A shortage of living room

Image / NZ Herald Graphic

Home-sellers waiting months to find a buyer may find this hard to swallow but Auckland is short of houses. A housing supply crisis is looming because private developers are unable to provide houses at an affordable price. And the Government isn't rushing to fill the void.

With monthly reports of easing house prices, falling interest rates and fewer buyers, we might be forgiven for thinking the crisis in affordable housing was a pre-recession thing; that the market had corrected itself. But experts are now flagging a supply shortage which could send Auckland housing into another inflation spiral - good news for sellers but bad for almost everyone else.

The problem stems from the collapse in home building, caused not so much by softening demand but the property financing sector implosion.

With developers often needing 50 per cent equity before banks will lend to them, there are calls for the Government to do more to stimulate housing supply. But the Government is focusing on the overdue upgrade of existing state houses - and telling Housing New Zealand to tread carefully on new projects.

In February, the Government put the brakes on the planned 3000-home development at Hobsonville and on long-term redevelopment plans for the Tamaki (Glen Innes-Panmure) area, where it owns half the housing stock.

This move came as house-building plunged to its lowest level since the early-1990s. New dwelling consents in the year ended March 31 were more than a third down on the previous March year.

About 16,230 new dwelling consents were issued during the year, well below the 25,775 average which Statistics NZ estimates are needed to keep pace with population growth. Activity is expected to remain at a low ebb for at least another year, with developers struggling to secure finance for large projects.

Development of 1700ha at Flat Bush in South Auckland is tagged to house 40,000 by 2020 but construction is not due to begin until next year and main developer Melview has been hit by the property market downturn.

In a "State of the Nation" report, the Salvation Army social policy unit warns that critical housing shortages will begin to emerge in the northern North Island if construction levels continue during 2009. "The downturn is especially serious in Auckland where it appears that a housing shortage of 2500 has arisen over the past year because construction rates have not kept pace with population growth." That estimate was based on data to September last year; consents have continued their downward spiral since.

Now there are signs of a turnaround in demand. Fewer New Zealanders are departing to live overseas and more are returning home as recession bites in OE destinations such as Britain. Net migration in the year to March 30 was 7500, up from 4700 the previous March year.

"Sharp changes in outward migration are likely to translate quickly into housing market shocks, especially if outward migration declines at the same time that building activity is waning," says the report.

There is also pent-up demand from what some call the intermediate housing market and others the "working poor" - renters on moderate incomes who can't raise the deposit for an Auckland mortgage. Their numbers more than doubled during the house price boom.

Statistics NZ estimates the Auckland region needs a further 60,000 houses (12,000 a year) between 2006 and 2011. In the year to February, just 3722 consents were issued.

Australian property forecasters BIS Shrapnel say the lack of house-building, rising immigration and lower interest rates will soon push house prices upwards. The city's housing stock shortage will pass 9000 next year and exceed 15,000 by 2012.

The supply crisis is not just down to financing: other issues include high costs associated with council planning and building consent rules and an alleged shortage of suitable sites within Auckland's metropolitan boundaries. The land supply debate will be an issue for the new greater Auckland council. Compliance and consent issues are expected to ease in time through Government regulatory reforms.

But many argue the Government could do more in the short-term to foster house building - boosting the supply of affordable housing while providing work for the building sector.

Massey University head of property studies Professor Bob Hargreaves says house-building has an employment multiplier effect which spreads through communities. "It goes beyond just increasing the number of houses - it stimulates the economy."

Champing at the bit to launch more housing projects is the New Zealand Housing Foundation, which is halfway through a 70-home "proof of concept" development in Glen Eden, catering for a range of income levels.

It plans a further 30 homes - a mix of new and existing apartments and townhouses - in Auckland City under a deal with the Auckland City Council.

The foundation's executive director, Brian Donnelly, says the affordability gap remains despite falling interest rates and easing house prices.

"With banks now requiring 20 per cent deposits, those on low to middle incomes are still struggling," he says.

"We think it's a great opportunity for the Government to work with the community sector and the private sector to provide affordable housing at a time when the private sector is struggling to supply new developments.

"They don't have to do it all on their own."

