The return of the granny flat: the lowdown

Saturday, 22 June 2024

The Government is introducing new rules allowing people to build dwellings of up to 60m² without a consent.

Granny flats are set to make a comeback as part of the Government’s plan to boost housing supply, but they will not be a silver bullet for the housing crisis, experts say.

Acting Prime Minister Winston Peters and RMA Reform Minister Chris Bishop this week announced consultation on a proposal to allow people to build dwellings of up to 60m² on their property, without resource or building consent.

Such small, self-contained buildings are often described as granny flats, although builders say they are more accurately described as minor or secondary dwellings.

They are not new, and were particularly popular in the 1970s and 1980s, but have fallen out of favour in the years since.

The government have announced changes to the building act to make it easier to build so-called 'granny flats.'

The new proposal comes out of National’s coalition agreement with NZ First, which had a commitment to amend relevant legislation to make it easier to build them.

Peters said making it easier to build granny flats would make it more affordable for families to live the way that suited them best, and unlocking space in backyards would open the door to new ways of living.

The proposal fitted within the Government’s wider package of work to streamline the building consent system and address the housing crisis, Bishop said.

But what might the new granny flat rules involve in practice, and will they really make a difference?

So what are the new rules?

Nothing is set in stone yet, but the Government is proposing two legislative changes.

One is the introduction of a National Environmental Standard requiring all councils to permit the building of small houses on sites in rural and residential zones without resource consent.

The other is that a new schedule is added to the Building Act to allow single storey standalone houses of up to 60m².

But the buildings will have to comply with a set of permitted standards covering the maximum building coverage allowed, minimum permeable surface requirements, and distance from the boundary. These are to manage risks around flooding and stormwater runoff.

All minor dwellings built under the new rules will need to comply with the Building Code.

Plumbing and cooking facilities will be allowed, but they will need interconnected smoke alarms, and there will be other criteria around the potential risks.

While the coalition agreement said an engineers report will be required, the proposal instead specifies the buildings will need to be completed or supervised by licensed tradespeople, including a licensed builder. All building work will need to comply with the Building Code.

A discussion document released by the government looks at the conditions and criteria buildings will need to be exempt from consent, the occupational licensing requirements, and various ways to mitigate potential risks.

Following the consultation period, any new rules decided upon will not take effect until the middle of next year.

Why make changes?

According to the Government, it is a way to build more homes more easily and cheaply, and to increase housing supply.

AUT professor of construction John Tookey says the new rules will end up being more complex than they sound.

Bishop said many district plans already allow granny flats without resource consent, but there is a lack of consistency and different standards across the country.

Removing the regulatory red tape will speed up the build process, he said. “It is also estimated to save up to $6500 just in the standard building and resource consenting fees per build, not to mention all the savings in time and resource.”

But aren’t there risks?

Yes, there are. AUT construction professor John Tookey said that in the past it was a “free for all” when it came to minor dwellings, and it was not a good thing, so the rules were tightened up.

“Basically, if you stick a huge amount of them all over the city sections it starts to affect the total amount of cover of permeable real estate. It increases the amount of stormwater runoff, and as we saw during last year’s weather events that can be a big issue.”

What the changes might mean for stormwater systems will need to be considered carefully, as will the impact of increased densification on infrastructure such as sewage, drinking water, roads, and schools, he said.

He was supportive of the concept generally, and would consider building one himself once the final criteria was established.

“But the devil will be in the details, and there are many details that need to be worked through. I suspect the requirements will end up being more complex than they sound.”

Offsite NZ chief executive Scott Fisher said the proposed rule change presented an opportunity to the off-site building industry, and it would hopefully help to normalise the concepts and products involved.

A basic 60m² dwelling costs around $200,000 for the house alone, Keith Hay Homes general manager Matthew Hay says.

“It will be necessary to make sure there is quality control because we want safe and healthy homes, and maintaining quality is key to that,” he said.

“We need to make sure that we don’t end up with a landscape littered with poor quality minor dwellings, whether they are produced by offsite manufacturing, or traditional building.”

He pointed to the proliferation of poorly constructed pre-fab school buildings in the post World War II period, and their legacy, as an example of what could go wrong.

What are the costs?

Matthew Hay is the general manager of Keith Hay Homes, a company which already builds many minor dwellings, both on and off site.

