Building Consent Rates and Housing Affordability: what is the link?

Readers will know from a recent Making New Zealand article (27 August 2016) that Auckland's Building Consent Rate, both before and since the Super City was brought into existence, has failed to build enough houses for its population growth for 14 of the last 19 years. It has taken a long time for the problem to become severe and sometimes I wonder why it has taken a long time for it to come to public attention. Maybe New Zealanders are a long suffering people?

Looking more closely at the inability to build to meet demand, I decided to plot the building consent rate against the housing median multiple. The basic theory we hear from the Government, and, in my opinion, from less informed observers, is 'we need to build more houses'. That has led into huge, and very slow damaging debates on what sort of city we want, given we have now fallen so far behind in building to meet demand.

Using data from Statistics New Zealand, and logic detailed in the previous article I refer to above, we have failed to build enough housing capacity for 53,322 people over the last 19 years. On the face of it - at 2,754 people per year - that doesn't sound much in a city of well over 1 million people. Nonetheless, housing affordability has declined over the last 19 years, even if it has been at differing rates for each year.

So, the first chart below tells you the building consent rate for each year since 2004, plotted against the median multiple for that year, from Demographia. The plausible theory is that, if we build more houses, then we wont have too many people offering to buy one property and thus we wont have irrational prices being paid, thus decreasing affordability for others.

Building consent rate per 1000 people in Auckland versus the Housing Median Multiple from 2004 - 2015

While the chart above is only for 11 years, and is thus a limited data set, what is very clear is the lack of correlation between increasing building consent and improving housing affordability. This so surprised me: that building dwellings doesn't solve our housing affordability problem. This leads to a couple of observations:

Firstly, housing is being seen as a financial instrument for gain, rather than a necessity for people. While the role of a landlord is necessary for a variety of reasons in a modern economy, that function is separate to the capital gain driven investment approach.

Secondly, even though we did not build enough houses in 2015, there is a risk that as even more dwellings are built a bubble in supply will occur that at some point, having built more than we need, a crash occurs. Now, to be very careful here, we may build more houses than we need, and still have declining affordability or home ownership. The reason is the dwellings are still too expensive and so those who would like to buy them can't afford them. At that point the developer may need to sell at a loss or even go under if they have not been careful enough in gauging costs and market demand, at price points the market can afford. Increasing the supply of dwellings could prove to be our undoing, not because people did not want to buy them, but because the market for such highly priced real estate has all but dried up.

I would argue that it is not simply increasing the building consent rate that is going to improve our housing affordability. The second chart I want to show is what happens when we subtract off the population increase from the capacity created by building consents (again shown in the previous article I refer to above) and plot that against the housing median multiple from 2004 onwards.

Shortage & Surplus of Housing in Auckland versus the Housing Median Multiple from 2004 - 2015

Here there is a stronger correlation that as we failed to house people (by building dwellings), in general affordability declined. If you plot a straight line equation for both charts, the first chart has a R-squared value of 0.28%, while the second chart has an R-squared value of 40.72%. So, while that second R-squared value is still quite low, there is certainly a stronger relationship between people being housed and affordability when compared to consent rates for dwellings and affordability. This suggests that housing affordability is more sensitive to population growth rather than housing growth and the major difference between the two is people have preferences in their housing choices.

Too many people in too few homes, or the wrong quantities of the different types of dwellings - a recipe for unaffordability?

While some like high density dwellings, most people prefer the standalone dwellings. If you don't build enough of those - and we know already that we haven't built enough of all types of dwellings for around 70% of the last 20 years - then the intense competition for those dwellings will send prices through the roof.

The message that people (who after all are the market) are sending to Local Government, Central Government, developers and economists, is build more houses, but build according to demand. That in turn requires the release of land as an essential prerequisite among others to solve the problem.

I look forward to the time when demand for housing is met by a choice of homes that reflects our values, and not some arbitrarily imposed idea of what demand should be. The home below is a nice start, and I daresay a popular one.

An example of a very popular choice of housing in Auckland and across New Zealand