New Zealand’s Rack-Rent Housing Crisis
Contents
Introduction
Part One: Political Constraints
Part Two: Who are the Jedi Knights of Housing Affordability?
Part Three: Political Precommitment — Depoliticising Housing
Part Four: Is the Housing Crisis Bad for Productivity as well as Inequality?
Part Five: Housing as a Human Right — Restoring New Zealand’s Egalitarian Dream?
Part Six: Where to Now?
Part Seven: New Zealand Should Knock! Knock! On Wood
Introduction
Much of human history has consisted of unequal conflicts between the haves and the have nots — Jared Diamond
The New Zealand political-economy over the last 40-years has a Koru Club aspect to it — the sort of people who can afford membership to Air New Zealand’s exclusive club are doing well. This privileged and self-entitled group have made huge gains, not from hard work or enterprise, but from regulation that prevents competition in supermarkets, petrol prices, electricity, house building, and so on. Meanwhile the wider population works harder and harder but makes no gains.
The worst offender is housing. This can clearly be seen in the Covid period where the institutional fiscal and monetary response meant homeowners received mortgage repayment deductions and asset price gains while rental households were lucky if their landlord did not put up the rent. As a group homeowners and property investors made $billions while renters went backwards.
The Covid period is not unique, though. Renters have been on the rack for decades — at least since 1990.
Housing in New Zealand is bad — there are many metrics indicating the country’s housing market is one of the worst in the world.
New Zealand needs to quickly change house and rent price expectations. There should be no expectation that house prices or rents will increase in the coming decades. Prices should be constrained by the marginal cost of building more floor space. There needs to be a commitment to contain land prices and construction costs (RMA reform, local government funding reform, infrastructure financing reform, market study of building material sector, assistance for the transition from steel and concrete to engineered wood…).
New Zealand should be pumping out new houses at a rate of 8 to 10 new builds per 1000 people.
This rate of building was achieved for decades after WWII. It was needed to counter the under build from the Great Depression and the world war.
New Zealand has just reached this build rate. Auckland, Canterbury, and the Waikato are doing well. Other parts of the country need to catch up — especially Wellington.
A high build rate is a necessary but insufficient requirement for housing to deliver for the have nots.
There is plenty of evidence that increased house building constrains price increases but there is less evidence that a high build rate will cause large price falls. The outcome seems to be that nominal prices stagnate or in Japans case gently decline.
Last century, when New Zealand’s build rate was higher, house prices were static and it was only through inflation and wage increases that ‘real’ house prices fell. Japan had a house price ‘bubble’ in the 1980s and early 1990s — a consistently high build rate slowly deflated rather than ‘popped’ prices. Canterbury also has a high build rate that peaked around 2015 which caused house prices to go sideways rather than fall (rents did dip though).
Auckland’s consents per thousand people has reach about 12, which was about the level that Canterbury reached in 2015 so this is an encouraging sign that Auckland’s house prices and rents will stop increasing soon.
The problem going forward is that if the high build rate is maintained, and if house price inflation is reduced to nothing, it will take decades to restore affordable homeownership — 2037 at the earliest according to ANZ modelling — which assumes an unrealistic 5% rate of income growth.
To put that in context, Jacinda Ardern who is a young 41 year old prime minister will be 57 years old by 2037. New Zealanders of her generation cannot wait that long for affordable homeownership.
Some sort of interim housing solution is required. Probably based around rental housing because rents ‘price correct’ faster than house prices i.e. rents respond faster to changes in housing supply. Also importantly, interim rental housing schemes can be better targeted at modest- and low-income households.
The Human Rights Commission is right to launch a national inquiry into the housing crisis because as they say “successive governments have failed to give New Zealanders decent homes”.
Chief Human Rights Commissioner Paul Hunt said for generations governments have promised to create the conditions to enable everyone to live in a decent home, but that has not happened.
Economist Shamubeel Eaqub agreed it was time to recognise housing as a human right.
We’ve signed up to the Declaration of Human Rights (1) but there seems to be very little connection between the Declaration of Human Rights and how our other policies connect together, so the co-ordination and cohesion of our policies is not there.
The Government needs to show the same political will to tackle the crisis that previous governments showed after World War II.
In response to the inquiry into housing by the Human Rights Commission the Housing Minister put out a statement saying that across Government a major programme of work is underway aimed at increasing the supply of public housing. More houses are being built than at any time since the 1970s. That the plan is working — it is on track for 18,000 new Kāinga Ora homes by 2024 (the count started in 2017).
In the decade to 1947 New Zealand was building social housing at a rate of 1.55 per thousand people, and in the decade to 1957 at a rate 1.73. In today’s terms that would be the same as building 7,750 to 8650 state houses per year.
Kainga Ora is currently building at a rate similar to the 1970s but that is not enough as it is only a third of the 1940s and 50s rate.
Bernard Hickey in his Dawn Chorus email newsletter argues the government is not, as the prime minister claims, ‘pulling all the levers’ it can for housing.
Stuff have an article titled Housing as a human right: those for and against where some people — including some politicians like David Seymour — argue that housing is not a human right.
Claiming housing is not a human right probably misreads majority opinion. Especially since the 2016 media coverage of families living in cars. It is more likely the public believe access to decent housing is a right, as worthy as, free healthcare, and educating children for free.
The ‘have and have nots’ economy of the last 30 to 40 years has ruined the home owning chances of a generation. There are now large numbers of life-time renters. Renting in New Zealand is bad. Rental houses are lower quality than owner-occupier homes — they are more likely to be cold, mouldy, and damp to a health threatening degree. Rental households have very little security of tenure. It is common for life-time renters — including rental households with children — to move five, ten or more times while they are in the private sector rental market. Rents are expensive and for low-income earners — rent takes a higher proportion of income than anywhere else in the developed world.
The evidence supports Shamubeel Eaqub position — there needs to be a massive increase in the social housing build programme. Community housing providers or state housing should provide decent, affordable, long-term rentals to a much wider range of low-income households.
The Rack-Rent report suggests New Zealand adopts the Austrian social housing framework to achieve an expanded social housing build programme. A large increase in the state housing stock would also be a good policy response if there is a political consensus not to sell them (which I doubt there is).
If New Zealand doesn’t find creative ways to provide good quality, affordable homes, with security of tenure, for large groups of low- and modest-income earners, then this will push young workers with developing skills overseas, rental families with children will more easily slip into poverty, while greater numbers of older workers will retire without becoming mortgage-free which our system of retirement is premised on.
New Zealand’s housing conditions are similar to those resulting from the Great Depression and World War II and today’s housing crisis requires a response of similar scale.
There are many options for achieving this, for instance, the community housing sector if it wasn’t starved of capital could help increase the social housing build rate. In the Greater Auckland article — What if Landlords Built Hot New Things there were some general suggestions for improving the rate of house building.
New Zealand needs a new type of urbanism that delivers for the have nots rather than continuing with a rigged system that only benefits the haves.
I am sure many New Zealanders would love to live in a country that embraces a culture of house, community, and city building. Where there is an increased allocation of resources to build warm dry houses, inclusive communities, and functional cities. This is a vision that a majority could get behind.
In the future carbon-zero world, the built environment will be different. Buildings will be constructed differently without emitting carbon using engineered wood for example. Transport, energy, and many other factors will be different. These new directions can bring opportunities for rural, regional and urban areas. New Zealand should have confidence in its future.
(1) Universal Declaration of Human Rights: Article 25 — Everyone has the right to a standard of living adequate for the health and well-being of himself and of his family, including food, clothing, housing and medical care and necessary social services, and the right to security in the event of unemployment, sickness, disability, widowhood, old age or other lack of livelihood in circumstances beyond his control.
Note: the Introduction was written in August 2021 and Parts One to Eight were written as separate articles between December 2020 and August 2021.
Part One: Political Constraints
“We might make mistakes but we will make other things too”– Michael Joseph Savage
Renting in New Zealand is bad. The bottom 20 per cent of income earners spend a greater proportion of their income on rent than anywhere else in the OECD. For many decades New Zealand’s housing market has failed low-income earners due to rents inflating faster than wages.
For the bottom 20 per cent of households by income, housing costs as a proportion of income have increased from 29 per cent to 51 per cent since 1988.
Too much of New Zealand’s economy is rack-rent, where those with market power exploit those without. Effectively, wages are confiscated.
Rack-rent is described in Winston Churchill’s 1909 speech about land value taxes. Churchill spoke about a bridge over the River Thames that gave a poor neighbourhood access to work in London. The bridge was tolled, but in an act of civil kindness the toll was removed. However, the workers did not benefit because rents rose by the amount the toll fell.
Rack-renting is a problem for the Covid economic recovery because the stimulus is not evenly distributed across ‘the team of 5-million’. The biggest stimulus — $128 billion of nearly interest-free credit provided by the Reserve Bank — is giving the ‘haves’ a wealth-effect of lower mortgage interest payments and higher property values, while the ‘have-nots’ are still experiencing rents inflating faster than wages.
This raises the question: how much kindness does New Zealand give to the essential workers who did the hard yards during the Covid lockdowns? Not much is the answer if they are low-income workers — like cleaners or supermarket employees — living in rental accommodation.
Landlords are not passing on their lower costs to tenants. Instead, property investors are going on a buying spree. Reserve Bank figures show the share of house buying by landlords with high loan-to-value ratio (LVR) borrowing doubled to 16% in the period between the removal of LVR rules in May and the end of October (H/T Bernard Hickey). House prices are rising as a result. First home buyers (FHB) with a fear of missing out (FOMO) are adding to the demand effect.
As former Finance Minister Michael Cullen says in his paper titled Time for a Monetary Policy Rethink the ladder between the haves and have-nots is getting additional rungs at the top while the rungs at the bottom are being removed.
Political commentator Ben Thomas is correct to state the reason that housing “is so visceral is that it represents a fundamental break from the middle class egalitarian creation story of New Zealand (and elsewhere) — you can work hard, value education, and — even if you have a humble life — you can give your kids something better”.
What to do?
The government needs to define what its housing affordability goal is. Is it aiding the sons and daughters of the middle class into homeownership? Or is it about ensuring kiwis have a universal access right to affordable housing, like they do with free education and free healthcare?
