With Auckland now the world’s fourth most expensive city relative to income, the Listener investigates what’s gone wrong with the housing market and what’s likely to happen.
So this is what you can get for around a million bucks. A 10-year-old cookie-cutter house in the sprawling new suburb of Flat Bush: brick and plasterboard, four small bedrooms, two bathrooms, open-plan kitchen and lounge. It’s a perfectly adequate home, albeit devoid of architectural charm and squeezed onto a postage stamp section of 237sq m.
On paper, the house, pictured below, is worth $640,000, but no one in Auckland takes any notice of the CV these days. Barfoot & Thompson agent Melanie Broodryk thinks it will sell in the high $900,000s.
Broodryk and fellow agent Veronica Ding have agreed to show the Listener around a few homes that represent the new normal in Auckland’s out-of-control housing market. Within a couple of hours, we’ve looked through three places that they think will go for about “a mill” or a touch under, and a 1960s brick-and-tile house on a 437sq m section on the noisy Pakuranga Rd that will probably sell in the mid-$800,000s.
The experience is enough to leave a non-Aucklander slack-jawed with disbelief. One two-year-old house on 351sq m of land is expected to sell for $950,000-$1 million, even though an almost identical place a couple of doors along went for $830,000 just over a year ago and the CV is just $690,000. Another, a 19-year-old place with four small bedrooms on 675sq m and a CV of $570,000, sold a week after the Listener’s property tour for $960,000.
Broodryk – whose Flat Bush sales team is one of Barfoot & Thompson’s top performers – says despite the eye-popping price tags, properties are often snapped up quickly. A place in the West Auckland suburb of Swanson went for $1.1 million within a day of being on the market; another Swanson house was gone within two weeks, at $1.08 million. Broodryk prides herself on getting her new listings quickly and efficiently to market and presenting them well for sale: “Time is money.”
Literally. Financial writer Bernard Hickey says according to the Real Estate Institute’s stratified median house index, Auckland prices rose in June by an average of $1358 a day, or $57 an hour – almost twice New Zealand’s average hourly earnings. The stratified index series was developed in conjunction with the Reserve Bank to give a more sophisticated measure of underlying market trends by stripping out unusual sales patterns.
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Hickey says at that rate of inflation, the median Auckland house price passed through the $1 million mark on July 9.
Real estate agent John Goodrum sold an ex-state house in Te Atatu for precisely $1 million recently. According to the CV, it was worth $585,000. Goodrum describes the three-bedroom, one-bathroom place as “tidy, but not phenomenal”. It hit the million-dollar mark because the 814sq m section is subdividable, he says. “It’s all about the land.”
With that simple statement, Goodrum has identified the factor that many believe is the root cause of the dysfunctional Auckland housing market. For more than 15 years, the city has been ring-fenced by a planning boundary that has forced up the price of land. According to Housing Minister Nick Smith, the median section price in Auckland has increased 350% since 1990. In the same period, building costs have gone up 78% and the consumer price index 71%.
A report last year by the Productivity Commission, “Using Land for Housing”, found that the price of urban land just inside Auckland’s Metropolitan Urban Limit (MUL) was 10 times the price of neighbouring land just outside the MUL.
Those most affected by the inflated land prices are families at the bottom end of the housing market, the commission said. “When an artificial ‘fence’ delineates residential land from non-residential land on the urban fringe, it limits the supply of lower-priced land, with a resulting impact on prices at the lower end of the housing market,” according to research cited in the report.
The impact of the MUL has been compounded over time by both inaccurate forecasting of Auckland’s population growth and rigid enforcement, says South Auckland property consultant Jon Maplesden. Throughout the 2000s, the city’s population grew at a faster rate than had been projected by Statistics New Zealand, whose forecasts were relied upon by the old Auckland Regional Council to determine where the edge of the city should be drawn.
And because the MUL was set in regulatory stone through the Regional Policy Statement and administered by a regional council that regarded the defence of agricultural land around the city as an “article of faith”, it was extremely difficult for both developers and the legacy city and district councils (which were amalgamated into the unitary Auckland Council in 2010) to get land outside the MUL zoned for housing.
Consequently, the land price now accounts for 60% of the total value of property in Auckland, according to the Productivity Commission. Constricted supply and high demand have created perverse incentives that reward land banking.
Onto the hot embers of restricted land supply has been poured inflationary fuel in the form of:
- the lowest mortgage rates since the 1950s;
- aggressive use of financial leverage by property investors, who benefit most from rampant house price inflation and account for 46% of house sales in Auckland;
- record-breaking net migration of 69,000 permanent and long-term arrivals in the year to June, and 160,000 over the past three years; and
- a collapse in the number of new house consents following the global financial crisis (see Pattrick Smellie's article on the risk to banks of a 40-50% drop in house prices) and a shortage of new listings on the real estate market. The Reserve Bank says the number of building consents per capita in Auckland is only 40% of the peak level achieved in the early 2000s.
“The population of Auckland has increased about 90,000 in the past two years,” estimates Maplesden. “The rest of the country can hardly comprehend what that means. We should be building 20,000 houses a year just to keep up, but at the moment we are consenting around 9500.”
The result is that prices that were merely crazy a few years ago are now obscene. Hugh Pavletich, author of the Demographia home affordability survey, says the city’s median price in 2008 was 6.7 times the gross median household income; now it’s 10.2 times. If things continue on their current course, he says, it will be 12 times the median household income by the time of next year’s general election.
