Living Rent:
A Twelve Hour Home
Paying the rent should be a reasonable task for a full-time worker
Analysing the rental house market using a concept called living rent provides useful insights into where the gaps are in New Zealand’s housing support initiatives.
The living rent concept is thoroughly developed in this three part Living Rent report.
The first part Living Rent: The Twelve Hour Home -focuses on rental prices and its implications.
Taking the time to fully examine the policy implications of living rent allows the reader to understand the rationale for the various options to improve New Zealand’s housing situation.
Summary of twelve hour home proposal
This first report in the living rent series recommends the New Zealand government creates a build-to-rent programme capable of building a significant number of houses, up to 3000 houses per year.
These rental houses should cost tenants no more than twelve out of forty hours work, which this paper defines as a living rent.
The government should budget for this living rent programme costing $420m a year in capital grants to be given to non-profit housing trusts in the community housing sector.
The paper contends this will achieve the following benefits;
- This would roughly double New Zealand’s stock of public housing (subsidised affordable rental housing) by 2040.
- This will provide housing assistance to low income workers more effectively than the current flawed Accommodation Supplement Scheme.
- It creates a new tool that addresses the market failure of rapidly escalating rents and the private sector not building enough housing that is affordable for low income workers.
- It ensures government expenditure is directed at treating a cause not a symptom of housing related financial stress.
- It provides an intervention that can directly target providing affordable housing for ethnic groups like Maori and Pacific Peoples who are disproportionately affected by the poor functioning of the housing market.
- It can be part of a programme that tackles child poverty and the mental health crisis.
- It helps rationalise the governments various financial housing assistance schemes in a fairer manner so that low income workers do not miss out on government support. The basic organising premise of housing assistance should be -the lower the income and the more vulnerable the individual/household -the more financial aide they receive.
- It assists the government house-builder Kainga Ora to ramp-up to a size where it can provide transformational benefits.
- It helps social housing avoid stigma labels, such as fear of slums, crime, gangs and the ‘other’.
Introduction
For too many New Zealanders paying the rent is their biggest problem. Rent consumes more than 40% of their gross income. Renters have little protection from rent increases and little security of tenure, especially from private landlords whose business model is to buy and sell rental housing for the purpose of making capital gains.
For individual renters their best protection from these uncertainties would be to purchase their own home, yet for most renters their income is too low or too precarious for them to buy. This being the case, housing policy settings should also ensure renting is as equitable and as efficient as possible.
These problems have grown so big that it is now accepted that New Zealand has a housing and rent crisis.
No one solution will provide the silver bullet for solving the housing crisis. The government needs to expand its policy toolbox. This proposal is aimed at creating another tool.
Previous New Zealand governments have provided housing assistance in one form or the other for over a century. Financial assistance has come in three basic forms;
- The government has commissioned houses to be built, to directly provide affordable housing.
- It has paid renters a one-off grant so they can buy a new or existing house from the private sector.
- It has disbursed ongoing income support in the form of accommodation supplements so renters can receive affordable rental housing from the private sector.
This report contends that the third option is flawed, which is New Zealand’s most expensive housing assistance scheme -the $1.5bn per year accommodation supplement given to 190,000 households -as it subsidises landlords more than tenants. A radical review is required.
Added to this flaw there is another 240,000 rental households whose incomes are too great to qualify for the accommodation supplement yet who are not in a financial position where they can benefit from purchasing a KiwiBuild priced house with a home ownership grant. Even with a progressive home ownership scheme where the household only pays 60% of the mortgage costs most of this rental household group are not able to finance home ownership. Affordable rental housing needs to be built so there is a low cost housing option for this group.
The government provides no financial support for building affordable rental housing for low income earners despite the demand for this type of housing having grown the fastest in recent decades. An example of this demand growth is in the five years to June 2018, two-thirds of new household formations were housed in private sector rental housing.
There is a mismatch between supply and demand of rental housing that is driving up rents. This is having detrimental social and economic effects, especially for low income workers, that requires policy intervention.
The remedy proposed by this Living Rent: A Twelve Hour Home report would cost $420m a year for capital grants to fund the construction of ‘living rent’ housing.
What is Living Rent?
The living rent concept follows from the living wage idea. The living wage concept being that workers should be paid an income so they can afford the basic necessities of life.
The living wage rate for 2019 in New Zealand is $21.15. Which is $3.45 more than the minimum wage rate of $17.70.
If the living wage concept is applied to rental housing, then a ‘living rent’ value can be calculated.
Affordable housing literature indicates rent should consume no more than 30% of gross household income to avoid poverty or financial stress.
So full-time workers should live in homes that cost no more than twelve hours of work. Note 12 hours is derived from the simple calculation that 30% of 40 hours of full-time work is 12 hours.
For example, a single-income household, living in a ‘twelve-hour home’ and earning a living wage of $21.15/hour, should be paying no more than $253.80/week in rent
Wellington bus drivers are an example of an occupational group being paid just above the ‘living wage’, as they are paid $22/hour. That would mean a Wellington bus driver in rental accommodation should be paying no more than $264/week in rent.
This theoretical ‘living rent’ can be compared to actual rents.
Living rent compared to actual rents
Interest.co.nz publishes median rent figures for different size houses in the three main centres. These figures give an indication about the kind of rents low-income earners are paying.
In the below graph the median rent figure for the lowest cost dataset -two-bedroom rentals in Auckland, Wellington and Christchurch is compared to the cost of a theoretical ‘twelve hour’ living rent home where the tenant is paid the living wage rate (the green bar).
The above graph shows in Auckland and Wellington renting is expensive and in Christchurch it is more affordable.
Even in more affordable Christchurch a median two-bedroom rental is $76/week above what a ‘twelve hour’ living rental should be.
Rents since 2017 have increased the most in Wellington and the least in Christchurch.
Living wage households should be residing in living rent homes, which assuming their rent is the two-bedroom median priced rental in their respective cities, means they would need to work 78 hours in Auckland, 76 hours in Wellington and 52 hours in Christchurch. In Auckland and Wellington these households are likely to consist of at least two full-time workers. Households consisting of lower paid minimum wage workers would need to work even more hours to keep rent under 30% of their income.
