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Housing Affordability PDF

343 Pages·2012·9.44 MB·English
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Housing affordability inquiry 2 1 0 2 h c r a M the Productivity commission aims to provide insightful, well-informed and accessible advice that leads to the best possible improvement in the wellbeing of New Zealanders. Housing Affordability March 2012 The New Zealand Productivity Commission The Commission – an independent Crown Entity – completes in-depth inquiry reports on topics selected by the Government, carries out productivity related research, and promotes understanding of productivity issues. The Commission’s work is guided by the New Zealand Productivity Commission Act 2010. Information on the Commission can be found on www.productivity.govt.nz or by calling +64 4 903 5150. Disclaimer: Access to Household Economic Survey and Survey of Family, Income and Employment data used in this report was provided by Statistics New Zealand under conditions designed to give effect to the security and confidentiality provisions of the Statistics Act 1975. The results presented in this report are the work of the New Zealand Productivity Commission, not Statistics New Zealand. ISBN: 978-0-478-39506-8 (print) ISBN: 978-0-478-39507-5 (online) Inquiry contacts Administrative matters: T: (04) 903 5150 E: [email protected] Other matters: Steven Bailey Inquiry Director T: (04) 903 5156 E: [email protected] Website www.productivity.govt.nz iii Foreword There are few things more important to New Zealanders than the homes we live in. Housing is a fundamental determinant of wellbeing, central to health, family stability, and social cohesion. Affordable, quality housing is also important for the New Zealand economy – it is a big and complex sector. For most New Zealanders, buying a house is their single biggest purchase, and the cost of owning or renting a home takes a large share of household income. If housing is more expensive than it needs to be, then the cost to individuals and families, and the New Zealand economy overall, is significant. Volatility in house prices also has wide-ranging impacts. Finding ways of making the housing market work better for all is therefore critically important. I cannot think of a better first inquiry topic for the Commission. This inquiry follows a house price boom in New Zealand (and many other countries) over the early 2000s, leading to widespread concern that housing has become unaffordable, particularly for low income earners and those trying to get into their first home. While the recent house price cycle was significant, home ownership in New Zealand has been declining for many years. At the same time, low income households have been facing serious affordability issues in the housing rental market. This suggests that something more structural has happened in the New Zealand housing market and that there are many dimensions to the affordability problem. Seen in that light, our inquiry has investigated the underlying factors that contribute to the high cost of housing in New Zealand and poor access to appropriate housing for those on lower incomes. The inquiry has found many obstacles getting in the way of affordable housing. A number of factors are small though cumulatively important. Other factors are more significant, such as land supply restrictions, the problems with achieving scale in new house construction and inefficiencies, costs and delays in regulatory processes. The inquiry has also identified that the current approach to social housing in New Zealand will not provide sufficient support for many New Zealanders in need. Having identified the underlying problems, we have set out a number of a ways to improve housing affordability. There are, unfortunately, no quick fixes. Rather, a coherent and determined push across multiple policy areas is required in order to meaningfully improve housing affordability. We have also identified excessive costs and impediments in almost every aspect of government’s interaction in the housing sector. This report poses a challenge for central and local government agencies to address the issues we have identified. In forming its views, the Commission has met with a large number of people, which has been invaluable. Across our issues paper and draft report, we also received a large number of submissions helping us to understand key issues and concerns and ways to potentially address them. We are very grateful for the high level of interest and involvement. In addition, we have also undertaken extensive research and analysis ourselves to help inform our recommendations. Preparation of the report was overseen by all of our Commissioners, Professor Sally Davenport, Dr Graham Scott and myself. We would particularly like to acknowledge the work and commitment of the inquiry team – Steven Bailey (Inquiry Director), Judy Kavanagh, Terry Genet and Paul Miller – and a number of other Commission staff and external providers that made important contributions to the work. MURRAY SHERWIN Chair March 2012 iv Housing Affordability Terms of reference The Government has asked the Productivity Commission to undertake an inquiry into housing affordability. New Zealand Productivity Commission Inquiry into Housing Affordability Issued by the Minister of Finance, the Minister for the Environment, the Minister of Housing, the Minister for Building and Construction, and the Minister for Regulatory Reform (‘the referring Ministers’). Pursuant to sections 9 and 11 of the New Zealand Productivity Commission Act 2010, we hereby request that the New Zealand Productivity Commission (‘the Commission’) undertake an inquiry into housing affordability. Context Stability of the home environment is widely considered to be important for social cohesion and family stability. Real house prices in New Zealand are markedly higher than they were a decade ago. The rise in real house prices has been associated with general declines in housing affordability, as indicated by a number of different measures, and in the rate of home ownership. These declines have contributed to increased demand for rental accommodation and additional pressure on the social housing sector. The debt accumulation and wealth effects associated with the rise in house prices may have also exacerbated New Zealand’s last economic cycle. Interest rates and exchange rates were arguably higher than they otherwise would have been during the upturn and there has been greater contraction in demand during the recession. Debt accumulation may also be a factor in ongoing economic risks. Scope Having regard to the context outlined above, the Commission is requested to undertake an inquiry to evaluate the factors influencing the affordability of housing (both rental and owner-occupied housing), and to examine potential opportunities to increase housing affordability. For the purposes of this evaluation the Commission should:  Identify and analyse all components of the cost and price of housing.  Identify mechanisms to improve the affordability of housing, with respect to both the demand and supply of housing and associated infrastructure.  