Jeff Walters: New approach to housing needed

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Development costs can be reduced through scale and intensive building of a greater range of quality properties.

Developers are used to building four-bedroom houses on large sections but that has to change.  Photo / Paul Estcourt
Developers are used to building four-bedroom houses on large sections but that has to change. Photo / Paul Estcourt

We know Auckland has a serious housing issue.

As the population increases by 1.2 million over the next 30 years, Auckland Council expects a market demand of around 10,000 new houses a year. The present supply is around 4000 houses a year.

Right now, first-home and young buyers are struggling to enter the market.

About 50 per cent of young people are renting, and these buyers can't afford to spend more than $350,000 on a house. Yet developers are building large four-bedroom homes on large sections. These are not $350,000 properties.

A new strategy is needed if we want young families to be able to buy homes as their parents and grandparents did. Unfortunately, there is no quick fix.

A menu of options has been mooted:

•Economies of scale are required to reduce costs and to give the construction industry confidence to mobilise resource.

•Builders should be encouraged to merge into large entities.

•A capital gains tax should be introduced to make property a less attractive investment.

•Resource and building consent processes need to be more efficient and cheaper.

We also need public intervention and wider use of different ownership structures.

Here's the thing: affordable housing does not mean cheap housing.

Development costs can be reduced through scale and intensive development of a greater range of quality housing types.

The problem is that developers have experience building and selling four-bedroom houses on large sections.

They must be encouraged to build a greater range of housing, and we must ensure that the cost saving does not simply mean a greater margin for the developer and continued high prices.

Public entities hold the key.

There are projects in Auckland where the land is acquired and amalgamated by a public entity or entities that release the land to builders, usually in stages, which in turn reduces the land holding cost for the developer.

More of this kind of public-private teamwork is needed.

The public entity is also in a position to either ensure that developers build a greater range of house types more intensively or develop a portion of the development itself.

Developers need to see that there is profit in a range of intensive house types, and consumers need examples of other types of suitable housing.

A public entity can also be more creative in controlling the sale of the new homes to give young families a step up. Sales could be limited to first-home buyers with restriction on resale for a few years.

Leases can also help people into permanent ownership.

Leasehold estates have had a bad rap through problems with leasehold apartments that people bought without taking into account rent-review mechanisms and consequent skyrocketing costs.

This problem can be eliminated with a well-drafted lease and proper disclosure and price-setting.

Leases can also be set up as "rent to buy" products.

Social housing providers such as New Zealand Housing Foundation promote such schemes, as do various small profit providers - not yet to the scale to make a difference, though.

Rent-to-buy leases are a variation on a 1970s strategy known as long-term agreements for sale and purchase. They were designed for a buyer who couldn't afford to buy a property outright.

The buyer would contract with the vendor to settle on a future date, up until which the buyer would make partial payments in reduction of the price, along with paying a reasonable rent. Eventually the buyer built up a sufficient deposit to obtain finance and exercise the option to buy.

The advantage of these structures is that they enable a buyer who can't finance a deposit to get a foot in the door, and their own home from day one, with security of tenure and confidence to undertake improvements.

From an investment point of view, landlords receive the benefit of a committed long-term tenant who should take care of the property as if it was their own.

Like any consumer product, rent-to-buy leases are vulnerable to unscrupulous developers who inflate prices, charge unreasonable fees or include onerous conditions.

But if a public entity is committed to ensuring the supply or delivery of affordable housing, it can take make sure the structure is not abused.

Jeff Walters is a partner at law firm Lowndes Associates.

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