Assuming other factors are constant, increasing rents will lead to more crowded rentals which will result in detrimental housing related health outcomes, especially if combined with poor quality housing stock.
New Zealand does have very poor quality housing and very significant housing related health problems, as documented in this academic paper. Policy wise efforts have been made to improve the quality of rental housing by implementing a rental house warrant of fitness. Yet for the warrant of fitness initiative to be beneficial the warrant of fitness rental houses need to be affordable to prevent overcrowding.
Living rent analysis shows how difficult it is for low income workers to live in New Zealand’s towns and cities in a manner where they can comfortably afford the necessities of life.
For example, high Wellington rents is almost certainly a factor behind Wellington’s chronic bus driver recruitment difficulties. In 2019 Wellington was short of fifty bus drivers despite offering a living wage of $22/hour.
Wellington’s housing and employment situation is likely to be an example of the productivity loss resulting from inelastic housing supply which was discussed in the article -The Housing Productivity Story.
The Wellington region for some decades has built housing at a much slower rate than Canterbury despite having a similar population.
The high rent consequences of Wellington’s unresponsive housing supply is getting increased media attention.
Auckland in recent years has managed to ramp up its house building rate and this appears to have reduced rent and house price increases. Although Auckland’s build rate in the decade between 2005 and 2015 was much slower than population growth so there is a large backlog to fill.
Unresponsive house building outside Auckland and Canterbury has contributed to rising regional house prices which has made New Zealand’s housing market less affordable in 2019 according to research group Demographia’s annual housing affordability survey.
Building affordable homes at a slow rate is one cause of high rents. This means poor housing supply is also a factor in the public and private sectors inability to recruit staff.
Public and private sector firms could of course increase wages to keep up with the described landlord’s rentier economy. In Wellington’s case that would mean wages for bus drivers increasing by $1/hour every year just to keep up with rent increases.
The effect of an unresponsive affordable housing build rate is to create a rentier economy whereby landlords and property owners are extracting excessive gains to the detriment of the wider city economy.
The Financial Times in an article titled -Why rigged capitalism is damaging liberal democracy -explains the term rentier economy (note the concept applies more widely than to just housing and rent). The Economist in a series of articles describes inadequate house building in response to demand, as the West’s biggest economic-policy mistake.
In New Zealand, if this described housing rentier economy effect is not remedied it will over time create an increasingly heavy financial burden for the public sector. The wage cost pressure from keeping up with rapidly inflating rents will affect what and how public services are delivered. It will either cause budget difficulties due to compensatory wage increases or if wage increases do not keep up with rent increases, it will degrade public services due to staff shortages.
The rentier economy burdens the private sector with the same dilemma, of either increasing wages or experiencing staff recruitment difficulties. Logically this private sector dilemma is being passed onto consumers in the form of either higher prices or lower quality goods and services.
It is hard to reform this urban based rentier economy because it involves so many different stakeholders.
For instance, quality medium density housing requires quality public transport. The Ministry of Housing and Urban Development needs to cooperate with the Ministry of Transport. Central government needs to cooperate with local government. Landowners with strategically located land that could be used for housing need to cooperate with an urban development authority to masterplan that space. And so on.
All the stakeholders need to be on the same page to make progressive transformational change. The politics of ensuring all the stakeholders are aligned is extremely challenging, as detailed in the second part of this article about Wellington’s difficulty in transforming itself.
The economic cost though of not achieving political alignment is the rentier economy will continue to contribute to New Zealand’s high cost of living, poor productivity and low wage difficulties.
Understanding rental households situation may help craft a better policy making response.
A stocktake of New Zealand’s rental housing
When New Zealand’s actual rental cost information is combined with the 2018 stocktake of New Zealand’s housing a clear picture of need can be seen.
Renters are nearly half of New Zealand’s adult population that are over the age of 15.
Based on the 2013 Census there are 687,000 households which are not owner occupier homes.
Around 82,000 dwellings are social housing units, mostly state housing. A further 190,000 private tenant households received the accommodation supplement, 85% of these supplement recipients are beneficiaries, with an increasing number being superannuitants (A Stocktake of New Zealand’s Housing, P.32).
These figures mean only 40% of the private rental market has some level of government housing assistance and the main group not receiving housing support are low income workers.
The number of social housing units and private tenant households receiving the accommodation supplement has changed little in recent decades, while the number of households renting in the private sector grew by 126,000 between 2007 and 2017. This means that in the decade to 2017, an increasing number of rental households received no government support against a background of rising rents (A Stocktake of New Zealand’s Housing, P.9).
Pacific Peoples and Maori are the ethnic groups with the highest renting figures -over 50% of these ethnicities rent.
Children are increasingly growing up in rental households, nearly half (43% in the 2013 Census) live in rental accommodation. This percentage increased from only 26% of children in 1986 living in rental households.
The government has a target of reducing the percentage of households with children who are considered low income to 10% by 2028. The definition of low income households is they have a disposable income less than 50% of the national median income after housing costs.
254,000 children in New Zealand currently live in low-income households. By 2028, the Government has committed to reduce this number by 130,000. This target cannot be achieved without addressing the issue of housing costs inflating faster than incomes.
The Children’s Commissioner Andrew Becroft said in a recent report;
I want to see family income dramatically raised by increasing benefits and making the minimum wage a living wage… And the government needs to move much faster at increasing the supply of social housing -building, buying and re-purposing -and working closely with community-based housing providers.
In other words low income families need living rent housing to go with living wage incomes to avoid children being raised in poverty.
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.
For the government to make progress in addressing childhood poverty and the mental health crisis, then fixing the flaws in the way it provides housing assistance will need to be part of its reform agenda.
What housing assistance does New Zealand currently provide?
The below housing continuum graph indicates the situation of New Zealand households not in owner-occupied housing, with a particular focus on how many rental households can afford to buy a KiwiBuild priced home.
