Articles by Matthew Gilligan
House prices have been increasing in Auckland, and this is a hot topic in the media. It's little wonder prices keep going up when we have prime time TV and the front pages of newspapers pounding us with a message that Auckland has a supply problem and long-term bulletproof demand. Investors come out of the woodwork and compete with first home buyers, leading to yet another boom cycle for the Auckland property market. Households pay more and investors accept ever lower returns. When does it all stop?
Historical net supply problem
There is no question that the city is facing a significant shortage in housing supply in the short to medium term, as shown in the graph below (which I have extrapolated from NZS data and information from Auckland City).
Supply (Building Consents) vs Household Formation
Source: Matthew Gilligan, 30 yr Analysis of NZS
© Gilligan Rowe & Associates
As the graph shows, demand (new households forming) has exceeded supply (new building consents) since 2006 in Auckland. Various economic commentators have estimated the shortfall by anywhere between 5,000 and 30,000 homes. This shortfall has been widely reported in the media and has created a furore. In response, supply is now coming on-stream with the advent of the Auckland Housing Accord and the early adoption of Auckland Unitary Plan rules in Special Housing Areas.
What is more contentious is why house price inflation is rampant in Auckland, and what are the solutions?
I've heard it all across the years, but the most annoying arguments I hear are:
It's not these things – it's Council and Central Government historically not sorting out land supply and all of the factors involved in the supply chain of housing being frustrated and mismanaged. But first, items 1–3 above.
Tax is the problem?
Assertion: A tax incentive exists in not taxing capital gains in property, which causes house price inflation. Further, property gets cushy tax incentives in NZ.
I therefore don't buy into the argument that it's all a tax dodge causing Auckland's house price inflation and New Zealand's preoccupation with property. Gareth Morgan (and others) seems to be arguing this, but in the same breath I have read articles from him in years gone by, saying that leveraged returns in property are what attracts the investors to property, and that's a fact of life globally, not just in New Zealand.
By the way, this is not to say that I think CGT would be bad for NZ, it is simply to say that I do not think that house price inflation is caused by the lack of it. It's tight supply conditions, and the ability to leverage property that swings investors into the market, not a lack of CGT.
Property developers and speculators to blame for high house prices?
In some circles, investors, speculators and developers are being blamed for the increasing house prices in Auckland. There is dinner table talk to this extent, but I think this view is also prevalent in the eyes of some council workers across New Zealand, along with certain political offices. In the vein of dinner table talk, recently I had a real estate agent telling me he laid the blame with speculators – saying 'it's people running seminars on property investing, mum and dads speculating, and developers extorting huge profits'. These factors, in his view, were cumulatively the source of Auckland's house price inflation. My reply was 'I totally disagree'.
Over-exuberant speculation in housing is a symptom of tight supply leading to super normal profits in housing, not the cause of the problem. Flood the market with housing supply and saturate the market with houses, and speculators will disappear. Returns will drop. Money will be less attracted to housing in New Zealand. It's as simple as that. Hold supply tight, and speculators thrive.
Also the developers, speculators and investors dealing in property, renovate the housing stock. They make shiny new houses out of dirty old run-down housing stock. Society needs this. Who else will do this commercially and en masse, if speculators and property traders do not renovate and develop the housing stock? Go for a drive through Auckland open homes in older suburbs and have a look at some of the shabbier houses on the market (many are filthy and run down). Then go through houses that have been renovated by speculators, and having compared the two, try to say speculators are not adding value to the housing stock. We need these people in the housing economy, or our housing stock gets run down. The buyers certainly appreciate it.
And don't talk of throttling immigration, it's not the problem either. Out of interest, it is roughly 1/3 of Auckland's population growth over the longer term (two thirds of Auckland's growth is organic, from net births and deaths.)
We should embrace the growth in our environment that immigration brings to our nation. The building and expansion of the economy creates economic prosperity, a buzz in the economy and vibrancy from the diversity. Think of how many TVs, cars and coffees those migrants are buying each day. Remove the migrants, consumption will drop. We shed jobs and a lot more from the economy.
Supply vs demand
If a housing market is saturated with supply of housing stock, and remains so, house prices will inevitably fall. This has happened all over the USA where development rules aggressively release land and construction costs are low, due to the scale of the house builders there. I believe the bulk of cities in the USA have mixed median multiples of 'Affordable' or 'Very Affordable', with median house prices less than three times median household incomes. Auckland's mixed median multiple is closer to 10. If you flood the market with land supply, house prices go down. Just think Florida, Atlanta, Detroit…..over supply causes house prices to plummet.
Supply is coming on tap to Auckland. This solution is in the wind. Auckland's land supply is being focused on, and Council together with central government are making remarkable inroads under the Auckland Accord, targeting 13,000 houses a year. But the roll-out of the new rules and services takes a long time. The rules are draft until 2016, the services still need to be stuck in the ground and infrastructure built to support the expanding population. It's a slow, physical process that only time and money can roll out. Meantime the legacy of short supply causes a bubble. Get over it and stop blaming tax, immigrants and the developers.
Solutions from the coalface
Instead, let's take a look at how we can make development easier and cheaper.
While I am a chartered accountant specialising in property, I am also a property investor. In years gone past I have done a bit of development in both New Zealand and Australia. I can tell you from experience, the Australian system is better for getting resource consents than New Zealand.
Support our developers, builders and speculators
In my experience, Australian cities treat their developers and property industry better because they realise that a difficult consenting process, and anti-development attitude in council, completely undermines building a constructive environment for getting on with the job of increasing land supply
Of course as a whole, councils don't set out to be bad, but they are large organisations, and as such often the left hand doesn't know what the right hand is doing. Anyone dealing with them will tell you of their 'frustrations'. The RMA requires a convoluted and complex process to obtain consents, and consequently there is a huge amount of red tape involved. All of this exacerbates delays and slows service, which is costly for developers, leading to higher house prices.
