World-Class Auckland: How to make houses cheaper

Auckland consistently ranks highly in lists of the world's best cities but is never number one. So what would it take to turn Auckland into a first-class city? This week the Herald begins a 10-day series examining some of the biggest hurdles Auckland faces, from housing and transport to entertainment and education. We look at what we are doing, what we need to do, and why Auckland's success matters to the rest of the country. In the first part of the series we look at housing

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Record migration and surging demand for property is putting Auckland's desperately short housing stock under massive pressure. Lane Nichols investigates how the city ranks internationally and what we could do to become "world class".

Decent housing is a basic human right and home ownership considered a cultural rite of passage in this country.

But with Auckland house price inflation running at more than $3000 a week, house hunters are losing hope and many are destined to become lifelong renters.

Though considered an unspoilt and corruption-free country, New Zealand's housing is consistently ranked among the world's least affordable, and no where more so than our biggest city.

Deutsche Bank economists have listed New Zealand houses as the world's third most over-valued behind Canada and Belgium.

And OECD figures show our residential property is the most over-valued relative to rents and second-worst relative to incomes in the developed world.

The country's unenviable rankings are driven largely by dramatic price inflation in the over-heated Auckland market, where the median house price is now $755,000, up 26 per cent in the last year alone.

While those who bought before the boom are watching the value of their biggest asset soar, residents yet to buy property are being locked out of the market with fears of a looming generation of renters.

There's no denying Auckland is an international city. It's beaches, thriving arts scene, top schools, buzzing hospitality sector and strong jobs market draw thousands of domestic and foreign migrants each year.

But that success is putting enormous pressure on the city's housing stock. Experts estimate a current shortfall of up to 30,000 homes and around 13,000 new houses are needed each year just to keep up with demand.

The insatiable appetite for properties combined with weak supply and a worsening shortage has seen the value of sections surge to nearly 60 per cent of the price of an Auckland home. Developer contributions, infrastructure, construction costs and red tape are also pushing the cost of housing well beyond the means of most first-time buyers.
As overcrowding worsens, officials are scrambling to bring more housing on stream and find ways to dampen demand. But there is simply no quick fix to what many commentators are labelling a crisis of bubble proportions.

So how can Auckland turn the tide?

Where we rank

The 2015 Demographia International Housing Affordability Survey ranked Auckland as the 9th least affordable major city in the world.

Auckland was slightly cheaper than London relative to household income but pricier than Los Angeles, Toronto, New York, Paris, Brisbane and Boston. The city was 14th most expensive of all the 378 surveyed cities. Honk Kong took out top spot followed by Vancouver and Sydney.

The study compared Auckland's median household income (now $78,500) with the median house price (now $755,000). That means it would currently take the average buyer 10 years of their total income to afford a standard Auckland home. A "median multiple" of more than three years is considered unaffordable and anything over five severely out of reach.

Demographia co-author Hugh Pavletich puts the blame for Auckland's dizzying price growth down to planning regulations and infrastructure costs. He says metropolitan urban limits which prevent large scale housing developments beyond arbitrary city boundaries are "strangling" land supply and driving up the value of scarce, developable land.

He also argues the cost of infrastructure to service new developments is loading massive upfront costs on the price of new houses.

These factors combined had seen Auckland house prices surge by about 50 per cent since 2011, while many other cities like Houston, Dallas, Atlanta and most of middle North America had enjoyed relative price stability.

Houston, we have a solution

Houston Texas is being singled out as a case study Auckland should look to emulate. The affluent city has a population of 6.5 million and a buoyant economy, with GDP of around US$470 billion. And though it ranks highly in desirability indexes, house prices remain comparably affordable. Houston's current median house price is US$202,500 while median household income is US$58,500 - a median multiple of 3.5.

A report by the New Zealand Initiative puts Houston's low housing costs down to two key factors.

Firstly, it has no zoning for fringe land, meaning private property owners are free to develop housing on the city's outskirts provided the developments meet other environmental regulations. This means housing supply can more readily react to demand and the value of land closer to the city is not artificially driven up by scarcity pressures.

The second factor is infrastructure funding. Texan cities issue municipal bonds to investors to cover the upfront cost of infrastructure to connect new housing developments. Nominal taxes are then levied on residents who purchase the newly built homes. It means the cost of water and sewerage systems are not built into the initial purchase price, but spread over the life of the infrastructure.

"The high standard of living, which includes the ability to buy a house on a modest wage or salary, has been one of the hidden factors behind Texan prosperity over the past decades," the report states.

