Housing lessons from the United States

These American metros do a magic trick that has eluded New Zealand's local government.

Although they compete for urban development to keep housing affordable, they co-operate for the common good of economic development.

Infrastructure funding, financing, and governance lie at the heart many of our nation's biggest challenges, underpinning the housing crisis and land supply, the poor state of our urban waterways, and poor health standards of drinking water.

It seems the country is helpless.

The Crown is constrained by its commitment to reducing debt, growth councils have no further debt headroom and most developers are capital constrained.

Yet capital markets are flush with cash, and property prices signal the high benefits of growth. Where's the logjam?

We've taken an interest in the metropolitan areas of the US. As outrageous as it seems, half of them are growing, yet have affordable housing. Their land markets are competitively priced, and houses cost two and a half to four years' median household incomes — not 10.

What's their secret? Part of the answer might be their heavy reliance on competitive and dynamic local government. Their local authorities operate more like local urban businesses. They make it easy to constitute new local authorities that compete for property taxes.

Pro-growth local bodies like this simply work around councils that fail to meet demand. It's all about getting the structure and incentives aligned.

Their pro-growth councils can create new internal finance arrangements that have their own credit ratings on the common balance sheet. They ring-fence the costs and risks of projects to beneficiaries.

Municipal Utility Districts (MUDs) is one of several types of special districts that function as independent, limited governments. The purpose of a MUD is to provide a developer with an alternative way to finance infrastructure, such as water, sewerage, drainage, and roads.

Managed by a board elected by property owners within the area, a MUD may issue bonds to reimburse a developer for authorised improvements and will utilise property tax revenues and user fees from water and sewer services it operates to repay the debt.

There are three benefits: access to debt finance, alignment of incentives and risks, and circumventing blockages.

Here, beneficial projects that are willing to repay debt cannot be debt financed by our growth councils. They can't borrow more than 2.5 years' worth of repayments. There, they may create a public authority specialised in repaying debt, and borrow some 14 years' worth of their debt servicing payments.

The market lends to these districts only if they're judged economically viable. If lenders don't judge this, then bond insurers may choose to.

In New Zealand, infrastructure is paid for and underwritten by all city residents, who don't benefit and drag their feet by creating red tape. There, beneficiaries pay and take the risk; the other city residents say "do what you like, we don't care".

Here, council says you can develop where you like, when you like, how you like, as long as it's here or there. There, communities say "You won't serve my demands? No problem, we'll create our own local authority. Oh wait, you'll serve me after all? That's more like it."

Key to this is that their councils are urban, not mixed rural/urban like ours. Their territorial jurisdiction is limited to their urban extent. Beyond that, it's their property-tax hungry counties that serve development.

Texas in particular is quite possibly the world's fastest growing state. Its the only state that forbids its counties from zoning outside riparian areas.

These American metros also do a magic trick that has forever eluded New Zealand's local government sector. Although they compete for urban development to keep housing affordable, they co-operate for the common good of economic development.

How? Incentives. A metro's various municipal authorities also share in sales taxes, which need to be levied metro area-wide. They co-operate for trunk infrastructure and business development, to promote economic activity. The better they co-operate, the greater the sales taxes they each get.

Just like the firms and body corporates of an economy, their local authorities can be created, split, merged, and retired. As terrible as the latter sounds, it seems key to their independent debt-financing and credit rating.

They create new forms of institutions, public and private, to ring fence infrastructure projects. Here, Crown Infrastructure Partners is one such novel attempt at doing the same.

Given the size of Auckland housing and infrastructure challenges, we need to be willing to do things differently. There is much that we can learn from the US.