billion black hole in Auckland's transport bill that Len Brown and Phil Goff have helped dig.

But he has "big plans" to do that, he tells faithful recorder Bernard Hickey. "Big plans" to fill the black hole. "Big plans to change the way Auckland's multi-billion dollar light rail projects will be paid for," he says. Which means: big plans about who he is going to soak to pay for all the monuments, of which "light rail" is only the most ill-defined. And the answer in four words, dear reader, is: "motorists and property developers."

Now that smokers have slunk away quietly, motorists are the new lepers. Hitting them with new fuel taxes is only the starting point. He has an endless stream of new ideas about how to soak anyone who drives a car. Lock up your wallet now, while you can.

He also plans to sock property developers, hinting he will hit them with a new super-rates bill on developments. This appears to be in addition to "targeted rates" to repay infrastructure bonds (and in addition to the almost already crippling rates rises that Mayors Len and Phil have been exacting to pay for their grandomania and Rodney Hide's super-sized stuff-up.).

At this stage these are only just hints about his big plans. But any added tax burden on the developers who build Auckland's houses will only make it even more difficult for developers to make a margin on building those houses, making it more likely rather than less that lots more affordable housing for would-be first-home buyers will ever easily be built. (Every single change from every single housing minister has made this hope less likely rather than more, so he does at least follow in a grand tradition.)

But motorists, vendors, and property developers and their erstwhile first home-customers will not be left to suffer alone. Mum and dad and several kids already happily home-owning anywhere near any part of Auckland's expensive upcoming light rail- and rapid transit-building orgy will also be hit with something special too, in the shape of extra special "targeted rates" -- Mr Twyford's favourite new phrase, it seems -- all the better for him "to capture the value uplift in property prices" mum and dad might otherwise enjoy.

What he may miss out on with his 5-year capital gains levy on mum and dad if they don't sell their house within that time frame, he'll claw back from them anyway with his "targeted rates" if they stay put.

And if they don't enjoy any value uplift at all? Fear not. They and everyone else will still receive their share of the disingenuous Mr Twyford's $6 billion bill anyway.

TANSTAAFL.

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Let’s rain on Phil Twyford’s parade

Two big announcements were made yesterday in relation to building and housing. In New Zealand terms they don’t get too much bigger, yet they were totally at odds with each other.

The first was by Fletcher Building, the darling of the former government yet who contrived to lose a fortune on two large government projects, and several other smaller ones. The primary reason, Ralph Norris told disgruntled shareholders, was that "Our project management resources became stretched, impacted by the labour scarcity of the broader sector and our own rapid growth."

To break that down: as they took on too many projects they discovered

• their own resources are too few to cover them all; and
  
•  local labour was too hard to come by.

Keep these points in mind as you read Phil Twyford’s announcement yesterday, repeating in somewhat amended form his pre-election pledges, that he is going to build 100,000 homes in the next decade.

How can that be done with the severe local labour shortage? Easy, said Twyford.

The just-announced Housing Minister told the Herald labour, skills and land shortages in the over-stretched, under-delivering, under-resourced high-priced housing market were planned to be resolved by his regime which will change immigration laws and form public private partnerships with business like Fletcher Residential and Mike Greer Homes.

Do you see the problem?

I’ll make it easy for you:

PROBLEM ONE: Fletchers is already overstretched.
PROBLEM TWO: Local labour is hard to come by.
PROBLEM THREE: Mr Twyford will solve problem #2 by calling on the folk already struggling with problem #1

Tell me how he will square that circle.

Could you?

Could anyone?

Add to that his further and still unsolved problem, which is that his whole scheme to build and/or finance 100,000 houses in a decade within his stated fiscal envelope of $2 billion is financially untenable (i.e., that his numbers simply don't add up, as he himself admitted three years ago when I asked him) and you have a new minister flying a flagship policy with very real problems.
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Nick Smith & Phil Twyford are both right, and both very wrong

 

The major party’s various spokesthings have all been arguing through the media over how many “affordable” homes have been built in the last three years, yet none have bothered to ask whether that tag in the context over which they’re arguing means anything.

The story first. Looking for a headline, Labour’s Phil Twyford “released official Auckland Council figures that showed in the past three years, only 18 houses built on special housing areas were declared to be an affordable dwelling.” Which sounds damning. In response, “Housing Minister Nick Smith said more than 500 homes from two special housing sites have been completed and cost under $650,000” – 190 homes at Weymouth, and 327 at Hobsonsville. Which sounds better.

But which one’s right? And does it actually matter?

Well, they’re both right, because they’re both talking about different things – one about houses for which a “statutory declaration” of being affordable has been made as part of a so-called Special Housing Area (SHA) developement, the other about houses in the SHAs a cabinet minister might call affordable.

But does it matter?

Well, let’s ask the Prime Minister who, in 2007, said

I think it’s dangerous for the Government to pretend that developments such as that [government-promoted scheme] at Hobsonville are some sort of panacea to the housing affordability crisis…

And he was right. Still is. Because as he went on to say, “Well, let’s get real here.” Which is to say, if we’re to speak with the bark off, either 18 or 500 – that’s a drop in the fricking bucket compared to the thousands of houses needed to break the ever-spiralling cycle upwards! The only solution, as the Prime Minister understood in those halcyon days before he actually took office and became a wind-up Smile-and-Wave Doll, “If we want to make houses more affordable for first-home buyers, we need more houses to be built as cost-effectively as possible.”