Urban sprawl

It's all very well promoting outward expansion as a solution to the city's housing woes. But critics argue that simply leads to urban sprawl, forcing thousands more motorists on to choked motorways. Auckland's urban area is already 544 square kilometres - about a third of the size of London, according to the 2015 Demographia World Urban Areas report.

The New York metropolitan area in contrast is the world's biggest built-up area - about 22 times the physical size of urban Auckland, which is ranked the world's 212th largest city. In terms of population density, Auckland is ranked 868th, with 2500 people per square kilometre. Despite our ranking, the city has a higher population density than Los Angeles, San Francisco, Sydney, Vancouver, Las Vegas, New York, Melbourne, Chicago, Houston, Perth and Brisbane respectively. Though smaller than Auckland, Bangladeshi capital Dhaka has the world's highest population density - more than 43,000 people per square kilometre.

Statistics NZ says population density has increased rapidly in parts of central Auckland, which is likely to continue if the region is to accommodate almost two million people by 2031.

Under a "medium variant projection", the city could have 110 unit areas with more than 4000 people per square kilometre within 16 years. "The Auckland CBD will continue to have the highest population density - increasing from 4600 people per square kilometre in 2006 to possibly over 13,300 people per square kilometre by 2031."

Higher density would spread to other parts of Auckland and Manukau cities, with Waitakere and North Shore also experiencing major growth. The projections have obvious ramifications for the city's housing stock, underlining the need for more intensive living options like apartments and townhouses to meet demand.

Pressure points

House price inflation is being fuelled by surging immigration. It hit a record net gain of 58,300 permanent and long-term migrants in the year to June, nearly half of whom settled in Auckland.

Meanwhile, mortgage rates have dived to 60-year lows and debate is raging over the impact of foreign investors and speculators on the Auckland housing market.

In a bid to slow demand, the Government has announced a new bright line test on capital gains for any investment property bought and sold within two years. The Reserve Bank will also require Auckland investors to stump up bigger deposits and officials will track foreign buyers by requiring them to have a New Zealand IRD number and bank account. \

The changes come into effect in October.

However, the Government has refused to introduce a more universal capital gains tax which could dampen Kiwis' love affair with property investment, and resisted calls to ban foreigners from buying New Zealand homes, though it is now considering land taxes or stamp duties - a surcharge on non-resident buyers used in Britain and Australia.

The Government argues that foreign buyer restrictions have not reined in house price inflation over the ditch. Though foreign nationals there can only purchase new homes, adding to overall supply, Sydney house prices have just breached the AUS$1 million mark.

Up or out?

As Auckland wrestles with the prospect of up to a million new residents over the coming decades, Auckland Council is pinning hopes on its proposed Unitary Plan.

The controversial document is a blueprint for the city that aims to promote higher density suburban intensification like that seen in Melbourne, Vancouver, London and New York.
It would see an estimated 280,000 new homes built in urban Auckland and 160,000 in four main rural areas.

But intensification plans were scaled back after a community backlash at the prospect of high rise apartment blocks and multi-level terraced housing in residential suburbs.

Deputy mayor Penny Hulse says the city needs a plan to accommodate forecast population growth and offer people choices as to where and how they live. This includes more high density, affordable housing close to public transport, amenities and people's places of work, rather than "condemning" them to a two-hour daily commute.

"It is better and more affordable for cities long-term to have a more dense city core and not keep spreading out and out and out into greenfield areas."

She admits tight urban boundary restrictions have not served the city well over the last 20 years and thousands of homes are now set to be built on greenfield sites, many in special housing areas subject to fast-track consenting processes under the Auckland Housing Accord.

But further sprawl is not the answer because of the cost to ratepayers of connecting far flung satellite suburbs to key infrastructure and additional pressure on the city's congested roading network, she argues.

The council will consider funding models like Houston's municipal bond scheme and is already working with developers here on how to finance infrastructure costs. "People want housing choices. The presumption that everyone wants to live on a quarter-acre in South Auckland or North Auckland, that just doesn't hold true."

The key is to promote high quality urban design based on the best examples from overseas. "This isn't just slamming in a whole lot of tilt slab buildings in a suburb near you to achieve some sort of ideological outcome. This is building good quality [housing] where people want to live and giving them the opportunity to see more vibrant suburbs."

Apartment living

But are Aucklanders ready to downsize their home ownership dream and settle for smaller, more intensive housing? As land prices soar many will have little other option.

Infometrics chief forecaster Gareth Kiernan says Kiwis' aspirations about the size of houses and amount of land they can own don't align with financial realities.

"By clinging to the dream that we should all be able to own our little piece of New Zealand, we are constraining our own housing options and effectively pricing a significant proportion of society out of the housing market. The reality is that in larger urban areas overseas, having your own private yard is simply not viable for most of the population."

