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Housing Affordability

13 Sep 2017

One of the key political themes for this election is on housing prices and affordability. Obviously, this is not surprising, when so many people have decided that they want to live in Auckland. House prices are largely a function of supply and demand.

One of the reasons why house affordability has decreased relative to a number of countries is because our property prices did not decrease anywhere near the extent that countries such as the United States, Great Britain and Spain did. The other catalyst has been immigration in record numbers increasing demand for property, particularly in Auckland.

Few of the residential building companies in New Zealand seem to offer significant economies of scale to their clients. Most New Zealanders wanting to have new homes generally want input into the design and style of their new home. That is, they personalize the house to suit their needs within their budget. There may be very little difference in price between a house of a similar style and size from the major building companies and one custom built by a local builder. It seems that if there are real economies of scale, these simply reflect a higher margin that the major building company can achieve.

Post Second World War America went down the route of integrated developments all controlled by a few major contractors. The result was often a sameness in a subdivision. The 1963 Malvina Richards written political satire hit song “Little Boxes” was about the development of suburbia and associated conformist middle-class attitudes. Yes, these were affordable houses.

Historically, New Zealand has also been there with the building of many state houses. Years later, the most remarkable thing about them, is that a lot of them occupy now valuable large sections. Then, there are also those that remain in some of the worst suburbs in our larger cities. They are no longer considered to be fit for the purpose for social housing which they were originally built for.

There are probably three main areas where it is possible to significantly reduce housing costs. The first is one controlled by councils throughout New Zealand. This is the cost associated with obtaining all the necessary consents for the building process. There is a major fee variation between councils. The second is to speed up the resource consent process. This would substantially reduce the property holding costs by the developer. The third area relates to land price. This needs to be reduced, but the reality is that it is subject to supply and demand. Land banking is another likely problem.

Progress has been made around these issues over the past few years, although it remains a talk feast amongst politicians just as superannuation was thirty years ago. So where does this all go to? Over the long term, it will do very little to make homes more affordable. While they may cost less to get to a finished state, it does not mean that the house will be sold for less. The sale price will be established by the market. It is all a question of supply and demand. Perhaps the solution is to encourage New Zealanders to move to the provinces, where house prices tend to be more affordable.

Disclaimer

Steven Barton (FSP 32663) and Susan Pascoe Barton (FSP 32382) are Whakatane based Certified Financial Planners and Authorised Financial Advisers.  Their initial disclosure statements are available free of charge by contacting them on (07) 3060080 or they can be downloaded from www.pascoebarton.co.nz. This column is general in nature and should not be regarded as personalised investment advice.