What happens when you make it hard for developers?
Make it hard for developers, and one thing they do is land bank (sit on the land undeveloped and take the capital gains, rather than develop the potential use). Why would a developer develop land or airspace rights, and deal with unconstructive, expensive and risky planning and development processes? Or put up with atrocious, slow, expensive service from councils, or deal with an expensive New Zealand judiciary (in the Environment Court), when a developer can sit on land and watch it skyrocket in value by doing nothing? In fact by land banking, the developer tightens supply (causing house price inflation) and avoids the hassle and risk of the RMA, council, and the judiciary.
A developer faced with some of the monstrous requirements and delays of council and the RMA process, while sitting on millions of dollars of debt, can be bankrupted while they wait for council to stamp planning consents. So many developer's land bank, and avoid the cost and risk of the process. We need to reverse this trend by making it easier for developers.
Make the development process easier
A small example: I was developing land in Central Otago, and wanted to change a proposed roof colour of a commercial property that I was building, from brown to olive green. The Alexandra Council made our company apply for a notified consent, the community board were made to meet to discuss the issue, and we were presented with bills for over $5000 – just to change the colour to one that matched houses we had already built in the same subdivision. The community board asked ‘what the hell is this notified for?’ at the hearing. In another example, we had a member of the community make demands on us as developers saying ‘if you don’t give us a bridge from X to Y on your development, we will lodge an objection in the Environment Court and you will be another 1-2 years away from getting your consent.’ (With the presumption being it was cheaper and safer to give them their bridge, than fight them in court and pay interest while we waited for a decision). We were cornered. We built them the bridge, because it was indeed cheaper to appease them than wait for our day in court.
All developers have war stories with councils and the RMA process, right across New Zealand. Notifying a resource consent for changing a roof colour is the type of lunacy we need to combat. It was arguably unlawful behaviour on the council’s part – but what does a developer do when faced with petty requirements and delays in councils in New Zealand? The Environment Court is not an option – it’s for large issues and disputes. It’s slow and expensive. Developers need fast decisions and certainty, or they put the price of property up to cover their costs.
In my experience, these petty issues during the development consenting process are running unchecked for the smaller developers. The soft costs of the professionals fighting council run into the thousands for every development or consent. This is primarily due to the lack of a cost-effective, external body to appeal to. Plainly speaking, a council watchdog is required, like Australia has. It stops bullying, unreasonable, and tardy behaviour, and smooths the supply of land process out.
Land and Housing Development Administration Court
In this regard, the Australian Land and Housing Development Administration Court is something New Zealand needs to copy. It’s the stepped down version of the Environment Court that is accessible to all, cheap, fast and powerful. As a result of its existence, small and medium sized development in Australia is faster, lower risk and cuts through red tape.
By example, I did a number of small subdivisions in South East Melbourne in 2007, and it was, simply put, an awesome process. The local council (regrettably just like many New Zealand councils I have dealt with) was inefficient, disjointed and tardy in response times. When challenged about failure to respond on time and issue consents for works that obviously complied, they became obstructive. Of course they had their reasons – under resourced, etc. But the reality was the council service experience I received was non-responsive and poor.
Then I learned you could take them to the Victorian Civil and Administrative Tribunal (VCAT). $50 was what it cost in 2007, and a simple form put me in front of a judicial land court judge within three weeks. The judge would say things like, ‘Well Mr Gilligan, here you are again. Nice to see you. What seems to be the issue this time?’ Then the judge would box tick with the council member: ‘Traffic report – tick. Density rules and height to boundary – tick. Services – tick. Arborists and indigenous affairs impact report – tick. Well Council, I can’t see why this should not proceed. Do you have a valid concern or reason why you have not granted this consent within the three-week statutory time frame?’
Council member: ‘Arrrh, ummmm, no ma’am.’
Judge: ‘Well then, the decision is that Council will issue a development authority to Mr Gilligan within in three working days. Mr Gilligan, if you have any further issues with council over this matter, please let me know.’
Three days later – I have a consent and I get on with it.
As a developer when I discovered this process, I just about fell off my seat. Like a breath of fresh air, it takes all of a developer’s worries away. You get a fast answer over contentious issues, you get your consent on time, and this reduces risk, legal cost and interest cost. Big picture, this rapidly increases the land and housing supply because the red tape is cut in three weeks, and someone is empowered to make a decision at very low cost.
Bring this to New Zealand. It’s a developer’s dream. It’s one of the answers to increasing supply quickly and reducing houses prices in Auckland.
Reduce building costs
Land is one component of high prices. The other is the cost of materials. Building costs in New Zealand are out of control. Building materials sourced from offshore could be used, which would greatly reduce the cost of construction, but it is not easy to get them through BRANZ. Why do Chinese builders in China build houses with such incredibly cheap components, and we can’t use them here in NZ? Why do USA companies build with such incredibly low costs and NZ house builders not get access to cheap supplies?
Take, for example, a two-plug power point fitting. $6.50+GST in Bunnings on special. USD 32 cents in China. Cheaper on Ali Baba. You will say it might burn houses down, we need standards, BRANZ are there to set standards to protect us, and I agree. But make it easy for someone wanting to bring that 32 cent plug into New Zealand to get it to comply, and make this compliance process well resourced and inexpensive. And we will have a lot of the costs of housing tumble just by doing that. Some other examples:
Source (April 2014):
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