In practical terms, is the goal returning the median house price to median income ratio back to three to four, so more first home buyers can afford a home? Or is the goal returning rent as a proportion of income back under 30 per cent for the bottom 20 per cent of households by income so that the high cost of rent does not cause those households to suffer poverty — something which is recorded far too frequently in New Zealand’s statistics. Both of these housing targets were in the affordable range up until the 1990s, and since then both have become steadily worse.
Former Prime Minister John Key seemed to have restoring the middle class home ownership dream in mind when he called the Resource Management Act (RMA) a “self-imposed straitjacket” that needed reform in his 2002 maiden speech to Parliament and in his 2007 speech to the National Party Conference where he outlined a housing affordability plan.
The problem with fixing housing affordability for middle-income earners is the goal is defeated from the get-go.
For New Zealand to restore median house prices back to three to four would require house prices to roughly halve. In other words, to give the ‘future middle class’ the opportunity of home ownership requires much of the stored asset wealth of the ‘current middle class’ to be destroyed. No prime minister or finance minister in the modern era, at least since Helen Clark and Michael Cullen, has been willing to publicly announce that is their intent. This includes John Key and, of course, Jacinda Ardern. Yet they both campaigned on housing affordability prior to becoming prime minister.
I cannot find any evidence from around the world that restoring housing affordability for middle-income first home buyers in the way that it is talked about in New Zealand is possible. It might have occurred in Japan after their 1980s property bubble. But it wasn’t an explicit policy agenda as is demanded in New Zealand.
Yet there is plenty of evidence that it is possible to restore housing affordability for low-income households if the government builds a good proportion of new housing stock (about a quarter or more) as affordable housing (affordable rentals and progressive home ownership houses) targeting a wide band of low-to-middle-income households in schemes that prevent speculative capital gains. New Zealand under Michael Joseph Savage did it in the 1930s and 40s. Austria has been doing it for nearly a century and Singapore has done it since WW2.
In the 1920s, after WW1, New Zealand experienced a housing crisis, especially once the Great Depression halted villa-suburb building. Rents were inflating and housing conditions were poor. The newly formed Labour Party campaigned to fix this housing situation.
The Labour Party came into power in 1935. The next year it started a large, broad-based state house build programme that targeted not just the destitute but also low-income workers. By 1940, state land development programmes accounted for 45 per cent of all housing construction in New Zealand.
This historic policy agenda should be a lesson for the current government and the Reserve Bank. In 1936, the Reserve Bank provided credit with interest rates as low as now. This meant the government could fund infrastructure and its house building programme — this connected monetary policy with the real economy, thus aiding economic recovery.
Despite the government undertaking a large housing supply programme, targeting rental house affordability, there is no evidence this negatively affected the asset wealth of the 1930s middle class — something our current political leaders fear doing. And the 1930s monetary policy stimulus did not cause the inequality effects that New Zealand is currently experiencing.
This monetary/fiscal spending effect wasn’t a one-off or unique to a certain time and place in New Zealand’s history. The UK also successfully used housing construction and infrastructure provision (the expansion of the London Underground, for example) as a link between monetary stimulus and the real economy. It escaped a liquidity trap in the 1930s through a combination of cheap money combined with a house building boom.
This approach could be used now. The IMF issued an unusually blunt warning in November that the world was in a “global liquidity trap” where monetary policy was having limited effect. In this situation the advice from the IMF is further interest rate cuts will do little to stimulate growth and the only way forward is a coordinated global effort focusing on large government spending programmes rather than monetary stimulus.
The current Labour government would also do well to learn the lessons from the failure of KiwiBuild. The policy failed because the government committed too little capital and the goal was to aid middle-income earners into home-ownership rather than low-income earners into good quality yet affordable rental accommodation. Unfortunately, the numbers for KiwiBuild did not stack up.
The Ministry of Housing and Urban Development’s (MHUD) 2019 assessment of first home buyer demand showed only 162,000 out of 588,000 rental households had the financial means to purchase a KiwiBuild priced home (see graph below). Of course, the number who would actually consider buying a KiwiBuild home would be much smaller due to various non-financial or personal reasons.
If it was properly configured, a government build programme could supply the rate of house building promised — 10,000 houses a year. New Zealand governments have built at that per capita rate in the past. Singapore and Austria do it now. The problem — specific to the proposed KiwiBuild pipeline, but not to government build programmes in general — was a lack of demand to buy even a small number of KiwiBuild homes. Since the start of the build programme in 2018 only 955 KiwiBuild houses have been successfully sold.
Lack of demand was fatal for the KiwiBuild scheme because its internal logic was reliant on building at scale. Creating more affordable housing types via investment in innovation, standardisation, specialisation, economies of scale, prefabrication, more and larger competitive construction firms, integrating housing with transport, using land more efficiently by building a range of housing types/sizes, better land acquisition, improved land assembly and master planning — these all suffered because the lack of demand generated insufficient scale.
This meant per unit housing costs could not be reduced.
Overall, the problems KiwiBuild encountered means it is a failed experiment in restoring housing affordability for middle-income earners.
If the government had invested more capital in KiwiBuild they could have increased the build rate into the economies of scale part of the production system. But that would have meant significantly subsidising build-to-own KiwiBuild houses. This would have caused all sorts of problems that providing capital subsidies for social housing does not face because the rental housing sector is already subsidised.
Switching government housing support from being income based (the Accommodation Supplement etc.) to being capital grant based would be a significant shift; it would take time, but it is a viable option. New Zealand has run that sort of system before. Other countries like Austria have very well developed systems for issuing housing capital grants to their social housing sector — something that has architectural, economic, social and environmental advantages.
I have no doubt that improving housing supply by way of reforming the RMA and infrastructure financing can help maintain housing affordability. New Zealand from the 1950s to the 1990s had relatively affordable housing due to private sector developers being mostly free in how they built New Zealand towns and cities — mainly outwards (the Kiwi dream of a quarter-acre pavlova paradise as John Key described it in his 2007 speech). Other cities around the world — in the US, Germany, Japan and so on — are affordable because housing supply responds to demand.
I am less convinced housing supply can quickly restore housing affordability to middle-income first home buyers. No prime minister or finance minister will publicly support that course of action. Without their full support, interventions will always be half-hearted. Proposed housing accords cannot be undertaken. There can be no common cause.
With the prime minister’s hands effectively tied, action on housing inevitably degenerates into the various involved parties acting at cross-purposes to each other, blame-shifting and finger-pointing. We have already seen this with the finance minister and reserve bank governor.
The better course for the prime minister would be to acknowledge political reality — housing affordability in New Zealand cannot be resolved by addressing middle-income needs first.
Politically, that might seem unpalatable. Being a centrist, the prime minister may have a vague contention that she should deliver housing affordability to middle class swing voters. Hopefully it is becoming clear to her that this is not possible — at least not in one electoral cycle, or even several.
This means housing affordability inequality should be addressed as the highest priority. The prime minister should state that the government’s housing goal is to get rent as a percentage of income below 30 per cent for the most vulnerable socio-economic groups, and that this target is what her government will aim to achieve first.
If housing inequality becomes the clearly articulated priority, it creates a common cause. A housing accord is possible. Actions from the various parties can be aligned and progress can be made without it being undermined by finger-pointing.
Over time, after a decade or two of government-led house building, the median house price relative to median income ratio may stabalise back to affordable levels. In the meantime, progress will be made by reducing housing inequality.
In the past, the Savage Labour government built state houses for the lower end of the housing continuum (see the below two videos). It was this house building effort that provided the foundation for the Kiwi housing dream of the 1950s through to the 1990s. New Zealand’s most successful set of housing policies achieved its success by focusing on helping lower-income households first.
To re-establish the Kiwi home owning dream may require Jacinda Ardern to look at her photo of Savage and think: ‘what would Michael do?’
Videos
Part Two: Who are the Jedi Knights of Housing Affordability?
Former Finance Minister Michael Cullen recently wrote an opinion piece on housing and monetary policy. To paraphrase him: the Reserve Bank are the Jedi Knights of the economy with interest-cutting lightsabers fighting against the evil empire of inflation. This worked when the problem was stagflation — high consumer price inflation and poor economic growth — but it is not working now when the problem is poor productivity, rising inequality and high house price inflation.
The Reserve Bank (RBNZ) in December 2020 rejected Finance Minister Grant Robertson’s proposal for its monetary policy remit to consider house prices as well as its current inflation and employment targets.
Rather, Reserve Bank Governor Adrian Orr has suggested house prices be included in its financial policy remit — the way it regulates banks. The RBNZ has asked Robertson for debt-to-income (DTI) ratios be added to its macro-prudential toolkit, so it can restrict bank lending to those seeking large mortgages compared to their incomes.
In summary, Adrian Orr is not going to be a Jedi Knight fighting housing inflation but he will continue to protect retail banks from a crash in the housing market.
The Reserve Bank Governor went on to say: “Given the wide range and number of parties involved, and the complexity of underlying issues, there is a need for a single agency or ‘clearing house’ to co-ordinate the government’s response across agencies.”
This statement is not quite asking for an independent housing commissioner which I will explain could be a way forward but it is very close.
Michael Cullen sees an opportunity for monetary policy reform “in the current situation to make a quantum leap forward in dealing with some of our needs, which require large amounts of capital.” The primary needs are a big increase in the level of housing construction and infrastructure development, and a large investment in transforming the economy to meet New Zealand’s climate change commitments. There is a strong echo of the First Labour government in this policy prescription.
If the government intends to copy the Michael Joseph Savage Government and use the Reserve Bank to invest in a massive housing, infrastructure, and climate change build programme I would agree wholeheartedly.
Renting in New Zealand is bad — for low-income groups it is the most unaffordable in the OECD — as my previous paper published on Interest.co.nz showed. The government should transition from band-aid solutions like the Accommodation Supplement to comprehensive, long-term solutions like a large-scale public house building programme. But that is not the signal the government is giving.
New Associate Minister of Housing (Public Housing) Poto Williams states the government is on-track to produce 18,000 public and transitional housing places by 2024, or about 4500 government builds a year (Correction — actually 3250 public houses per year from 2020 to 2024, Note on the 21.1.21 I realised from more recent announcements that the 18,000 houses promise dates back to 2017 not 2020). This is still a significant promise. But on a per capita basis it is only one-third of the build-rate of the Savage government.
