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Key: Speech to New Zealand Contractors Federation

John Key MP
Leader of the National Party

20 August 2007

Speech to Auckland branch
New Zealand Contractors Federation


Thank you for inviting me to speak to you today.

You’ve asked me to talk about the New Zealand economic situation as it affects the construction industry.

Let me start by saying that I think the prospects for New Zealand are better than they have been in decades.

We face a golden opportunity to become a more prosperous country. The Internet is bringing New Zealand businesses closer to international markets. Demand is booming for the commodities we produce, especially dairy products. The world wants to buy protein and we are one of its biggest exporters. Countries are willing to pay good money for the food we produce, and we have a natural advantage in producing it.

What is more, some of those countries – particularly China and India – are getting wealthier all the time. They have a growing middle class, which more and more will want to buy high-quality foods. They want to travel. They want to educate their children. They will want safe places to locate their businesses.

They will look to New Zealand for these things. And they will do this on a scale that is almost unimaginable. National’s goal is to ensure New Zealand can take advantage of these opportunities.

As it is, we see some major issues with the fundamentals of our economy that could prevent New Zealand from making the most of our future.

We have an infrastructure deficit throughout the country. One in five Kiwi kids leave school unable to read, write and do maths at the minimum expected level. Skilled people are deserting the country in droves. Each week 760 people leave New Zealand to live in Australia. New Zealanders are completely frustrated by the bureaucracy and over-regulation that hampers anything they try to do.

National is committed to addressing these issues and we have a five-point economic plan to create a more prosperous society.

1. A programme of ongoing tax cuts.
2. Disciplined government spending.
3. Effective investment in infrastructure.
4. Cutting red tape, including urgent reform of the Resource Management Act.
5. Keeping interest rates lower.

Your industry stands to benefit from each of these policies. And, obviously, you will have a vitally important role in ensuring we are able to achieve our goal of investing in the infrastructure this country needs to grow.

Like you, National is committed to providing New Zealanders with the services needed in a modern developed country, both for the difference they make to living standards and for the role they play in ensuring our businesses can compete in world markets.

We want New Zealanders to have world-class roads, public transport systems, Internet networks, and electricity, sewerage, and water utilities.

Home ownership

We also want to ensure that every young New Zealander who works hard and is disciplined about saving can expect to own their own home and thereby have a real stake in the economic future of this country.

Today, I want to talk in some depth about the declining rates of home ownership in New Zealand.

It has relevance to you, not only as an industry that interacts closely with the building and construction sector more generally, and as the mums and dads of a generation coping with this issue, but also because you are key voices in the debate about resource management law and compliance costs in this country.

It’s those aspects of the home affordability crisis that I want to concentrate on today.
But first, let’s take a minute to look at the enormity of this problem.

It wasn’t so long ago, in the 1990s, in fact, that New Zealand had a high level of home ownership compared to other countries. Not so anymore. We now have what has been described as the second worst housing affordability problem in the world.

Make no mistake; this problem has got worse in recent years. Home ownership declined by 5% between the 2001 and 2006 census to just 62.7%. To put that into context, home ownership for the preceding five years had been stable at 67.4%.

If you dig down into those numbers a little deeper, some worrying facts emerge. The share of homes owned by people aged 20 to 40 dropped significantly between 2001 and 2006. Young people – the people we most want to prevent joining the great Kiwi brain-drain – are really struggling to get onto the property ladder.

This decline shows no signs of slowing. In fact, on current trends, the crisis will only deepen. Home ownership rates are predicted to plummet to 60% within the next decade. And one of the biggest factors influencing home-ownership rates over the next 10 years will be the difficulty young buyers will have getting into their first home.

This problem won’t be solved by knee-jerk, quick-fix plans. And it won’t be curbed with one or two government-sponsored building developments.

Instead, we need government leadership that is prepared to focus on the fundamental issues driving the crisis. National is ready to provide that leadership. Earlier this month I announced our four-point plan for improving home affordability:

1. Ensuring people are in a better financial position to afford a house.
2. Freeing up the supply of land.
3. Dealing with the compliance issues that drive up building costs.
4. Allowing state house tenants to buy the houses they live in


Since I made those initial announcements, various experts and independent bodies have come out with even more evidence to support our approach. I intend to go over some of that evidence in this speech.

Over the next 18 months or so, in the lead-up to the 2008 election, I will be announcing plenty of new policy in these areas.

National will look for long-term solutions based on a sound understanding of the economic forces that have led to the contemporary low home-ownership rates.

Those forces can be grouped in two categories.

The first is demand-side. Sadly, in 2007, thousands of young New Zealanders have resigned themselves to never owning their own home. Since 2001, saving a deposit for a house has become increasingly difficult for too many of them.

Even though unemployment has declined, having a job hasn’t been enough to enable people to buy their own house. In 1999 a median-priced house cost just over 6 times the median wage. By 2006 it cost 10 times the median wage.

