Apr 27, 2019
Future Proof Housing:
A Twenty Degree Home — An Eight Richter Home — A Carbon-Zero Home?
A proposal to increase the quality of New Zealand’s housing with respect to energy efficiency, seismic risk and climate change.
Introduction
The success of housing policy reforms is very much dependent on whether it results in good quality housing or not. Reforms to New Zealand’s Building Act in the 1990s failed this test, leading to the leaky homes crisis which cost over $10bn to remedy.
Further back in New Zealand’s past, housing policy reformers had a better understanding that houses should be of high quality. For instance ensuring state houses were solidly built. Even now those first generation state houses are in demand because of their ‘good bones’.
This Living Rent report looks at what sort of quality standards are needed to future proof New Zealand’s houses.
Overseas Examples
Around the world one of the most exciting responses to unaffordable housing and climate change concerns has been the building of highly energy efficient, warm, dry and well ventilated social housing.
For example the Goldsmith Street social and passive housing scheme in Norwich this October was named the winner of the Royal Institute of British Architects (RIBA) Stirling Prize. There has been a huge amount of media attention. The RIBA President described the housing scheme as a “beacon of hope”. Another architect, Piers Taylor writing for Dezeen states, “Goldsmith Street offers a roadmap for precisely the type of housing the UK needs”. A Guardian Journalist suggests that Goldsmith Street is the end of brutalist social housing (think tower blocks and slab block estates), as architects realise streets make communities. The New Statesman describes the potential importance of Goldsmith Street in the revival of architectural designed Council Housing.
After Mikhail Riches won the UK’s top architecture prize for its low-energy Goldsmith Street development, the practice committed itself to working on projects that go to an even higher standard, “As a practice, we don’t want to do anything that doesn’t aim for zero carbon” Mikhail Riches co-founder Annalie Riches said.
In 2009, Stockholm planned the redevelopment of its Royal Seaport district as an ambitious program devoted to being a “climate-positive” development. This large-scale project is planned to not only eliminate its own carbon emissions, but also remove carbon from surrounding areas as well. The city has declared that the Royal Seaport would be climate-positive by its completion in 2030, with more than 12,000 new residential apartments and 10 million square feet of office and commercial space.
An article titled In pursuit of sustainability’s holy grail: climate-positive development detailed two main drivers that has kept Royal Seaport on the climate-positive path: strong political will and private-sector buy-in.
European examples of affordable public housing which have high sustainable quality standards can be seen in the above twitter thread.
New Zealand should design a housing policy tool enabling it to build public housing to a high quality standard, including an internationally accepted environmental standard, such as passive house.
I was introduced to this international trend of social or affordable housing being built to the passive house standard when I published a previous paper -The Housing Productivity Story -where I discussed an economic theory explaining why New Zealand’s unresponsive housing market could be causing poor productivity due to staff recruitment and retention difficulties.
An Interest.co.nz reader contributed with a video that described an innovative project in Heidelberg, Germany that is performing brilliantly by building a large scale 100% passive house standard residential and commercial district.
One of the key features of the German initiative is house builders can access low cost 1% interest loans up to the value of 75,000 euros if they are constructing energy efficient buildings. In the Heidelberg example the whole development of 5000 homes plus the commercial and industrial buildings are all being built to the passive house standard.
This is a good idea because energy efficiency features can add 15% to upfront build costs (for bespoke houses much less for multi-unit dwellings) yet in the long-run energy efficiency savings outweigh build costs.
If New Zealand implemented a ‘future proofing’ housing construction policy not only would it help the housing and urban development sector meet the countries carbon zero by 2050 target, over time there would be a gradual improvement in the quality of its housing stock, which is notorious for being cold, damp and unhealthy.
Preventing housing financial assistance from being regressive
A difficulty for implementing a housing construction subsidy is it would be highly regressive as the construction industry mainly builds for the top end of the market. It would be like giving a tax cut to high income earners but not low and middle income earners.
Since the 1980s the building industry has shifted from building more affordable homes to focusing on building for the upper quartile of value. The lower two housing stock value quartiles now only contribute about 5% and 10% of the total amount of new builds.
