In October we invited you to lob your Auckland housing crisis questions at AUT professor John Tookey, an expert on the subject. Here he responds to a selection of the many questions he received, and explains why – spoiler alert – there are no easy answers.
John Tookey is a Professor of Construction Management at AUT, where he specialises in supply chain management. He is one of several lead researchers working on the Government’s National Science Challenge 11: ‘Building Better Homes, Towns and Cities’.
First published on November 2, 2016.
I’ve always assumed that the only way Auckland will ever catch up with the housing crisis is by building many residential tower developments based on standard templates, either as full or mixed-ownership social housing, or as affordable properties restricted only to first-home owner-occupiers or public servant ‘key workers’ as in London. We seem to be able to do the ‘expensive apartment’ approach, but does NZ have the expertise and capacity to build the ‘affordable apartment’ approach both cheaply and to the required standards? – Ethan Tucker
We have the expertise, no question. NZ produces some of the best engineers on the planet, employable anywhere. We are known for it. Pretty cool, right? However if you want to make money in the property game you try to build the biggest, sexiest place you can on the smallest space possible. Do it quickly and sell it on before the market or investors go away. Large multi-unit properties imply large upfront investments and maybe slow returns – hence higher risk for the developers. As a consequence you do not see huge numbers of high density developments of apartments etc. How will that change? Potentially getting council or government to ‘front end’ the risk by investing in land development of real estate, or they could commission these developments themselves, through the housing association model used in the UK.
Do you think the Supercity concept has added to the crisis ? Would it make more sense to leave Manukau, Waitakere and the North Shore to develop their own CBDs and grow in the natural way, Manukau expending south, the North Shore growing north etc, considering the current infrastructure? Auckland central would seem to be the only part of Auckland growing up at this stage. – Monica Cozma
Honestly – not much. The smaller councils had less funding to expedite development anyway. Arguably delays occurred as councils aligned their regulations and expectations prior to the supercity. But other than that, none of the previous councils had any more nerve to make things happen ahead of the market.
Is it the housing pricing that we need to adjust, or the NZ salary? The average cost of a flat in London is something like 46x the average salary; in Auckland, the average price of a flat/apartment, is less than half that ratio. So is housing in our major city too expensive, or are our salaries too low, or is it both? – Mathew Coleman
Our prices are inflated by investor behaviour and demand for central suburbs. Too expensive? Hell yes. Salaries too low? Arguably yes but in line with the country as a whole.
London and Auckland do not equate. London is a destination city and is seen as a go-to hub for many of the great and good of Europe, The Americas and the Middle East. Elites ‘base themselves’ in London. Hence the astronomic prices of central city districts because the inhabitants do not belong to the ‘average’ category you allude to. London is also a city with a vast infrastructure of rail and underground that allows long distance commuting. By comparison Auckland is totally wedded to the car as the main method of getting around. In the absence of serious public transport, Auckland is constrained to having massive pressure on the central city suburbs that allow folks to commute to work.
Would government intervention around building companies assist? House building in Auckland becomes a licensed thing and only two or three companies get the tender, forcing them to them to become bigger, better resourced building companies? Or just go the whole way and set up a couple of government-controlled building companies and let them do everything, with a government guarantee against the work? – Ben Jackson
Government and council intervention would help, yes. They can force outcomes through contract terms, conditions and the profit motive – “We want x houses by y date at z cost” – just like they did after the second world war to house returning troops. At the moment most construction companies are not investing in speculative (i.e. “give it a go bro – she’ll be right”) construction because they expect the market to take a downturn, soon. Housing gets built when there is a definite commitment of funds from a client to the finished product. Every house in every development you see is already purchased and fully funded. Depressing eh? The only way a surplus can occur and thus prices be affected is through government and/or council commissioning production ahead of the normal market.
If the real estate companies are the only ones profiting (maybe banks too), how can the general public be confident that they haven’t created this crisis for personal gain? – Tahi Piripi
You can’t. But actually it is property investors (mainly baby boomers) that are the beneficiaries of this bubble. The obvious profiteers from the bubble – real estate agents primarily – are without doubt less than popular for good reason. Apparently there is a code of conduct and ethics for these folks… yes really. I laughed too. However in reality the principle personal gains are usually amongst our friends and families. When we visit the ‘bank of mum and dad’ they got that residual wealth from somewhere. But rest assured, asset bubbles like this do not come from pre-planned ‘created crises’. They occur from investor herd behaviours – like with the dot.com bubble of the 2000s and the tulip bubble of the 1700s.