Identify any significant impediments to home ownership, and assess the feasibility and implications of reducing or removing such impediments. Particular attention should be given, without limitation, to the following matters: a) factors influencing the supply of land and basic infrastructure for residential construction; b) factors influencing the cost of residential construction, including the effect of standards, specifications, approval and title requirements on the cost of new housing construction; c) the level and growth of productivity in the land development and residential construction industries, and the effect of government regulations on productivity in these industries; d) the efficiency of taxes, levies and charges imposed at all stages of the housing supply chain; e) the efficiency of the tax treatment of owner-occupied and rental housing; f) the influence of changing consumer housing preferences, willingness to pay, and financing costs on housing affordability; and v g) the operation of the overall housing market, with specific reference to the availability of a range of public and private housing types, the demand for housing, and the efficiency of use of the existing residential housing stock. Consultation Requirements In undertaking this review, the Commission should consult with key interest groups and affected parties. Timeframe The Commission must publish a draft report and/or discussion paper(s) on the inquiry for public comment, followed by a final report, which must be submitted to each of the referring Ministers by 1 February 2012. BILL ENGLISH, MINISTER OF FINANCE NICK SMITH, MINISTER FOR THE ENVIRONMENT PHIL HEATLEY, MINISTER OF HOUSING MAURICE WILLIAMSON, MINISTER FOR BUILDING AND CONSTRUCTION RODNEY HIDE, MINISTER FOR REGULATORY REFORM 30 MARCH 2011 vi Housing Affordability Contents Housing Affordability ............................................................................................................................. i Foreword ............................................................................................................................................. iii Terms of reference ............................................................................................................................... iv Overview ............................................................................................................................................... 1 Why is this inquiry important? .................................................................................................................. 1 What has happened to housing affordability? ......................................................................................... 3 What are the key features of the housing landscape? ............................................................................. 5 Where has the Commission found opportunities to improve affordability? ............................................ 9 Concluding comments ........................................................................................................................... 18 1 The housing affordability inquiry ............................................................................................... 20 1.1 What has the Commission been asked to do? ............................................................................ 20 1.2 Housing and wellbeing ................................................................................................................ 21 1.3 The Commission’s approach ........................................................................................................ 23 1.4 Analysing housing markets .......................................................................................................... 25 1.5 A holistic approach to housing affordability ................................................................................ 25 1.6 Guide to this report ...................................................................................................................... 26 2 The New Zealand housing market .............................................................................................. 28 2.1 The New Zealand house price cycle ............................................................................................ 29 2.2 Housing market drivers ................................................................................................................ 32 2.3 The rise of the private rental market ............................................................................................ 36 2.4 Housing investment ..................................................................................................................... 41 2.5 The quality of the housing stock .................................................................................................. 45 2.6 Ongoing challenges for the housing market ............................................................................... 47 3 Macro-economic factors ............................................................................................................. 49 3.1 Introduction .................................................................................................................................. 49 3.2 A retrospective ............................................................................................................................. 49 3.3 Implications .................................................................................................................................. 55 4 Housing affordability: distribution and trends ............................................................................ 58 4.1 Introduction .................................................................................................................................. 58 4.2 Why does housing affordability matter? ...................................................................................... 58 4.3 Affordability for potential home owners ...................................................................................... 59 4.4 Affordability for renters ................................................................................................................ 66 4.5 What conclusions can be drawn about housing affordability? .................................................... 68 5 Population and demographic change ......................................................................................... 70 5.1 Introduction .................................................................................................................................. 70 5.2 Population growth ........................................................................................................................ 70 5.3 The impacts of demographic change on household formation .................................................. 73 5.4 The impact of population growth and demographic change on underlying demand ................ 77 5.5 Implications for tenure choice ...................................................................................................... 79 5.6 Implications for house prices ....................................................................................................... 