State house builds are currently running at about 2000 a year, although they are on an expansionary trend. There is also a transitional housing build programme— currently there is a stock of 3650 with 120 added in October 2020. The government is planning to have 6641 transitional spaces by 2024. There has been no funding announcement for the Community Housing Provider sector, so it does not have a significant build programme.
The promised government build programme is small relative to total house production (which was almost 38,000 houses consented in the year to October 2020); it is also less than half the rate of those countries with large-scale public housing build programmes, like Austria.
For the rental housing market, despite some increase in supply, increases in demand is still the greater effect — it is pushing up rental prices, especially at the lower end of the market. As Stats NZ detail in a major review of housing the rental housing market is in even worse shape than thought. The government has tried to respond with initiatives such as Housing First, which created a stock of transitional housing. People are meant to live in these houses for a maximum of 12 weeks, but because there is insufficient long-term housing to move into, residents are staying much longer.
The waiting list for public housing is growing and now exceeds 21,000. This is due to a range of issues, including the private rental sector not catering for those on low-incomes, structural planning restrictions on building, and the public sector having insufficient resources to compensate.
In Parliament, Opposition Leader Judith Collins asked Prime Minister Jacinda Ardern if the $4600 increase in median rents since Ardern took office and the public waiting list ballooning to over 21,000 were signs of a housing emergency.
There are many questions that can be put to government ministers on housing. In effect asking if they are housing Jedi Knights.
The biggest question, though, is whether the prime minister is a Jedi fighting the evil empire of housing inflation. It is quite clear to anyone following politics that National are planning to beat up Labour on housing issues just like Labour did when they were in opposition. Yet, neither party is prepared to go past tokenism and implement a genuine workable housing accord.
Ardern’s recent public comments on housing are closer to former Prime Minister John Key’s then Savage’s, even though Ardern has a portrait of Savage in her office.
By stating recently that the government’s goal is sustained moderation in house prices, Ardern gave the message that the market is too big to fail — that house prices can rise but not fall, and that this price guarantee is government and Reserve Bank policy. And there does not seem to be any suggestion there is moral hazard in these guarantees. Nor even an acknowledgement of the social costs (H/T Bernard Hickey).
The problem Ardern has with progressing a housing affordability agenda is that when the government is distracted by multiple needs, such as responding to Covid-19, housing demand and supply pressures can — and did — get out of balance, meaning house and rent prices inflate excessively. This creates a new, higher floor-price in the housing market and the ratchet effect of the rack-rent process stretches renters and first home buyers (FHB) even further.
Ardern’s second problem is the rack-rent process has created the perception she is soft on housing — that there will be no meaningful consequences if house prices and rents continue to inflate unsustainability. Meaning investors’ and others’ expectations of further capital gains is being reinforced.
Environment Minister David Parker has the task of replacing the Resource Management Act with two new acts — a Natural and Built Environments Act for most consent applications and a Strategic Planning Act for issues like transport — plus a separate law on managed retreat from land threatened by climate change.
This would be a heroic task in the best of times, but with a prime minister soft on housing — like they all have been for the past 20 years (arguably the housing political football started 70 years ago when the cycle of one government building state houses was followed by the next government selling them) — the task becomes mission impossible because no legislation can perfectly align all the involved entities (local authorities, government departments, developers, construction industry, iwi etc.) for all potential circumstances.
Parker has been set a heroic task but he lacks support from the head of his government because the prime minister does not have the credibility in the housing space to get everyone on the same page. David Parker needs a friend — he needs a housing Jedi Knight.
This is not a situation unique to Ardern. The last National-led government under Key faced the same difficulty with housing. New Zealand, therefore, has already seen what happens when the prime minister has their hands tied on housing. Action inevitably degenerates into the various involved parties acting at cross-purposes to each other, blame-shifting and finger-pointing.
Politicians have been in this situation before. The stagflation of the 1970s meant politicians lost credibility to run monetary policy to tame consumer price inflation. In particular, they lacked credibility to change the public’s inflation expectations.
But public opinion needs to change, too. As journalist Andrea Vance says, housing should be a right for all New Zealanders: “we should think of it in the same way we regard universally available services, like schools, hospitals and public transport”.
Successive governments at the central and local level have manipulated the housing situation for their own ends. As journalists such as Bernard Hickey have detailed, they have taken the fiscal benefits from a massive immigration boom yet underfunded the required infrastructure. They have deferred maintenance on out-of-sight infrastructure for decades because they did not want to impose rates increases on homeowners, creating a multibillion-dollar infrastructure deficit. Local government and electorate politicians have actively worked against moderate urban planning initiatives. The political class cannot put the affordable housing genie back in the bottle.
An independent entity with clear targets and tools is required to ensure housing as a human right is delivered for all New Zealanders.
Could an Independent Housing Commissioner be the Housing Jedi Knight that New Zealand needs?
I think it could be if the independent Reserve Bank governor concept is used as a guide.
What would the policy targets be?
I would suggest the following, in order of importance:
- Rents as a proportion of income falling below 30% for the lowest 20% of income earners.
- Median house prices inflate slower than median income increases.
- Housing market remains stable and does not destabilise the wider economy.
What would the tools be?
- Ability to fund an expansion of social housing placements as needed. Preferably using the Austrian social housing model because of its cost/benefit efficiency, its stability over the political cycle, and its transparency in achieving multiple goals — social, economic, environmental, architectural/construction quality.
- Ability to buy land in support of urban area spatial plans and release it at cost for urban development as deemed necessary. As a last resort, the Housing Commissioner should be able to use the power of compulsory purchase if there is evidence of land banking. For each and every instance of compulsory land purchase Cabinet level sign-off would be required.
- Ability to appoint and direct Independent RMA Hearing Panels to review planning regulations, such as occurred with Auckland’s Unitary Plan.
- How to fund this? — the Housing Commissioner uses the mana of their position to publicly request funding as required — something like the Climate Change Commissioner. Austria has a 1% regional income tax that funds its public housing model. Economic theory would argue the most efficient funding method would be if the Housing Commissioner imposes a tax on urban land values to fund the acquisition of land to help maintain competitive housing markets and to build the necessary public housing. Note — the land value tax could be applied region by region on an as needed basis.
How would this work?
The housing crisis has grown for the last 30 years — it might take half that time again to resolve. Over time, the solution could look like this:
- Housing Commissioner focuses on their first goal — reducing rent as a proportion of income for low-income groups.
- Housing related inequality reduces.
- The Housing Commissioner’s credibility with the public increases.
- Capital gain expectations in the housing market declines.
- There is more investment in other more productive areas of the economy.
- Labour productivity improves.
- Housing Commissioner use policy tools to work on second housing target — house prices relative to incomes.
- Incomes rise faster than house prices.
- Eventually the housing market becomes affordable — first for renters and then for first home buyers.
- Policy success — Yah!
Part Three: Political Precommitment — Depoliticising Housing
The end of the John Key government was marked by a desperate scramble to reverse housing policy settings. Media reports showing homeless families living in cars shocked the nation. As a stop-gap measure, the homeless were housed in motels. The former prime minister was forced to contend with the consequences of his earlier housing attention being focused on middle-income earners and his assumption that building social housing was economic vandalism, when in fact housing as a human right was the political necessity.
Governments are obligated in the last resort to provide affordable housing. The call to action — to build houses — becomes overwhelming when the public is exposed to images, videos and personal accounts of homelessness being a growing systemic problem.
Housing as a human right is something many countries are struggling with. This problem is particularly acute in New Zealand because, as detailed in the part one of this paper, rent as a proportion of income for the lowest 20% of income earners is the worst in the OECD.
The government is still housing homeless people in motels. A post-election briefing to ministers (P.9) indicates 6300 motel units are being used to house individuals, families and whānau; this might be doable in the middle of a pandemic but in the long-term motels are better used for tourists than for permanent housing. And while signs look good for the resolution of the Covd-19 pandemic in 2021, it is not clear if the government’s housing solutions for the low-income end of the housing continuum will have much impact or even what the housing targets are.
New Zealand has taken the economic opportunity of its world leading response to Covid-19 to bid up house prices.
By November lower quartile house prices reached $541,000, meaning it had increased by $95,000 since May, a 21% increase in six months. Interest.co.nz figures show “the rate at which house prices have increased over the last six months has not only erased the benefits of lower interest rates. It has also eaten up the increases in wages over that time”. Because the rental market is so tight it is inevitable that rents will also continue to inflate faster than wages. Meaning non-property owning workers and businesses will not benefit from doing the hard-yards during the Covid-19 lockdown.
The property owning ‘haves’ have taken all the economic opportunity leaving nothing for the ‘have-nots’.
Part two of this paper argued both local and central government politicians have failed on housing for so long they lack credibility to fix affordability by themselves. As is widely discussed in the media, the rational course of action for existing homeowners is to leverage up investment in housing because the actions of New Zealand’s leaders show they will not allow house prices to fall. The siren call of the one-way housing bet comes at a tremendous cost to the country’s social fabric, yet it is how New Zealand is responding to the current economic situation.
The Jedi Knight paper advocated for a housing accord to bring all the major players together and for a housing commissioner to provide long-term housing affordability direction through specific tools and targets. In effect, this would make the implicit obligation that governments treat housing as a human right explicit.
The book Ulysses and the Sirens by Jon Elster provides the theory for why governments at times use independent entities to solve difficult political problems like the housing crisis. Elster developed a theory called precommitment which he applied to the domain of politics. He asserted that direct democracy tends to reverse its own decisions and to display inconsistent preferences over time — that democracy can be “incontinent, vacillating, and inefficient.” Based on this, Elster argued that certain institutions in modern democracies may be considered precommitment devices. A democratic electorate may bind itself as a way of “protecting itself against its own impulsiveness.” The establishment of central banks, he argues, can be interpreted as an act of precommitment on the part of an electorate seeking to pre-empt the impulse to meddle with interest rates.
If the electorate decides that precommitment is needed to address the housing crisis a housing commissioner could be given the following targets, in order of importance.
