The Gordian knot of Auckland housing

5:22 am on 7 June 2016

OPINION: Auckland's housing market now has so many strands tied up in so many knots that it will take more than an airily waved finger from Housing Minister Nick Smith to untie it. Not even a barely concealed middle finger from Finance Minister Bill English will do the trick.

House price rises, as illustrated by houses stacked on top of coins.

Photo: 123RF

It seems every time someone tries to unravel a solution to this Gordian knot of a problem, there's another knot that blocks the way through to affordable housing. The latest intervention is no different.

The government's National Policy Statement on Urban Development will require fast-growing councils, especially those beginning with 'A' and ending with 'd', to ensure there is 15 to 20 percent more land available for housing than is needed over the next 10 to 30 years.

So far, so good. It's all standard Economics 101. If there's a lot more supply of land than demand, then the price should fall, or at least stop rising so fast.

Auckland has become the safest and richest of tax-free havens for land-bankers over the last 25 years because section prices have more than quadrupled. Over the same period, building costs rose 78 percent and consumer price inflation rose 71 percent so something was horribly wrong with the market. The old Auckland Regional Council's Metropolitan Urban Limit ensured land-bankers could be safe in their knowledge the supply of developable land was limited, while the refusal of the old city councils to allow much intensification meant Auckland could not grow either up or out.

Therefore it makes sense to require - or prompt or nudge or even suggest - that the still relatively new Auckland 'Super' City Council open up more land for development and loosen those limits, both up and out, so that land-bankers can be stripped of their complacency about limited land supply over the long-run.

But here's where the knot tightens. Councils can't simply wave a rubber over a map and redraw the lines to get developments cracking. Firstly, they need to plan to put pipes and roads and footpaths and bus routes into that map, and this is where it gets expensive and difficult.

The Auckland Council has estimated it needs $17 billion to build that infrastructure to handle all these new developments on the fringes over the next 30 years.

The trouble is the council has run out of borrowing room and its ratepayers and creditors won't allow it to load up on more debt for the infrastructure. Auckland's borrowing costs are close to 12 percent of its revenues, and its debt is near 275 percent of those revenues.

Those numbers matter because the council has agreed with ratings agency Standard & Poor's that it can't go over those limits if it wants to keep its AA rating. Every single-notch credit rating downgrade costs the council $10 million in extra interest costs per year, which adds an extra 1 percent to rates.

Separately, ratepayers in the Eastern Suburbs and the North Shore don't love the idea of borrowing more and paying more in rates to pay the costs up-front for all those developments in Albany and Drury. They could (and may well) vote in councillors in October who refuse to borrow to fund that infrastructure, or simply refuse to allow the intensification of housing needed to help strip the land-bankers of their power. Nick Smith can huff and puff all he likes, but if the money is not there for the roads and pipes and buses, then the 'for sale' signs on the sections won't appear.

Just quietly, there's a whole lot of property owners who like things just the way they are. Restrictions on land supply and intensification keep driving up land prices and the tax-free wealth of property owners, who are much more likely to vote in council elections than renters.

The government's finger-wagging doesn't solve the infrastructure funding problem or the political reluctance to borrow to fund growth. Prime Minister John Key has already suggested the Auckland Council start selling assets to pay for that infrastructure. Cue the latest twist in the tale. The next fight will be over why the council isn't selling its port or its airport shares to pay for roads and pipes and buses.

And so the knot tightens again....

Ultimately, the government is the only player with the balance sheet, the long investment horizon and the economic necessity to step in and slice that knot right open with a big dollop of infrastructure cash and orders for tens of thousands of new affordable houses. It is also the only player with the power to change the tax and borrowing incentives for both local and foreign investors.

Until Wellington is prepared to start slashing and spending, the Gordian knot of Auckland's housing supply will remain tight and painful for Generation Rent, and a thing of beauty for landlords.

* Bernard Hickey is the publisher of Hive News and a regular contributor to a number of media outlets on matters concerning economics, business and politics.

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