Too little, too late: finally fronting Auckland's housing problems

Singing an old song
It’s hardly worth blogging about the Auckland housing crisis any more.  It’s an old song few people wanted to hear in the past. Now everybody’s singing it. Today’s comprehensive coverage by the New Zealand Herald neatly highlights the ultimate contradiction – how can Auckland be one of the most liveable cities in the world when it is one of the least affordable?

When the problem of where to put our growing population could have been relatively easily solved 20 or so years ago, planners were stuck in an eighties groove promoting Plan A - a city contained within strict boundaries against the clichéd chorus of “no more sprawl”.

The idea of urban sprawl was – and still is – used to raise an image of ever-expanding, continuous development of monotonous housing and crowded roads swallowing pristine bushlands and a pastoral cornucopia.  From this it was a short step to damning all and any greenfield development that might have kept the housing market functional, offered opportunities for smart urban design, and made new communities viable –and liveable.

Even though geography, economics, and preferences favour a city in which employment can disperse and urbanisation can take place on greenfields divorced, if necessary from high cost legacy infrastructure, we put up the shutters and were blind to the consequences and costs of a high density, high rise alternative.

The tide has turned 
The resulting shortage of affordable housing has finally risen to the top of the Government agenda. The Minister of Housing and even Auckland Council are starting to push the boundaries and look at options for a realistic city footprint.   Initiatives include extending the capacity of hinterland villages and towns , identifying areas well suited to urbanisation on or beyond the city edge, and tackling the thorny issue of how to re-form swathes of the existing urban area to accommodate greater density. 

It’s a sign of our past failures, though, that these initiatives necessitate bypassing the Resource Management Act and leapfrogging the fraught process of translating the Auckland Plan into a meaningful statutory planning document.

But things will get worse before they get better. 
The Council still estimates a shortfall of 25,000 dwellings in 2018 compared to 15,000 today.  The Productivity Commission estimates an even greater 32,000 shortfall and says another 13,000 homes would be needed annually just to cater for growth.    Whatever the number turns out to be, it will swamp the best we have achieved, a peak of 12,000 dwellings consented in 2005, and a long-term average of little over 7,000 a year. 

Unfortunately, it's no longer just a numbers game.  We have procrastinated to the point that we are now faced with an enduring structural problem in a housing market that will be marked by increasing reliance on offshore capital, a lift in long-term rental tenancies, and ultimately a slowdown in population growth as the city loses its appeal.

Do we have the capacity?
It’s no longer just a question of releasing land for development.. 

One problem is that we have let our investment in infrastructure fall behind.  That can be solved with time, funded by more rates increases, foreign capital, or, better perhaps, the municipal infrastructure bonds long promoted by advocate of affordable housing Hugh Pavletich. 

But don’t expect any early boost given the small size of the civil engineering sector in New Zealand, and, like new housing, don’t expect it to be achieved without a solid injection of foreign capital.

We may also lack the capacity to ramp up residential construction and in trying to do so increase the risks around the quality and cost of building houses.  The challenge for the building sector will be to achieve levels of productivity not enjoyed since 2004 while boosting building personnel, and promoting a more competitive materials sector.  Without gains in these areas, Auckland may need twice the builders it had in 2014 simply to reach an annual target of 13,000 new homes, let alone make a dent in the existing shortfall.  

Finally, and fundamentally, prices have reached the point that the traditional drivers of new demand, the first home buyers, are effectively excluded from the market.  Incomes have simply not kept pace with house prices.

The flow-on effects are insidious
The consequent shift to a housing market dependent on investors funding new stock rather than occupants raises a new set of uncertainties (including a divisive populist reaction against offshore investors, as if their presence is a cause and not a result of a housing shortfall contrived by poor planning).

For a start, we have an insufficiently developed rental sector to provide tenants the degree of security necessary to underpin education, health, and career . Without a strong institutional and regulatory framework, rental housing is a second best solution for families, undermining commitment to community and increasing mobility. While that may not worry the young and transient, it is not conducive to family formation, household stability and savings, or strong communities.

A high rental population tends to be associated with high labour turnover, lifting the cost of employment and undermining in particular businesses that employ the less skilled.  At the same time, higher salaries and wages are needed to compensate for high cost housing (and commuting) in Auckland, boosting the cost of the professional and management services to the corporate and government sectors.

Can we afford the bubble to burst?
Auckland's distorted housing market contains the seeds of its own destruction that no amount of fiddling with macro-economic settings will now resolve.  And even if some twenty years too late we take the brakes off land supply, prices are unlikely to fall quickly and quietly enough to restore order as we knew it, if only because of the costs that have become embedded in the construction sector and are likely to be amplified if demand for development outruns the capacity of the market to supply it.