Which, to be blunt, means him and his cronies getting the fuck out of the way.

If they did, we wouldn’t need to be arguing about how many houses with the government label “affordable” on them had been built, because builders would be able to get out there and build by the thousand the houses that would make the overheated market actually affordable again.

They wouldn’t need to build them on Special Housing Areas or make goddamn “statutory declarations” about how many alleged affordable units were in each development if both the RMA and the Building Act were properly euthanased. Instead, we could simply rely on the ability for builders to make a fair profit on their spec houses and the age-old mechanism of “churn” – the housing version of The Double-Thank You Moment.

Churn?

“Churn” in this context refers to the chain of purchasers who “trade up” after a new house is bought and folk move into that house and out of their old one—leaving their old house empty for someone else to move into, which leaves their house empty for someone else to move into, which leaves their house empty for someone else to move into, and so on and so on right on down the line.

In a healthy housing market, one house purchase by one family can start off a chain reaction of up to ten, twelve or even twenty moves further down the line as each family moves out of their old and up to their new home.

Why do I say “move up”? Because this is the housing equivalent of the weird double-thank-you moment we talk about in economics:

How many times have you paid $1 for a cup of coffee and after the clerk said, "thank you," you responded, "thank you"?
There’s a wealth of economics wisdom in the weird double thank-you moment. Why does it happen? Because you want the coffee more than the buck, and the store wants the buck more than the coffee. Both of you win.

Equally, when you decide to sell what you’ve got now to move into a new place, it’s because you want the new place more than the old place—and your new buyer wants your old place more than their old place, and so on down the chain. You each want the new place because in your minds your new housing situation is going to be better for you than your existing housing situation.

It’s just the same for every buyer in the chain.

So every time a new house is built and purchased, of whatever value, that opens up opportunity for many other families to make their situation better. 

So while the buyer of the $300,000 may not know it, that new $485,000 house is what just made his own life better. He’s at the end of a chain of churn created by that first purchaser and his vendor saying “Thank you!”

This is what happens when the housing market is not broken by regulation, as it is now.

Here’s something else that seems contradictory until you think it through a little: It turns out too that in a healthy housing market a new more expensive home creates more openings down the line than a cheaper more affordable home does—up to twenty housing moves for an upper-quartile home as compared to less than five or six for one in the lower price quartile--meaning, strangely enough, that the more expensive houses that are built the more folk actually benefit.*

If that idea makes your head hurt, then consider this question: is it better in general to build better houses or lesser houses? Wouldn’t we all agree that better quality is far better than lesser? So as better houses costing more are built and folk move up to what in their own view are better houses, the overall housing stock for everybody is improved.

Isn’t this better than flooding the market with houses of lower cost and lesser quality, which actually produces fewer moves helping fewer people, and resulting in the end only in having created the slums of tomorrow?

The real answer to affordable housing then has been provided neither by the Blue Team nor the Red Team.

The answer is to fix the broken market.

And how do they do that?  They stop pretending they know what they're doing and just get the hell out of the way.

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Labour’s affordable housing plan is seriously unaffordable

 

There's a simple question that explodes Labour's just-made announcement to build 100,000 houses -- a staged build, they say, with the later stages built on the back of profits made the sale of early stages.

There's a simple question, and that question is this: If it were all that easy, then why isn’t everyone already doing it? 

It’s not like there isn’t plenty of money around to borrow: banks are lending money into existence for mortgages at an ever-increasing rate (two-thirds of all new money borrowed into existence, at an eight percent increase in quantity year on year; just one reason for this bubble.)

And land keeps getting “released” by council, making it available (in theory) for anyone to build on who can afford to buy it.

So what could a Labour Government do that a whole welter of speculative builders aren’t able to?  Because if there were profit in building and selling homes at $500,000, including land, then we and those speculative builders and land bankers would already all be doing it, wouldn’t we?

But we aren’t, because we can’t.  The affordable end of the market for speculative builders, the people who built this city and most major western cities, is dead. They can’t make a profit on a home at that price – not with the cost of land + building (see below) + external works and external services + borrowing costs + council costs + delays + …..

So the Labour Party promises $2 billion for this plan – $2 billion for 100,000 houses, plus theft. That’s just $20,000 for every house, or $200,000 for each one if they build just 10,000 in the first tranche to get the money to pay for the next.

But if there’s no profit in that first tranche, then there’s no next tranche, is there?

And if there’s no next tranche, then there’s no real plan, is there.

And there is no plan that’s worth a damn, is there, because if there were any profit in building affordable houses, then everybody would be out there doing it.

And they’re not doing it because with their ever-increasing gold-plated rules and regulations and Resource Management Act, successive governments have made building affordable homes just too damned expensive – and not one of the damned parties who’s done all of that what’s to do anything at all to arrest that, i.e., to fix the market to make the model for affordable spec profitable again.

