Carter: Opportunities in affordable housing
Hon Chris Carter
Minister of Housing
18 September 2006 Speech
Public and private opportunities in affordable housing
Speech to the Real Estate Institute of NZ's Annual Conference
Sky City, Auckland
Ladies and Gentlemen,
As I look around the room I see a lot of happy faces, which is hardly surprising. The property market has been very good to you in recent years, and it has been very good to me and to almost anyone who owns a home.
Values have soared, and so has individual wealth. Everyone has won – real estate agents, homeowners, property developers, rental investors, banks, councils and retailers – everyone that is, but those who don't own a home.
If there was a discrepancy between the wealth of homeowners and the wealth of non-homeowners before, it has got vastly wider in the past five years. And that gap is partly a generational one. The young tend not to own homes, the older do, sometimes several. My generation has just got that much richer than our kids, and at the same time it has got far harder for our kids to get on the same property ladder we have benefited from so spectacularly.
The median house price across New Zealand is now 6.6 times the average household income of $50,000, and up to 8 times the average household income in Auckland, and as many of you will be aware that disparity is biting first-home buyers very hard indeed.
Growing numbers of 25 to 44 year-olds on moderate incomes are simply unable to buy a house. And this is fuelling what is suspected to be a significant decline in our national home ownership rate.
In 1991 the national home ownership rate was 74 per cent and relatively stable. By 2001 it was down to 68 percent, and estimates suggest it could have dropped to 65 per cent today, possibly as low as 61 per cent in Auckland.
If these figures are confirmed by the 2006 Census, then New Zealand will have a lower home ownership rate than Australia, the US, the UK and Canada. All of those countries are already trying to boost their rates in recognition of the platform home ownership provides for settled family life and improved wealth.
Clearly, we have choices in how we respond to this situation in New Zealand.
We can do nothing and leave it to the market. But markets tend to accommodate those who are already in them. They do nothing for those who are not.
We can seek to raise incomes to match housing costs, and this is likely over the next couple of years. But it is unrealistic to expect increases large enough to close the enormous chasm between average household income and house prices.
We can seek to replicate the benefits of homeownership through promoting savings schemes and long-term rental arrangements, and we are doing both through the KiwiSaver scheme, which I note contains a tax deductibility component, and the review of the Residential Tenancies Act.
But in the end the Labour-Progressive Government believes we must also attempt to influence the factors that have driven the market, and seek to lift access to and the supply of affordable housing.
We believe this for three reasons.
First, we recognise that home ownership has been a big part of our national identity, and an important equalising and stabilising influence in our society. We have a responsibility to do what we can to maintain this tradition, and ensure an evenness of opportunity between generations.
Second, we cannot hope to bring about economic transformation in New Zealand, a goal of the government's, unless we confront our housing issues. A city or region that is unable to offer decent, affordable housing will struggle to attract and retain workers. This is particularly so for New Zealand because the liveability of our country has been a big selling point in the global market place.
Third, there is an international consensus that properly distributed affordable housing diffuses social polarisation between suburbs, enhances the distribution of community services, and improves outcomes for families and children. And again, social harmony contributes to the liveability of our cities and towns.
For these reasons, we have been exploring aspects of affordable housing supply both in New Zealand and overseas with mounting intensity. Today, I want to outline some of the new thinking flowing from this work, and seek your feedback before we formulate policy. After all, you are working at the coalface.
To begin, I want to briefly explore some of the causes for the rapid escalation in house prices that have been identified so far and are being further examined in studies conducted under the auspices of the NZ Housing Strategy.
Its fair to say rising property markets are a feature of a number of developed countries at present driven at least partly by a global supply of credit looking for a home. Much has been made by commentators in New Zealand of the number of baby-boomers investing in rental properties, the strong growth in bank lending, and the impact this has had on the market.
You'll know from your own experience that these reasons have credence, and the research and enquiries we have underway suggest the same thing.
The research is also telling us a number of other important things as well.
It is obvious an astonishing increase in the value of land has distorted house prices. Between 1981 and 2004, land prices rose 286 per cent in real terms. If it weren't for this increase, house prices would have risen only 16.4 per cent in real terms over the 23-year period instead of the 105 per cent they have actually increased.
Exactly what has caused this increase in land values is complex. There is evidence that in some areas constraints on land supply have been a factor. This is particularly so in districts like Nelson, Tasman and Marlborough where a real conflict exists between the need to retain green spaces and agricultural areas, and the need to free up land for new housing.
You can paint this as a Resource Management Act issue, and doubtless some will try, but it is not that clear cut. Instead, where constraints on land supply have occurred it has often been an unintended consequence of community choices.
Even where there is land supplied for development, affordable housing is not getting built. In Nelson, Tasman and Marlborough, research indicates zoning is encouraging big expensive homes on larger sections, and similar things are happening in cities. Developers are operating further up the market because the costs of holding land and assembling big plots make it more attractive to do so.
Intriguingly, house sizes nationally have increased 50 per cent in the past decade, and I suspect bank lending for renovation may be implicated in this trend.
We need to get a better understanding of these dynamics, and two studies due this summer on the Auckland property market should help a lot.
In the mean time we are left with an interesting conundrum - how to ensure land is consistently freed up for development and a proportion of it is actually used for affordable housing?
As is apparent from the Nelson example, many of the solutions lie with local government, and councils have recognised this. They have organised a summit next month on these issues, and many are beginning to engage Housing New Zealand in a discussion about what can be done.
