Housing Affordability: How did we get into this State?
Grizzlies, the Housing Economy and the chaos we are in
Do you ever wonder how on earth our housing market got into the state it is in, when we think how much is needed to pay for a home - something that is essential to our mental and physical health as people? We may debate how bad it is, or the methodology we use to get there, but you would be hard pressed to say there is no problem, whatsoever.
Sometimes it has been classed as a 'wicked problem'. The brown grizzly above I think is not a problem, as long as it is in its natural habitat. But if you take him into your home, the ball game completely changes and that, in a sense, is a metaphor for our housing here in New Zealand.
How did the grizzly get into our economy to bring the chaos we have now?
It struck me that we are now all aware of the problem, but it seems that it is beyond us, as a society, to solve it. There are disagreements on the solution, our Local and Central Governments on occasion point the finger at the other side, and the mainstream media attempts to capture both people's reactions and experience with Council, auctions, and NIMBYs, as well as try and dig a little deeper into the causes. Some people have been publicizing the problem for well over 10 years. Yet alas, here we are in 2016 with an extremely expensive housing market.
Sometimes problems like these have been around for so long we need to look back for more than a few years. I believe it is a combination of certain actions taken a long time ago - and by 'long' I mean something relative to our 24-hour media-focused internet-aware society (not that everyone agrees with that way of life) - and continued, followed by logical actions of people in our free market. By 'free market' I mean that basic notion that in New Zealand, we have considerable freedom to buy things we want, to not spend what we don't want, to choose a job, study for a qualification, travel anywhere, associate with others of our choosing, marry and have children, and so on.
After being provided with some Statistics New Zealand data I went to their website and retrieved some data back to 1996 in the areas of population growth and building consents. I think we all agree that we are not building enough houses, but do you have any idea how long this has been going on for?
Where are the homes?
Among the many statistics available, I decided to
1. Calculate the change in population for each city or district in New Zealand for every year from 1997 through to 2015.
2. Calculate the number of building consents granted to the same cities or districts per 1000 residents for each year.
My logic was something like this: if a city or district increases in population from one year to the next, that city has to build more housing. Sure people can leave a city, but a population increase in one city means that more people arrived than left: i.e. the net increase. We could say that some people who move to the city are able to move into vacant accommodation, but that presupposes a personal contact or a change in the home-owners choice, as often these houses are vacant for a reason. Aside from that, the only option is to build.
Therefore, as the population increases, we need a positive building consent rate, and that number must be enough to meet demand. I plotted the number of building consents on the x-axis and the increase in population on the y-axis. You can imagine that the bigger the population gain, the bigger the number of building consents needed.
Building Consent rate and Population Increase across New Zealand in 1997 without Auckland
When I first plotted this, I included Auckland but was shocked at how the chart looked. What you see above excludes Auckland but includes every other city or district in the country.
If you take the linear equation, I would like to highlight a few important facts:
1. The x-axis, represented by x in the equation, tells you how many consents were granted to that district or city. So, the bigger the number x is multiplied by, the greater the population growth across the country. So, a good thing.
2. On the other hand, if building consents become fewer and fewer, the steeper that linear equation becomes. So, the bigger the number x is multiplied by, the fewer and fewer houses are being built. So, a bad thing. We can call this number the x-coefficient.
So, this chart may be telling us good news, or not so good news. I'll return to that in a minute. Let's include Auckland into the same chart.
Building Consent rate and Population Increase across New Zealand in 1997 with Auckland
Immediately you can see the rest of the cities and districts in the country squashed at the bottom, while Auckland sits atop like a great weight! The x-coefficient changes from 87 to almost 148. Now, the building consent rate for Auckland - 8.4 consents per 1000 residents - seems to be quite low. You will be (quite rightly) saying that Auckland has many thousands of residents so maybe enough dwellings were allowed to be built to meet demand. You will also be saying that Auckland is a big city by New Zealand standards and therefore its population growth will be far beyond all other districts and cities in New Zealand. So I did a little more digging.
I calculated the total of building consents granted by the seven former City Councils and now one Super City Council and also plotted the population change, over the last 18 years. Every year, Auckland consented fewer houses than its population growth. Now you will be saying, "but hang on a minute, can't each house provide accommodation for more than one individual". Yes that is, for the vast majority of consents, true. So I calculated the average number of residents that live in a typical home in Auckland - it ranged from 2.85 through to 3.01. I then used that figure calculated for each year and multiplied that by the number of consents. Finally I subtracted off the population increase the capacity provided by the number of consents that year - that is the grey line.
Population Increase and Capacity for new building consents in Auckland: 1997 - 2015
Any time the grey line goes below zero, it means that not enough capacity was added to the Auckland housing market. Unfortunately, as you can see, this happened as early as 1997 and although for a few years more capacity was added than there was demand, it has since been on a downward trend since the peak of 1999.
So, this problem has been around over three successive Central Governments and while Local Councils don't quite have the same political setup, we can still say that the downward has been around for six successive Councils.
What I want to put forward quite strongly is this problem has been around for a long time. What happens when strong signals are given by Councils on how much they will consent to be built over an extended period of time, is people - both homeowners and investors - will behave in whatever way is economically advantageous to them. In this instance, you need to imagine that land becomes a scarce commodity and out of that, the owner can sell for an even higher price.
To change that economic behaviour is very difficult, if not close to impossible.
In addition, I believe we should start looking very closely at the Council - there are people and belief systems there that have behaved like this for close on 20 years - possibly more. The scale of the problem, and the length that some Council Officers and some of our elected representatives means that they have spent the better part of their professional or political careers committed to a way of operating that it is very difficult to turn around and say, 'well I was wrong'. Combined with the entrenched belief now that our land and houses are worth what they are, leads me to conclude that this is a very wicked problem.
It is against my, and I believe in general in New Zealand, to resort to a sort of witch-hunt of people. Instead I believe it will take either a conscious choice in many of us, or an economic event that New Zealand has no control over, to solve this problem. Which will it be?
