University of Auckland: Make developers provide affordable housing

Professor Laurence Murphy.

Releasing land and building thousands of new homes won’t solve Auckland’s housing crisis, says one expert.

Laurence Murphy, former Professor of Property at the University of Auckland Business School, says such a move will only result in the development sector doing what it has always done - buying land at market prices and building houses to sell for the best price possible.

With Auckland's average house price now well over $800,000 and climbing, most of the new housing would still be too expensive for low-income families - and releasing more land and building more houses to drop prices is "simplistic", says Professor Murphy.

Instead, he says, some attention needs to be given to providing affordable housing.

There is no easy answer to Auckland's housing problems. Low interest rates, rising incomes, thousands more people coming into the city every year, improvements to the city and increasing lifestyle expectations create rising demand pressures. House prices are ruled by supply and demand - and rising demand can overwhelm even high production.

"Economic models developed by the English and Scottish governments show that, even if you produce a very large volume of housing for a long time - 10, 15, 20 years of high production - it doesn't really bring house prices down," says Professor Murphy. "In Ireland, from 1995 to 2006, more than 500,000 new dwellings were built. Yet prices increased by more than 350 per cent during that period."

Developers cannot produce cheaper houses because they have to compete to buy land, he says: "The person who bids the most for the land will get it. So, even if you release more land, developers will not be building affordable houses."

New Zealand's mortgage market has also helped create the problem because "20 years ago you had to almost beg to get a mortgage". Increased bank competition and declining interest rates mean people take on more debt - again encouraging house prices to go up.

There was no other commodity for which such low interest rates were available, Professor Murphy says, creating the potential for good returns - and making housing a "pretty easy option" compared with the sharemarket and other investments.

Because borrowing was so cheap "there's this pressure that if you're not in the housing market, you're somehow losing out. We also have a situation where a lot of people believe their house is their pension fund, a way of saving for their future."

That buoyancy is bad news for people trying to grasp the bottom rung of Auckland's housing ladder. Solving the problem means not only building more housing but measures to ensure some are affordable.

Other flourishing countries have faced the same problem of demand outstripping supply. Some, like France, have used a housing tax credit system. In return for supplying long-term affordable housing, developers have access to large tax credits. In the United States, developers can on-sell their tax credits to other unrelated companies, money which becomes their upfront profit, Professor Murphy says.

In England, affordable housing is sold to a registered social landlord. They cater for people who do not qualify for council housing and cannot afford to buy their own homes. Schemes include long-term rental or shared equity, where the community landlord retains ownership of the portion of the property.

In various Australian states, land development corporations negotiate deals with land owners and do not make huge windfalls when the land is re-zoned for housing - "fair value rather than an inflated value," says Professor Murphy.

With the release of Crown land, he says the New Zealand government should consider requiring developers to include affordable housing. The initial cost of the land needs to be controlled otherwise owners, knowing the land is to be re-zoned for housing, would hold on to get the highest price.

"If you release land at market prices, when house prices are booming, you won't get affordable houses."

Swamping the market with land would also not work: "Even if more land is made available, it's in the interest of developers not to over-supply the market as this would cause prices to fall and adversely affect their viability."

The current proposed Auckland Unitary Plan allows for retained affordable housing and Auckland's special housing areas have provisions requiring developers to include some houses at prices below the median price for the area. But there is nothing to stop those properties being on-sold for profit, causing prices to start to escalate, Professor Murphy says.

"If you're going to include affordable housing, there is an argument that it should be retained as affordable housing."

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