Housing Affordability

343 Pages·2012·9.44 MB·English

Housing
affordability inquiry
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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 [phone].

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: [phone]
E: [email protected]

Other matters: Steven Bailey
Inquiry Director
T: [phone] 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
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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
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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