Home ownership even at KiwiBuild prices is a step too far for most renters. Only the bottom pink bar in the above housing continuum graph can afford a KiwiBuild priced home. KiwiBuild’s potential catchment of demand is only 160,000 households compared to the 425,000 private sector rental households who cannot afford a KiwiBuild priced home.
The relatively small amount of demand for Kiwibuild houses is one of the reasons that the KiwiBuild policy initiative has struggled. Fortunately housing assistance from the government extends beyond KiwiBuild.
This living rent report contends that a guiding principle of financial support for housing is that on a per household basis the most support should go to the lowest income and most vulnerable groups i.e government housing support spending should be progressive not regressive in nature.
A thorough analysis of New Zealand’s housing support schemes shows that this principle has significant gaps in its application.
At the most vulnerable end of New Zealand’s housing continuum there is increasing financial support for the most housing deprived cohort. These are homeless people living in inadequate housing conditions because they are living on the streets or in cars, couch surfing, living in garages, camping grounds or in other inadequate or temporary housing situations.
There are approximately 41,000 individuals in severe housing deprivation (2013 data).
The 2019 Budget increased the government’s investment in Housing First, by funding an additional 1044 transitional housing units. This raised the number of people the programme can help to 2,700.
There is nearly $500m allocated in the 2019 Budget targeting the most deprived (homeless) end of the housing continuum. Unfortunately, much of this funding is going to short-term motel accommodation. One motel worth $1.7m that provides emergency housing has received $6m in funding over the last three years. Community housing providers rightly say that short-term motel accommodation is not a permanent solution to New Zealand’s shortage of affordable housing.
Emergency housing grants are increasing. Especially where rents have risen the most. For instance, Wellington’s tight rental market has spiked the amount of emergency housing grants disbursements. In September 2019 housing grants in Wellington increased more than nine-fold compared with March 2018. Nationally, 6.3 times as much was spent.
Salvation Army Central Division community ministries secretary Major Pam Waugh said that in Wellington people were struggling to get back into the rental market if they have been forced out.
“People are having to become much more innovative in how they attract a landlord to take them on, so therefore the people who are further down the rank and don’t have all the resources are missing out.”
She said she knew of a mother who had spent more than a year in a motel with four teenagers.
The government is ramping up its efforts to stop using motels for emergency housing, announcing in February 2020 an extra 1000 transitional housing places will be ready by the end of the year. The $300 million plan promised to reduce demand for emergency motel accommodation by adding 1000 new transitional housing places on top of the 1300 places introduced since the government was formed.
The next most vulnerable group on the housing continuum are Housing New Zealand state house tenants. Housing New Zealand has come under Kainga Ora -Homes and Communities the governments new urban development authority and public housing landlord. The main method of financing new state housing is through income related rents. This is the ongoing funding allocated by the government to Housing New Zealand for state housing.
Kainga Ora has had its debt limit increased from $3.05 billion to $7.10b by Finance Minister Grant Robertson and Housing Minister Megan Woods. This will allow Kainga Ora to partner with local authorities, iwi and private developers in housing and urban development schemes to build infrastructure, create new urban sections and construct residential buildings. Some of these new residences will be state houses. Income related rents and rent income from state housing tenants will repay the state house share of the Kainga Ora debt. Kainga Ora debt will also be repaid by other revenue sources, such as, targeted rates, land sales of serviced plots and land plus house sales.
For the 2019 and 2020 years Housing New Zealand is expecting to receive $876m and $940m from the government in the form of income related rent subsidies and $414m and $444m in rent income from tenants (Our Statement of Performance Expectations, HNZ, 2019–2020, P.61). This is an increase in funding and has allowed Housing New Zealand to create a programme to build 1600 new state houses a year, which it is currently exceeding.
Housing New Zealand has reversed its policy of state housing selloffs. Under the previous government the number of dwellings owned or managed by Housing New Zealand peaked in mid-2011 at 69,717 units before falling to 62,917 units by June 2017.
Despite the government’s state house build programme, Housing New Zealand’s waiting list continues to increase, as can be seen in the above graph.
Clearly Housing New Zealand needs a larger injection of capital funding to increase the pace of its build programme. Perhaps income related rent subsidies should be increased another $400m a year to a total of $1.5bn a year? This would mean HNZ would receive the same amount of funding for public sector housing as the private sector receives in accommodation supplement payments.
Kainga Ora also needs improved planning tools so that the per house build costs are contained. This will allow HNZ to build more state houses for a given sum of capital funding. The third report in this series, Living Rent: The 10 Minute Community — The 30 Minute City discusses this issue further.
In addition to increasing the state housing build programme, it is the contention of this report that other affordable build-to-rent housing options need to be provided for low income earners before their personal situation becomes so desperate that they become eligible for state housing.
After the cohort receiving state housing the next group up the housing continuum receiving housing assistance are the 190,000 households renting privately who receive the accommodation supplement -85% of these recipients are working aged beneficiaries and retired superannuitants.
The previous government in the 2017 Budget increased spending on the accommodation supplement by $500m a year. They did this by increasing the maximum weekly amount tenants could receive. Below are the details of the increased level of housing assistance provided.
As well as the increased pay-outs there is an increased number of Area 1 & 2 locations receiving the maximum pay-out.
The biggest increase of $80/week was in Area 1 districts for families of three or more.
Wellington which is in Area 1 has seen rent increases of $75 per week for two-bedroom units between 2017 and 2019, so the 2017 increase in the accommodation supplement which was up to $80 for the area, has been negated due to rapidly inflating rents.
Despite private landlords receiving an additional $500m a year since 2017 they have not built a significant number of new rental housing units to cater for rising demand coming from the low income segment of the housing continuum.
Rent increases in New Zealand’s towns and cities are on track to consume all of the increased rent supplement which tenants received. This is the reason that the Accommodation Supplement Scheme is a very expensive and a very flawed housing assistance policy.
To address this housing assistance policy gap there needs to be a housing supply initiatives that target house building which is affordable to low income earners.