- That rent is less than 30% of income for the lowest income groups
- That house price inflation be slower than wage increases
- A stable housing market that does not destabilise the wider economy
And the following tools:
- The ability to direct an increase in public housing placements where and when needed
- To purchase and release land as needed (probably releasing land to Kainga Ora)
- And the power to review planning regulations, by creating, directing, and appointing Independent Hearing Panels
These precommitments would in effect mean affordable housing becomes a universal public service for whānau, much like free education is for children and superannuation is for the elderly.
The precommitments could not be undermined by inconsistent positions held by political leaders, the vagaries of the various involved government departments and local government, or by private investors believing housing is a capital gains investment commodity rather than homes being shelter — a basic human need.
Going forward there would be political consistency, too. The housing commissioner’s targets and tools would outlive individual governments. Of course, like for other commissioners and the reserve bank governor, the government of the day has influence by appointing who takes up the position and the government can alter the targets and tools as they see fit. But these changes would be public decisions that would occur in an honest and transparent process.
Precommitment would mean public expectations about housing inflation, like general inflation, would be controlled as inflation would essentially be ‘tied to the mast’. It is unlikely that once the government and the public see the benefits of a consistent housing position that it would untie itself.
Giving the housing commissioner the power to direct independent hearing panels to review RMA district plans (or any subsequent planning legislation), or to increase public housing placements where and when needed — which would come at taxpayer expense — would also be good for transparency and honesty. It would expose the social cost of NIMBY objections to new housing, whether that be inner-city youth mental health accommodation, suburban infill housing, or building apartments along high-frequency public transport corridors.
If certain sectors of the public insist on vetoing private sector housing options, then more public housing would have to be built at the taxpayers’ expense. Like schools, the housing would be built where it is needed — near employment and near amenities such as educational and healthcare facilities. These are likely to be in the same urban environments that objected to private sector housing being available and affordable through the planning process.
Applying precommitment to housing would bind all sectors of society to the mast — central and local government and the public in general. Greater consistency, honesty, and transparency would be the consequence. This would be a good thing for New Zealand.
Finance Minister Grant Robertson has said he will “spend some time over the summer looking at the full package of how we’re going to deal with housing as an issue.” Hopefully, he gets to the heart of matter rather than playing around the edges.
Part Four: Is the Housing Crisis Bad for Productivity as well as Inequality?
People might vote with their feet
The first three parts of The New Zealand Rack-Rent Housing Crisis series focused on housing inequality, an issue that feeds into and underpins numerous societal ills. Bold political action is needed to make housing affordable and prevent the entrenchment of New Zealand society into a class system based around inherited property wealth. This paper though focuses on productivity.
Jenée Tibshraeny, a journalist at interest.co.nz, has done excellent work investigating the inequality effect of printing money, a strategy employed by the Reserve Bank in response to the forecast economic downturn associated with Covid-19 (articles here and here, video here). In New Zealand, that effect mostly relates to housing, raising the question: does housing inflation cause a long-term decline in productivity in addition to its inequality effect?
This is an important issue because of its policy implications.
There is an assumption — held by the Reserve Bank at least — that when house prices inflate homeowners feel more wealthy and they spend more, making it an effective way of stimulating the economy. But perhaps this housing wealth effect is only short-term, within the one to two-year forecasting window of the bank?
In the long-term, an associated decline in productivity could be the more significant effect because of how towns and cities function as labour markets (see here and here). Some economists estimate the productivity cost of unaffordable housing at $1.6 trillion a year for the United States. Housing-related productivity decline might be a slow acting yet strong long-term effect, because changes in the labour market often take time to eventuate.
For example, high house and rent prices affect where a trainee nurse will consider living in five years’ time — after they have completed their training, gained a year or two of post-grad experience and are nearing their peak productivity and employability. Entrepreneurs, too, need affordable space to focus on developing innovative products and companies; many will fail, but the long-term payoff for some will be huge.
The Green Party’s wealth tax policy has merit as a means of addressing the short-term effects of housing inflation, the distributional wealth effect dividing the country into property-owning ‘haves’ and ‘have-nots’. Green Party co-leader James Shaw last year discussed this with Tibshraeny in the linked video above. This week the Green Party continued this line of enquiry with questions in select committee from Chloe Swarbrick to Treasury and the Reserve Bank and in parliament with Grant Robertson being asked by Julie Anne Genter — “Does he agree that it’s now time to respond with bold fiscal policy, including taxation, to mitigate the current wealth inequality impacts of this unconventional monetary policy?”.
But if housing inflation also causes productivity to decline then a different set of policy reforms becomes necessary. There are implications for the governments planned reforms of the Resource Management Act (RMA), active land management by public sector agencies, housing-related infrastructure funding, and for ensuring at least some public housing is responsive to the employment requirements of low-income renters — i.e. adding the Austrian public housing model into the policy mix rather than further expanding the Income Related Rent Subsidy scheme and the Accommodation Supplement.
Reforming housing in New Zealand so that it is affordable for all levels of society — the idea of housing as a human right — will require a combination of Tokyo’s housing abundance and Vienna’s egalitarian housing (a video explaining the role of the Vienna social housing agency responsible for land acquisition, infrastructure provision, project development and urban renewal can be viewed here).
My New Zealand Rack-Rent Housing Crisis series describes how the government could reform housing in New Zealand. If the state fails to intervene with sufficient boldness, to put the handbrake on housing costs rising rapidly out of step with incomes, the housing crisis will become existential — an issue which shatters the foundational myth of New Zealand as an egalitarian society.
In addition to academic theories and models, there is plenty of overseas evidence showing how unaffordable and insufficient housing affects the labour market if there is an extreme imbalance like is being experienced in California.
The way housing affects the labour market may not be linear. If house prices, rent and new builds are unresponsive to demand factors, such as job creation, there might be a tipping point or series of tipping points — each creating an exodus of business and employment.
Policymakers in California are concerned the state has reached a tipping point where the exodus of businesses and workers is now greater than the factors leading to innovation and inward migration that previously powered the state to be the fifth largest economy in the world (a video titled “What’s Driving California’s Mass Exodus?” describes this well).
Other parts of the world are having similar conversations about how housing is undermining society and the need for bold reforms to housing policy settings. For example Irish economist David McWilliams has a podcast with the following description. “Public housing should be addressed with the same urgency as public health. If we can close down the economy, borrow billions, furlough millions and stop the world in the name of public health, we should be able to tear up the rule book when it comes to housing. The property market in Ireland and the rest of the English speaking world is a scam, rigged to push prices upwards, indenturing working families and exacerbating the wealth divide. Here’s how to fix it.”
It would be easy for New Zealand to reach a housing-related labour market tipping point; there are already large expat communities of New Zealanders overseas who would aid others leaving the country as the housing situation becomes more dire.
Reforming our housing settings will be a difficult task, fraught with finger-pointing and the shifting of blame. It is naive to think any one government minister — such as Environment Minister David Parker, who is leading the RMA reform process — is capable of solving the housing crisis. Successful housing reform will require coordinated action from ministers of the environment, housing, local government, transport and finance at a minimum. It will require a prime minister — or entity the PM has given executive power to, such as a housing commissioner — who can coordinate these ministers by publicly expressing a clear set of housing targets and tools. Without this strong, coordinated approach the various housing-related institutions will pull in different directions.
For example, Auckland Council is already pulling away from the National Policy Statement on Urban Development (NPS-UD), a directive released last year which requires councils to relax height restrictions, remove car parking minimums and encourage density. Councillors and the mayor seem to believe the issue is not the restrictive nature of the district plan but the lack of infrastructure funding (see the second half of this video of the council meeting debating the NPS-UD).
Will a future Auckland Council faithfully implement the new RMA legislation if it directs local government to further liberalise planning restrictions, or will they find excuses to obstruct it? The 1991 Resource Management Act will be repealed and replaced with three new laws this parliamentary term, namely:
- Natural and Built Environments Act (NBA) to provide for land use and environmental regulation (this would be the primary replacement for the RMA)
- Strategic Planning Act (SPA) to integrate with other legislation relevant to development, and require long-term regional spatial strategies
- Climate Change Adaptation Act (CAA) to address complex issues associated with managed retreat and funding and financing adaptation.
“I expect that the complete NBA and the SPA will be formally introduced into Parliament by the end of 2021, with the NBA passed by the end of 2022,” Environment Minister David Parker said. A full explanation of this process can be read in the Richard Harman article titled — Parker is playing the long game with his far reaching RMA reforms.
Business journalist Bernard Hickey explains the viewpoint that reform to urban planning and environmental laws cannot deliver the necessary housing supply without first dealing with the politically untouchable roadblocks of population policy, infrastructure funding and the need for a wealth tax.
It is hard to know the size of New Zealand’s housing related infrastructure deficit and need for additional funding, it is probably sizeable but how big is uncertain. Transparency is not a hallmark of our urban development system. Overseas, more transparent systems, such as, Austria’s gold standard public housing provision that houses a quarter of their population and anchors their housing market is funded by a regionally applied 1% PAYE tax. Not an impossibly onerous level of funding. This indicates the infrastructure deficit and taxation/funding issues might not be the political untouchable roadblock that Bernard Hickey describes.
Although how any additional funding or taxation is spent could be an issue. If the Finance and Infrastructure Minister Grant Robertson does assess local government infrastructure deficits to be genuine and therefore increases funding to local government, would councils faithfully spend it on the required housing infrastructure (much of which is below ground, or not immediately obvious)? Or would they find other spending priorities, kicking the can down the road and allowing infrastructure deficits to mount up, as has happened in Wellington with embarrassing consequences — the raw sewage flowing down city streets and into the harbour.
What is required is an honest broker between local and central government, an entity which is not beholden to either parties’ flawed political processes. What is needed is an independent housing commissioner loyal only to a set of housing affordability targets. A housing commissioner could fairly adjudicate the issues of planning restrictions and infrastructure funding in order to get central and local government on the same page. Being independent, they would be expected to advise and direct government ministries and local councils — whatever is required in order to meet their affordability targets.
A bipartisan approach to the housing crisis at the central government level seems possible. A housing commissioner could be widely accepted across the political spectrum. Opposition National Party leader Judith Collins says suburbs will need to change their character in order to solve the housing crisis. In an interview with Stuff, Collins said Kiwis need to understand that the country needs more housing and that requires suburbs to change. Her party is now backing the Government’s National Policy Statement on Urban Development, which will stop councils from enforcing height limits of less than six storeys near major transit routes in an attempt to intensify cities.