The foundation, one of a handful of community housing trusts in New Zealand, was formed in 2002. It carried out small housing projects in Mangere and Clendon and has worked with agencies in the Far North, Tauranga, Coromandel, Palmerston North and Queenstown. It receives funding from the philanthropic Tindall Foundation (started by The Warehouse founder Stephen Tindall) and the ASB Community Trust.

The foundation raised $18.5 million on the open market and borrowed $6.5 million from the Housing Corporation to undertake the Glen Eden development, which it views as a "proof of concept" project which should lead to further large-scale subdivisions.

"When the private sector's perception is that the margins are not there, providing we can cover our costs, the not-for-profit sector can make housing affordable."

The foundation hopes further projects will attract funding from institutional and private sector investors, whose returns would come in equity gains when the property is bought-out or on-sold.

"Instead of losing money on the stock exchange as they have been recently they could be putting money into social and affordable housing which is beneficial to New Zealanders."

Sites owned by Housing New Zealand and surplus Crown land offer potential for such projects he says. "We think we can do a lot more by bringing-in private sector and community trust investment alongside Government investment in these neighbourhoods."

Public-private housing partnerships ease risks for both sides and make financing easier. As recently as February, Housing NZ chairman Pat Snedden was talking-up the potential for his agency to be more involved in private sector housing developments.

"In a sense there is a chance to provide something of a counter-cyclical force when things are looking a bit dim."

Instead, following Treasury warnings about the Government's exposure, Housing Minister Phil Heatley ordered a go-slow.

Although consents have finally been issued for the first 1100 homes of the long-planned 3000-unit Hobsonville development, the Government has told Housing NZ to proceed with caution. "We want them to meet market demand," says Heatley. "We don't want them to over-reach. We've said 'get on with the first ones, as many as the market will meet'. That translates to 660 homes, eventually, the first of five precincts to be built on the former airbase."

Plans to include 500 state houses in the development were fought in opposition by Prime Minister John Key, the local MP, and have been axed. Most homes will go to market but a significant "affordable home" component is still planned. Heatley says the Government's new Gateway shared equity scheme and community housing groups will play a role.

At Tamaki, the corporation plans to build 2200-4000 new homes and refurbish 1600 over 20 years, but progress is tortuous.

At Papakura, Housing NZ bought 25ha of former Defence land for a 450-home development, including 30 per cent state rentals and affordable homes. That project is going through the resource consent process and is said to be ahead of schedule. But hopes that earthworks will start next summer have faded.

Housing NZ has other sites earmarked for housing at Weymouth and West Harbour.

But in February, when the Government was preparing its package to bring-forward infrastructure spending, it was swayed by Treasury's "serious concerns" about Housing NZ's capital programme. Treasury warned that the Tamaki and Hobsonville projects brought high infrastructure capacity risks and, at Hobsonville where most homes would be on-sold, high risk of exposure to the depressed housing market.

Treasury's qualms flew in the face of advice from the Government's main housing advisory body, the Department of Building and Housing. In its December briefing paper to the incoming Minister, it warned of a lack of affordable housing and argued the new Government should intervene to increase housing supply, particularly in Auckland.

As well as reducing development costs, it suggested the Government buy land for future housing. It was examining options including a fund to lower the cost of land development and encouragement for institutional and not-for-profit investors.

Heatley says Treasury has every right to issue conservative advice in the current climate. He traces slow progress on Housing NZ projects back to the previous Labour-led Government, which promised much on affordable housing but delivered little.

He signals the Budget on May 28 may improve prospects for public-private and community group partnerships.

Housing NZ's frustration over consenting delays at Hobsonville, Tamaki and elsewhere led officials last week to ask a select committee to include housing developments as "nationally significant projects" in the streamlined Resource Management Act. But extraordinarily, the submission was withdrawn because it hadn't been approved by Housing NZ's board or Heatley.

The Housing Foundation's Donnelly agrees there is scope to lower housing costs through reforms to the RMA and council consenting rules. But these obstacles shouldn't stymie further mixed-neighbourhood projects on Crown land, including sites which Housing NZ has landbanked.

"We've heard a lot of talk for a long time around these projects but where are the houses? The key message from us is let's stop talking about it and get a couple more of these projects under way in a climate where we know there's housing demand, at the same time creating more jobs by using under-utilised Government land.

"We've a strong belief that no one sector, public or private, can achieve these outcomes on its own."