The biggest group in the housing continuum whose accommodation demand is not being catered for is the 425,000 households who privately rent and who cannot afford to buy their own home, even at low KiwiBuild prices. This is the biggest criticism of KiwiBuild by renters. KiwiBuild prices are too high for it to be a viable housing option for most of them.
Of the 425,000 households who are not in a financial position where they can afford a KiwiBuild priced home, there is about 230,000 whose incomes are such that they do not receive the accommodation supplement -flawed as it is.
This 230,000 household group receives no housing assistance from the government, despite government housing grants being available to higher income households.
Middle income earners in the 2018/19 financial year received $86.2m in KiwiSaver HomeStart grant payments, this compared to $81.2 million paid out in 2017/18 (Housing New Zealand Annual Report, P.28).
A progressive home ownership scheme has been championed by the Green Party, it is budgeted to cost $400m in a one-off sum that covers four years. This decision was made in the 2017 Coalition agreement.
It has been calculated that a progressive home ownership scheme where the household only pays a mortgage on 60% of the value of the house, only increases the number able to buy a KiwiBuild priced house by 60,000 households.
In September last year Megan Woods the new Minister of Housing reported the number of households the proposed progressive home ownership scheme will support depends on how funding is targeted, but she expected 2500 to 4000 households to benefit over four years. Megan Woods has announced she will take a paper to Cabinet by the end of 2019 with a detailed policy proposal.
Hopefully this Cabinet paper recommends a much larger government house building scheme because $400m over four years for the proposed progressive home ownership scheme is not a large increase in affordable houses being built. Given New Zealand’s current house building rate, 4000 houses is only 3% of the approximately 140,000 houses expected to be built in the next four years.
To successfully prevent rents rising faster than wages will require the building of a lot more affordable rental houses (also remember in the ten years to 2017 the number of rental households grew by 126,000).
The other major issue with the progressive home ownership scheme is the full continuum of renters cannot access this housing option. Most renters are not in a financial position where they can take advantage of this housing support. There is approximately 365,000 private rental households not able to participate in this programme.
The progressive home ownership scheme is welfare for middle income earners, like KiwiBuild and home ownership grants. It is only appropriate if low income earners receive an equivalent and better resourced form of housing assistance.
Progressive home ownership will provide a benefit but another housing policy tool is required. One that targets further into the private rental part of the housing continuum and that can build a greater number of affordable homes. This reports contends the living rent scheme discussed in this paper could be that tool.
The flawed Accommodation Supplement Scheme inflicts financial and political pressure on the governments accounts.
The Stocktake of New Zealand’s Housing report in February 2018 discussed the increase in the accommodation supplement in the 2017 Budget. This increased funding was the result of public disquiet about the housing crisis in 2016.
The Stocktake acknowledged the increase in the accommodation supplement had a short-term benefit in relieving the harm caused by the housing crisis, but presciently they doubted its medium-term worth, as the benefits tend to be eliminated quickly by rent increases.
By the end of 2019 increasing house prices and especially increasing rents was again an increasing public concern. The benefit from increasing the accommodation supplement by $500m a year has gone. Once again the public are calling for something to be done about housing.
The accommodation supplement has long been suspected as benefiting landlords more than renters. For example, journalist Alex Tarrant wrote an article in 2011 discussing how the accommodation supplement was a landlord subsidy which punches a big hole in the governments books.
New Zealand based economist Eric Crampton clearly explains the accepted economics of private sector tenants receiving income support for renting. Basically, in tight housing markets, it is landlords. For tenants to benefit, the conditions need to be such, that it is easy to build affordable homes.
Eric Crampton summarised these conditions as follows; whenever the flow of expected rental income exceeds the cost of buying land and putting a new house on it, somebody would build a new house. That means that rents can never get too much above construction costs because new housing would get built. Under these conditions, tenants benefit from the accommodation supplement. Landlords can’t just put up rents, because somebody else would build a house and get the tenant. Competition works.
New Zealand’s housing construction market is not functioning in this way, as rent increases are on track to eliminate all the benefit from the 2017 accommodation supplement increase. There is some sort of market/regulatory failure preventing this housing supply response. This failure means there will be increasing political pressure in the coming years for another $500m a year increase in the accommodation supplement.
Alternatively the political pressure might be transferred to increased government spending which treats the symptoms of housing stress, such as, Working for Families tax credits, Best Start new-born baby payments, Winter Energy payments, the School lunch programme, essential worker pay increases etc.
Recommendations
This paper recommends the government preempt this political demand for more government spending on housing stressed households by providing $420m a year in capital grants to charitable trust non-profit Community Housing Providers to construct living rent houses.
The purpose of these capital grants being to provide living rent housing for low income workers who are not currently benefiting from government housing assistance schemes and are not in a financial position to buy a KiwiBuild priced home with government grants, such as HomeStart.
The recommendation being these capital grants be delivered in two tranches of a 1,500 houses/year each.
- The first tranche with the highest capital grant of $180,000 would target workers at the lowest end of the housing continuum that is currently not receiving housing support i.e. minimum and living wage workers.
- The second tranche, a $100,000 grant would target the group of renters who fall just below the income level where they can financially consider buying a KiwiBuild priced home or the proposed progressive home ownership scheme. These would be workers earning below the median wage or essential workers, such as, nurses, police and teachers.
A minimum requirement on Community Housing Providers who receive capital grants is that they price their rents below the median value for the number of bedrooms in the particular city concerned, so that the build-to-rent housing provides competitive price pressure on the local rental market, therefore reducing future rent increases.
For the larger $180,000 capital grant the requirement would be to target housing demand further down the income spectrum, by providing living rent homes for living and minimum wage workers. Hopefully this living rent housing would take some of the pressure off Housing New Zealand’s state house waiting list.
A significant benefit of the living rent build programme is its ability to address the imbalance between supply and demand for rental housing causing rents to rise faster than wages. The living rent programme would therefore provide wider benefits to all renters.
Who would build Living Rent houses?
Non-profit housing charitable trusts with an ethos of housing being a human right not a speculative asset should be the recipients of capital grants to build affordable living rentals. This type of housing provision has a long-term record of providing affordable rental housing. For example, the original capital endowment to Peabody Trust by the banker and financier George Peabody in 1862 has sustained the affordable rental house provider for over 150 years.