It should be possible for New Zealand to start solving the housing crisis without blame-shifting and finger-pointing. And the sooner we act the sooner we prevent our towns and cities being priced out of contention, becoming failed labour markets that are not attractive for the next generation of kiwis.
To prevent an exodus, to address housing-related inequality and its attendant social markers — think poverty, families living in cars, rheumatic fever — New Zealand must pursue a path where housing is seen as a human right. Action is needed, not later but now.
Part Five: Housing as a Human Right — Restoring New Zealand’s Egalitarian Dream?
“While Adam delved (dug) and Eve span, who then was the gentleman?” — John Ball priest — hung, drawn and quartered, 1381.
There was no privileged landed gentry in Adam and Eve’s time so why are they favoured in later times?
New Zealand is bad at housing its people — very bad. Relative to income, homes in the country are among the most expensive in the world.
Yet for decades housing as a capital gains investment commodity has provided bumper returns — far exceeding other investment options.
The bottom 20 percent of New Zealand income earners have the highest housing costs in the OECD, an economic organisation with 37 member countries.
The disparity in emotions different groups feel about the above graphs cannot be overstated. For some the graphs represent a horror — real, visceral socioeconomic pain. For others it is a booming bonanza. Overall they depict — an explosion of the country’s egalitarian ideals.
This disparity has continued since the onset of Covid — the wealthy are now sitting on property and savings that have risen by $271.7bn, and poor families received an extra $2000 or so in benefits and winter energy payments over the last 12 months. That increase of $38 per week was easily gobbled up by a $50 per week increase in the median rent to $500 in 2020.
Renting in New Zealand is bad. Rentals are more likely to be cold, damp and mouldy than owner-occupied homes. Housing poverty diseases like rheumatic fever that have almost been eliminated in other develop countries are still prevalent in New Zealand’s rental accommodation communities — nationwide the incidence of rheumatic fever is increasing. Eviction is a real threat and tenancies are short — on average less than two years. And there is a real power imbalance: 25 percent of rental household moves are instigated by landlords.
Rents are rising faster than wages for the lowest income groups.
Many low and middle-income workers in our most successful towns and cities can only afford a room in a shared rental. If renters face a financial setback, especially if they have dependent whānau, rent can quickly take the majority of income — leading to difficult budget choices as necessities become unaffordable. The situation can even deteriorate so badly the tenant becomes homeless. An all too prevalent problem in New Zealand.
The unmet need for affordable, good-quality, well-located housing is massive.
Figures from 2018 show more than 180,000 households — 10 percent of all households — are in financial stress because they spend more than 30 percent of their gross income on rent. Given that lower quartile rent is inflating faster than wages, that number is likely to be larger now.
Currently, there are over 4000 kiwi children living in emergency motel accommodation with their whānau. Emergency accommodation is now costing the government $1million per day, as revealed by Opposition Housing Spokesperson Nicola Willis. This expense is a reflection of how housing has become a significant driver of poverty.
Nicola Willis is concerned that this year between January and February, median house prices have increased by another $50,000.
The National Party suggest these immediate actions:
- Strengthen the National Policy Statement on Urban Development
- Remove the Auckland Urban Boundary
- Make Kāinga Ora capital available to community housing providers
- Establish a Housing Infrastructure Fund
- Implement new finance model
Nicola Willis should be applauded for making constructive suggestions. The issue though is not with the merit or otherwise of each action. The problem is strategy should come before tactics and the National party has not explained what their housing strategy is. The government have the same problem.
Discussing tactics without agreeing on strategy — is like going through the last year of Covid debating the merits or otherwise, of lockdowns, quarantines, testing, tracking and trace… without agreeing on whether the strategy was suppression, elimination or herd immunity.
For instance the housing strategy could be that affordable accommodation (spending less than 30% of income on housing) is a human right for all New Zealanders.
This strategy could be achieved by planning reforms, infrastructure provision, and government capital injection into the housing market (so similar tactics to what National is suggesting). This will build more houses which will affect rent levels. When rent falls it is important to keep building public housing at pace. Don’t slow even if the balance of power shifts — for example if the market expectation became landlords submit references to tenants not the other way around.
For the ‘housing as a human right’ strategy to be achieved, then expectations of capital gain need to be eliminated with the same degree of ruthlessness that general inflation expectations were removed in the 1980’s and 90s. This is especially important now because house price expectations are back at 2015 highs.
If expectations are not constrained the housing crisis has the potential to get much worse.
Tenants as a group pay much more of their income on rent than homeowners pay in bank interest charges. Homeowners collectively pay just 6 percent of their disposable income in mortgage interest costs, down from a high of 14 per cent in 2008. This and other favourable conditions, that business journalist Bernard Hickey details here, means those already owning property have the financial ability to keep driving house and rent prices up if the current housing settings remain the same.
In 2020 landlords and homeowners collectively borrowed more and paid down less. Given last years strong house price gains and the expectation of more housing inflation those in ‘the game’ can continue to use debt to inflate the housing market further.
The situation is so favourable to landlords and homeowners, it is no exaggeration to say the market is rigged.
For decades when tenants’ incomes rose, when accommodation and other grants increased or when landlord costs fell — in particular, borrowing costs — this benefit went to the landlord not the tenant.
This rigged rental housing market drives landlord greed for capital gains, and it drives first home buyers FOMO — fear of missing out — the fear that if they do not buy now, they will be in a worse situation in the future.
And the rigged rental market increases demand for state and emergency housing.
This process is a long term drag on the economy. It misdirects borrowing and investment, and it imposes costs on employment and business.
It is the inequality effects of the housing crisis, though, that are the most worrisome.
Discussions about the crisis are fraught, characterised by blame-shifting, finger-pointing and can-kicking. In many rental households, merely talking about buying a home is taboo because of the stress and tension it unleashes. Yet in the wider community there seems to be more housing market reckons than there are people.
For many at the sharp end of the housing crisis there is a feeling of despair — a resignation that society does not have their back. For others, there is sadness at the erosion of New Zealand’s ‘fair go’ culture, the idea that even those with modest means can make a go of it. The inequality effects of the housing crisis are so great, some believe, that it amounts to an existential societal crisis.
But discussion about the housing crisis need not be fraught. New Zealand has been here before and social democracy solved the problem by extending universal human rights.
The first Labour government led by Prime Minister Michael Joseph Savage faced a terrible existential crisis to the global economy: the Great Depression. Their solution was to extend universal rights to free healthcare, education and social security — rights that we now take for granted but which, at the time, triggered a social and economic transformation.
The Savage government was the first to provide: free hospital care; free secondary school education that was compulsory to the age of 15; and universal superannuation for all who reached retirement age.
In housing, affordable, good-quality homes became another right. The state built 29,000 houses between 1937 and 1949, including a break due to World War II. Adjusted for population, that equates to over 90,000 houses now.
These homes were universally accessible to a wide range of workers (the first house went to a Wellington tram driver’s family); unfortunately, that right to quality housing faded away, first gradually and then suddenly with the 1980s reforms.
We can see what a difference maintaining ‘housing as a human right’ has made in societies like Austria and Singapore. Their mixed state and market economies have achieved better housing outcomes. Collective action has supported the market and the common good. There are, of course, Soviet Union-type examples where government and markets became completely disconnected but success stories like Austria and Singapore show a middle ground does exist.
There are even some local politicians in the US looking at solving their housing crisis by employing the social democracy, ‘housing as a human right’ approach — specifically looking at the Austrian public housing model. When Vienna housing officials explain what they do, it is clear how competent and common sense their actions are (this provides a stark contrast with how irrational New Zealand’s housing market has become).
New Zealand does not need a fraught discussion about which affordable housing model is viable — we have done it before, and it still exists overseas.
When it comes to housing reform, the Government and market forces are not as disparate as some might think. When Auckland Council’s unitary plan was being developed, for instance, free market advocates and public housing officials were aligned in requesting a more liberal planning regime. Housing affordability activism can be a broad church.
The Black Death of 1348–49 killed about two-fifth of everyone in England. As a result, the remaining workers had their bargaining power increased — outraging the aristocracy. They responded by persuading King Edward III to pass the Statute of Labourers Law, which made it an offence for landless men to seek new masters or be offered higher wages. Workers, of course, hated it (the legislation was referred to as a contributing factor in the 1381 Peasants’ Revolt).
New Zealand has its own 21st-century version of the Statute of Labourers: regulatory and economic settings that have added needless expense and restrictions on building affordable housing near the best employment opportunities.
There is no right to affordable housing enshrined in legislation. At most levels, the rights and bargaining position of the propertied class are privileged over the landless. Even where housing affordability is specified, such as the Reserve Bank’s Monetary Policy Committee remit, it is a long way from being a universal right — for instance, the remit (see below) does not include renters in the housing affordability goal.
(d) assess the effect of its monetary policy decisions on the Government’s policy set out in subclause (3).
(3) The Government’s policy is to support more sustainable house prices, including by dampening investor demand for existing housing stock, which would improve affordability for first-home buyers.
How can freedom of movement for workers be respected when affordable housing is so hard to access? How can the bargaining position of the landless versus the propertied be made fairer? How can housing be a right for all New Zealanders, like it is in Austria? How do we prevent the right from fading away again?
The right to housing needs to be deeply embedded in New Zealand’s system of governance.
Housing in New Zealand is based on a system of land contracts inherited from feudal times as described by Alastair Parvin in his fantastic — A New Land Contract where he describes;
Mostly when we talk about the spiralling cost of housing, we refer to it as the ‘housing crisis’. But the truth is that our housing crisis is actually a land crisis; of which the housing crisis is just one of the many symptoms….And actually, it’s not really a Land crisis, it’s a Land system. It’s the rules of the game, hard-coded into the firmware of our society and economy.
New tools — such as public land buy-backs for the purposes of land value capture — are needed. This is one of the tools suggested by Alastair Parvin and is also a tool recommended in Part Two of the New Zealand’s Rack-Rent Housing Crisis series.
New Zealand needs to take a bold, innovative approach to addressing the housing crisis. As described in Parts Two and Three of New Zealand’s Rack-Rent Housing Crisis, the Government could create a powerful housing tsar, a housing commissioner who — as their legislated goal — would advance the idea of housing being a human right for all New Zealanders. This firm principle could be the basis of a coordinated state and market housing accord that over time would eliminate the housing crisis.
