Could 'affordable' housing policies fix the broken property ladder?

Friday, 10 December 2021

Housing is getting increasingly unafordable for people in the “missing middle”.

If housing is a ladder stretching from homelessness to homeownership, then it is one where each year another rung on the ladder is being removed.

The people trying to get up this ladder are a class of people sometimes called the “missing middle” of the housing market.

They are “missing” because no housing policy seems to benefit them. They earn too much money to qualify for social housing, but also can’t save enough to buy a home.

Livingston and Associates director Ian Mitchell says that group in the middle is growing in number, and stuck.

James Wilson, from Valocity, talks about housing data and looks at what the next five years could look like for first home buyers.

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“We’re talking about the group who can afford to rent, but can’t afford to buy, and you’re also talking about the group who are not in social housing, but are really struggling to pay the market rent,” Mitchell says.

The problem is getting worse, not better, as house prices grow faster than incomes.

Mitchell says the true extent of the problem has been hidden in recent years by low interest rates, but even that is about to change with a rapid series of interest rate hikes set to roll out over the next year.

Rising interest rates and stricter lending rules, mean fewer people will be able to afford a mortgage. New lending rules are already seeing banks withdraw pre-approvals for mortgages.

“It’s going to start expressing itself more and more, as a greater and greater proportion of these households are being priced out of the market.”

Mitchell has conducted research work across a number of different council areas and found 43 per cent of renters in Christchurch fall into this intermediate category, while in Hamilton they already account for 28 per cent of all households.

Other research produced before Covid estimated 125,000 households in Auckland could find themselves in this category by 2025.

A global problem

New Zealand is one of the most unaffordable housing markets in the world, but problems like these have taken root right across the globe.

In Ireland, strict height restrictions have seen cities like Dublin become some of the lowest rise cities in Europe, which has fed into a significant affordability crisis.

The Spanish rental market has come under real strain after a flood of people entered the rental market because they were priced out of buying a house, putting huge pressure on rents.

In Germany, the patient domestic capital that supported its long-term rental sector has given way to less patient foreign capital funds who have hiked up rents, sparking significant social unrest.

None of this is new, the world’s cities were looking increasingly unaffordable to live in even before a Covid-19 induced wave of housing affordability issues hit.

Some local governments are looking to inclusionary zoning policies, where a proportion of developments, or money from them, are set aside to provide affordable homes for rent or purchase, effectively cordoning off “affordable” accommodation for essential workers like teachers, nurses, and police.

Inclusionary zoning has already been implemented in Queenstown Lakes District, and it was part of Special Housing Area legislation too.

However, there is ongoing debate about whether such measures can be legally implemented by councils, and even more debate about whether they make much of a difference to affordability.

Some want policies encouraging intensification to have an ‘inclusionary zoning’ aspect to them.

Housing Minister Megan Woods is not looking to take more government action on inclusionary zoning, but says she is working on a range of other policies to turn the tide.

'We are not planning to include inclusionary zoning more widely as it is most useful when it’s tailored to the particular needs of an area, with supporting systems to implement it.”

Some of Woods’ plans, like the Resource Management Act (RMA) reforms, are aimed at boosting housing supply generally, but others are an attempt to carve out more “affordable” housing supply.

These include alternative forms of home-ownership, including shared ownership, collective or co-operative housing, rent to buy, or leasehold arrangements.

'We are looking at how to remove barriers to alternative tenures to outright homeownership and ensure there are ways to fund affordable housing supply.'

The Government’s KiwiBuild scheme was initially pitched as creating more supply at affordable price points, but people who bought these were largely free to sell them at market rates afterwards.

Now plans around affordable ownership generally seek to take land or houses out of the main housing market.

Work on some of these measures has stalled, according to some who have proposed them, especially proposals to get a new form of homeownership off the ground – cooperatives.

Megan Woods says she is not looking at rolling out inclusionary zoning, but does want more forms of housing tenure.

Getting a housing co-operative off the ground

The most-cited example of successful co-operative housing hails from Zurich, Switzerland.

Members of a Swiss co-operative, typically an architecturally designed high-density development, buy into collective ownership of a building and take part in all decisions around them.

In New Zealand, co-operatives are already heavily involved in all parts of the housing supply chain, just not homeownership.

On the building supply side Mitre 10, ITM, Plumbing World, Flooring Xtra, and Combined Building Supplies are all legally recognised co-operatives. In finance, there are services like SBS Bank and The Co-operative Bank.

There are a range of barriers when it comes to methods for getting co-operative housing arrangements off the ground, many of these roadblocks can only be unblocked by the Government.

For starters, Co-operative Business New Zealand chief executive Roz Henry says people can’t legally set up a housing co-operative under co-operative legislation as it stands.