In part that’s because house prices have risen sharply. Median house prices are now essentially double what they were six years ago.

Not only have house prices increased but the cost of serving a mortgage has also skyrocketed in recent years. During the 90s, interest rates came down from 15.4% to 6.7%. That made servicing a mortgage more affordable for many people. But in 2007 interest rates have spiked to 10.4%.

To put those stats into context, you need only look at what that means for a first-home buyer on the average wage buying a median-priced house. In 1999 it took just 42% of their average take-home pay to service their mortgage. It now takes around 81%. That’s after they’ve somehow managed to save up a 20% deposit in the first place. That is a crippling increase.

The result is that too many Kiwi families can’t see a way to get themselves onto the first rung of the property ladder. They don’t even aspire to owning their own home anymore. We have to turn that around.

The second and most important reason for the home affordability crisis is one of supply. It explains why houses have become so unaffordable for so many people. Quite simply, not enough new houses are being built in New Zealand. This is a recent phenomenon. In many parts of the country, increases in demand for housing are now outstripping supply.

That imbalance is vividly illustrated in Auckland. In the five years to 2006, the supply of housing stock has failed to keep up with population growth. Again to put that into context, over the 15 years to 2006 the housing stock grew at a faster rate than population. So the supply problem is a recent one.

Economics 101 would tell you that if the demand for housing outstrips supply, then the only way for house prices to go is up, up, up. So, if we’re going to do something about home affordability we need to do something about the factors strangling the supply of housing.

Labour’s approach v National’s approach
National’s goal is to turbo-charge the supply of housing in New Zealand by confronting the fundamental constraints that have kept a lid on it. By contrast, Labour’s instinctive reaction to the housing supply problem is to say the government must get in and build some houses.

In recent months for example, they have trumpeted their role in a housing development at Hobsonville. I’ve been critical of that development. There are several reasons for that, which relate to the specifics of the project. In short, I’m convinced the taxpayer could be getting much more home affordability bang for the Hobsonville buck.

More importantly, however, I think it’s dangerous for the Government to pretend that developments such as that at Hobsonville are some sort of panacea to the housing affordability crisis.

While schemes like Hobsonville might make a difference to a small group of people, they do nothing to address the fundamental constraints preventing New Zealand companies and builders from bringing new houses to market in the many parts of the country where young people are crying out for them.

The fundamental questions the Government should be fronting up to are these:

 Why is it that, in a time of unprecedented demand for housing, builders and property developers haven’t jumped in to fill market demand?
 What’s holding them back and what can the Government to do about it?


Labour has dismissed National’s concern about these issues, stating that we want, “to help property developers, not ordinary people buy their first home”. Similarly, Labour has said that developers, if left to their own devices, will build only “large, expensive houses”.

Builders and developers throughout the country should read that as a clear threat to their independence. The current Government does not trust you to build houses that meet the demands of your local communities. Instead, they will force you to build the houses that the Government wants.

Well, let’s get real here. If we want to make houses more affordable for first-home buyers, we need more houses to be built as cost-effectively as possible. Unless the Government thinks it can do the job all by itself, we’re going to need property developers to come on board.

That means providing a legislative and regulatory environment that makes it cheaper and easier for people to develop and build houses. That helps first-home buyers.

Going back to basics, supplying a house requires the following things:

 Land to build it on.
 Someone, i.e. a developer, who is motivated to build on that land.
 Regulatory consent to build on that land.
 Resources, i.e. materials and labour, to build the house.


So, it’s safe to assume that when supply is lacklustre then something must be going wrong with one or all of these things. That’s certainly the case in New Zealand:

 There’s been a lack of land available to build on.
 Opportunities for developing the land have been reduced, and the costs of doing so have got bigger.
 Acquiring resource and building consent has got harder and harder and takes longer and longer.
 And resources for building, particularly skilled trades people, have become scarcer.


If we’re serious about increasing housing supply, we need to enhance the incentives to build new houses by addressing these problems. Because, for as long as the costs of development keep rising, housing investment will fall and housing affordability will get worse.

So, National’s plan for housing affordability tackles these supply-side problems in two main ways. First, by freeing up the supply of land and secondly by dealing with the compliance issues that drive up development and building costs.

Freeing up the supply of land

Difficulties with the Resource Management Act and disagreements between various arms of local government too often slow the release of land. This drives up its price and the cost of its development.

The Reserve Bank, the Master Builders Federation, and government-commissioned research agree with us on this point – too much land is being locked up.

The Reserve Bank has said that a review of planning practices may be required, with a view to possibly relaxing ‘urban fences’ and encouraging medium-density redevelopment in existing urban areas.

We agree. National will take the legislative actions required to ensure there is an increased supply of suitable land available to build houses on. Labour has dismissed this policy proposal as “encouraging urban sprawl”. I think that’s a cowardly response.

Central and local government should always be aware of environmental and community concerns regarding new housing developments. But if we are serious about dealing with the housing affordability crisis, if we are serious about protecting the Kiwi Dream of home ownership, then we need to get a better balance between those concerns and their eventual impact on home affordability.