The Peabody Trust retains enough earnings so that it can continue building and modernising its properties, it currently supplies 55,000 affordable rental houses in London and the South-East of England.
The UK has found that the community housing sector is a good fit for new master planned developments too. Many in the UK hope that integrating social housing into new urban areas can reverse the trend of segregated bland monocultures of council housing estates or executive housing developments being built on the edge of towns and villages.
An example of a more integrated approach to social housing is the Poundbury extension of Dorchester. Guinness Homes -one of the largest providers of affordable housing and care in England -has been heavily involved in Prince Charle’s Poundbury master planned development. Prince Charles insisted that 35% of the housing in Poundbury be social housing and that this housing being indistinguishable from standard housing.
Despite initial fears about the large amount of social housing in Poundbury the sales of general market rate housing has not been affected. There was no negative effect on house values for homes higher up the housing continuum.
Poundbury is the largest Guinness estate in Britain that has not required an on-site manager.
There is an impressive amount of employment opportunities documented within Poundbury’s urban development area, further improving its diverse character. Having a wider range of income earners residing in the locality almost certainly improves the local business creation and employment opportunities. Mixing residential and commercial neighbourhoods has worked well for Poundbury.
Poundbury by integrating social housing in a manner that is indistinguishable to general housing reduces exclusionary fears that social housing attracts. In New Zealand it is common to hear that public housing will become a slum for an unwanted ‘underclass’, create a gang ghetto, foster drug-use or criminal behaviour…
In recent decades New Zealand has undertaken two government master planned housing developments. The first, in the mid 2000’s, in Hobsonville Point was the planned conversion of an unneeded military airbase to a residential suburb. The former Prime Minister John Key in contrast to Prince Charles called the proposal that 15% of Hobsonville housing be state housing as -‘economic vandalism’.
The second master planned development is called One Central and is part of the rebuild of Christchurch’s central business district following the earthquakes of 2010 and 2011.
No state housing or community housing provider rentals were built in Hobsonville or One Central.
There has been some successful build-to-rent housing in Hobsonville built for the private sector firm New Ground Capital in partnership with Ngai Tahu Property and the NZ Super Fund.
In Hobsonville there is also an affordable housing requirement -20% of the houses need to be ‘axis series’ housing. Meaning these houses are sold to owner-occupiers for prices quite similar to Auckland KiwiBuild prices.
In summary for Hobsonville, there was no requirement and no housing built targeting further down in the housing continuum where low income workers need affordable rental housing despite that being where housing demand has grown the most.
In One Central, despite its existence only being possible due to significant government intervention in the form of compulsory acquisition there was no requirement to build any affordable or public housing. The new housing that has been built targets the top end of the housing market. This has contributed to a slow build rate, as the higher priced housing has been the slowest to sell.
One Central has been criticised for being overpriced, bland and lacking mixed-use retail, commercial and social facilities that the likes of Poundbury planned from the outset.
It is notable that One Central has one monopoly builder, Fletcher Building. Whereas the usual practice for master planned developments, such as Poundbury and Hobsonville Point, is to have multiple builders, ensuring greater price and quality competition.
This report further contends that a significant proportion of the capital funding for housing should go to charitable trusts which build papakainga housing so that housing better meets Maori cultural and accommodation needs. Architectural designer and housing advocate Jade Kake in a paper titled -The future of papakainga: there’s no place like home describes this opportunity.
Community housing providers which focus on improving rental accommodation for Pacific People communities should also receive a significant share of the funding.
Making capital grants to non-profit charitable trusts to build new rentals has the advantage that if house and rent prices do continue to rise, the charitable trusts can borrow against this rising capital value to supply more build-to-rent housing. So, this proposed remedy improves to a small degree, the housing supply response to house price rises in the long-term, as well as providing a strong short-term housing supply effect.
If New Zealand had a strong community housing sector, then if landlords increase rents, the community housing sector can respond by building more rentals and taking tenants from the private sector. This feedback mechanism will encourage landlords to contain rent increases to the community housing sector’s construction inflation rate. In this way rent increases are contained and the accommodation supplement can benefit tenants not landlords.
Having affordable rental housing owned by non-profit community housing trusts also has the advantage of removing social housing from the political football of successive governments building up and then selling off social housing stock.
Community housing providers could partner up with institutional investors like the Superfund, ACC or KiwiSaver funds. These investors because of large fixed due diligence costs would likely to be interested in larger housing projects of $100m or more i.e. a minimum of about 300 houses per project.
Stable long-term rental payments from such schemes may be attractive to these investors. Especially if the living rent capital grants and economies of scale from larger housing projects raise rental yields above returns from alternative investment opportunities. Given that global interest rates are falling and institutional investors are struggling to find safe investments with positive returns they may be very grateful for this opportunity.
Nobel economics prize winner Paul Krugman has said very low interest rates are a global story meaning;
Markets are basically begging governments to put their money to work; and the obvious thing is to engage in a lot of public investment, both in physical infrastructure and in things like child development…
For the community housing sector being able to access capital from institutional investors like the Superfund or ACC might be a financially better option than borrowing funding from New Zealand’s banking industry.
Having institutional investors do due diligence on community housing schemes helps manage risk because it is an independent check on rental demand, design, build costs etc.
Involving multiple large scale institutional investors in community housing construction may help modernise New Zealand’s residential construction sector which has been criticised because of its dependence on many small scale building firms only constructing a few high-end bespoke houses a year.
The construction industry’s structure seems to be preventing investment in productivity and economies of scale which could assert downward price pressure for residential construction. Also the small scale builders are price takers lacking bargaining power with the two big building material suppliers.
Community housing providers engaging in the proposed living rent program can access three sources of capital funding -direct government grants, philanthropic donations and institutional investors. This means more houses can be constructed for a given sum of government funding compared to if the government is the sole funder as it is with state housing.
