John Paine: May 2007 Newsletter
May 2007 Newsletter
Last Thursday the New Zealand Reserve Bank -
* raised the Official Cash Rate by 0.25% to 7.75%,
* said the NZ dollar was exceptionally high by historical standards – and “unjustified on the basis of medium term fundamentals”, and
* gave no hint that further interest rate rises were contemplated.
This left the market with the feeling this was the last of the interest rate rises - but the RBNZ may intervene in the currency market if necessary.
This is a quite different approach from that we have seen in the past. The Bank is clearly worried about the affect the currency is having on exporters. It hit the highest in 22 years at US74.03 cents a week or so ago. Most commentators feel the chance of direct intervention in the currency is nil, but the rhetoric may have the desired effect on the “carry trade” and Uridashi and Euorokiwi markets.
The result will be residential floating mortgagees over 10% for the first time in nearly 10 years. Those refinancing fixed rates averaging around 7.8% will now be looking at fixed rates nearly 1% more.
The enemies identified in the Bank’s statement included the same as before – buoyant housing market, rising terms of trade, ongoing net immigration and a robust labour market. But at last it’s added increases in government expenditure as an inflationary factor.
Government expenditure and Political Correctness have become popular subjects on talk back radio recently.
The issue for property developers - which is reflected in the increased cost of new developments - is the increase in the cost of local government compliance.
Firstly there’s the direct cost of compliance through such measures such as development contributions. According to the Property Council of New Zealand’s Policy Director, Daniel Newman, since 2004 development contributions have been consistently increasing.
“For example” he says, “the Auckland City Council is proposing to increase the development contribution for a typical 3 bedroom apartment, which the developer pays and passes on to the buyer, from the current $7,000 to $40,000.” And, as Daniel points out, unlike resource consents which can be appealed at the Environment Court, there is no method for a merit base review for development contributions. Once the Council sets them – that’s it!
The other worry is the time it takes to get resource consents. A report by Motu Economic and Public Policy Research - prepared for the Centre for Housing Research, the Department of Building and Housing, and Housing New Zealand Corporation - concludes a number of factors have constrained the supply of housing in Auckland. To see this extensive report CTRL + click here http://www.hnzc.co.nz/chr/pdfs/housing-supply-in-the-auckland-region-2000-2005.pdf
It says “One of these has been a limited supply of land. Another contributor has been the difficulties in the consents process, especially its time consuming nature; lack of appropriate resources within councils to handle both non-notifiable and notifiable consents is partly responsible for this situation.”
“Council planning procedures and consent processing times are the subject of huge dissatisfaction amongst private stakeholders. Over 80% of respondents see these two features as major development constraints. Consent approval processes tend to proceed iteratively within councils, each item having to be ‘solved’ before the next officer becomes involved. This leads to a prolonged process. Developers consider that councils are neither aware of the length of the consent process nor of the implications of delay.”
“Delays are most extensive where a development is notifiable, opening up the potential for objections and lengthy hearings. Developers seek to avoid notification at all costs. This frequently means they settle for ‘lowest common denominator’ developments that meet all District Plan requirements, rather than build innovative features that might make the development notifiable.”
As Daniel Newman says, “The building Act of 2004 requires the local authorities 20 working days to decide on the consent application but they consistently fail to meet the deadline.”
At Global Pacific we’re constantly seeing this as a major problem - leading to construction and settlement delays, even cancellation of sale contracts and loss of deposits, and certainly increased finance costs.
New Zealand’s champion of housing affordability, Hugh Pavletich - co-author of the International Demographia survey www.demographia.com - consistently claims housing inflation here is a lack of supply, and that raising interest rates will not solve the problem.
In a letter to the Christchurch Press he says “Until this ‘supply issue’ is dealt with, excessive housing inflation will persist – driven in the main by artificially created equity with the support of increased household debt, competing for a limited supply of property.”
In another letter he goes on to say “We have the Parliamentary Commerce Committee Housing Inquiry coming up with submissions closing 15 June and hearings soon after.” “Regrettably – I am getting too many reports of Local Authority planning staff being obstructionist with elected representatives and others – in not allowing these issues to be fully discussed and debated within Councils and local communities. It needs to be made clear to these people that this behavior is professionally unethical.” “Planning staff have a lot to answer for with respect to this unnecessary housing shambles and need to recognize that they have a responsibility now to assist in ‘righting this wrong’. They should be ‘inviting’ researchers to Council offices to discuss these issues.”
The views given above are supported by another lengthy report prepared by DTZ New Zealand for the Centre for Housing Research and the Auckland Regional Council, entitled The Future of Home Ownership and The Role of the Private Rental Market in the Auckland Region. To see this report CTRL + click here http://www.hnzc.co.nz/chr/pdfs/future-of-home-ownership-and-the-role-of-the-private-rental -market-in-auckland.pdf
It says “Given the limited capacity of housing policy to influence house price cycles, and the ability of government programmes to mitigate some of the affordability problems faced by target groups we would argue for a supply side focus for housing policy over the medium to long term.”
“Often regulatory pressures on land or construction costs seem minor in themselves and originate from different arms of local or central government. Cumulatively, though, they can be important. While measures to ease supply constraints can have only minor effects on housing price cycles, any such measures should contribute to better affordability (than otherwise) over time in both the owner occupier and rental market in Auckland.”
“Unfortunately, most of the regulatory pressures, at both local and central government level, appear to work in the other direction.”
Whatever your view, it’s clear that many of the problems surrounding higher development costs and lower housing affordability could be sorted out by increasing government and local authority efficiency - rather that creating more artificial rules.
John Paine B.Sc. Dip BIA Global Pacific Corporation Limited P O Box 3229,
Auckland, New Zealand
Please note that all opinions and statements expressed in this newsletter are indicative of my opinion only. Global Pacific Corporation Limited issues no invitation to rely on the information contained in this newsletter and intends by this statement to exclude liability for any such opinion and statement.