And if we could drop prices sufficiently to bridge the affordability gap we risk bursting the bubble.  Highly mortgaged householders will find themselves without equity and banks without collateral. The social and economic consequences and the fiscal and political impacts would be grim.

On the other hand, we may no longer have a say.  As the rock economy encounters softening commodity prices, falling consumer confidence, and a weakening labour market, expect that pillar of economic activity – the Auckland housing market – to encounter its own rocks. A weaker economy could burst the bubble without any supply side response.  On the other hand, global deflation and a low New Zealand dollar could prop up a bubble market for a little longer, exacerbating the problem in the long run. 

Will the market simply slow down as people move out or stop moving in?

There are other scenarios that might just ease the pain and slow the market.

For example, the trickle of households exiting Auckland (which has exceeded any gains from the rest of New Zealand for over twenty years) could turn into a torrent .  Detached housing, lack of congestion, and ready access to amenities underpin the growing attraction of secondary cities and towns.  Retirees have known this for a long time, and the potential to cash up their Auckland home for two or three times the cost of a better dwelling in a smaller city or town is likely to boost the momentum as increasing numbers of baby boomers retire.

And despite loose talk of zombie towns, employment and entrepreneurial opportunities are out there to complement the lifestyle opportunities associated with small town living. 

And we can expect many more families to make the move.  A return to the regions and a slowdown in gains from international migration as excessive house prices and lagging infrastructure diminish Auckland’s liveability may be sufficient to lower the city's temperature.

Retreat of the baby boomers?
We also need to think about what will happen to the stock of baby boomer housing 10 or 20 years out. While we can incorporate the ageing of the population into naïve demographic projections, do we really know how their behaviour might shape the housing market ten or twenty years hence?

Only a minority might move out of Auckland, but that will have a significant impact on the housing market.  Many more may opt for the convenience, comfort and security of retirement villages.  That, and a little natural attrition along the way, should see the options for suburban revival increase as the large houses of the 1950s and 1960s are recycled or replaced, increasing residential capacity in existing suburbs.
 
Add to that the changing household characteristics in an increasingly diverse Auckland– including more multi-generation families occupying larger individual dwellings, more sharing among non-family members and households – and the numbers game might change substantially.

So what do we plan for now?
Of course, either of these scenarios – a bubble burst or a market moderated – creates another problem.  What do we do with all our plans and projected spending predicated on another million Aucklanders – or thereabouts – by 2041.  How should we revise the massive spend proposed for transport infrastructure that assumes that the growth of the past decade is somehow inevitable over the next?  And how do we maintains the conceit that as much as 70% of it might be contained within the existing built-up area?   And pay the debt that we are accumulating on the basis of growth assumptions that we were never ready for and are consequently unlikely to be fulfilled?

It’s time to think about Plan B; Plan A has clearly failed the city.

It’s all about housing ... isn’t it?

What is planned for new houses in Auckland?

The discussion of housing in Auckland Unleashed, which sets the Council’s thinking for a spatial plan, follows a tried and tested formula.  It talks about the different sorts of houses we might use to achieve higher residential densities in the city. 

On housing and neighbourhoods it says that it is important that:

Auckland has a clear strategy concerning the way it wants development to proceed in our town centres, avenues and areas of intensification. Delivering new and appropriate house types requires a rethink in planning policy (specifically density rules and onsite parking requirements), a commitment to achieving design quality, new approaches to home ownership and land subdivision, and importantly, investment in the amenity of areas (streets and open spaces) in which they are proposed. (p143)

This sounds well and good, but it’s planning for a particular vision of how a city might work.  It falls short on how its residents might want to live.  Like all such strategies, it’s about housing as a land use and houses as design elements.  It’s not about households and their residents. 

It was the same in the old Auckland Regional Growth Strategy; notions of diversity and affordability emphasised structures for smaller dwellings, rather than what people might need.  And from what I have seen, it’s been the same in the planning documents for the Bay of Plenty, Hamilton, Christchurch, and Wellington. 

So what about the people who will live in them?

I looked elsewhere in Auckland Unleashed to see what it might say about people rather than buildings. There were some expectations outlined under the heading of Housing (page 42).  But they were hardly convincing.  Here are some responses to what I found there:

Auckland Unleashed says: Households with children will decline to one third of households by 2040. 
Really?  That’s not very helpful.  A quick look at Statistics NZ’s latest medium projection for the region (to 2031) does show a likely slow-down in the rate of growth.  But it also projects 71,000 more families with children in 2031 compared with 2006.  Sure, their share of the total will contract (from 52% of the total to 44% in this projection) but let’s not obscure the need to house many more families over the next two or three decades.    If migration is a key driver of growth, the figure will probably be higher.  How and where will we be housing our families? 