Having long-term institutional investors in the rental market delivering professional standards of rental service based on a rental yield not a capital gains business model should have a positive flow-on effect for the whole market. Not just in the sense of charging tenants reasonable rents but also by instituting good quality professional property management practices for issues like maintenance repairs.
How does these living rent proposals fit into the wider political and economic housing reform puzzle?
For the last thirty years residential construction has increasingly built for the top end of the housing continuum. There are a number of possible explanations for this;
- Residential land prices have increased either due to geography, zoning or a lack of infrastructure (such as spatial corridors for mass transit, major road upgrades or trunk infrastructure for freshwater, sewerage and stormwater) limiting competition with respect to developable sites. Spatial economic theory indicates the market response to higher land prices would be to build higher value residences on each site. Capital should substitute for land i.e. taller buildings with higher floor to land area ratios should be built. In other words when land supply is restricted in high demand locations, the market response should be to create more land in the form of floor space being built above floor space.
- Developers have increasingly used land covenants to market their developments as being more exclusive. Selling high priced sections to buyers building high value bespoke houses. These covenants create a type of market failure because they prevent the high land value/high capital value/taller/larger residential buildings being multi-unit dwellings suitable for the rental market.
- Governments back in the 1980 and 90’s as part of their ‘ free market’ reforms reduced capital grant financial supports for buying or building lower value homes. Assistance prior the free market reforms was given in a number of different ways. The government gave access to 3% loans, generally for 30 years to councils and what are now known as community housing providers. Households were able to access very low interest rates through State Advances loans or Maori Affairs. Housing Corp had income related interest rates.
- The high cost to build and insure multi-unit dwellings in New Zealand because of increased concern about earthquake risk (Note this issue is more extensively discussed in Living Rent: A Future Proofed Home).
- A lack of competition in the construction sector increasing build costs for multi-unit dwellings meaning the transition from land to capital is less than it should be.
- Planning restrictions and NIMBY objections from some parts of the community restricting the building of cost effective multi-unit rental dwellings.
There is a need in New Zealand to remove restrictions on house building and to find better ways to fund the public infrastructures that new housing requires. Although how much this helps given the private sector practice of using covenants to restrict the building of lower priced rental homes is debatable.
Mechanisms need to be found that increase the supply of housing so that New Zealand can respond to population growth. Over time house building has responded less and less to population increases, as can be seen in the above graph. This declining build rate in response to population gain is likely to be a subset problem of a bigger issue; that New Zealand’s housing construction sector (housing supply) has been unable to build affordable housing in response to house and rent price increases.
Further discussion of possible housing and urban planning reforms can be read in part three -Living Rent: The 10 Minute Community -The 30 Minute City.
This report envisions the proposed capital grants for the living rent initiative would be complementary to a wider housing and urban planning reform programme not a substitute for it.
There would be strong public support for housing supply initiatives, such as the this proposed living rent programme. Surveys show that housing is one of the most important issues that New Zealand has to deal with according to both boomers and millennials.
There is also very strong public support for greater public spending on housing.
A government house builder has been created called Kainga Ora -Homes and Communities. It came into legislative existence on the 1st of October 2019 and its enabling powers will pass in 2020. Kainga Ora being a housing and urban development authority is likely to concentrate on ten to twenty, multi-year, major housing projects around the country with a goal of building many thousands of houses in each project.
There is cross party support for the Kainga Ora Bill, with opposition housing spokesperson Judith Collins stating the National party supports the Bill. This includes supporting compulsory acquisition if proper safeguards, such as contained in the Public Works Act that ensures fair compensation and the right for property owners to have their land back if the land is not built on is included in the legislation (see this video interview of Judith Collins from the 1.20 min mark). Compulsory acquisition or even the threat of it will be needed by Kainga Ora to assemble large enough plots of land to make master planning viable. It will also ensure raw land prices do not escalate excessively.
Kainga Ora will need a public sector entrepreneurial approach. It will be aiming to build quickly and in large numbers so that economies of scale and competitive efficiencies can reduce the per house cost of land development and construction.
In these Kainga Ora masterplan developments there could be various types of housing. For instance market priced owner occupied housing, state housing and KiwiBuild housing. State housing is obviously subsidised. KiwiBuild priced houses and first home ownership houses will be eligible for government subsidies, in the form of HomeStart grants.
Yet if Kainga Ora wants to facilitate the construction of affordable build-to-rent housing, targeting the large amount of housing demand coming from low income workers there is no government financial assistance. This means the cohort of minimum and living wage renters who need living rent housing will not be catered for in Kainga Ora master planned developments, much like they were poorly catered for in Hobsonville Point and One Central.
This is inequitable and there may be political consequences, as the government house building programme could be accused of narrowly focusing on beneficiaries and middle-class professionals, whilst low income workers miss out.
Economically it doesn’t make much sense either. The economic rationale for the government builder -Kainga Ora is its ability to build at pace with economies of scale. Once it achieves pace and scale then it can transform the housing market in a number of positive ways.
For example Kainga Ora can be transformational by directly building affordable housing and new types of housing, with low-cost building materials from more competitive suppliers, with greater use of prefabrication, building more liveable communities near employment, education and other high-demand amenities, with warmer, drier and more energy efficient housing, which integrates housing with rapid transit and builds communities that are less car-dependent to meet climate change objectives.
To achieve pace and scale requires Kainga Ora tapping into as much housing demand as possible. By subsidising housing for beneficiaries and middle income earners but not living rent housing for the living waged Kainga Ora could miss out on a large group whose demand for housing Kainga Ora needs.
Not providing capital grants for building affordable rental housing means Kainga Ora could be compromised in its ability to ramp up the build programme to achieve the necessary economies of scale transformational benefits. This could put the entire Kainga Ora initiative in jeopardy.
Arguments against using capital grant to build living rent housing
Reasonable people could come to the conclusion that if housing capital grants are to be increased then they should be directed at building owner occupier housing rather than rental housing. This was one of the recommendations from a Salvation Army October 2018 report titled -Beyond Renting.