To not do so is to ignore a fundamental long-term driver of the housing affordability crisis.

The Government’s other argument on this issue is that “sprawling suburbs” will “compound infrastructure and transport costs”. My answer to that is: Get some vision, guys!

Is New Zealand really going to stop building houses on the grounds that it will require investment in roads, public transport, sewerage and water systems? National will have more vision than that.

As I outlined to you earlier, we are serious about backing New Zealand by investing in the infrastructure this country needs to grow.

National’s infrastructure plan will go hand in hand with our efforts to confront the housing affordability crisis. We will free up more land to build on while ensuring new developments are served by the infrastructure they need.

Freeing up land supply isn’t just about freeing up more land; it’s also about the time it takes to get permission for building on the land that’s already available.

As it is, anyone wanting to build new houses in New Zealand experiences seriously concerning delays in obtaining planning consents. More than 80% of respondents in a recent survey of people associated with the building industry cited this as a major constraint on development.

Councils themselves are screaming out for planners to deal with the arduous and time-consuming RMA process

The Government’s own research into home affordability has stated in no uncertain terms that, “The RMA process needs a revamp to reduce delays associated with objections.” That’s because delays result in major uncertainty for people considering developing housing.

They also cost money directly. A one-month delay on a $12 million project adds $100,000 to its cost. This increased cost in turn increases the required profit margin for houses and thus the price of those houses when they eventually come to be sold. This is just one more way that the RMA hits first-home buyers in the hip-pocket. .

National is committed to simplifying and streamlining the RMA and doing it fast. We will introduce our RMA reform bill in the first 100 days of a National Government. Those changes will be made into law within six months.

Furthermore, any changes we make to streamline and speed up the process of zoning or land release will require developers to build on that land within a reasonable timeframe. This will prevent the land-banking that is currently choking off the supply of land.

Compliance issues

Supply of land is not the only problem holding back the building of new affordable houses.

More rules, regulations, and compliance costs have also pushed up the price of building on that land. This Government doesn’t seem to understand that every new requirement they place on developers has a cost that is ultimately pushed onto the home buyer, thus deepening the home affordability crisis.

As if to prove my point, on the very day that I announced National’s plan to tackle the housing affordability crisis, Clayton Cosgrave, Labour’s Minister for Excessive Regulation, came out with another set of proposed add-ons to the Building Code.

The Cosgrove proposal would require all builders to assess the overall carbon cost of producing, maintaining, and using new buildings. It would go so far as to require builders to calculate the “embodied energy” used to produce, for example, each piece of four-by-two or each nail used to build a house.

While I support the idea of more environmentally friendly and energy-efficient homes, I think this proposal is a serious case of overkill. Not only that, it would also add yet another expensive layer of compliance to an industry that is already struggling under the crushing weight of heavy regulation.

Recent changes to the Building Act have added hugely to the compliance costs and delays associated with building new houses. Development and building levies have tripled. Compliance hurdles have multiplied and the time needed to clear them has been ramped up.

In the past five years, the time taken to build a new house has doubled. Or, to quote the Master Builders Federation, it now takes longer to sort out consent issues than it takes to actually build a house.

It’s little wonder why. The Wellington City Council says that these days anyone wanting to build a house is required to file 12 A3 size plans and up to 300 pages of additional documentation. Just four years ago a typical house plan was three A3 size plans and 30 additional pages.

Getting those plans together takes time. Time is money, and when developers are asked to pay, home buyers end up shelling it out. That does nothing to help home affordability.

A high legislative priority for National will be amending the Building Act to pull back the red tape and untie the knots that builders and developers are being strangled by. The current Government is stubbornly ignoring this problem, claiming that heavy-handed regulation is the only possible way to prevent another leaky-home crisis.

National does not accept this. We believe it is in the interests of all concerned – developers, builders, home owners, councils – to ensure that the leaky-home problems are not repeated. We see the way forward as driving quality through greater commercial accountability.

The alternative is not one we would tolerate. Because, make no mistake, there is a cost to bear for Labour’s red-tape bonanza, and potential home buyers are bearing it.

Conclusion

Over the past few years a consensus has developed in New Zealand. We are facing a severe home affordability and ownership crisis. The crisis has reached dangerous levels in recent years and looks set to get worse.

This is an issue that should concern all New Zealanders. It threatens a fundamental part of our culture, it threatens our communities and, ultimately, it threatens our economy.

The good news is that we can turn the situation around. We can deal with the fundamental issues driving the home affordability crisis. Not just with rinky-dink schemes, but with sound long-term solutions to an issue that has long-term implications for New Zealand’s economy and society.

National has a plan for doing this and we will be resolute in our commitment to the goal of ensuring more young Kiwis can aspire to buy their own home.

It’s a worthy goal and one I hope you will support us in achieving. Thank-you.

ENDS

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