The intent of Kiwibuild was to encourage the building industry to change its business model to be more responsive to housing demand from lower income groups. So far the industry has been reluctant to make this change.
The KiwiBuild initiative has faced significant public criticism. KiwiBuild’s policy goals might be more successful once the new Ministry of Housing and Urban Development (MHUD) and Kainga Ora its housing and urban development authority is better established.
A Construction Future Proof Fund could help the building industry change its business model so it is more responsive to lower quartile income groups housing demands.
The legislative remit of the construction fund would be to issue capital grants only to housing schemes where there is a mix of housing sizes, types and ownership models, that target the different segments of housing demand. For instance, developments that include subsidised state housing for the most vulnerable low income groups, affordable build-to-rent housing (ideally with security of tenure) for low income workers and affordable KiwiBuild owner-occupied housing or rent-to-buy houses for middle income households.
This approach would fix the regression problem of construction subsidies being taken up by developers and builders whose business model only caters for high income households. It would encourage the housing construction and development industry to master plan mixed income housing developments which provides better social outcomes than segregated developments.
How would a Construction Future Proof Fund Work?
Instead of giving an interest free loan like the German scheme, New Zealand’s Construction Future Proof Fund could distribute grants to eligible households up to the value of $25,000. This would be based on the assessed energy efficiency, seismic strengthening and carbon sequestering merits of the new builds.
Australia in June 2020 announced the Federal Government will give eligible Australians $25,000 to build or substantially renovate their homes, in an effort to boost demand in the construction sector and keep builders employed.
Australia’s announcement occurred after industry bodies painted a grim picture of the second half of this year, warning that the economic downturn associated with the COVID-19 pandemic could see the number of building projects in the pipeline plummet, putting hundreds of thousands of people out of work in a “valley of death” scenario.
What are the Cost/Benefit Considerations of the Construction Future Proof Fund?
Some market purists will say this is a subsidy for house construction, but it is a much smaller subsidy compared to the accommodation supplement payments to tenants and landlords which totals $1.5 billion a year.
The proposed $25,000 Construction Future Proof Grant is comparable in size to the First Home Grant, which can be up to $10,000, per Kiwisaver contributing person in each household, for new-builds. This paper would contend the long term benefits to New Zealand from a Construction Future Proof Grant scheme would be far greater than the First Home Grant scheme.
The accommodation supplement is criticised because it benefits landlords more than tenants, as it increases demand but not the supply of housing. The more inelastic (unresponsive) a city’s housing supply is, the more the supplement is capitalised into higher house prices and higher rents.
There is evidence that New Zealand cities have very inelastic housing supply so improving rental conditions by increasing the accommodation supplement will be of little benefit for reducing inequality. Providing a subsidy on good quality construction for lower income housing would help assist in improving housing supply elasticity. This would also have wider benefits, including for productivity, workers and city-based productive firms as detailed in the paper -The Housing Productivity Story.
Construction subsidies should be tied to defined and measurable quality targets. If there is insufficient quality standards then the government risks repeating The Great British Housing Disaster of the 1960s where many government initiated housing complexes were so badly built they had to demolished. This was due to defective building standards, as the UK construction industry responded only to the ‘numbers game’ of quantity targets.
In New Zealand 318,000 homes, more than one in five, are damp some or all of the time, and it’s more common for people in rental properties to report damp or mould. Rental homes are seven times more likely to be always damp compared to those owned by the household or held in a family trust.
New Zealand currently has very lax energy efficiency building requirements, being able to leapfrog past generations of overseas building standard improvements to one of the most efficient standards could have the same effect as developing countries bypassing landlines and going straight to widespread mobile phone use.
The proposed Construction Future Proof Fund should also be seen as an investment in decreasing housing related health costs and an investment in a just climate change transition for the housing sector.
Housing research shows that housing disadvantage is harmful to mental health, in addition to its physical health effects, and these effects can last well after the housing situation has improved. For instance, living in an overcrowded house from birth to early childhood is associated with depression in midlife.
The research indicates New Zealand’s housing crisis, childhood poverty and mental health crisis have some common connections.
A correctly configured housing policy reform program that included quality targets could significantly address four issues that most trouble New Zealand. The housing crisis, climate change, childhood poverty and the recovery from the corona pandemic.