Instead we just get more bullshit announcements like this one – an unaffordable way to attempt to make housing affordable.

NB: Think it’s cheap to build a house? Andrew Little does. The big home-builders know otherwise. Here below the average cost in 2015 for a home from NZ’s top ten group-home builders, not including the price of land + external works and external services + borrowing costs + council costs + delays + drapes and coverings and on and on and on. And if you think you can get hold of reasonable land inside Auckland for anything less than $250,000 … you’re dreaming. Let alone on the scale he’s dreaming about. So do Andrew’s sums for him, and see how much profit they would have to pay for their second tranche…

RELATED POSTS:

• “Do you see the problem already? Even excluding the rocketing price of land – about which Labour pledges to do precisely nothing -- the Labour Party’s maths requires thousands for homes to be built for well under $300,000, or  as Labour’s housing spokesman Phil Twyford concedes, the Labour Party's Kiwibuild policy ‘will quickly run out of money.’
      “Yet the very room full of actual experts in which Twyford made that concession – at a conference on affordable housing filled with people talking honestly rather than talking their book -- had already established that homes by the thousand, or even by the dozen, could not be built for well under $300,000 or anything like that, leaving the Labour Party's Kiwibuild policy as little more than a wet rag to wave around on the election trail that will quickly run out of money if they ever get a chance to try it.”
  Labour’s Kiwibuild policy "will quickly run out of money" – NOT PC, 2014
• “Housing crises? They’ve been with us for decades – and the answers to them are no secret. It’s not that the solutions that are in short supply, it’s the political will.
      “I have in front of me a book that’s been on my shelf for more than thirty years…
      “Every answer to this present housing crisis in there, and has been known for decades. You can see just from the chapter headings that that because the causes of virtually every housing crisis are political, the solutions to every housing crisis are the same…”
  A housing crisis, four decades on – NOT PC
• “So a theft of property rights now to ‘fix’ a crisis almost wholly caused by their previous and ongoing theft of property rights! What could be more ingenious!!
  Nick Smith’s government land-grab - NOT PC
• “The key to making Auckland liveable is to make it affordable—a fairly complicated and heavily politicised subject, so let’s try to make it simple: we won’t have an affordable Auckland until the model for ‘spec’ building  is viable once again.
      “Spec building being ‘speculative’ building—a builder buying land, building a house and ‘speculating’ he can sell it to a buyer for a reasonable profit. This is how the vast majority of NZ’s cities have been built, by small builders hoping to make a modest profit.
      “But in recent years this model has broken… The problem is that even while housing prices have rocketed, both land and building costs have skyrocketed.”
  Fix spec building to make Auckland affordable again – NOT PC, 2013

Labour’s Kiwibuild policy will quickly run out of money [updated]

Surprise, surprise, house-builders raise their arms in the air about government paying house-builders to build 100,000 houses.
Hardly even worthy of a headline. Except it got one: Labour's housing plan 'achievable,' says Master Builders.

Labour says the scheme to get the rate of new homes being built up to 200 per week is realistic and has been devised in consultation with experts in the building sector…
    Master Builders spokesperson Brendon Ward says the scheme could be a positive step towards addressing New Zealand's housing issues, as well as an exciting opportunity for the building and construction sector.

That wooshing sound you hear is the expectation of taxpayers’ money rushing into Master Builders’ accounts. That’s the “opportunity” Mr Ward is talking about.

And what about these “experts”?

Labour’s housing policy requires homes by the thousand to be built for well under $300,000 which, when sold, will provide the wherewithal for the next tranche of houses to be built for well under $300,000 which, when sold, will provide the wherewithal for the next tranche of houses to be built for well under $300,000, etc.. etc., until the next election.

Do you see the problem already? Even excluding the rocketing price of land – about which Labour pledges to do precisely nothing -- the Labour Party’s maths requires thousands for homes to be built for well under $300,000, or  as Labour’s housing spokesman Phil Twyford concedes, the Labour Party's Kiwibuild policy "will quickly run out of money."

Yet the very room full of actual experts in which Twyford made that concession – at a conference on affordable housing filled with people talking honestly rather than talking their book -- had already established that homes by the thousand, or even by the dozen, could not be built for well under $300,000 or anything like that, leaving the Labour Party's Kiwibuild policy as little more than a wet rag to wave around on the election trail that will quickly run out of money if they ever get a chance to try it.

So much for Mr Ward’s “opportunity.” But then, he cares little as long as the project’s seed money ends up in his members’ pockets.
The harsh truth is that Labour’s housing policy relies on a figure the industry can’t produce.

Square-metre costs for the very cheapest slums-of-tomorrow produced by your average builder are presently around $1450 to $1550 per square metre, plus GST. (This is a 90-130sqm house with particle-board floor, fibre-cement weatherboards, galv steel roof, el cheapo fittings.) To that you have to add the price of land.

The top-ten group home builders, who pride themselves on using efficiency, standardisation and their buying power to keep their prices down, can barely manage a home at $300,000. (Check the second left column for this years prices to May; compare them to their prices to Jun last year.)