Once this issue is sorted, the Government will probably need to underwrite a pilot to prove the concept is viable.

Henry is confident more housing co-operatives will follow once a pilot gets off the ground, but getting government agencies to back one is proving difficult.

“We’ve been talking to [Ministry of Housing and Urban Development] and Kāinga Ora and we haven’t made as much progress as I would have liked.”

It is proving an uphill battle for Forever Affordable Homes founder, Imogen Schoots, too.

She initially pursued a co-operative housing project with Auckland Council’s development wing Eke Panuku, and is now trying to get broader Government support for co-operative housing.

Queenstown has used inclusionary zoning since 2003.

The first idea was for a 10-storey building on a 948-square-metre site with 53 apartments, and 13 micro-apartments.

A typical family would be able to buy-in to the co-operative with $55,000, which would also entitle them to dividends from the project. If they got in before the development started they would also be able to help co-design the building.

In the absence of new legislation allowing housing co-operatives Schoots says they are planning to issue shares in a company owned by residents.

Occupants would still pay rent, but there would be strict rules around how rent could increase.

Over time these apartments would get progressively more affordable. They would start off $35 a week below market rent, and after a decade the rents being charged would probably be $275 below market.

Institute of Directors governance leadership centre general manager Felicity Caird says from a governance perspective co-operatives could end up looking like a type of arrangement many people are already familiar with – body corporates.

The institute is profiling housing co-operatives in a magazine it circulates within its membership, because of the rising profile this form of ownership is getting.

Schoots says even with capital contributions from residents, additional funding would need to be sourced from banks, along with providers of “patient capital” like superannuation funds.

To persuade funders to take these risks a government underwrite would be needed, and support to cover basic start-up costs.

The need for someone to underwrite the pilot is why Panuku paused their involvement in it, saying only the Government could pull off such a feat. Schoots went to Kāinga Ora, but has little progress to show for it.

She has even downgraded the proposal from a multi-storey building to a three-storey walk-up, to make the idea more appealing to decision-makers

“We just need to get something across the line, and the ball rolling, to start this.”

While Kāinga Ora seems reluctant, National Party housing spokeswoman Nicola Willis says she is looking into whether the Crown balance sheet could be used to back co-operatives as part of her party’s pitch to the electorate.

“The potential to be using the Crown balance sheet to bring on housing supply, and affordable housing supply, that might not otherwise be brought on, is a potential I’m interested in.”

Willis wants to understand why housing co-operatives are widespread overseas, but not in New Zealand.

“It’s huge in Switzerland, there’s at least 200 housing co-operatives in Australia, so what’s holding it up here?”

Mitchell says Government support for these types of initiatives at the start are crucial, because they never really get off the ground without it.

National Party housing spokeswoman Nicola Willis says she wants to understand why housing co-operatives are widespread overseas, but not here.

Schoots says there are other hurdles to overcome. Apart from needing the Government to allow a co-operative to be formed, it would also need the Government, or local governments, to provide cheap land.

Which is where inclusionary zoning comes in.

Inclusionary zoning: affordable housing for all, or a select few?

Schoots sees an opportunity for the community to capture the value uplift within current plans to re-zone urban land for higher density housing.

Developers of rezoned land could be compelled to provide land, or funding, for co-operatives, and other types of affordable housing, as part of the cost of doing business.

Inclusionary zoning is not a policy without controversy, even though it has been running in Queenstown Lakes District since 2003.

Critics of inclusionary zoning say it raises the cost of developments, discouraging supply from coming onto the market.

In the United States, where the tool is widely used, it has been mocked as a solution for the “0.1 per cent” of people lucky enough to get an affordable unit.

There are also questions around whether councils can legally impose inclusionary zoning costs on developers.

Queenstown Lakes District council general manager Tony Avery says his council plans to use inclusionary zoning more widely, but realises they could face litigation for it.

“Our clear legal view, and the legal view that has been obtained by many councils, is that we do have the ability under the RMA, but we do expect that will be tested by developers.”

Willis recognises there is a balance to be struck with inclusionary zoning, but says she is looking at it.

“You don’t want it to be used as is a tool to prevent housing occurring that would otherwise occur,

“However, I have been pretty interested in Queenstown Lakes’ experience with inclusionary zoning, and how they have used inclusionary zoning to bring on affordable housing options that might not have otherwise existed.”

In the meantime, the policy and political wheels keep turning, and Schoots continues to be both frustrated and puzzled at why more isn’t being done to tackle the housing problems of the “missing middle”.

Especially as these problems just get worse every day.

“I’m surprised there’s not more young kiwis vocalising how p…ed off they are about the housing situation.”