The Salvation Army report noted that New Zealand’s default housing policy in recent decades has been to rely on private rental housing to soak up housing demand. Housing statistics indicate this is true. In the five years to June 2018 two-thirds of new household formations were housed in private sector rental housing provided by thousands of small-scale ‘mum and dad’ private investors.
The Salvation Army believe this default housing policy is not sustainable. Their rationale being high yet stable house prices mean rental yields are poor and there is diminishing prospects of making capital gains from investing in residential property. They believe that private rental housing investment won’t keep pace with demand. The result will be rents rising faster than household incomes, increasing levels of housing-related poverty and unmet housing need, alongside growing numbers of people sleeping rough on the streets, in parks and in cars.
This rationale contains a lot of assumptions which may not occur, in particular the assumption that house prices do not rise further. Setting this aside it is worthwhile looking at the Salvation Army’s strategic framework for policy recommendations that address the challenges in the private rental housing market.
The Salvation Army report had many recommendations but the one most relevant to this report is the recommendation to subsidise home ownership rather than building more social housing i.e. the Salvation Army did not recommend the building of affordable rental housing by community housing providers as recommended by this Living Rent report.
The subsidising home ownership recommendation, as can be seen in the above strategic framework diagram, essentially hinges on the concentrating wealth argument.
The wealth concentrating effect was most famously noted by Piketty’s finding that investment returns on capital are greater than wage increases for labour, which he attributed as being the main driver of rising global inequality. Further analysis of this finding is high capital returns is a housing effect i.e. house prices and rents have inflated faster than worker pay increases.
This Living Rent report disagrees with the conclusion that providing capital grants to owner occupiers for new builds is the better option. Certainly it will make little difference to the overall housing supply effect whether new housing is owner-occupied or build-to-rent housing.
This report contends that subsidising build-to-rent for low income earners better addresses housing inequalities than subsidising new build homes for middle income earners.
The proposed living rent policy will improve social mobility over the long term by giving renters stability to invest in such things as education, business opportunities or acquiring long term beneficial assets like buying their own home.
The difficulty young New Zealanders find in saving for home ownership is shown by Interest.co.nz who track the median wages of couples aged 25–29 throughout the country, and calculates what percentage of this cohort can save for a 20% deposit required for a modest lower quartile priced house, if they set aside 20% of their after tax pay each week for four years. In 2004, in all parts of New Zealand, four years of saving allowed a couple to purchase a lower quartile priced home. By the end of last year this was true in just four regions -Taranaki, Manawatu/Wanganui, Canterbury and Southland.
With rents having also risen faster than wages in the last 15 years it has become even harder for renters to set aside 20% of their income to save for a house.
Renters are increasingly trapped by high rents on one hand and high house prices on the other. One of the only escapes is family assistance in the form of either rent free accommodation or by assistance with a home loan deposit.
Shamubeel Eaqub in his book Generation Rent has predicted if the housing crisis is not remedied then New Zealand will create a new landed gentry. That social mobility will be limited to those families who can pass on home ownership. This will increasingly challenge the nation's collective identity as an egalitarian society.
Fundamentally to reduce wealth inequality and improve social mobility will be about ensuring workers wage growth is higher than rent increases, which means implementing a broad range of effective housing policies. Factors like, spatial planning, infrastructure provision and removing unnecessary house building restrictions. It is this broad spectrum of policy tools which will best address the concentration of wealth issue. This living rent proposal is though a helpful addition to the policy toolbox.
The politics of public housing
The Accommodation Supplement was introduced in 1993 by the National Party’s then Finance Minister Ruth Richardson in an experiment that replaced capital funding for house building and home purchases to assistance with rental payments.
Back then the Treasury had criticised the existing mix of housing support programmes suggesting that these tended ‘to bias households’ tenure choice by emphasising home ownership over renting’. It recommended a general housing allowance which would eventually make state housing all but redundant given that it would be paid at the same rate to all low income households regardless of their tenure or landlord.
On its introduction, the Accommodation Supplement was designed to provide additional income support to low income tenants and home owners and to replace operating subsidies provided to the State’s social housing provider Housing New Zealand. (P.1, A Policy of Cynical Neglect: The slow demise of the Accommodation Supplement by Alan Johnson,18 February 2016).
For low income earners this experiment has been a huge failure as their cost of living expenses have ballooned out due to high housing costs. For the bottom 20 percent of households by income, housing costs as a proportion of income have increased from 29 percent to 51 percent since 1988.
The Helen Clark government in 2000 ended the policy of state housing tenants paying market rents. Her government replaced market rents with income-related rents, meaning state house tenants only pay a maximum of 25% of their income in rent. This policy by the Helen Clark government meant housing related poverty improved for the 80% of state housing tenants who were in housing related financial stress. Which was over 100,000 people in the year 2000.
Clearly the income-related rent policy was insufficient, as New Zealand among OECD countries, has largest proportion of the bottom 20% of income earners paying over 40% of their income in rent. As seen in the first graph in this report New Zealand has about 1,000,000 people in the bottom 20% income group living in worse rental housing than any comparable group in the developed world.
Re-introducing income-related rents twenty years ago did help a significant number -a 100,00 people -with housing stress. A new policy that can help another even large cohort of low income earners get out of housing related poverty is needed.
The cost of subsidising income-related rents has risen to approximately $1billion a year. This policy has not been reversed by subsequent right wing governments because clearly the public support taxpayers funding public housing. The last right wing government though did try to sell off state housing.
The previous National party government had a plan for the community housing sector to take over state housing from Housing New Zealand. That housing initiative fell through when in 2015 community housing providers, like the Salvation Army, walked away from negotiations with the government.
At the time Community Housing Aotearoa director Scott Figenshow said that the government offer for the sector to take over state housing did not make financial sense and the sector did not want to provide lower quality housing than Housing New Zealand.
Scott Figenshow did though indicate the community housing sector had ambitions to grow, but that was in addition to, rather than taking over Housing New Zealand’s state housing stock. In 2015 he stated that if the community housing sector was given $220m/year in capital grants, the sector could over several decades grow to the size of Housing New Zealand. The previous government and so far the current government have chosen not to allocate this funding.
