New Zealand houses are of poor quality, mainly old, cold, damp, and draughty. Newer homes are better, but they are still not built to standards accepted overseas. In large measure this is due to a fear that high housing construction costs will increase further. We have new codes for insulation coming in, but there is talk of them being delayed for just this reason - not enough product, causing shortages, increasing costs.
Not enough homes are being built. The usual suspect is that immigration has been high, with the population increasing, we need more homes. This is true, but the structure of the population is changing, households are getting smaller, so we need more houses. Even in a static zero population growth world, more homes would be needed. We need to build more accommodation for our changing growing population. With not enough homes we have pressure on prices as people compete for those that are on the market.
Land prices are too high. I've mentioned that rezoning will likely increase land costs, but as more multi-unit homes can be built on them the relative cost might decline. But this will likely increase the cost of single houses on neighbouring properties. Long terms this might incentivise redevelopment, but short term this might put a floor under land prices. I'm in favour of the rezoning as denser cities are better for everyone - assuming we get out of our cars.
Construction costs are too high. There are many factors creating this problem. New Zealand does not have a large immigrant population of labourers who work long hours to build homes and then return to their home countries. This is in part why the US has cheaper housing construction costs. But monopoly suppliers are also a problem, as are the middlemen, and transport cots. A small country far from anywhere will always have higher transport costs. But labour is probably the biggest cost centre. Build your own home and you will save on costs.
So what are the solutions? Read the previous article - Housing Crisis
- for some of my concerns about current policies. But read on for my solutions.
The high cost of housing is largely due high construction cost, and the price of land. This last is obvious as witness the differential in house prices between Auckland and Christchurch - similar income levels, and yet houses are half the price. Christchurch rezoned large parcels of land for redevelopment following the earthquakes, so more land was available for housing even when large parts of the city were red-zoned and abandoned. Re-zoning and up-zoning will help here as I've mentioned. But for new home construction the cost of construction is the crux.
Imagine if it were possible to build a new home for half the cost presently - suddenly all those old houses would be torn down, and redeveloped. Better housing would be built, and likely denser to boot with the new MDRS zones. The policy change is enabling - it is not enforcing. No one will be forced to redevelop - it has to become economical to do so. How?
Off-site prefabrication will drive down house construction. When a factory can build a home inside, there are no weather issues. Inside a factory automation makes sense, increasing the skillset for workers, and the value of their time and so their incomes. Fewer workers can build more homes. Prefabrication is something that New Zealand does already - prefabbed framing and roof trusses are huge time savers. Compared to the US, New Zealand is bleeding edge. And yet there is more that can be done.
Entire wall panels, fully insulated, clad, and ready for lining are built by some contractors. I hope to use one for my own home project - for cost reductions and speed and safety on site. But modular construction is the step that will build the better, cheaper homes we need. I've talked about this in - Open Source Modularity
- but even smaller elements that are built off-site would be a boon. Modular kitchens and bathrooms for instance. But why not service cores, and stairs?
However even the factories that can build modular bathrooms have trouble keeping their factories busy. Why? Because they need scale. Small factories doing framing are limited in their automation needs, size of the premises, and start-up costs. Their feedstock is framing timber, and nails. Full modularity is a bigger costlier set-up but with bigger returns.
So how to square all this?
For a capitalist it is strange to say that we need the government. What I propose is a new government contract with the population, along the lines of the UN's judgement that housing is a human right. Even Hong Kong does this better than New Zealand.
The New Zealand government should institute a rent-to-buy programme, where the developer is the government, or government agencies. The homes built should be based on a modular system with flexibility and customisation, but based on a single factory built design. The scheme would underwrite the construction of a factory, or factory... with ownership being an SOE, but anyone can order a home from them. Smaller contractors would take these modules and then build them out on site. The resulting units would be rented out at below market rates, but with a built-in sum that over time builds up equity in the home so that the home owner can eventually purchase the home with a traditional mortgage based on the equity they have built up.
What this means is that the construction industry would have an increase in capacity caused by the SoE owned off-site prefabrication factory, lowering costs. Traditionally built homes are still possible, and will be desirable, but would be cheaper to build as the capacity and productivity will be available to keep costs down.
Land cost will still be a bigger problem. But the new MDRS zoning will likely help here, making possible more units on existing land. But for a rent-to-own scheme to work, the government needs land. Unlike Hong Kong landowners have rights, and can not be forced to sell, and the New Zealand government does not create land like Hong Kong and Singapore do with reclamation. I believe there is a model though. At present land is rated at the present developed value. So if you have empty land with no home, or you have a large piece of land but a small old home on it - your rates are low. If instead rates where set at the maximum developable value then there would be an incentive to redevelop. However this would have to be increased over a 10 year period in order to give landowners time to adjust, plan, and develop. Or to sell to the government. And it would be fair to split some of the increase in value between government and landowner.
Such changes in land rates should only be done in certain areas - perhaps the NPS-UD designated areas - so that the new homes would be dense neighbourhoods around rail stations. This would effectively be a means of value-capture. As the value of land around a station increases this should be captured by the government to fund the railway station, and to enable development of the rent-to-own schemes.
By providing scale, and identifying small section of cities for the programme, cheaper better homes in denser more walkable neighbourhoods would result. With the scale would come lower costs for everyone - even those who don't want to live in such neighbourhoods.
There are some illiberal elements - effectively socialising house construction, and resumption of land from owners - but this can be moderated with some fairness. Creating an on-site industry that is privately owned. And to share the value capture with home owners with resumed land. Ultimately this should be win-win.
The problem I have with current policy is that it is haphazard, and not coordinated. It is throwing things at the wall to see what sticks, We need to know what we are doing, why we are doing it, and what the outcome would be. We would then need to put in place regulatory reviews so that we can test to see how we're doing and to pause and reset if required. This is what Kiwibuild should have done from the outset - acknowledged that the result would be uncertain, set a range, and review points, so that the direction of the programme could be adjusted. Setting 100,000 homes as a goal was doomed.
So can government afford it? Surely printing money to ginger demand during COVID, which resulted in higher housing prices is not the way. This type of programme is one I believe we can not afford not to do - it would result in a wealthier, healthier, country, with a better urban form. We can build the homes we need, and then empower people to own them... all without tanking the prices of homes of existing home owners.
There are several policy levers the central government has pulled which I believe have been failures. And I'll address them in another article. Namely capital gains taxes, and bright line tests. These will not likely survive this government as they are crude, and don't address the problem. But I'll get to them another time.