Ultimately, solving the housing crisis comes down to public support and the political will of elected officials. Hopefully, it does not get to the stage where the ‘peasants’ have to revolt.
Part Six: Where to Now?
The point of incremental change is to grease the machine, making a more efficient model than what existed prior to the change.
In contrast to how gradual changes improve a preexisting system, radical change calls governments to move past current practice to create an entirely new system better suited to the obstacles presented.
As my family and friends know, I am more than a little obsessed about housing. I believe, and have done for a long time now, that our cities and towns are profoundly broken. The poor way New Zealand manages the built environment risks making the housing crisis an obstacle that might prove insurmountable. That has awful flow-on effects for a myriad of issues, including: climate change, inequality and poor productivity.
My earlier papers in the Rack-Rent Housing Crisis series described how bad the current housing situation is and outlined what I thought should be done. This article builds on that by providing my personal history with the housing crisis; it provides a big picture view and a rationale for what I think the government will do next.
Back in 2007, I had experienced two stints living in Europe for extended periods and knew housing quality and pricing in New Zealand could be much better — it was not just housing, the whole urban package could be better. I wrote to then-Finance Minister Michael Cullen expressing my concerns and he was good enough to provide a considered response, unlike many other politicians I have approached over the years.
Judging from his reply, back in 2007 Cullen was reflecting on the housing situation and had some uncertainty regarding the best response. Readers can make their own judgments as a transcribed copy of the letter is included at the end of this paper.
To me, it showed Cullen had a broad understanding of the many factors influencing the housing market — he would be in the ‘no silver bullet’ camp.
In the immediate period after 2007, demand was the most obvious influence on the housing market. The global financial crisis (GFC) flattened house price increases for several years, but supply did not catch up to demand. Housing construction slumped, so when demand returned in the mid-2010s prices and rents ratcheted up again. The median house price went from $345,000 in July 2007, when I raised housing supply concerns with Cullen, to $810,000 in April 2021.
A significant demand stimulus from 2015 was high net migration numbers.
The clearest macroeconomic impact of net immigration for New Zealand is on the housing market, ANZ Research has found. They concluded their report with this statement.
This highlights the importance of addressing the relatively unresponsive nature of housing supply in New Zealand. We simply do not build houses fast enough to keep up with population growth (particularly following periods of strong net immigration, but also more generally), and that’s fundamentally what’s impacting the wellbeing of many Kiwis.
For the last year, the spike in house prices has been due to significant monetary stimulus in response to Covid-19. House price growth in New Zealand is running at the second-fastest rate in the world. The government acted in February 2021 by directing the Reserve Bank to take into account the government’s housing policy in its decision-making, and again in March by changing the tax settings for landlords.
Documents released as part of the May 2021 Budget predicted a sharp house price adjustment is coming. The future is uncertain, so let’s see. No one forecast the Covid-related house price boom, for example, except for a few monetary policy tragics like Jenée Tibshraeny and Bernard Hickey.
The change in property tax settings will have reduced speculative demand, housing construction is relatively high, and due to Covid immigration is low — so supply should catch up with demand at some point in the next few years.
The question is whether supply can have a long-term influence that gradually improves housing affordability or if construction again drops off.
Cullen, whose thorough response showed the depth of his mana and his democratic ethos, was not correct about everything back in 2007.
Firstly, he undervalued the potential for supply side reform to improve affordability, specifically by addressing (1) infrastructure funding, (2) making the planning system more permissive, and (3) undertaking proper spatial planning.
Secondly, Cullen’s view that the housing crisis was cyclical and would pass meant he undervalued the risk unaffordable housing would pose for New Zealand’s economy in the future — wiping out many of the benefits of other reforms, like the 2004 Working for Families package.
Thirdly, by not articulating that housing-related inequality is unacceptable to the public and that the New Zealand government has an obligation to ensure all New Zealanders have access to affordable housing. The inequality side of the housing crisis is now better understood by the public following media coverage in 2016 showing homeless families living in cars.
In hindsight, we all have 20/20 vision and I do have sympathy for Cullen’s 2007 housing position. Since then, understanding of the negative effects of unaffordable housing has become much clearer, as detailed in articles like this. I am sure Cullen’s 2021 view on housing has evolved to reflect the events of the last 14 years.
In June 2021, Cullen reflected on his political career in a long interview where he talked about housing at the 53-minute mark.
In the interview, he made it clear he believed the government was correct in 2017 to focus on building more houses (supply), with a particular focus on building for the middle to lower end of the market through state housing or community housing providers. He also thought the government needed more supportive policies covering things like the labour market, building materials, property investment and so forth. The Reserve Bank and the government needed to be better coordinated, Cullen thought. The bank could have lent to the government for its build programme rather than effectively “putting an awful lot of money into asset prices. Which we don’t need — which we simply don’t need.”
In my Rack-Rent series, I advocate for greater centralisation to strategically address affordable housing and ensure it is treated as a human right for all New Zealanders. Part Two of the series recommends a housing tsar would be beneficial.
There are two main advantages for New Zealand taking a centralising approach to solving the housing crisis.
- Housing related-inequality can be tackled without crashing house prices. The government can repeat the state house building policies of the First Labour Government (or a similar version, such as supporting the expansion of the community housing sector using the Austrian model).
- A centralising housing approach could be part of a wider shift towards adopting the East Asian development model so that New Zealand can catch up with nations like Japan, Singapore, South Korea, and Taiwan.
Back in 2007, I was advocating for greater decentralisation to improve housing-related infrastructure bottlenecks “by replacing local councils with a smaller number of regional councils and assigning a percentage of income tax (at the local level) to these councils”.
How do I reconcile my 2007 position with my more recent centralisation view?
Basically, I am a pragmatist. I agree with Deng Xiaoping, who said: “It doesn’t matter whether a cat is white or black, as long as it catches mice.”
There are multiple options for addressing the housing crisis.
The two countries with the most successful and stable housing markets over the last 40 years — Germany and Japan — have taken quite different approaches along the centralisation spectrum to achieve housing success.
Alan Durning from the US Sightline Institute describes the difference as:
Japan’s lesson, as I previously wrote, is that pushing power to higher levels of government is a tonic for housing. It counteracts NIMBY obstructionism. Germany’s lesson is that decentralized control can be fine, as long as local authorities have strong incentives to welcome homebuilding…
Local German officials, like local leaders everywhere, seek bigger budgets to provide more and better services to their constituents. What’s different about Germany is that the way to get bigger budgets is to increase local populations. And, as Professor Buettner says, “Ultimately, to get people, municipalities will need to support housing.”
Professor Robin Hambleton from the University of the West of England describes how small German cities like Freiburg have made bold moves to address housing affordability and the climate emergency. He states the extreme centralisation of the UK rules out these sort of imaginative initiatives. New Zealand has a similar degree of centralisation.
The German system of incentives is the opposite of “fiscal zoning” — the practice of zoning land in ways to maximize local government income and minimize its costs.
In the US, fiscal zoning has meant in places that use sales taxes as a local revenue source, such as Washington State, more land for shopping centers is zoned. In places where residential property taxes are capped, such as California, they zone less land for homes and more for offices. In affluent suburbs, they often zone land for standalone housing on large lots, thereby excluding low-income people.
Ultimately, what is needed is better government that can provide the conditions for housing markets to be successful. Good governments — like those in Japan and Germany — provide permissive house building regulations with low transaction costs (entities such as Vienna’s social housing agency have provided a similar function). Good governments also deliver the required public infrastructure that markets cannot provide.
The nature of local government in New Zealand means its revenue source is constrained by politics. Local government rates revenue has not risen as a percentage of GDP since the late 1800s. A recent Productivity Commission report noted councils faced pressure from homeowners to keep rates low which prevented necessary investment in housing-related infrastructure. Local government in New Zealand is similar to the California situation: politics has imposed a revenue cap, meaning there is an infrastructure bottleneck and permissive planning rules are not incentivised.
While there is a distrustful relationship between central and local government, this situation will only continue. One kernel of distrust is that local government accuses central government of making it impotent and central government does not respond because it believes local government is incompetent.
Despite knowing the consequences of a lack of local government incentives, more recently I have been advocating for more centralisation to address the housing crisis. This is because the Japanese centralisation model (or more generally the East Asian development model) is a genuine success. The reality in New Zealand, is that governments from both sides of the political spectrum have lacked the will to empower local government, something Cullen accurately predicted in 2007.
However, the current Labour government will not centralise housing-related public service delivery like the first Labour government did. By 1940, state land development programmes accounted for 45 per cent of all housing construction in New Zealand. This required a Ministry of Works and a huge government state house build programme. In comparison, the current government house building programme makes up only about 10 per cent of total residential construction (Kainga Ora is building less than 4,000 of the roughly 40,000 houses being constructed each year).
After its landslide victory in the 2020 election, the government had an opportunity to implement the first Labour government’s housing model. For the first time since MMP was introduced, one party had majority control. The barrier to that course of action is not party politics — because currently there is no effective opposition — the problem is the fragmented public service.
Even if there is the political will to reform governance in the following areas:
- More centralised housing related infrastructure provision.
- A national set of permissive planning regulations.
- A more coordinated set of actions between government and the private sector (to build the vegetarian city model — which will be the topic of my next article).
The fragmented state of the public service means New Zealand would still struggle to implement these reforms.
What happens next?
If radical change is not possible by switching to the German model — incentivised localism — or the Japanese model — centralisation — does that mean New Zealand’s housing crisis is an insurmountable problem? Not necessarily.
New Zealand might become more aware of its disempowered and fragmented governance systems and therefore make greater efforts to ensure collaboration and coordination occurs. Constructive engagement should be valued, and finger-pointing and blame-shifting frowned upon.
Incremental reform that sits between the Japanese and German models is possible. New Zealand could even create its own ‘incremental radicalism’ governance model (note the term ‘incremental radicalism’ is discussed at the end of this talk by veteran political analyst Colin James).
The government is currently working on a bunch of reforms that could improve housing governance. Individually, each reform will only have a minor incremental effect, but collectively they may add up to something more radical.
