Why are housing prices high in Auckland? What can we do about it? How can we create parallel real estate markets?
The Council Problem: The market is suffering from a zoning problem. Auckland Council experienced an internal battle between environmentalists in the long-term planning department who wanted to contain residential development within an Rural Urban Boundary (RUB) and upper level managers who are in a constant search for more revenue to support more staff and higher pay & perks (such as elegant office space in the CBD). The fastest way to increase revenue is to rezone rural land as residential, to permit infill housing and tear down single family residences in favour of apartments. With the SHA, the power shifted to the rates chasers, except that the CCOs, especially Auckland Transport and Watercare then tell the SHA developers that they will have to wait 10-15 years because the Council's credit line is at the maximum... no money to widen the roads or install the water/sewer pipes. The investors see opportunity, not in building new developments, but in land banking. The whole thing has turned to shambles, and central government is increasingly frustrated.
Of course Auckland is probably lucky this has happened because the SHA plan is 1970's Los Angeles type sprawl. Like LA, Auckland (and most of NZ) is earthquake country, thus high-density, Shanghai or New York City design is not an option. LA found that no matter how many motorways (freeways) it built, congestion resulted.
Real Demand: The Christchurch earthquake displaced a number of New Zealanders who moved north. This demographic shift added to the price pressure. But the big pressure is more complicated, and unfortunately is poorly reported in the press.
It is a population issue - especially middle class population growth. 25 years ago, when today's generation Millennials were born, the global population was 5.4 billion. Today as that generation is struggling to get a foothold, the population is 7.4 billion. With much of that growth happening in Asia, and simultaneously, Asia is creating middle class wealth, today's housing price explosion is not a bubble, but a trend. It's a whole new world, with a new set of pressures.
The prime areas of growth are China and India. China has amassed $3.3 trillion US dollar equivalents in its State Agency of Foreign Exchange (SAFE), money that cannot be spent within China. In order to be of use, it must either be used to buy raw material, goods or invest in capital. The Chinese make goods domestically, and buying raw material to make goods sold abroad results in a higher reserve of offshore currencies. At the same time, China has one of the smallest arable land to middle class population ratios in the world, and it sees there will come a time when competition for food could become a major global issue. To further complicate matters, wealthy Chinese explain that despite the great economic progress of China, they fear that at any time the government could confiscate their money. Thus, using channels that seem to get around the $50,000 per year limit (see this article), they are converting RMB to USD and then buying up property in the free world. Auckland is a prime target. The Chinese are smart business people, thus one may ask why would they pay such high prices? The answer is that their prime motivation is capital preservation, not capital gain. Even if they lose money when they sell NZ property, they will not lose it all.
Regulation strangulation: The market is also disrupted because of changes in the regulatory environment brought about by rotting-house syndrome that prompted the government to introduce substantially more onerous rules in order to get consents to build. The cost of housing increased first because of the new rules, especially because the newly-licensed practitioners fund themselves in a sellers market. Many of the old timers quit. Then with the Christchurch earthquake, demand for labour and materials created shortages, and the market responded with higher wages and prices. Finally, the 2008 Global Financial Crisis took out a number of players in the market.
All of these factors combine to create the perfect storm in Auckland. It's real, it's here and we need a Plan B if we want our children to become thriving, participating citizens in our nation.
There also is an inherent problem in the way society provides affordable housing. Either it lets the market decide, which means poorer people live in poorer neighbourhoods, or the state intervenes and builds state housing. Neither is a great solution. There are better ways, but that requires some lateral thinking.
So let's explore some of the approaches to these converging challenges:
The MarketTown response to this conditions is complex, but the basics can be explained here.
- Single, non-combustible, non-deteriorating bulk material: Don't build with timber. Build solid-wall slab systems that don't burn, don't rot, don't emit toxic gasses, and which arrive on site in bulk form. When one builds 4,000 units in parallel, the cost of materials goes down.
- Manufacturing not construction: Forget the builder who shows up from time-to-time with a ute, cell phone and a dog, using hand tools and processes that have not changed much for 500 years. Invest in large-scale machinery and computerized technology that is cost justified given the scale of the project. This will not only save money, but shorten the construction time thus reducing the time the home buyer is paying for their current home while the new one is being built.
- Apply for about limited number of master building consent plans with minimum-maximum engineering specifications: The cost of 4,000 building permits is not only prohibitive, it's a logistical nightmare. Set standards.
- Factory QC inspections: Instead of the many on-site council inspections, which delays the process, manufacture to precision specifications in an on-site, temporary, pop-up factory. Build complete modules that install on site in four hours (drop, plug and play).
- Price on a cost-plus-20 basis, not the market value: Pricing will be a delicate matter. However, the policies will prohibit speculators.
- Control Investment Property: Investors will be invited to fund rental units, but these will be managed by the MarketTown.
- Build Parallel Market homes: This is discussed on the Complete Community page.
The key difference however, is the fact that a MarketTown does not use a conventional spec developer. When one is enabling the people and communities, one is serving the buyers. The cost-plus-20 policy means that some of the individual savings are set aside to provide for the economic wellbeing of the community, and to replicate the success. But except for ROI that may be necessary to secure seed funding, there are no outside spec developers or investors who normally extract market value profits. It's pure market-driven capitalism in which the shareholders are served... only the shareholders are restricted to MarketTown citizens (adult residents), and their interest is more than money.