Auckland Unleashed says: There will be more divergent family structures –single person, multi-generational, and extended families.
Good.  So hopefully plans will encourage more big houses, especially given the significance of international immigration as a driver of Auckland’s growth.  That’s a big group of people, many of whom will want bigger houses - three, four, five or more bedrooms.  That’s part of Auckland’s appeal to some of them.  For others it’s simply a reasonable response to cultural expectations.

Look at the census data. While there are limits in its accuracy, a pretty clear picture emerges.  The number of one and two bedroom dwellings hardly increased from 1996 to 2006 (what growth did occur happened between 2001 and 2006).  Some 30% of the growth was in three bedroom dwellings, and high 59% in houses with four bedrooms or more.  

Interestingly, the number of small households grew much faster over the period than the number of small dwellings, measured in these terms.  Even smaller households, it seems, like larger houses:

Comparing Growth in Households and Dwellings by Size

If we want Auckland to continue to grow and not just age, there may have to be plenty of larger houses on the planning menu.

Auckland Unleashed says: Home ownership rates are in decline and possibly 40% of households will be in rental accommodation by 2050, not always by choice.
Now this is a worry.  New Zealand has a long-standing tradition of home ownership.  Much as over-investment has been implicated in the housing bubble, owning a home still plays a significant role in our society and economy. 

So we shouldn’t treat the emergence of the intermediate housing market as inevitable, or in the least bit desirable.  This comprises young households with significant income but not enough to become owner occupiers, or to step off the bottom rung of the housing ladder.  The rapid growth of this segment is the reason for the jump in the rental market. 

This has big implications for family formation and fertility, educational attainment, employment stability, and a sense of community and belonging.  Home ownership is still important to developing a personal asset base that can encourage entrepreneurship and investment in an economy where over-consumption may have been a barrier to long-term growth. 

I cannot see anything in Auckland Unleashed that might counter this decline in home ownership, and if the spatial plan it will inform persists in promoting land rationing through the way it applies the Metropolitan Urban Limit and by pushing inappropriate apartments as a solution to affordability, it will only make the problem worse.

In fact, Auckland Unleashed says to expect in excess of 300,000 households in rental units by 2050.
This is not something that people necessarily want, and not something we should simply accept. Between 1996 and 2006 an increase of 42,000 rental households brought the city’s total rentals to 145,000, 34% of all private dwellings.  This is one of the faces of our housing affordability crisis.

Auckland Unleashed talks about another 330,000 dwellings in total by 2040, and implies 155,000 rentals by 2050 (I’m not sure why two different end dates are used). 

Those that can may just go
But, then again, it may not happen. The inability to buy a home may simply push more young, skilled, and talented people offshore, and discourage the skilled and talented people we hope to attract from overseas to replace them.  If we don’t address the affordability or the suitability of housing for young families then we may as well scale back population projections.  But I don’t see such a slow growth strategy discussed in Auckland Unleashed, even though it is a likely outcome of an inappropriate housing policy.

And many of  those that can't will live in bigger households
There are other responses: one is to pack more people into existing structures.  This is already happening with more sub-letting of spare rooms and attics; more inter-generational multi-family households. 

There’s (indirect) evidence that this has been happening a while.  According to the Census, there was an average of 2.95 residents per (private) dwelling in Auckland in 2001.  The average size of additional households over the next five years was 3.22 (the equivalent figure in Manukau City was 4.03).  Consequently, any long-term fall in dwelling occupancy that might have been factored into housing projections can now be reversed.  That raises interesting questions over the housing mix we might be imposing through our plans.

With the slowdown in the housing market since 2006 the chances are that in many parts of Auckland household size is continuing to increase.  Unfortunately, that’s associated with increasing social inequity.  And I couldn’t find anything in Auckland Unleashed that addressed how to plan for increasing household sizes while promoting smaller dwellings, or for the possible impact on social disparities.

Time to introduce people to plans?
We are heading on to shaky ground with housing plans and policies that focus on structure and form rather than on the needs, preferences, and behaviour of households and residents.  Delivering a sustainable city may not be the same as delivering a sustainable community. 

Hopefully, the spatial plan when it is prepared will leave plenty of room for the middle ground to emerge, for housing to reflect what people want, rather than just planners' and designers' models of what they should be allowed.

Let's not jettison bold urban development plans

New centres fail to fire

Anne Gibson in the New Zealand Herald reported the recent failures of several large, integrated urban development projects on Auckland’s fringe.  Plans for a number of substantial developments are now defunct or substantially scaled down.   She said that this was a result of “the end of the boom-bust real estate cycle rather than any centralised planning attempt”.

The article attributes the failure to “commercialise” Auckland’s borders to financial failings, to the drying up of bank funding and consequent bankruptcies, and a reliance on too much debt to carry forward bold plans.  What planning could not achieve by way of containing the city, the global meltdown has apparently done. 

