Housing affordability involves a multiplicity of issues

by Alistair Helm in


Transient

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.


Auckland housing - a crisis in the making

by Alistair Helm in


Transient

This was the quotable opening comment from Doug McKay, CEO of Auckland Council speaking yesterday at the NZ Property Council conference on Residential Development for Auckland.

Naturally the private sector for which the Property Council advocates and represents judged somewhat more critically, that Auckland housing is already in a crisis. A little bit of tension between private sector and public sector is nothing new and hardly unexpected. However having said that, the conference did demonstrate a fair degree of collaboration and respect for each other’s role in delivering the future vision for Auckland.

I was invited to attend the conference as a guest of the Property Council and as someone who would judge themselves as not much more informed that the average Aucklander, I came away from the conference with a mix of feelings.

Auckland has to change, it has to grow, it has to build and it has to get going fast!. The question is – is the progress fast enough? as one speaker commented in a some-what off-the-cuff remark “or central government may take charge to ensure the development gets done, as is happening in Christchurch” – this was taken as a sober consideration, with much substantive foundation support for this view from many attendees.

Anyway lets dissect this Auckland Housing Crisis. The numbers are a great way to start.

Auckland City’s Plan sets out the 30 year horizon, a timescale within which Auckland is expected to grow from the current 1,500,000 population to 2,500,000. That extra million people will require an extra 400,000 homes to be built. Roughly 300,000 of which will have to be built within the existing boundaries of what they now call the RUB (Rural Urban Boundary) – the remaining 100,000 will be built in what is currently greenfield areas, specifically to the South around Pukekohe, the West out to Whenuapai and Kumeu and to the North up towards Warkworth.

This scale of development is daunting, 13,000 dwellings a year for 30 years,  match that to current run rate of the consents of the past 5 years at around 4,500 a year, and you have some perspective on the crisis (looming or real) – oh and by the way the clock has started!

The good news or at least the motivational incentive to get going, is the economic value that this will contribute to the local and national economy – as estimated by Martin Udale of Essentia Consulting a direct construction benefit of at least $150 billion with a 3+ times multiplier adding up to a total of $500 - $600 billion.

These numbers are all great, but the big question which needs to be grappled with and was to some extent in the ensuing sessions, was what type of building, where and at what cost?

The valuable data presented by Alan McMahon of Colliers pointed to the trend of the likely owners / tenants of these new dwellings of the next decades. They will be 30somethings who want convenience. Convenience in location, lifestyle and maintenance – they have no aspiration for cutting grass or general DIY. They do want quality and private space. They do want more than a shoe box sized apartment but they do not want the current serviced supply of 4+bedrooms homes of 218+ m2 at a price point of c. $1m which according to Todd Properties is what has been selling-a-pace at Stonefields over the past year.

This trend to intensification of future dwellings will reflect the cultural change, which will see Auckland become a minority urban area for European origin kiwis within the next 5 years.

To find the space to build these incremental 300,000 dwellings will require demolition of existing housing stock to allow density levels of the current 15 dwellings to the hectare to rise to over 25 per hectare and upwards of 50 – 100 a hectare in the city centers with high rise apartments. The question that is then posed is how will this demolition and rebuilding be managed to maintain cultural heritage and also to ensure appropriate urban design to ensure there is cohesion of amenities and communities so that we don’t end up with bland enclaves of dormitory housing?

The other critical aspect of the crisis and one that continues to receive significant press is the question of affordability. Reduced dwelling size and intensification will go someway to reduce overall cost, but the constant cries over development contribution as opposed to apportioned future general rates for these new developments did not seem to have found any favour with the public sector who clearly feel that with the capital costs of maintaining and upgrading existing infrastructure the added capital burden of shouldering the development costs for new dwellings is something better borne by developers (or as was rightly pointed out – property buyers).

Given the scale of this massive challenge and given the focus that it is receiving matched to the fact that this was the first full day conference on residential development held by the Property Council in Auckland, there is comfort to be gained by witnessing the participation of the major development companies who are members of the Council. Their strong balance sheets, long term perspective and collective vision for a quality solution in partnership with the Council could just have us achieve this vision. There is a clear view that with the outlook for commercial property not as rosy then their collective focus to residential could address the issue and match their business cycle need.

As was stated early on in the day the watch word for the future of Auckland in the context of residential development is “Quality intensification” – however you define it. My hope is that is delivers vibrant communities, served by robust infrastructure, that attracts and retains the best and most creative talent to make this city one of the most livable in the world.