NZ house costs driven by lack of new land

Friday 16th December 2011 3 Comments

New Zealand’s high cost of houses is driven mostly by a lack of new land being released for development in fast-growing areas and a construction sector that operates inefficiently because much of it works as a “cottage industry,” says the Productivity Commission.

With the dream of home ownership slipping out of many young New Zealanders’ grasp, it calls for better coordinated release of new land for subdivision, more large-scale home construction projects, and better performance from local body regulators, who often took too long, charged too much, or were not clear about their expectations in granting building consents.

Issuing its first draft report for public submissions after being established in the last term of government under the coalition agreement between the National and Act parties, the commission dismisses much of the concern that tax advantages have driven house prices.

“Housing is less tax-advantaged than is often suggested,” says the report, which seeks submissions by Feb. 10 ahead of delivering a final report to the government on March 16. “The present tax position is long-standing and can be expected to have been subsumed into house prices long ago.”

The commission’s findings are not binding, but its investigations are government-directed and high hopes are held for its capacity to kick-start new thinking in areas of protracted policy debate, as has occurred in Australia, which has had a similarly independent productivity watchdog for some years.

The report highlights that during the house price boom of 2001 to 2006, there was a 150 percent increase in the number of households renting, who might in earlier times be expected to become first home owners.

“In some parts of the country, the ‘starter’ house that once eased New Zealanders into property ownership seems to be a thing of the past,” the report says, describing this as an emerging “missing rung” on the New Zealand residential property ladder.

The report challenges the current preference for urban development to be ring-fenced because of fears of urban sprawl.

“Probably the single biggest source of adverse impact on housing affordability is insufficient release of new land for housing,” the commission says, with land purchase accounting for an average 60 percent of the cost of a new house in Auckland, and 40 percent in the rest of the country.

“In large part, this land scarcity is created by policy and planning practices, in particular the preference for the ‘compact urban form’.”

While intensified land use would be part of the answer to New Zealand’s housing costs, the reality remained that “conventional homes on greenfield sites are generally cheaper to build than infill, multi-storey or brownfield (previously development but underused or abandoned) development,” the commission says.

New land for developing needs to be “urgently” released in fast-growing cities “for the construction at scale of affordable new homes” and would likely require local governments and developers to work together on areas to make available.

It also highlighted a 30 percent increase in inflation-adjusted terms of building a house in New Zealand over the last decade, and noted that houses cost 25 percent less to build in Melbourne than in Auckland, leaving aside land costs.

“This price difference reflects the higher cost of building materials in New Zealand and also the fact that our residential construction industry has the characteristics of a ‘cottage industry’, dominated by small firms building small numbers of homes.”

It offered the Christchurch rebuild as an opportunity for the country to “demonstrate the efficiency gains from building at scale, with greater use of standardised components and strong project management skills.”

The commission is lukewarm on the idea of a capital gains tax, for housing or more generally, especially since it believes tax influences on house prices have been over-stated.”

“Designing a regime to bring capital gains and losses more generally within the tax system would also present a number of difficult conceptual and practical challenges, such as how to define and keep track of capital gains and losses, particularly in the presence of inflation.”

(BusinessDesk)

BusinessDesk.co.nz

Comments from our readers

On 16 December 2011 at 7:06 pm international said:

Did the so called Productivity Commission get outside and look beyond little NZ. Compact cities with quality apartment style homes can and should be affordable, they do it overseas, and it creates a far better environment compared to sprawling bungalows where the worker spends hours in traffic. Like any statistic - they can be bent to back any argument. LA, LA, LA .... no thanks.

On 18 December 2011 at 10:10 am joronda said:

There has been a shortage of land being released for housing since the environmental procedures were strengthened to make it much harder to put farmland into housing. The land classifications have not been an accurate functional guideline as to the productivity of farmland

On 19 December 2011 at 10:35 am David said:

Councils historically have undercharged developers for contributions to new infrastructure to service urban sprawl. Existing ratepayers subsidise profits of developers of greenfields subdivisions. Bet the Productivity Commission ignores the significant cost of new infrastructure.