Examples of these reforms are:
The National Policy Statement on Urban Development (NPS-UD). This is the government’s first attempt at directing councils to implement a more permissive planning system; for instance, by raising height limits around rapid transit and removing car parking minimum requirements. Councils are currently in the process of implementing the NPS-UD (as seen by the recent housing debate in Wellington). There are concerns, however, that Auckland Council is planning for unaffordability.
The planned replacement of the Resource Management Act over the next few years will give the government more opportunities to incrementally implement a more permissive planning system, which may be needed if local government push back against the spirit of the reforms.
Clearer national direction will be provided under the Natural and Built Environment Act (NBA), and “the new National Planning Framework (NPF) will provide strategic and regulatory direction from central government on implementing the new system. This will be much more comprehensive and integrated than the RMA required” (42).
The government has created a $3.8 billion infrastructure fund that local government can access. However, commentators have criticised the size of the fund, saying it is insufficient compared to the size of the infrastructure deficit.
Of the $3.8b, Housing Minister Megan Woods announced $1b has been set aside to create a contestable housing infrastructure fund. Funding will be available for projects that provide drinking water, waste water, sewage, roading, and flood management that enable new houses to be built. To qualify for funding, infrastructure projects need to support the building of a relatively large number of houses, at least 200 homes in larger cities, 100 homes in smaller cities and 30 homes in towns.
The $3.8b fund is a step in the direction of incentivising localism that could, over time, be improved into a more formal structure. However, the fragmented nature of the governance system in New Zealand means, for every step towards localism, there seem to be barriers pulling the country further away.
For instance, most New Zealanders are unaware that fuel tax and road user charges do not pay for the full cost of the road network. Ratepayers significantly subsidise roads and recently the New Zealand Transport Agency (Waka Kotahi) told Councils to expect $420m less for local roads than originally indicated, forcing councils to cut spending on cycling infrastructure, public transport and local roads in hastily rejigged budgets for the next three years. Auckland Council, for example, has delayed its Eastern Busway for two years following the NZTA funding cut.
The Local Government Minister wants to centralise three waters provision (fresh, sewer and storm water) in New Zealand. I can understand the attractiveness of a Scottish Water type entity (or four such entities) using volumetric charging to provide fresh and sewer water services (although a single water standard is problematic given the 150 year history of using non-treated water from safe artesian water sources in places like Christchurch).
Many local governments historically have favoured lower property taxes over expenditure on three waters infrastructure. In the short term, this has been a politically successful tactic but in the long term it has led to water delivery failure. Hence the desire for reform.
Regarding storm water provision, I have concerns that an unelected water entity will lack the mandate needed to make required land-use changes to manage flood protection. Christchurch, for instance, invested $120m to create large storm water basins and other drainage schemes that prevented the city flooding during its recent heavy rain event. Christchurch City Council has also put more effort into gaining an accurate picture of sea level rise and its implications than the Ministry of the Environment has. After significant rain events, many farming areas ask for drainage scheme protection, some of which will be beneficial and some highly contentious as there has been a systematic effort to strangle rivers into narrow drainage corridors. A distant, unelected water entity will struggle to navigate these local issues.
It is likely that New Zealand’s busiest cities will be allowed to congestion charge the overloaded parts of the road network. Congestion charging can provide many benefits, including improving the use of existing infrastructure, informing better transport planning by providing credible signals of effective demand, and requiring people living in new suburbs to internalise the congestion costs that they impose on other transport users.
In 2020 the Urban Development Act was passed. This created a Kainga Ora-run urban development authority following on from the Hobsonville Land Company, an entity which was wholly-owned by Housing New Zealand. The original concept of developing Hobsonville dates back to the Clark/Cullen-era, although the scheme was implemented by the Key government. The National-led government made significant changes, like removing the 15% state housing requirement. No new housing development areas have been announced following the passing of the Urban Development legislation in 2020. Going forward, the current or next housing minister may be more enthusiastic about using this housing supply tool.
Among other beneficial changes, the replacement of the 30-year-old Resource Management Act with a Strategic Planning Act and a National and Built Environment Act, could allow New Zealand to undertake proper regional spatial planning. The existing 100-plus RMA council planning documents will be reduced to about 14.
New Zealand cities and regions could undertake initiatives like New York’s 1811 Commissioner’s Plan that designated a road grid for Manhattan Island which was later able to accommodate the subway network. This spatial planning work was a critical step that allowed New York to become the largest and densest city in the US, while having a lower rate of transport-related CO2 emissions than Auckland (on a per capita basis).
Spatial planning has been successfully done around the world, including Barcelona’s 1859 Cerdà plan. Ontario’s late-1800s designation of north-south and east-west paper roads throughout the province meant the roads were later used to provide a grid system of frequent public transport services for Toronto. Copenhagen’s 1947 Finger Plan guided development into multi-modal transport corridors and protected the ‘green wedges’ between corridors.
New Zealand’s failure to spatially plan its urban growth areas is shown by the fact that only 9.5% of homes built in 2019/20 had access to frequent public transport services, according to the Ministry of Transport (quote from Page 22 of this discussion document).
The direct impact of poor spatial planning is:
- Vast cost escalation. Infrastructure Australia found billions of dollars of cost escalation because the corridors protected in the 1950s, 60s and 70s were built out in the 80s, 90s and 00s, and now they have run out. New Zealand is in the same situation.
- Inability to build transport projects to add transport capacity, provide congestion free travel alternatives, and to reduce CO2 emissions because there is not enough room on public right-of-ways. For instance, arterial roads in New Zealand are frequently too narrow to fit rapid transit and active mode infrastructure.
- This leads to housing supply constraints that cause shortages, unaffordable homes, and overcrowding.
- In turn, there is less urban development from the infrastructure projects that are built, reducing their uptake and benefits.
The wider societal impacts are:
- Increasing inequality (e.g., a landed gentry and a renting class).
- Lost agglomeration economies and lower wages because of congestion and disconnected labour markets.
- Reduced flexibility to repurpose transport systems to reduce emissions.
- Increased risk of economic depression from overinflated urban land prices.
- High infrastructure costs requiring higher taxes and lower value for money.
Spatial planning solution:
- Plan, protect, and pay to acquire land for corridors and a regional hierarchy of public open spaces so that cities have the capacity, if needed, to double or treble in population size over an extended 50-year time period, through both urban intensification and competitive urban expansion.
- The corridors should be connected (i.e., grid-like), perhaps spaced about a km apart and 30 metres wide each.
Time will tell if these sorts of incremental reforms can be implemented ‘radically’ enough or whether New Zealand needs to move past its current practices to create an entirely new system better suited to tackling the housing crisis, climate emergency, inequality, and productivity obstacles the country faces.
Dear Mr Harre
Thank you for your email of 19 May 2007 forwarding your article on housing affordability and supply. I appreciate receiving your views.
Your main thesis is that house price affordability is at low levels due to demand for housing out-stripping supply. I agree that supply limitations are partly responsible for the increase in house prices; although I also consider that there are a number of other factors that are contributing to significant house price inflation. In particular, growth in borrowing capacity is likely to be the biggest driver of house price increases. The combination of low interest rates (by historic standards), banks’ access to cheap foreign capital, and growth in income means the households can afford to borrow more. In the last seven years, almost 320,000 additional people entered work, and wages have increased by around 13 percent (after taking account of inflation). Job security has given people the confidence to borrow more. I would also note that the influence of supply on prices is not straightforward, since the supply of new dwellings has expanded rapidly in most areas, including Auckland.
The link between house price and macroeconomic effects is strong. The Reserve Bank, in its role of controlling inflation, considers the housing market to be an important transmission mechanism for monetary policy since such a large part of the population is affected by changes in mortgage rates. The response of monetary policy, by way of rises in the OCR, is intended to dampen inflationary pressures, but because so many mortgages are on fixed rates monetary policy has taken longer to work.
Other influences on house price inflation include immigration, the role played by the investment property market and growing demand for larger and higher quality housing.
The solution you propose to solve affordability issues is to force, through legislative change, regional authorities to balance local demand and supply for land by setting a house price inflation target which would be met through greater land release. Aside from any other considerations, I would expect such a target to be unachievable through the supply side alone. In many parts of the market land is finite so any change in demand in those areas would presumably result in increased prices.
Nevertheless, I acknowledge there is room to influence overall prices by increasing supply, either through new developments or infill developments. There are elements of the government’s housing strategy focused on achieving increased supply. You are probably already familiar with this government’s substantive review of housing policy, released in 2005 as the document “Building the Future: The New Zealand Housing Strategy”. Although house prices have continued to rise since this document was published, the findings and recommendations are still relevant. If you are not familiar with “The New Zealand Housing Strategy”, you can view it from the link (no longer active) if you have access to the internet. The first chapter of the report is focused on responses to supply limitations.
To meet our goals of adequate housing for all New Zealanders, government housing policy needs to incorporate a range of assistance, rather than just helping first home buyers. For example, officials have been working on a range of planning tools that could be used by local government to increase the supply of affordable housing in communities where it is scarce.
You suggest a method of funding the infrastructure needs of increased development by replacing local councils with a smaller number of regional councils and assigning a percentage of income tax (at the local level) to these councils. As you note, your proposals require a fundamental change in our system of government. It goes without saying that any change of this magnitude would first require detailed assessment of the risks and cost at all levels, and subsequently would need cross-party support. Even if there was a political will for such change (and this is very doubtful) this process would not happen quickly. Given that fluctuations in house prices and housing affordability are inherent characteristics of housing markets, it is quite possible that the present housing affordability crisis could be over before any changes were implemented. This current cycle is exceptional — house prices have risen by more than at any time in the last 30 years — but forecasts by the Treasury and the Reserve Bank suggest that the current rates of price increase will not be sustained.
I hope my comments have helped to explain the government’s position. Thank you again for forwarding your article.
Yours sincerely
Hon Dr Michael Cullen
Minister of Finance
Part Seven: New Zealand Should Knock! Knock! On Wood
The planet is on fire. Humanity is responding — hopefully fast enough
Historically, the rise of cities, the industrial revolution, and increased greenhouse gas emissions have all been closely connected. Going forward for the world to survive cities need to break the link between their construction and environmental harm.
