The billion-dollar question hanging over housing reforms

Saturday, 6 July 2024

Housing Minister Chris Bishop has announced a suite of zoning and land reforms to help “flood the market” with more houses.

Liberalising rules to allow more housing development is a start, but questions hang over the lever the Government has pulled to enable more housing. Specifically, where is the infrastructure going to come from and who will pay for it? Miriam Bell and Thomas Manch report.

The Government’s latest housing policy is intended to “flood the market” with more houses, but a critical piece of the puzzle is missing, and until it is addressed nothing will change, developers say.

Housing Minister Chris Bishop on Thursday announced a suite of zoning and land reforms to free up land markets and enable developers to deliver high and low density housing and commercial developments.

The policy, called Going for Housing Growth, will set house zoning targets for councils; scrap urban-rural limits; encourage mixed use zoning; and get rid of minimum floor sizes and balcony requirements for apartments.

It will also make the Medium Density Residential Standards (MDRS), which would have allowed three townhouses on most urban sections, optional; and more tightly define high density transport corridors eligible for development.

But developers The Post spoke to say while they support the drive to boost residential housing, the policy’s failure to address infrastructure funding is a problem. They also warn of unintended consequences.

Auckland developer David Whitburn, from the Whitburn Group, says it’s all very well to free up land supply but unless there is funding for infrastructure it won’t achieve much.

Housing Minister Chris Bishop says average house prices need to fall in order to make Aotearoa 'a property-owning democracy'.

Getting rid of urban-rural boundaries will lead to greater urban sprawl, and that means serious challenges as infrastructure, such as roads, wastewater networks, freshwater supply, and schools, is extremely expensive, he says.

“Even with the controversial Drury development contributions in Auckland, the infrastructure required is not fully funded, for example. It costs billions of dollars for a city the size of Auckland to build the infrastructure required.”

Many councils are challenged financially, and if they will not or cannot provide infrastructure, many developers will not build, he says.

In his speech, the minister said work was under way on the infrastructure funding and financing system, and he would have more to say on it later in the year.

But Whitburn says he has heard similar before, and more details are needed upfront.

He would like to see more about infrastructure funding, but he thinks a good option would be government wholesale funding, and some directives to the big KiwiSaver funds.

“Imagine if the NZ Superfund, ACC, and KiwiSaver providers purchased infrastructure bonds, or similar financing arrangements. Infrastructure is a safe, long-term investment, so it would be a win-win, and it is something done in many other countries around the world.”

Whitburn likes that the Government is working to encourage more building, but says there are consequences with unchecked building out, such as traffic congestion and increased carbon emissions.

Developers say infrastructure and funding for it is key to the success of the Government’s housing growth policies.

In contrast, building up means lower infrastructure costs, he says.

But he does not think giving the ability to build shoebox apartments by abolishing minimum floor sizes and allowing no balconies is necessarily progress either.

“In theory it might be OK, but there are many developers who are only interested in money. So they won’t apply good design principles to create good living spaces.

“It will be all about how many apartments can be squeezed in, and that will create some nasty, but more affordable accommodation.”

It could lead to a situation where ghettos are easily created, and that would be a disaster as there is a positive duty to look after the nation's most vulnerable people, he says.

Hamilton developer John Kenel, from Assured Property Investments, says restrictive zoning policies have the biggest effect on restricting housing supply, and this can be seen across the Western world.

“That means that anything the Government can do to make zoning easier will help.”

But there are other issues and the big one is infrastructure, he says. “Many of my projects in Hamilton are on hold due to insufficient infrastructure. Easier zoning alone won't solve this problem.

Hamilton developer John Kenel says more money would help with infrastructure development.

“What would help infrastructure development is more money. I think councils should issue infrastructure bonds. We need more investment opportunities in New Zealand as the stock market is so small.”

More oversight on councils and their spending is also needed, he says.

“Where have all of the millions I have paid in development contributions gone? Not into the inner city infrastructure where I develop.”

Another issue is that banks typically won't lend for smaller apartments, he says. “It is a 38m2 to 50m2 minimum depending on the bank. Allowing smaller units won't help if people can't get loans to buy them.”

Construction economics also come into play, he says.

“With interest rates at the level they are, new builds don’t stack up financially. We won’t see an increase in new housing supply without a significant drop in interest rates.”

Graham Vercoe is the owner of GJ Gardner’s Nelson franchise, and has been a developer for over 20 years. He says the Government’s plans, much like the previous government’s plans to build 10,000 houses per year, are focusing on the wrong aspects of the issue.

“Without the right infrastructure you can’t have a house built. But they seem to overlook the thing that seems most obvious to us.”

Governments should focus on helping councils with the basic three waters infrastructure, Nelson developer Graham Vercoe says.

The private sector has the capacity to deliver upwards of 50,000 homes per year, and that is evident from the statistics showing the previous peak of residential consents, he says.

“What we need governments to do is focus on one simple thing. That is helping councils with the basic three waters infrastructure.

“It doesn’t take a rocket scientist to figure out you can’t build a house if you don’t have a water pipe, if you can’t connect to sewer and stormwater.

“You can’t grow your community if your main sewer infrastructure is at capacity, and you need a new water treatment and pumping station.”

Infrastructure that is unaffordable for most councils, or that might take decades to develop and fund, is the main constraint on housing, and growth of all types, he says.