80 6 The role of taxation ................................................................................................................... 83 6.1 Introduction .................................................................................................................................. 83 6.2 How does the current tax system apply to housing? ................................................................... 84 6.3 Recent tax inquiries ...................................................................................................................... 87 6.4 Income tax influences on housing affordability ........................................................................... 88 6.5 GST and territorial government rates – two good taxes? ............................................................ 98 6.6 Concluding observations ........................................................................................................... 100 vii 7 Urban planning and housing affordability ................................................................................ 102 7.1 Introduction ................................................................................................................................ 103 7.2 Matching the demand and supply for housing .......................................................................... 107 7.3 Increasing the supply of land for housing .................................................................................. 110 7.4 The impact of urban development policies and processes on housing affordability ................ 113 7.5 An immediate way forward ........................................................................................................ 121 7.6 Concluding remarks ................................................................................................................... 124 8 Paying for infrastructure development ..................................................................................... 126 8.1 Introduction ................................................................................................................................ 126 8.2 The nature and role of infrastructure ......................................................................................... 127 8.3 Financial and development contributions ................................................................................. 130 8.4 How do development contributions affect housing affordability? ............................................ 132 8.5 Possible problems with the current system ............................................................................... 136 8.6 A way forward ............................................................................................................................ 139 9 Building regulations and affordability ...................................................................................... 151 9.1 Why have building regulation? .................................................................................................. 152 9.2 The regulatory framework for residential building .................................................................... 154 9.3 In what ways can building regulations increase the cost of housing? ....................................... 155 9.4 Are housing standards set at the right level? ............................................................................ 157 9.5 Is there scope to expedite the building consent process? ........................................................ 158 9.6 Is there scope to improve the allocation of risk under the Building Act? ................................. 159 9.7 Is there scope to improve the impact of regulation on innovation? ......................................... 162 9.8 Is there scope to reduce the diseconomies associated with many small BCAs? ...................... 165 9.9 Measuring the outcomes of regulation ...................................................................................... 166 9.10 Overall assessment .................................................................................................................... 167 10 The performance of the building industry ................................................................................ 170 10.1 Introduction ................................................................................................................................ 171 10.2 Are building costs increasing? ................................................................................................... 172 10.3 There is evidence of poor productivity ...................................................................................... 181 10.4 What are the barriers to improved productivity? ....................................................................... 183 11 The private rental market: affordability and outcomes ............................................................ 196 11.1 The dynamics of the private rental market – an overview ......................................................... 197 11.2 Growth of the private rental market ........................................................................................... 199 11.3 Lower-income households are under stress .............................................................................. 200 11.4 Quality and tenure issues ........................................................................................................... 203 11.5 Improving outcomes from the private rental market ................................................................. 205 11.6 A long-term solution .................................................................................................................. 214 12 Social housing .......................................................................................................................... 216 12.1 Introduction – the role of state and community (social) housing ............................................... 217 12.2 The state and community housing sectors ................................................................................ 217 12.3 Social Housing Reform Programme (SHRP) ............................................................................... 218 12.4 The future role of the community housing sector...................................................................... 225 12.5 Funding the community housing sector using the Accommodation Supplement .................... 231 12.6 Areas requiring emphasis in the reform programme ................................................................. 235 13 Mäori housing .......................................................................................................................... 238 13.1 Mäori housing needs.................................................................................................................. 239 13.2 Broader issues in Mäori housing ................................................................................................ 244 13.3 Responses to the housing affordability and wellbeing challenges facing Mäori ...................... 