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Housing: Dealing With Real Structural Issues

New Zealand Housing:

Time To Start Dealing With Real Structural Issues

July 20, 2008

Hugh Pavletich
Co author
Demographia International Housing Affordability Survey
Fellow – Urban Development Institute of Australia
Past President – South Island Division – Property Council of New Zealand
New Zealand

New Zealand’s “phony boom” or urban property bubble that got underway around May 2001, caused by artificial land supply scarcities and inappropriate infrastructure financing - is now over.

REINZ data illustrates that in the month of May 2001 - national median house prices were $NZ170,000 with monthly real estate agency sales of 6459 and transaction volume of $NZ1.3 billion.

The bubble ballooned out in March through May 2007 - when median house prices inflated to $NZ350, 000, generating grossly excessive monthly transactions of 10,989 and a transaction volume of $NZ4.534 billion.

By June 2008 - national median house prices had eased to $NZ340, 000 with monthly sales and transaction volume falling dramatically to 4,305 and $NZ1.740 billion – some 39% and 38% respectively of their early 2007 peaks.

This phony boom provided the inflated equity or fake value to allow existing owners of older housing stock to leverage their way - fueled by further debt – in to new more expensive housing and engage in speculative activity - crowding out new buyers seeking affordable housing. The performance of the housing construction sector was degraded with the bubble inflating – as the inflation taking place with the existing housing stock, spilled over in to new house construction pricing.

The normal development ratios for new urban fringe housing should be around 20% for the serviced lot / section and 80% to the actual house construction.

As the housing bubble inflated - these important development ratios became severely distorted to the extent some 50 – 60% of the fringe new housing price went to the section / lot – further unnecessarily degrading the quality of new housing stock.

According to REINZ data – lot prices nationally had moved from around $NZ80, 000 per lot in mid 2001 with monthly transactions of $NZ50 million through to a price peak of $NZ200, 000 in May 2008 and transaction volume peak earlier in May 2007 of $NZ256 million.

The latest median lot monthly sales price has since slumped to $NZ165, 000 with transaction volume of just $NZ52.8 million –the transaction volumes (not inflation adjusted) now back to where they were in February 2001 - when they totaled $NZ50.4 million.

The national figures understate the section / lot inflation of the higher demand “attractor” metro areas where fringe lot pricing of $NZ200, 000, $NZ300, 000 through to $NZ400, 000 became common through the peak of the bubble.

Local Government has persisted in strangling land supply through this period – and still today - appears oblivious to the economic and social consequences. It would appear that the senior ranks of New Zealand Local Government officials have been extremely generous to themselves through this period of poor performance - as illustrated within this article Councils' top pay rises 45pc .

Local Government employees are excessively paid in New Zealand in comparison to their counterparts in the United States and Canada – particularly when New Zealand’s GDP per capita (similar to Macau, Slovenia, Israel and the Bahamas) is taken in to account.

Appallingly – in $US terms at current exchange rates – the value of New Zealand’s (population 4.2 million) residential sector of approximately 1.6 million units generally aged and sub standard units – exceeded that of Houston (population 5.6 million) with approximately 2 million housing units. In the peak of New Zealand’s bubble - its housing stock value was around $US480 billion, whereas Houston’s is in the order of $US400 billion. Even though - (according to US Bureau of Economic Affairs figures) Houston’s GDP is around $US317 billion – New Zealand’s a paltry $US105 billion.

Residential real estate total value should not exceed around 1.5 times GDP. If it does – it creates massive distortions throughout the rest of the economy.

These unnecessary urban property bubbles divert resources from the productive sector – with one example being the persistent weakening of the New Zealand stock market - as outlined by the recent New Zealand Herald Editorial and Simon Louisson of Fairfax NZ in Policy failure will keep NZ wealth declining -

Why work creating real wealth and investing in productive enterprise when “easy money” can be made by participating in inflating urban bubbles? The Onion – in a wonderful satirical piece Recession-Plagued Nation Demands New Bubble To Invest In | The Onion - America's Finest News Source summed up the publics and politicians appetite for bubbles rather well.

As these artificially created urban property bubbles burst (as they always do) – real estate sales and transaction volumes are the first to slump – until months later - section / lot and house prices fall as well.

Within the July 20 2008 New Zealand Sunday Star Times article Property plunge: even worse than you thought – Greg Ninness and Anna Page accurately outline the current situation in New Zealand.

These local government created artificial urban bubbles are bursting elsewhere – with California leading the charge – and in the process - nearly bringing the global financial system to its knees. Currently bubbles are deflating within other problem United States and Canadian markets – and those of the United Kingdom, Ireland and New Zealand. Australia will follow in due course.

Policymakers – particularly in the United States - have been distracted applying “band aid” solutions with injections of liquidity with other measures to prop up the financial sector – and to date – not focusing on the structural issues. It is these structural issues artificially creating the land scarcities that provided the foundation for these urban housing bubbles to get underway in the first place.

The 2008 4th Edition Demographia International Housing Affordability Survey clearly identifies the bubble urban markets of what is loosely termed the Anglo world (United Kingdom, Republic of Ireland, United States, Canada, Australia and New Zealand).

Normally functioning urban markets housing should not exceed three times household income.

Houston, Texas is a helpful example of a “normal market” where housing is approximately 2.9 times household income. The Houston Association of Realtors website provides excellent information on the housing stock available within this dynamic and diverse urban market of 5.6 million people.

On the fringes of Houston - new ducted air conditioned starter housing of 190 square meter living space (plus garaging) is being provided at around $US140,000 and slightly smaller manufactured housing on lots is being provided at $US73,000 – with manufactured house construction component of it in the $US40,000 - $US50,000 range.

The fringes are the supply or inflation vent of an urban market. Strangling them creates bubbles.

Within a superb recent article Houston, New York Has a Problem - July 16, 2008 - The New York Sun - Professor Edward Glaeser (more) of the Department of Economics, Kennedy School of Government, Harvard University (and Consultant to New Zealand Motu Research which has completed outstanding research work for the Centre fot Housing Research Aotearoa New Zealand) explains in very clear terms, just how much better off Houstonians are than New Yorkers.

It is to be hoped that researchers, commentators and the wider media within the United States follow Professor Glaesers’ lead and compare the performances of California and Texas.

It is clear that a long overdue “culture of performance” must be inculcated in to the local governments of urban markets that have failed and artificially created these destructive urban bubbles - as suggested within the writers’ discussion paper Getting performance urban planning in place and further explained on Television New Zealand.

There is no “one simple solution” –but each jurisdiction in its own way and mindful of its individual political culture – must start getting the necessary performance measures and processes in place – to restore housing affordability to no more than three times annual household income - over a reasonable and realistic time frame.

There is no alternative – unless Governments at all levels wish to stand idly by and allow their residential construction sectors to collapse - as is happening currently in California (CAR, CBIA, RealtyTrac, Housing Tracker, CBIA Recent Update, John Burn Constr Stats) and the United Kingdom – where residential construction has slumped to below 2 units per 1000 population on an annual basis – well below replacement levels.

Do New Zealand and Irish politicians wish to see their annual new residential housing production collapse to British and Californian levels - of just 8,000 units annually? New Zealand is currently generating around 20,000 units – Ireland some 55,000 units annually.

Australia – with heavy current inward migration flows (being partially boosted by increasing numbers of unemployed New Zealanders) of approximately 177,000 per annum and total annual population lifts of around 320,000 – is grossly under building by at least 60,000 units annually.

In any event - the survivors of the finance sector globally will likely be in no hurry whatsoever to provide the financial support or “fuel” to assist in creating further urban housing bubbles.


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