Embracing a climate change agenda has economic opportunities for New Zealand — an open-minded view of the situation would see the opportunity. In particular, that New Zealand can take a globally important role in reducing construction related CO2 emissions.
For a century-and-a-half large buildings in the world’s cities have been constructed from steel and concrete.
There is now an alternative — wood has the structural properties to be an engineered building product.
As a result of timber research, on issues like fire protection, restrictions on building larger buildings from wood have been relaxed.
Engineered wood products are becoming increasingly sophisticated.
Greenhouse gases, such as carbon-dioxide, nitrous-oxide and methane that were locked deep under the earth, or in forests, grasslands, wetlands, soil, peat, and other biomes have increasingly been released into the atmosphere. Rising levels of greenhouse gases is causing multiple feedback loops and tipping points that are negatively affecting the environment, the most significant being global warming.
Life in the pre-industrial era never extended much further than the neighbouring village. City-life in the modern-era has meant mobility has significantly increased. Globally the population of cities is expanding and the population of rural areas is declining. The rise of the city is predicted to continue for another hundred years, before the process of urbanisation and female education, is expected to lead to global population decline. Thousands of cities are expected to double in size in this intervening period.
Humanity needs a Houdini trick — some way to minimise its planetary impact before it reaches the turning point where population decline can ease pressure on resources. Climate change is probably the biggest choke point. Currently, the world is on a pathway to over 3 degrees in warming by the end of the century — which will destroy modern life as we know it.
Better forms of mobility will be a huge part of this Houdini trick. But that is not the focus of this paper. At least not directly.
Concrete and steel together account for 14.7% of global carbon dioxide emissions. Construction and manufacturing are 9.3% of New Zealand’s gross emissions.
The proposal is simple — for climate change reasons cities need a new diet. Less concrete and steel — and more plant-based construction materials that sequester carbon, such as, engineered wood. This could be called the vegetarian city model.
For NZ-Inc this opportunity could be like refrigerated shipping in the 1880s. That new technology had significant national implications as the economy transitioned from a boom-bust extractive economy to a more stable renewable economy — i.e. the transition from gold mining, native-timber felling, whaling and so forth to dairy and lamb exports (of course now agriculture has to tackle its climate change emissions to be truly considered a sustainable renewable industry). New Zealand needs to make a similar if not greater transition now.
Currently, the majority of New Zealand’s wood exports go to China as raw logs. Last year 80 per cent of the country’s $2.8b log trade was earned in China. There are concerns that New Zealand is overly reliant on this one market and that China may be artificially raising log prices — against World Trade Organisation rules — which disadvantages opportunities to add value to domestic wood products.
There are also concerns that methyl bromide gas used to fumigate logs for export to China and India is toxic to humans, damages the ozone layer, and international agreement requires it to be phased out — something that New Zealand has struggled to do for more than ten years.
A 2016 technical report showed that from New Zealand’s 10.38 million cubic metres of log exports to China — 2.48m m3 was processed into solid lumber and 2.36m m3 into plywood, both of which were used for temporary purposes as form-work for concrete construction. Because of these factors the timber exports were estimated to have an average half-life of only 6.6 years.
The report also found some of the resulting waste wood was repurposed into lower grade board products but mostly it was burnt — thus quickly releasing the stored CO2 into the atmosphere.
New Zealand produces tens of millions of cubic metres of wood each year, much of which is exported. As a percentage of world production this is quite small. Although it is a higher proportion of sustainable timber production. How high is a difficult figure to find.
New Zealand should aim for its pipeline of timber exports to go into long life-cycle products that sequesters carbon for decades — centuries even — not years.
Global shortage of wood products
In theory, New Zealand should not be dependent on one market for its wood exports as there is a global shortage of wood products.
Currently, some of the shortage is related to temporary Covid factors while a good part is structural change related to increased global demand for long lasting wood products, especially engineered wood products.
The increase in demand for sustainable structural building products can be seen in media material such as this:
- The hottest new thing in sustainable building is, uh, wood — The many, many benefits of using wood in place of concrete and steel
- Wooden skyscrapers: Sustainable homes of the future?.
PF Olsens June 2021 update in its regular Wood Matters reports discusses the shortage:
You do not have to look too closely to notice the extent of the word-wide shortage of wood products. Just a few of the recent headlines are noted below.
— More than 90% of US homebuilders report a shortage of timber.
— Turkey has started to limit export of some timber products.
— Production of about half of Germany’s furniture manufacturers is restricted due to material shortages. There is a particularly tense supply situation for chipboard, MDF and HDF boards.
— Prices for wood products in France are up 50% since the start of the year as the industry is struggling with a new law that requires half of the materials used to construct public buildings to be wood or other natural substances. The law is part of the country’s drive to become carbon neutral by 2050.
— Sawn timber prices have doubled in the Netherlands in recent months.
— Lumber futures in Japan topped US$1,700 for the first time in history and lumber prices are about three time higher than what they were a year ago.
Log prices are also escalating because Russia intends to ban the export of softwood logs from 2022. It was Putin who announced this policy which almost certainly means it will be implemented, especially as it is supported by the Russian sawmill industry. The consequence of the log ban being China will have to source 4–5 million cubic metres of logs from somewhere else, which in the short term will be good for New Zealand’s log exporters and bad for the country’s sawmills.
What technologies can help cities go on a plant-based diet?
Accoya — British company Accsys Technology manufactures Accoya using an ‘acetylation’ process that turns fast-growing, sustainably-managed softwoods like Pinus radiata into wood that has the durability and dimensional stability properties of slow-growing, tropical hardwoods without the accompanying deforestation and habitat loss.
The proprietary acetylation process essentially pickles the wood in vinegar (acetic anhydride). Water-loving hydroxyl compounds are sucked out and replaced with naturally occurring acetyl groups. This means Accoya has barely any swelling, warping or cracking and a very slow decay rate. Accoya offers an unrivalled 50-year warranty for wood durability and a 25-year warranty in ground or freshwater. Accoya is non-toxic and 100% biodegradable unlike the chromated copper arsenate (CCA) treatment process that is the mainstay of New Zealand’s wood industry (Note CCA is banned for residential use in the US, EU and Australia).
Accoya is being used to make windows and doors in the UK. A joinery manufacturer explains in this video why Accoya is such a good option for his industry (the field experiment is very revealing).
Cladding in Finland.
A motorway bridge and canal walls in the Netherlands.
Decking in Australia.
The acetylation process was partly developed by Scion New Zealand — who sold this IP to British firm Accsys in 2006. Which helped Accsys to commercialise Accoya. This involved an evolving experimental Netherland production plant and long term brand investment. Accoya is now well recognised for its sustainable environmental qualities — meeting numerous European standards and has a good reputation for its technical characteristics.
Pinus radiata is recognised as the wood most suited to the Accoya process. In New Zealand pruned logs are processed into dried clear boards that are then exported to the Netherland factory for the acetylation treatment and some Accoya is re-imported back into New Zealand. The value-added process according to a Farmers Weekly video interview is as follows. The pruned log is sold by the forest owner for about $180 m3, the clear board processing in New Zealand raises its value to about $1000 m3, and the Accoya that is re-imported back to New Zealand sells for about $3500 to $4000 m3.
There is a tendency to bemoan lost IP opportunities in New Zealand — but it is unlikely that a government funded research institute could have advanced the acetylation process much further than they did in 2006. New Zealand probably needed a well financed European located partner with a long term focus to progress commercialisation as quickly as has been achieved.
Going forward, both Accsys and the New Zealand wood industry want to expand and diversify its markets — Accsys believes it is currently only catering for 2% of its potential market. In my opinion NZ Inc — including government — should be engaging constructively with Accsys in this pipeline of work.
Optimised Engineered Lumber (OEL) is a commercial product developed in New Zealand. It is structural lumber beams constructed from the stronger and weaker parts of a tree trunk in a way that optimises the amount of wood recovered from each log and the strength of the resulting wood products.
OEL is made from thin strips of wood that are finger-jointed and laminated together. By laminating wood the stiffness and strength is improved. The OEL process means the whole log can be used to make high quality structural products, whereas previously much of the log could only be used for low value uses.
The first OEL plant was opened in Gisborne by Wood Engineering Technologies (WET) in June. When fully completed it will have six production lines producing up to 140,000 cubic metres of OEL — enough for more than 11,000 houses — and employing more than 130 people.
Wet chairman Angus Fletcher said:
“Our disruptive technology turns unprocessed logs that would have otherwise been sent overseas into an innovative, high-value product. And it does it in a fully automated, artificially intelligent, robotic factory in less than 12 hours while creating skilled, higher-paid jobs in our regions — New Zealand innovation at its best.”
Cross laminated timber — Red Stag Timber, an independent and privately owned timber company based in Rotorua, will shortly open a new $50 million wood processing plant. The Red Stag facility will have the capability to produce CLT panels that exceed 16 metres by 4 metres in size. This will allow for fewer connectors and an overall faster construction process.
The plant will add 5% to the capacity of the New Zealand wood processing sector. That equates to around two thousand dwelling units, or most of the estimated shortfall in current timber supply.
Red Stag group CEO, Marty Verry, said
“CLT has a value sweet spot in large-format structures, buildings of three stories or more, and for mid-floors in terraced housing built to the NZS 3604 standard. Apartment buildings and fast-to-install CLT mid-floors will be our residential focus areas.”
Substituting for wood in the built environment has already begun to change New Zealand cities. There is plenty of potential for more change. The better New Zealand becomes at constructing its own built environment in engineered wood, the better it will be at exporting these high value wood products overseas for the planets benefit.
Decision makers — like landowners and developers — need to gain more confidence in building with engineered wood.
In the rebuild of Christchurch following its devastating earthquakes of 2010/11 — of the over 1600 large building rebuilds — less than 100 used engineered timber. Professor Buchanan discusses this in a talk about timber building and carbon forestry.
Further reading on engineered wood
Engineered-wood can be used in the construction of bridges.
There are many technical papers describing the timber construction opportunity.
Financial investors have identified modified Pinus radiata as an investment opportunity.
Engineered timber is cost competitive with steel and concrete.
A farm forester describes the Accoya industry opportunity for New Zealand.
What if wood could be welded like steel?
What if carbon fibre reinforced wood could replace steel reinforce concrete?