He said that to build a basic minor dwelling of 60m² it would cost around $200,000 for the house alone, but that did not include connecting to all the services needed, such as water and power.

Once those costs were factored in, the basic amount would be in the mid to high $200,000 range, he said.

“Our units are normally in the $320,000 to $380,000 range, depending on the region, the requirements of council, and the type and difficulty of the site being built on.

The build processs with a minor dwelling is relatively straight forward, Matthew Hay says.

“There are provisional sums that come into play too, and people often make the mistake of underestimating them. That can be a bit of a pitfall.”

Tookey said $3000 per square metre would be the baseline starting point for a new build, and it would be for a basic design that did not include groundwork, or any additional costs with the site.

“A cost of around $200,000 would be a starting proposition, but costs could be significantly more.”

Offsite manufactured buildings are a good option, but the prices on them vary depending on the company providing them, and the design, he said.

Are there any issues to watch out for?

For Hay, it is difficulties, problems or restrictions with a property or its typography that can cause the most problems with minor dwellings.

He says the actual building process is usually straightforward, particularly if the dwelling is built off-site and relocated to the site.

“Even site access is not usually too difficult. We’ve used cranes and even boats to get off-site builds, or materials to properties.”

The other area of complexity could emerge when councils got involved, he said. “And they will be as soon as you start connecting to the water, drainage, and sewer systems.”

Tookey said the idea the new rules would make for entirely “consent free” building was nonsense.

That is because dwellings will still need to meet the building code, and will require the involvement of a licensed building practitioner.

“If people think they can skirt that, and just build what they like they will be in for a shock. You won’t be able to get insurance if a dwelling is not up to code, nor will you get an extension to a mortgage for it.”

Who is likely to build a granny flat?

When making the announcement Peters emphasised the new rules will allow people to build granny flats for family members, such as ageing parents or university aged children.

Putting a minor dwelling on a property is a classic investor strategy, Opes Partners’ Ed McKnight says.

But Hay said the number one group they build minor dwellings for is investors who want to boost the cashflow they can make on a property.

The next largest group were “accidental investors”, who had a large property and wanted to make some money off it, he said. They were often older people who wanted to downsize without leaving their community.

“We do some units for lifestyle blocks, and some for families, but it is predominantly investors that we see.

“That’s not surprising because it is possible to rent out a minor dwelling for around $550 to $650 a week, depending on the location.”

At an average build cost of $350,000 and with rent at that level the property will be positively geared and the owner will get a decent return, he said.

Do the numbers add up for investors?

But there are some differing views on whether the numbers still work for investors.

Opes Partners property economist Ed McKnight said if the build spend was $200,000 to $300,000 and the rent was $400 to $600 a week, a minor dwelling might provide a gross yield of 8% to 12%.

That would improve cash flow, but he did not think a 60m² minor dwelling, which would usually be a two bedroom, would significantly add to the value of a property.

It could be more worthwhile to build a 70m² dwelling with three bedrooms, he said.

“Although I have seen calculations suggesting the new rules might lead to savings on development contributions of $12,000 to $18,000. That is a decent saving, so it might depend for some.”

Putting a minor dwelling on a property was a classic investor strategy, and if someone was thinking of putting one already the new rules could be just what they need, he said.

But Auckland Property Investor Association general manager Sarina Gibbon said many of their members felt the numbers did not stack up, given high interest rates.

“The new rules might make them more doable for some, but they haven’t been that popular in recent years, especially in Auckland where the Unitary Plan gives people more build options.”

There needs to be more rental properties on the market, so anything that helped was a good idea, she said.

“Investors who go down this path have to remember that minor dwellings are subject to the healthy home requirements, and to tenancy law when rented out.”

Will the new rules lead to a flood of granny flats?

No. The consensus among interviewees was that while the new rules might prompt some increase in the number of minor dwellings built, they will not lead to a deluge of them.

Tookey said the current economic climate, the cost of building, and high interest rates made it prohibitive for many people to build anything right now.

Those factors will improve over time, but this is not going to be a silver bullet that will magically resolve the housing supply situation, he said.

“I’m not trying to rain on the Government’s parade. It’s good to try and increase supply, and this may lead to more people building minor dwellings than otherwise would.”