“The thing is you can buy a paddock and develop it, no problem. There is money for some of that, and the will is there, but the infrastructure to support it is not.”

Vercoe says the more infrastructure available, the more land can be opened up for greenfield and brownfield development, and the more density can be achieved.

The more land and density, the lower the raw land value, which is the second part of the puzzle in facilitating development, he says.

Simplicity’s Sam Stubbs says the Government’s housing policy will lead to a lot more urban sprawl.

“Very little in this announcement will provide any tangible benefit as it has not identified the root cause in determining supply and cost. It’s tinkering in the wrong sand box.”

He applauds the Government for trying to do something, but says they should have worked through what they are going to do about infrastructure first.

“These changes are putting the cart before the horse. Infrastructure is what drives housing.”

Sam Stubbs, managing director of not-for-profit Kiwisaver provider Simplicity, which owns development company Simplicity Living, says there are only so many levers the Government can pull to try and boost the number of houses built, and land supply is one of them, so they have pulled it.

With more land available, and clearer ideas around brownfield development so it is easier to develop, the policy will potentially increase supply over time, he says.

“But we need to see how councils respond, and if they get behind it - because more infrastructure is needed to build more houses, and who will pay for it? That is the billion dollar question.”

The reforms will lead to a lot more sprawl, and “we need to think about whether that is what we want in the long-term”.

“In Auckland for example, population growth is expected to start shrinking. And if you look at cities like Seoul in Korea where that growth is shrinking - people retrench to the centres of the cities.

A big boost in housing supply over the long term might stabilise the market, and put a lid on new build costs, Sam Stubbs says.

“This might be good as a 30 year solution, but is it good as a 100 year solution? I’m not so sure.”

What happens with productive land in city fringe areas, such as Pukekohe in Auckland, is another issue, as these changes have the potential to impact on it, Stubbs says.

“What is clear is that while the previous government was keen on brownfield development, this government is keen on any development, greenfield or brownfield, big or small, whatever it takes to get more homes built.

“So any concerns about productive land or infrastructure are secondary to getting developers to get more homes under way. But will we live to regret that or applaud it? We will only know in 30 years time, but we could see all sorts of issues in future.”

He is neutral to mildly positive about the policy, but says it is good it allows for greater land supply and more development around transport nodes.

None of the developers think the policy will have a significant impact on house prices, particularly in the near term.

Stubbs says that over the longer term it might boost supply so much that the market stabilises, and puts a lid on escalating new build costs.

It is not just developers who are concerned about the infrastructure issue.

Economist Shamubeel Eaqub says land, without infrastructure is worthless, because it’s not buildable

Local Government New Zealand president Sam Broughton says the key bit missing from the policy is how the infrastructure required for housing growth will be paid for.

“At the moment, the growth is paid for by local communities, whether it's roads or water supplies, and the benefits of growth are collected by the government through GST income tax and in the general tax take.”

Housing targets make sense, and tier one councils have been thinking about them and the right land to put homes on, he says.

“But the terminology now around what's not just available, but feasible, will mean there needs to be a new look at it, and there's even costs to that for councils.”

The outcome of Government announcements, when it affects local communities and when things change, is cost to councils and that leads to rates increases, he says.

Economist Shamubeel Eaqub says the Government’s announcement included some very positive changes, but was missing information around the funding and financing of infrastructure.

While the minister acknowledged that, it is a big issue, because for every new household, on average, local governments invest $100,000 of new assets, he says.

The planning and land use changes are a good direction of travel, The New Zealand Initiative’s Eric Crampton says.

“The development contributions are only on average about $15,000. So growth doesn't pay for local government.

“In theory, if we massively remove the policy restriction, then there are a lot more competing bits of land,” he says.

“But the infrastructure piece remains the critical part. So that land, without infrastructure connections, is worthless, because it’s not buildable.”

The policy is heading in the right direction though, and having more clarity around transport corridors and nodes and what is rapid transport is overdue, Eaqub says.

“We want to have really good incentives for developers, because we want them to do well, and to build lots of houses.

“If you think about the history of companies like Fletcher building, and Naylor Love, they got big on the back of house building programs in the 50s, 60s and 70s. We want many more.”

The New Zealand Initiative chief economist Eric Crampton says the changes avoid the “substantial harm” to housing capacity that could have been done by allowing councils to pull out of MDRS.

For councils to pull out they now have to put together a plan for 30 years of housing supply that will “get that flood” of housing through, so it is still a good direction of travel, he says.

“If you do this right, it isn't this big costly sprawl thing. You want the new places to cover their own costs. But you have to make them able to do that over time.

“Because that infrastructure is going to last for decades, trying to pay it all off in a year or two is stupid. It makes it just too hard to do. Enable them to wash their own face, and let that help guide where development happens.”

To assist that, he would like to see the Infrastructure Funding and Financing (IFF) Act strengthened, and the use of IFF style instruments, where debt is used to fund the infrastructure for developments and a special ratings area is set to pay off the debt over the 30 years.

“The point isn't to try to get sprawl everywhere. The point is to get rid of monopolies in land so that you don't get the scarcity zoning rents.”

Easing the urban boundary should make the urban land market overall more competitive, and that will bring down the overall cost of land within city limits, he adds.