The Coalition government's previous Housing Minister Phil Twyford and his officials made a bid for the 2019 Budget to include a $450m “Affordable Housing Fund” to help low income people into affordable rentals and home ownership. The idea being to develop a procurement process so the non-government sector could help with progressive home ownership schemes and build-to-rent housing to meet the accommodation needs of the segment of the housing continuum that were not benefiting from either KiwiBuild or the state house build program.
Cabinet rejected this proposal and the Finance Minister Grant Robertson did not allocate this funding in the 2019 Budget, focusing instead on housing initiatives for the most deprived end of the housing spectrum (Housing First). The new Housing Minister Megan Woods has tentatively supported a progressive home ownership scheme, as detailed earlier.
The National Party now in opposition made in 2019 media announcements indicating it wants community housing providers to play a greater role in managing social housing. The Party said it was consulting on whether government should underwrite the building of social houses, to encourage community housing providers to build more.
More recently though, with the release of the National Party RMA Reform and Housing document by their Housing Spokesperson Judith Collins, the underlying theme appears to be about supporting home ownership initiatives.
The document did not discuss encouraging the construction of affordable build-to-rent housing. The document did support rent-to-buy and shared equity which are alternative terms for describing the Green Party’s progressive home ownership scheme.
From the discussion document it also appears the National Party continues to plan for the community housing sector to replace Housing New Zealand.
The ‘Community Housing Provider’ section of the discussion paper summarises the National Party’s policy proposals for the sector.
The community housing sector has indicated a willingness to do more but needs better support from the government. This may be in the form of rent-to-buy schemes, the development of housing bonds, shared equity schemes, or a policy shift to allow community housing providers access to Housing New Zealand homes.
The broad thrust of National Party’s proposed housing reforms is to target further up the housing continuum. There is no indication the Party is planning on increasing the supply of living rentals for low income earners.
Judith Collins attributes New Zealand’s recent rent increases to ‘attacks’ on landlords causing a reduced supply of rental properties which has driven up prices. The attacks Judith Collins is referring to is the Healthy Homes legislation which has strengthened regulations on insulation, heating and ventilation for rental properties. ‘Attacks’ is a strong word. I doubt any reasonable person would consider enforcing restaurant hygiene rules or recalling a particular type of car -if say their brakes were defective -as ‘attacks’ on the hospitality or motor vehicle industries.
The substantive problem though with Judith Collins analysis is the facts do not agree with her. There is no evidence that landlords have left the property market. Statistics NZ estimates the number of households renting their homes increased by 15,400 in the year to June 2019, while owner-occupied households increased by 7900.
Also the private rental market sector received an additional $500 million a year from 2017 -in the form of increased accommodation supplement allowances. This should in theory and appears to in practice to induce landlords to continue to rent, as this stimulus is significantly larger than the one-off costs of installing better heating or insulation (which add value to the property anyway).
Unfortunately the increased accommodation supplement payments have not stimulated the building of housing affordable to renters to constrain rent increases.
The Labour led government does not have a housing assistance scheme supplying living rent to the living waged either. Some on the left would argue for the doubling or tripling of the state housing stock. This option could provide many of the benefits of increased community housing provision.
Expanding state housing would provide a better form of housing assistance to minimum and living wage workers compared to the flawed Accommodation Supplement Scheme. State housing has been successful in New Zealand’s past and social housing is successful in places like Singapore and Vienna. The problem is New Zealand does not have a political consensus regarding public housing.
If New Zealand under a left wing government decided to build state housing that targets further up the housing continuum i.e. living rentals to the living waged, then it is likely the next right wing government will offer to sell these state houses to tenants as they have done in the past. This will be possible because some of the workers in state housing will over time gain the financial capability to buy their own home.
Of course it is good that social housing tenants can afford to buy their own home but that should be a normal private sector house like everyone else.
In the past, especially from the 1960s and 1970s state housing fell out of favour as state house tenants were denigrated, demonised and single outed as an ‘other’.
The reduction in the state housing stock due to the sale of homes to more well off tenants and the stigmatization of the remaining tenants had a very detrimental effect on Housing New Zealand and its predecessors. It has been difficult for successive governments to support the provision of affordable housing for low income workers which was the original intent of state housing (New Zealand’s first social housing legislation was titled the 1905 Workers Dwelling Act).
This report contends that community housing is politically the better option compared to state housing because future governments cannot sell it. Community Housing Providers are independent non-profit charitable trusts which makes it impossible for future government to sell them, especially if the Community Housing Sector have commercial contracts with institutional investors that are difficult to unwind.
The hope of using Community Housing Providers to expand the provision of public housing is that public housing becomes less of a political football and there is a long term housing supply solution for low income earners.
Lessons from the past
In the past New Zealand built a lot of state houses quickly. In the period immediately before and after WW2 the government built between 2000 and 4000 state houses a year. New Zealand back then had less than half its current population, so this rate of building was outstanding. During this period the government built for the large demand coming from low income workers. This can be clearly seen in the story about New Zealand’s first state house.
The first state house built by the First Labour government in 1937 was rented to David McGregor’s family. David was the sole income earner for the household. David worked as a tram driver for the Wellington City Council. Out of David’s tram driver wages he paid just over a third in rent for his state house. It is noteworthy that David and Mary were able to buy their state house 15 years later in 1952.
The modern-day equivalents of David-the-tram-driver are not being given the same opportunity of paying a living rent so they can have a stable start to life.
New Zealand needs to allocate government spending to capital grants for a build-to-rent programme to give modern day ‘David McGregor households’ the same living rent opportunities as the past.
Living Rent: A Twelve Hour home has mainly focused on discussing what the rental price of build-to-rent housing should be. It is the first paper in the Living Rent series.
The next in the series is Living Rent: A Twenty Degree Home — A Eight Richter Home — A Carbon-Zero Home? which discusses what the quality of build-to-rent housing should be.
The third in the series, which is still being edited is Living Rent: The 10 Minute Community — The 30 Minute City will discuss where build-to-rent housing should be located.