In Nelson, Tasman and Marlborough we have already agreed to provide some funding for an Affordable Housing Co-ordinator to work across councils, central government, business groups and community agencies.
I don't want to dwell on work with councils today because I am due to give a major speech on it to the upcoming summit. Suffice to say, if affordability issues are to be resolved in key regions local authorities must be bold and innovative, and central government must support them.
There are, however, two other areas of work that the government is involved in that I want to discuss in some detail with you – direct government assistance to home buyers, and the provision of affordable housing by the government in partnership with the private sector.
The first category of work relates to products, such as the Welcome Home Loan scheme, the expansion of which I announced a few weeks ago.
This scheme and others like it are designed to help people in the here and now because whatever is done to influence land supply will have a long lag time before influencing the market.
The Welcome Home Loan is a recognition that some young people are trapped in a vicious cycle of saving for a deposit on a home, only to reach what they think is a sufficient amount, and then find the market has moved ahead of them.
It essentially underwrites private institutions and banks to lend to people who can technically afford to service a mortgage, but lack a sufficient deposit to get one. It is deliberately targeted at modest income families looking for homes in the lower quartile of the housing market in rural and provincial areas, and on urban fringes.
Because the scheme is naturally capped by the amount participants can afford to borrow, it is of little use in the major metropolitan areas where prices are so much higher than incomes, and affordability issues are correspondingly that much greater.
For this reason, the government is considering introducing a New Zealand version of a shared equity scheme in next year's budget.
Shared equity schemes are used overseas, particularly in the UK. They involve either a government or a private entity taking a share in a house of say 30 percent at no cost to the homebuyer. The homebuyer then seeks a conventional mortgage on the remainder of the property, and when the property is later sold 30 per cent of the sale price complete with capital gain is returned to the equity provider.
Whatever we introduce next year will need to be carefully piloted, sized and targeted to ensure it does not create market distortions. Such a scheme will also require a shift in thinking by people working in the property market. For instance, overseas property developers are some times those holding equity shares.
These schemes are intricately linked to the second category of work I mentioned earlier – the role the government can play in directly boosting the supply of affordable housing on public land by working in partnership with the private sector.
As some of you may be aware, a subsidiary of Housing New Zealand is currently seeking a plan change to enable it to develop 111 hectares of crown land at Hobsonville in Auckland.
Rather than just build state housing, a cutting edge community of 3000 houses is planned comprising luxury and middle market housing mixed with 15 per cent state housing and 15 percent affordable housing, a proportion of which may be sold through equity sharing arrangements. Land will be parcelled up and developed by private operators with Housing Corporation retaining overall direction.
Hobsonville represents the first example of the Government leveraging off public property assets to enhance housing supply and deliver social outcomes in markets of high housing unaffordability.
We are considering a similar development in Papakura, and officials are working with the Auckland Regional Council to identify other patches of surplus public land that could be used for the same purpose.
But the possibilities of what the government can achieve in partnership with the private sector do not end with just building on unused crown land.
There are at least three areas in Auckland where Housing New Zealand owns an unusually high density of properties –Tamaki, Mangere and Otara. In all of these areas there are entrenched social problems which would be best eliminated by changing the make-up of these communities, and renewing their environments.
Small-scale community renewal projects have already begun in places like Talbot Park in Glen Innes and Aranui in Christchurch, but it is possible to lift these schemes to an entirely new level and tackle housing affordability issues at the same time.
Because many of the state properties owned in these areas consist of small houses on big sections, it is technically possible to completely redevelop the areas, increase the overall number of state houses, build a whole variety of new affordable and middle market housing, enhance community services and in doing so actually reduce the overall proportion of state housing in the area.
Take Tamaki as an example. There are 5000 properties in Tamaki, 2500 of which are state housing properties, a density of 50 per cent. Modelling has established that under likely planning rules for the area an extra 3000 homes could be provided on the land already owned by Housing New Zealand.
These 3000 new homes could comprise 600 additional state homes, 500 homes for first-home buyers, 500 affordable homes for modest income families, 400 homes for the third sector, and 1000 homes for the open market.
Just by using public land you could over time reduce the concentration of state housing in Tamaki to 39 per cent, and enhance affordable housing supply in the area. You could significantly expand this impact if private land was redeveloped alongside Housing New Zealand's community renewal project.
I don't need to tell you that these ideas could provide exciting opportunities for a lot of people in the real estate industry, but they require a great deal of discussion first with the people of Tamaki, Mangere and Otara, as well as local councils and private developers.
I think in this period of housing unaffordability we have to be creative, and break down some of the artificial walls that have existed between public and private activity in the housing market.
The redevelopment of Tamaki, Hobsonville or Papakura should provide opportunities to forge those closer links, as well as demonstrate the type of cutting edge developments and social benefits that are achievable.
This work is necessarily Auckland focussed at present but its applications are not confined to Auckland. There is room to apply these ideas in parts of Wellington as well.
I hope I've given you something to think about. I hope I've given you a taste of the direction the government is starting to head in, and I hope all of you will find away to get on board.
I'd like to invite the Real Estate Institute to come back to me in the next couple of months on the ideas I have talked about today, and also those I will talk to local government about in October.
Let me know what you think. Let me know how to adapt those ideas, and let's work together to lift New Zealand's home ownership rates. Thank you.