Affordability & Intensification in the current Auckland land market

The new Unitary Plan in Auckland, although subject to a court challenge, is slated to among various goals to provide affordable housing with types of homes and in areas where Aucklanders, and future residents, would like to live in.

However, let's look at the foundation for this arrangement to work, with respect to the economics and desirability of the different housing forms (standalone, townhouses, terraces and apartments). We will then see if this foundation is something that can presumed upon going forward.

The first place to start is land, and more importantly, land costs. I am going to use the area I live in, as an example, because it is slated for significant intensification in an area which is largely single dwelling units. Below you can see what www.homes.co.nz says our homes are worth.

The new Unitary Plan has rezoned our entire area (against my submission, for what it's worth) to mixed housing suburban. What this means is homes with 20 metres of road frontage can be sub-divided into 300m2 sections, provided the developer can get enough land. In our case, this means buying both properties, bowling the 16 year old homes and building 4 new homes in the process. Just opposite us we have a new 50+ mixture of 1 bedroom, 2, bedroom, 3 bedroom and 3 bedroom + study, ranging in price from $499K through to $949K on Auckland's North Shore and they come as terraces or similar and with around 200m2 of land per house. They have sold stage one before construction started. This leads me to believe that a developer interested in acquiring our property (at 648m2) and our neighbor's (at 620m2) is going to struggle. I have had mentioned to me by a person familiar with the development sector and by a real estate agent that Developers work on a 30% profit margin, or the so called 1/3 + 1/3 + 1/3 model:

1/3 for the land

1/3 for the construction

1/3 for profit

Now, you can be sure that ourselves and the home owner next door are not going to sell our land (+ improvements) at $600,000 each, which is the budget allowed for the developer in the table above. In Auckland, that is tantamount to intentionally making yourself unable to buy a similar home. For a developer to make this financially work, they would have to decrease their profit margin. How much? Well, both our houses are worth together around $2,200,000 and after a construction cost of $1,600,000, this leaves a margin of 5%. In fact you might even get some land owners wanting more, because they want to capture some of the increase in site value now that 2 houses are going to be built in their land!

My conclusion: we might see some intensification here or there, but the sheer absurdity of our house prices means I won't see any developers appear on my door step. The developer has been relying on (endless) capital gain to make up for the cost of land, but for the above simple equation to be viable the house sales would need to be ~$1,600,000. Two consequential observations:

1. As soon as land owners get a whiff that similar sized houses on half the land will be marketed for $1,600,000, then they will assume their own houses are worth around $2,000,000+.

2. This actually reduces housing affordability, presuming the homes can be sold.

Finally, because such a proposition - precisely enacted by the Unitary Plan I and many others opposed - developers will not take the risk, and the much needed housing supply problem will not be solved. Also, in our society & rule of law, the power lies in the land owner - if the developer offers them XYZ, then they can simply decline the offer.

I am not against intensification, for those that want it, but I can't see it happening at the scale needed to increase affordability and improve supply.