What sort of timeframe do you envisage when you predict an incremental decrease in values? – Nick Mulvey
Can’t say. More likely you will see ‘stagflation’ in which the prices stay the same for a long period of time while inflation eats into house values. It happened (and continues to happen) in Japan and more recently in the UK post the global financial crisis of 2008. After a number of years when house prices and values look more realistic then the market starts to move again.
Do you think there are now too many people (government included) with an interest in keeping house prices high at any cost to allow a correction back to even semi affordable levels? In other words, is it now a too big to fail situation? – Zac Fairhall
I don’t think the market is too big to fail – bubbles always burst. Period. Nor do I think it is a plan to retain high values deliberately. What I can say is this: if a government really stepped up and made a concerted effort to improve affordability, it would imply that it had acted in such a way as to reduce the fundamental value of the largest asset that most people own. i.e. their house. Does that sound like a policy that would earn a government further employment after the next election? Probably not. I guess turkeys voting for Xmas is the equivalent.
Do monopolies in the supply chain drive the cost of building in NZ? Have current property taxation laws added fuel to the current predicament? Should the use of more sustainable materials sourced locally be incorporated into the building code? – Arash Barzin
Honestly the evidence I see is that the cost of materials do not affect the price of housing. There is a fundamental conflation of cost, price and value in the minds of most people. Logic is this – we increase the total numbers of dwellings in NZ by about 1.5% annually. However the value of property is based on the residual value of housing in an area rather than the cost of building new. For example, most houses in Devonport are 50+ years old. How much did they cost to build? How much are they worth now? Therefore is the cost of materials significant in value? No. Put it another way, Let’s say it costs $2m in materials to build a 200sqm home in Manurewa. How much can you sell it for? Alternatively if the same house was built for the same money in Remuera, how much would it be worth? Materials costs do not affect price or value.
Taxation can affect things in terms of the capital gains game that investors play. In terms of locally sourced materials and their sustainability, well honestly our market is so small as to be unsustainable for manufacturers of all sorts of products.
Would you link the leaky homes crisis to the current crisis? Did it put off building and destroy faith in new housing to the extent that everyone was stuck cashing in on older homes which were ‘safe’, in turn leading to a lack of new projects and decent companies? – Ben Jackson
Not so much. Only issue is the drag effect of increased building consent costs to meet Building Act regulations. Otherwise we make better houses now than ever before.
Regarding houses selling for well over their RV: does anyone have the predictive ability to advise first home buyers “wait awhile til things become less crazy” vs “jump on as soon as you can before things get even crazier”? – Rebecca Gray
Anyone who says that they can tell you that with either high degrees of certainly or confidence is talking complete BS. The economic system is so complex and sits in a global economy with all sorts of nuanced balances between fundamental indicators that it makes prediction impossible.
There are some fantastic places that already have the utilities to go up rather than build out (like the corner of Great North Road and what I believe is Titirangi Road, in New Lynn). Why aren’t there any initiatives outside of the city itself, like in a SHA, to tender a more dense style of living outside of zoning? – John Donald
It comes down to risk versus reward. High density housing construction equates to higher attributed costs (materials, scaffolding, time, labour) with lower margins. We talk about affordable housing but affordable to whom? Builders have to spend more money and bear more risk in order to deliver more affordable homes. Attractive? Not so much. Much more profit in building low density, single storey homes with a guaranteed return based on guaranteed funding.
Is the best way to simply address the issue of housing affordability and rampant market hyperinflation to have an effective and properly worked out capital gains tax? – Matthew Lane
No. This is a complex issue with multiple elements: Releasing more land. Forcing development. Disincentivising property investment. Incentivising the divestment of property holdings. Council / government investment in new development ahead of the market, and more. One dimensional solutions do not work.
Why doesn’t the government tax the property speculators to such an extent that they move out of the property market thus making more homes available to first home buyers? – Lawrence Townsend
Bloody good question. The problem is fundamentally that of property investment. But there are other issues that need to be addressed as a coherent portfolio of policies to deal with a complex problem.
What do you think of the Labour Party’s housing plan? – Jean Jeanie
Too little, too late. Sorry. Facts do not care about feelings. We are where we are now. Policy has to reflect the possible and affordable at the point of implementation. My sense is that if the economy hit the skids such that Labour would be elected, then any of the policy ideas would not be affordable or credible at that point of time. I would expect ‘mission creep‘ at that point.