High-density housing on smaller plots is more affordable, and price sensitivity means more Aucklanders are already willing to consider apartment living, "as long as the quality and location of the units are up to scratch".

In the year to April, new apartments and townhouse consents made up 34 per cent of new Auckland dwellings, the highest proportion in nine years. And figures from commercial real estate agency CBRE show nearly 6000 new apartments are set to be built across Auckland over the next three years, with most planned for suburban areas rather than the CBD.

However, 'NIMBY' attitudes which have hamstrung more intensive housing remain a threat, Mr Kiernan warns. While buyers need to accept more compact living options, "it is perhaps even more critical that existing property owners do not stand in the way".

But apartment buyers need to factor body corporate fees into their financial calculations.
Apartment Specialists director Andrew Murray said the fees were compulsory and enforceable by law. They varied depending on the size and quality of the building, and whether it came with extras like a car park, swimming pool or included water and power charges.

"Ballpark" fees for a 65sq m two-bedroom apartment were $4000-$5000 a year - but could balloon to over $10,000 per annum. The fees covered expense for cleaning common property, insurance, repairs and maintenance, common area power, security and grounds keeping.

Generation renter

Spiralling house prices are set to shut more Aucklanders permanently out of home ownership. But with the balance of power firmly with New Zealand landlords, commentators are demanding better rights and security of tenure to make renting more attractive, as it is in Europe.

New Zealand's home ownership rate is now at its lowest level since the early 1950s - just under 65 per cent - and nearly 40 per cent of Aucklanders live in rental properties, according to 2013 Census data.

Mr Kiernan says rental regulations that heavily favour landlords have fuelled our obsession with owning property. This is despite a massive financial premium opening up between renting and owning - $22 a week in 2003 compared to $444 a week now - a difference of $23,100 a year for the average Auckland home.

"The possibility of having to move out of one's home, for no good reason and at very short notice, means that renting is always going to be a significantly less attractive option, particularly for people with young children."

Tenants Protection Association (Auckland) coordinator Angela Maynard says we need longer tenancy lease terms - indefinite in Germany and some Scandinavian nations but typically six-12 months in New Zealand, and greater tenant rights.

German renters buy and install their own kit set kitchens, which can be taken with them or sold when they move on. Tenants can also carry out minor alternations and paint walls, provided they leave the home as they found it.

"It means tenants have a whole different approach to the house. It's not just some place. They've got a commitment to it and it's their home."

She also wants an end to 90-day eviction notices, which mean renters can be turfed out without cause, and for renting to be considered a viable tenure option, rather than just a "life stage".

Swiss rental model

Switzerland has a much higher rate of people living in rental accommodation - 90 per cent in Zurich. Swiss tenants are also given more legally-backed rights and responsibilities.

Research by the New Zealand Initiative shows indefinite Swiss tenancies are often life-long living arrangements, inherited by children.

Strict rent control laws keep rent increases below inflation for existing tenants, who are permitted to carry out minor alterations on properties, including painting walls and laying carpet. Tenants also contribute to maintenance costs, giving them a greater investment in where they live, and landlords must disclose what previous tenants paid in rent.

Despite net immigration of around 80,000 people a year, Switzerland has historically enjoyed relatively stable house prices, largely credited to the country's rent control measures, the research found.

Unlike New Zealand, there is no "cult of home ownership" or great pressure to get on the Swiss housing market. The average buyer is usually in their 40s or 50s, and only buys once in their lifetime, when they can afford the house they want.

"The upshot of this is that the Swiss have some of the best quality rental accommodation in the world; central heating, insulation, double or triple glazing, gas cooking and instant hot water are all standard. The downside is that supply is severely limited."

Housing: at a glance

Where we are at: Auckland house prices have spiked to record levels on the back of surging migration and a severe shortage of properties and available land. The city is now ranked among the 10 least affordable major cities worldwide but moves to allow more intensive urban housing have been stymied by community opposition to apartment buildings and multi-level terraced houses.

What we are doing: More than 80 special housing areas have been created under the Auckland Housing Accord, with the aim of consenting 39,000 new homes over three years. Auckland Council is also working on the Unitary Plan - a blueprint for how the city will accommodate up to a million new residents in the coming decades, while local and central government try to free up surplus land for private sector housing developments.

What we need to do: Ditch urban boundaries and allow more "urban sprawl". Allow more urban densification to cater for population growth by providing affordable housing options close to public transport. Investigate new ways to fund infrastructure costs and consider introducing restrictions on foreign buyers.
Give tenants greater security of tenure through long-term leases so renting is more attractive.