That is certainly part of the story, but it raises as many questions as it answers. 

Short-sighted planning still a problem

Perhaps most obviously, some of the projects cited were overturned because they contravened the Auckland Regional Policy Statement’s commitment to largely containing growth within Auckland’s existing boundaries.  In other cases, protracted planning requirements simply delayed getting projects to the market, precipitating or compounding any problems of financial over-leveraging. 

The irony is that a number of these projects were responding to the strictures of smart growth, reducing vehicle dependence, increasing housing densities, promoting pedestrianisation and public transit, and integrating local commercial and residential activity.  Some were potentially exemplars of the sustainability principlesbehind the Regional Policy Statement.  Unfortunately, these principles were buried by the practice of defending the Metropolitan Urban Limit at all costs and regardless of consequences.

So what have been the costs of these projects failing to fire?  

The financial losses associated with the failure of these projects can be far-reaching, especially as they impact on promoters, financial institutions, and investors.  More than that, they compound the nervousness of financiers for large developments.

But the impact reaches well beyond any undermining of the development sector.  The long-term cost is likely to be counted in a distorted housing market.  It may even undermine Auckland’s economic growth.

One cost has been a reduction of housing affordability.  In 2007, Motu Research demonstrated the pressure on residential land prices exerted by the Metropolitan Urban Limits.  While the study focused on an unsurprising gap between rural and urban zoned land, and perhaps the size of the differential was of some interest.  But what was most revealing about the data used was that growth in land values far outstripped growth in capital value. Inflating land costs have been a major contributor to falling affordability in Auckland.

Obviously, the inflation of land prices within the Metropolitan Urban Limits has done little for the economics of large-scale housing projects.  It adds to holding costs and by inflating prices for developed land may reduce the rate of uptake.  On this score , it is interesting that the one project cited as making progress in the Herald article, is Housing New Zealand’s Hobsonville development – a public project on publicly owned land.

The gap between the houses we need and what we are getting

Statistics New Zealand projected that between 2006 and 2011, Auckland region would grow by between 39,000 and 60,000 new households each year.  Over the four years to December 2009 there had been just 20,600 consents issued, a little over 5,000 a year.  With just 1,800 issued in the first six months of the current year, there is no sign of a recovery either.

There has been a solid decline in consents for dwellings issued in Auckland since 2004 (see figure below).  Whether this is a victory for market rationality or for our former regional planners so intent on holding the line, it has to be a defeat for new households and aspiring homeowners.  The fact that its share of national residential consents has fallen from 45% in 2002 to under 24% in 2009 suggests that whatever the reason  -- falling demand or constrained supply -- its impact is falling dkisproportionately on Auckland.

In fact, Statistics New Zealand’s medium projection would see 49,000 new households potentially entering the Auckland housing market between 2006 and 2011, and another 53,000 over the five years to 2016.  Even if this projection overestimates demand, it suggests that supply in the region is “short” by as many as 30,000 new dwellings . 

Impacts on Auckland’s growth

One response to a supply driven shortage, of course, is for households to go elsewhere.  It is instructive that Auckland’s share of new dwelling consents in New Zealand has been falling.  Other responses are deferred family formation, a growing number of multiple household dwellings, and in some instances over-crowding.  A turn down in the international migration gains that underpin Auckland’s long-term growth projections may be another result.

The reduction in activity in the new housing market has other effects, one of which is to hollow out the development, construction, and supply sector.  Trades move elsewhere, perhaps to Australia, and businesses shut down.   

While it is difficult to separate the downturn in urban development and housing and its consequences from the recession generally, the real issue is one of long-term impacts.  The city is looking at the prospect of a severe housing shortage.   Not only is land for housing likely to be a major issue for the foreseeable future, a diminished housing sector will see prices increases when -- or perhaps if -- demand picks up again.  Infill and brownfield development alone will not do it.  inevitably large scale projects within the urban fabric will compound infrastructure and congestion issues.  They cannot be cost effective, either, without a compromise to quality.

Such impacts and outcomes will be compounded if the significant urban development projects that are needed to provide the residential stock for the next ten to twenty years fail to get off the ground.  The demise of the projects cited is guaranteed to keep residential prices unduly high when there is a lift in demand, and may see the region faced with an unseemly scramble for housing, inside the Urban Limit and outside. 

Where to now?

Creating an environment in which plans support rather than stifle innovative urban investment wherever it goes will be one of the challenges that the new Auckland City needs to address now to ensure orderly long-term growth.  We need the sorts of projects which overzealous planning restrictions and difficult financial conditions have conspired to sink in the recent past if we are to have a properous and equitable future.