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As discussed throughout this report, rising house prices are the result of both short-term and long-term drivers of the demand and supply of housing. There are signs that housing market activity is slowing and it is possible that real prices could fall modestly in the next 1 – 2 years. If consumer confidence is adversely affected by external or internal economic conditions, a more substantial easing in activity and house prices is possible. In the absence of any significant economic shocks, however, prices are likely to remain high relative to disposable income.
The housing stock in New Zealand is nearly all held within the private sector; almost two thirds in owner occupation and one third in the private rental market. Social housing represents less than 5% of the housing stock. The implication of this structure is that to make a significant difference to house prices, affordability and home ownership rates, polices would need to alter the incentives and opportunities available to investors and home buyers.
Policy responses should not just add to the demand for housing as this is likely to fuel prices further. In a housing market that has seen considerable house price growth in the past six years the focus should be on increasing the supply of housing through reducing the input costs per dwelling and by building more affordable housing.
Increasing the supply of housing through identifying new land for residential development and lowering the costs of construction, which are both inputs into the cost of housing, are the most likely ways to achieve a reduction in house prices in the long run. The cost of land per dwelling could be lowered through more intensive use of existing land or the creation of new settlements outside of the central city with good transport links and amenities, or a mix of the two. The costs of construction could be reduced by improving the levels of research development and innovation and increasing offsite pre-fabrication and manufacturing.
Streamlining regulatory systems such as the building consent process will also help to reduce the cost of building a house. While these are not the largest drivers of house prices it is important to ensure that housing is produced as efficiently and cost-effectively as possible. But this does not mean quality should be compromised. One way of doing this could be to work with the industry to simplify the design of “starter homes” which could be subject to a minimal, streamlined building consent application and approval process.
As home ownership has become less affordable, peoples’ housing choices have become constrained and renting long-term and assisted pathways to home ownership will become more important for a growing number of people. There will be an increasing need for more long-term stable tenancies and better quality rental properties to ensure that a wider group receive the social and health benefits associated with stable, quality housing. This could be achieved through encouraging more institutional investors and the development of a large not-for-profit sector in New Zealand to provide more affordable options for owner-occupied and rental housing. Not-for-profits and large investors may be more effective and efficient at providing rental properties in a timely way to meet demand. They may also be better at providing accommodation that renters are more likely to want and have the capacity to provide pathways to home-ownership. They may be more likely than individual investors to take a longer-term view on their investments resulting in more longer-term stable tenancies. The development of a large not-for-profit sector could include working more closely with existing providers and iwi to scale up the provision of affordable housing, or creating new dedicated entities like the UK’s housing associations.
New Zealand, like many countries, has a complex set of taxes and subsidies that impact on the housing sector. Existing tax arrangements favour housing over other investment options. The tax system also gives mortgaged investors in rental property an advantage over similarly mortgaged first home buyers. Accordingly, there are a number of changes that could be made to the current tax regime that could contribute to a moderation in the growth of house prices, through a reduction in investor demand.
There were a number of issues that, in the time available, the House Prices Unit was not able to analyse sufficiently to draw firm conclusions. The Unit has identified the following areas for further work:
Information on the adequacy of land supply
Councils argue that they have between 12 and 21 years supply of land available for residential housing. Other stakeholders argue that not all of this land is suitable for development, and that there are blockages to it passing through to development including the presence of existing properties (and their owner-occupiers) and ‘land-banking’. The House Prices Unit has not been able to establish objectively, from the data and research that is readily available, whether there is an adequate supply of land that is either ready or close to being ready for development, or whether blockages in the land supply pipeline are contributing to price increases. These are key questions that warrant further investigation.
Resource Management Act
Developers argue that the land use
decision process is lengthy, adds cost and limits their ability to provide an
adequate volume of housing. Further research is needed to measure the costs to
applicants of obtaining a resource consent. This research will provide a better
information base on the effect of land use regulations on housing costs.
Improving building productivity
Preliminary work suggests that the New Zealand construction sector has exhibited low levels of productivity over the last 20 years. A study commissioned for the House Prices Unit suggests that problems with skills, investment quality, innovation and management practices would merit further analysis (Davis, 2007). Increased gains from scale could be obtained if there was greater pre-fabrication and manufacturing of parts of the building. Further work is needed to understand how best to address these issues. This would need to be carried out by, or in close conjunction with, the industry itself.
Infrastructure contributions
Under the Local Government Act and Resource Management Act, territorial authorities are able to charge developers infrastructure contributions during the development process. The ability to require a contribution rests on territorial authorities being able to reasonably link the infrastructure contribution to increases in infrastructure requirements flowing directly from a development attracting the charges. Developers have expressed concerns that the:
There is considerable variability between territorial authorities as to whether charges are applied and as to the size of the charges. This may be a reflection of the different costs territorial authorities face in providing infrastructure, or the different funding choices territorial authorities are making. It could, however, be an indication of inconsistency and variable interpretation of the power to levy found in the Local Government Act. Further work is needed to understand the impact that the variability and levels of infrastructure contributions between territorial authorities have on the cost of new housing.