The widely accepted measure of home affordability – the so-called “median multiple” – is that the median house price should be no more than three times the median household income (although Auckland Council has settled for a goal of five times income by 2030). According to the 2016 Demographia survey, Auckland is the fourth most expensive city relative to incomes out of 367 cities worldwide.
The grand plan
Will the proposed Unitary Plan for Auckland fix it? The Independent Hearings Panel, which spent three years considering the proposed plan, published its recommendations last week. They have been widely lauded as a bold step in the right direction, with many cheering the proposal to tear down the planning barriers to intensification in most suburbs – including allowing up to four dwellings to be built on a section without the need for a resource consent. The panel also recommends that the line demarcating the city’s urban limit – now called the Rural Urban Boundary (RUB) – be pushed out to allow for 30 years of growth.
The proposed plan envisages 422,000 homes being built by 2040, the bulk of them townhouses and apartments within the existing urban footprint rather than in greenfields subdivisions. It says 131,000 new homes will be needed in the next seven years to make up for the existing shortfall and cater for growth.
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But property economist Adam Thompson fears it won’t be enough to solve the critical lack of affordable homes. Thompson – who was part of an expert group advising the hearings panel – says it’s down to simple economics. The land in existing suburbs is expensive, and so the apartments and terraces that will be built on them are highly unlikely to be in the $300,000-400,000 range that working families need.
Modelling done by the expert group looked at the likely price of new homes under the proposed plan, based on underlying land prices and the commercial feasibility of development. It showed that only 15% of new homes across the city would be priced under $800,000 – although the distribution varies markedly between different suburbs. In the central and northern parts of Auckland such as Devonport, Takapuna, Orakei, Mt Albert and Mt Eden, the modelling showed there would be no new homes under $800,000, but in the southern and western suburbs a high proportion would come under that price point. In Otara-Papatoetoe, the model shows 81% under $800,000, 73% in Manurewa and 83% in Waitakere.
Thompson says the only way to roll out large numbers of affordable homes is through big greenfields developments on the city fringe.
“The price of housing in general in any growing city is set by the price of new dwellings. If new dwellings cost $1 million, then everything else adjusts to those prices. If a lot of the new dwellings cost $300,000-400,000 then that sets the price across the city.”
And though developers can apply for private plan changes to roll out subdivisions within the RUB – and the legal hurdles will be lower because decisions will be made under the District Plan rather than the higher-order Regional Policy Statement – Thompson says that process is slow and expensive and will take precious time that Auckland can’t afford to lose.
“The issue the city faces is acute. It’s over the next one to three years that there is a window to bring in some low-priced housing and settle the market down. If that doesn’t happen quickly the prices will keep going up far beyond [the] $1 million [median] and you could end up with a correction where you could have tens of thousands of people with negative equity.”
To get the economies of scale needed to bring cheap, high-quality houses to the market, Thompson says the panel should have live-zoned five to 10 areas of the scale of the 600ha Redhills subdivision at the north-west of the city. “That would give you competition in the greenfields development market, and that would push prices down.
“At the moment the new greenfields subdivisions are all very expensive – $800,000, $1 million or more. If you just have one or two new greenfields developments, it will sit in that same price range. If you put another five or 10 new developments in there, the developers have to reposition their price points to supply lower-priced housing.”
There’s the RUB
Thompson finds common cause with Labour housing spokesman Phil Twyford when it comes to the impact of the rural-urban planning boundary. Though the RUB is a more permeable “fence” around the city than the old MUL, Twyford says it’s still a restriction that depends on council decisions as to when land should come onto the market, and therefore provides opportunities for speculation by land owners, he says.
“Even the so-called soft moving boundary that is the RUB is basically like a fat man letting his belt out. So you have a series of concentric circles, and the council relaxes the fat man’s belt every few years to move out to the next concentric circle and allow a bit of land in. The idea that this creates a compact city is just not borne out by experience.”
Read more: Auckland home owners are leveraging their $200 billion of tax-free capital gains in the past four years to buy rental properties around the country
Twyford argues the RUB should be erased. Instead of confining the city within an rural-urban fence, he advocates intensive spatial planning along growth corridors, with the lines for roading and core infrastructure mapped out and land acquired for those purposes, protection of no-go areas of high environmental significance, more investment in rapid transit such as electric rail to Pukehoke “and then basically allowing development to take place in the growth corridors, so dissolving the distinction between urban land and future urban land growth – the boundary that creates the massive differential in land price from which land banking and speculation is the inevitable consequence.”
Smith is refusing to comment on the Independent Hearing Panel’s recommendations on the Unitary Plan because they are yet to be decided upon by Auckland Council. However, he is clearly pleased with the panel’s work, and argues the Government’s draft National Policy Statement (NPS) on urban development will complement the proposed Unitary Plan by ensuring there is more than enough land supply coming on stream to meet demand.
The proposed NPS, which he expects to be operative later this year, will require all councils to provide for a 20% oversupply of residential land. The idea is to provide “enough freeboard for genuine competition between the land subdividers, so you get the market working”.
But what’s clear is that the market is not working at present. The evidence is abundant in the form of disheartened first-home buyers, in the spill-over effect on house prices in centres like Hamilton and Tauranga as investors and home buyers seek better value elsewhere, and in the stories of families living in cars and garages because they have dropped out the bottom of a market that cannot provide.
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