246 13.4 Building homes on Mäori land ................................................................................................... 250 13.5 Why aren’t homes getting built on Mäori land? ........................................................................ 253 13.6 Alternative models for managing housing developments on rural Mäori land ......................... 261 Findings and recommendations ......................................................................................................... 265 viii Housing Affordability Appendix A Public consultation ................................................................................................ 277 Submissions .......................................................................................................................................... 277 Engagement meetings ......................................................................................................................... 280 Appendix B The costs of urban form ........................................................................................ 283 B.1 New Zealand .............................................................................................................................. 283 B.2 United States .............................................................................................................................. 290 B.3 Australia...................................................................................................................................... 291 B.4 A Generic Decision Tool for Urban Density? ............................................................................. 294 B.5 Conclusion .................................................................................................................................. 296 Appendix C Methodology on impacts of Auckland’s Metropolitan Urban Limit on land price .. 297 Appendix D Collaborative models for urban land development ............................................... 300 D.1 New Zealand .............................................................................................................................. 300 D.2 Australia...................................................................................................................................... 301 Appendix E Charging for infrastructure: international experience............................................ 304 Appendix F Housing initiatives ................................................................................................. 312 References ........................................................................................................................................ 316 Tables Table 2.1 Proportion of individuals who have a major problem with their house or neighbourhood ........ 46 Table 5.1 Proportion of home-owners by length of time in New Zealand .................................................. 80 Table 7.1 Typical plan change and planning consent timeframes ............................................................ 120 Table 8.1 The share of development contributions in capital expenditure, selected councils, 2010–11 and 2011–12 .............................................................................................................................. 129 Table 8.2 Development contributions as a share of section prices ........................................................... 133 Table 8.3 Dispute resolution mechanisms – key attributes and trade-offs ................................................ 150 Table 9.1 Breakdown of 2011/12 building consent charges by selected territorial authorities ................ 156 Table 10.1 Percentage change in key material costs, 1995–2010 ............................................................... 175 Table 10.2 Trade prices for building materials in New Zealand and Australia ............................................ 176 Table 10.3 Per square metre building costs in New Zealand and Australia ................................................ 179 Table 10.4 Total building costs in New Zealand and Australia.................................................................... 179 Table 10.5 Traditional versus integrated project delivery ........................................................................... 187 Table 10.6 Highest qualifications held by individuals in construction industry occupations (2006) ............ 190 Table 10.7 Productivity Partnership skills strategy for the construction sector ........................................... 192 Table 10.8 Government investment in the residential building sector........................................................ 194 Table 11.1 Changes in the composition of the private rental market ......................................................... 199 Table 11.2 Proportion of individuals aged 65+ in low-income households (after paying for housing costs) by tenure, 2009 ................................................................................................................ 205 Table 11.3 Current regulation relating to housing quality ........................................................................... 206 Table 11.4 House price reductions required to reduce the number of intermediate renter households ... 212 Table 12.1 Projected clients for and supply of community and state housing ............................................ 223 Table 12.2 Example of social service and housing provision ...................................................................... 225 Table 12.3 Example of Accommodation Supplement reductions absorbing the benefit of reduced rents in the community housing sector ...................................................................................... 231 Table 12.4 Likely results of three options for funding the community sector differently ............................ 232 Table 12.5 Expenditure available to be reprioritised if entitlement to the AS is cut at various thresholds ................................................................................................................................... 233 Table 13.1 Profile of demographic groups by financial knowledge ............................................................ 242 Table 13.2 Features of microfinance and their applicability to repair loans on Mäori land ........................ 249 Table 13.3 Strengths and weaknesses of mutual insurance schemes ......................................................... 261 Table 13.4 Strengths and weaknesses for using the retirement village approach to licences to occupy on Mäori land ............................................................................................................................. 263 Table 13.5 Strengths and weaknesses of using the unit titles approach to managing a housing development on Mäori land ...................................................................................................... 264

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This inquiry follows a house price boom in New Zealand (and many other New Zealand Productivity Commission Inquiry into Housing Affordability.
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