The costs of building to energy standards, such as, the passive house standard is likely to decrease over time. That has been the experience in Pennsylvania, whose particular use of the United States Low Income Housing Tax Credit scheme lead to nearly 900 affordable passive house standard housing units being built or under construction in the last three years.
These passive houses were part of 26 large scale multi-unit housing projects. Note the cost premium for building passive housing is less for multi-unit dwellings. The “construction cost premium for passive house versus conventional projects was 5.8% in the first year, 1.6% in the second, and minus 3.3% in the third year, suggesting that learning and innovation by project teams may be driving down costs over time” (Source P.24).
Higher energy efficiency weighting should be given to standards like the passive house standard which has specific temperature and ventilation requirements compared to New Zealand’s current housing quality tool -the Homestar 6 requirement which does not provide a statistical temperature improvement over the current building code.
Mike Hoskings on the radio station NewsTalkZB conducted an interview titled NZ encouraged to follow Europe and embrace the ‘passive house’ which was very positive towards New Zealand moving towards passive house.
What About Reducing Seismic Risk?
A similar approach could be taken to future proof seismic risk. The New Zealand building code constructs buildings to a standard that protects life but not the building itself, which post-quake often means the building has to be demolished. Buildings though could be constructed to survive earthquakes with only a little extra expenditure.
Subsidising the construction of ‘quake proof’ buildings would be helpful for transitioning to a greater variety of multi-unit housing typologies. Especially as multi-unit buildings are often considered high risk by the insurance industry.
Insurers in New Zealand have moved to risk-based pricing which means $thousands more in higher premiums for high-risk properties. This has led to a public discussion about how to better manage risk.
In the very long-run subsidising the construction of ‘quake proof’ buildings could be a large net saving for New Zealand, as the cost of recovering from earthquakes is reduced.
Economic Benefits
When I first wrote this paper I wrote the following paragraph suggesting the construction fund could be useful in an economic downturn. Covid-19 means the downturn has arrived and now the fund has gone from ‘a good to have’ to an ‘essential to have’.
If the government established mechanisms to subsidise the construction sector, then when New Zealand experiences an economic downturn it would be in a better position to support the construction industry. This mechanism would make it easier for the government during times of economic uncertainty and slowdown, when the private sector is under-investing in construction, to temporarily increase its contribution to construction funds to counteract the under-investment from the private sector.
If the previous government had supported the construction industry in the five years of slowed building after the 2008 Global Financial Crisis, New Zealand’s subsequent housing crisis would not have been as severe as it was.
If the construction sector is less subject to economic uncertainty, it is more likely to adopt a business model that makes long-term investments in factories, workers and supply chains to improve productivity.
New Zealand’s largest exports are food based but as can be seen in the graph food has a declining market share. If New Zealand could diversify its exports this would strengthen its economy. Exports that target the housing market could be a potential market to diversify into.
The French government has announced plans for a sustainability law that will ensure all new public buildings are built from at least 50 percent timber or other natural materials. If New Zealand encouraged the housing market to move in this direction too, then this might encourage innovation in a whole range of products which might be more energy efficient, stronger in earthquakes and sequester rather than emit carbon. Products like mass timber prefabricated buildings, bamboo buildings, woody insulation, Accoya Pinus Radiata hardened wood products and hemp hardwood flooring.
It is possible innovation in natural building materials could start an export boom like refrigeration did for New Zealand 130 years ago. It is even possible that some of these products could be individually designed and prefabricated in New Zealand meaning the country would gain an industry with multiple layers of value-added potential.
This is the vision that is promoted by the wood processing sector. Especially by Marty Verry who is chief executive of the Red Stag group, which operates the Southern Hemisphere’s largest sawmill with vertical integration form forestry to property development. Marty Verry has written several articles basically asking the government to make this strategic vision part of the Construction Sector Accord.
Overall, there are clear benefits for New Zealand from future proofing the housing market. A Wellbeing Budget approach which takes a holistic view of societal costs and benefits should be supportive of this proposal.
An earlier version of this paper was published in May 2019 by Interest.co.nz here. Readers were quite supportive in the comment section.
