Land prices seen as key to limits on housing

A key finding of a new housing study stresses the impact that land prices have on new house supply noting that factors that push up land prices stifle new house-building activity. The study investigates changes in regional housing markets in New Zealand between 1981 and 2004 and was carried out by Arthur Grimes and Andrew Aitken, Motu. The project was jointly funded by CHRANZ, the Departm

Thursday, March 2nd 2006, 12:00AM

by The Landlord

ent of Building and Housing (DBH), and Housing New Zealand Corporation (HNZC).

The study says that limiting factors to new housing supply may include geographical or regulatory constraints on developing land for new residential development, or restrictions on subdivision for in-fill purposes. High construction costs (e.g. stricter building regulations) can potentially have a similar effect.

Real construction costs have stayed broadly stable since 1991. However land prices, the study says, have increased dramatically. Between 1981 and 2004, the real (CPI-adjusted) price of vacant residential sections rose by 286% on average across New Zealand. The increase in Auckland City was almost 700%; in Manukau, North Shore and Rodney increases were around 460%. Increases in tourist locations were also substantial – more than 400% in Queenstown-Lakes and Thames-Coromandel.

These increases compare with real house price increases of 105% across New Zealand as a whole over the same period. In Queenstown-Lakes real house prices rose by 244%, while those of Auckland City, Rodney and Thames-Coromandel rose by around 200%.

Not all regions shared high land and house price increases. Ten territorial local authorities (TLAs) experienced real house price falls between 1981 and 2004; four experienced real land price falls. Areas with negative or low real price rises were predominantly rural North Island or southern South Island regions.

Local authorities differ substantially from one another in the responsiveness of new housing supply to population pressures. In the Auckland region, between 1991/92 and 2004, Manukau had a low ratio of building consents relative to population change (0.29; approximately 3.5 people per consented dwelling). This compares with Auckland City and Waitakere (0.37), Rodney (0.41), Franklin (0.46) and Papakura (0.56; fewer than 2 people per consented dwelling). Of these TLAs, Papakura had the lowest real house price growth over the period (48%) compared with 79% for Franklin and 92%-129% for the other five. The high supply responsiveness in Papakura (especially relative to neighbouring Manukau) may in part be responsible for its lower house price pressures.

Another key factor affecting house and land prices is the rise of the holiday home. Areas that have become tourist (holiday home) destinations (e.g. Queenstown-Lakes and Thames-Coromandel) have had both high rates of house building relative to population growth and high house price rises. They also have high unoccupied dwelling rates and low occupancy rates. In these areas, the need for new house supply to respond to demand pressures is particularly important. If supply is not extremely responsive in these regions, the effect on local prices, and hence on housing affordability for local residents, is severe.

The price of a house ultimately reflects the price of the factors that comprise that house: the cost of the structure and the price of the land. If high house prices are a concern, a key policy focus has to be ensuring that construction costs and land prices are kept to a minimum consistent with other objectives, the study says.

In turn, this requires planning and regulatory processes that are conducive to the development of residential land (or of in-fill sub-division of existing land) and to the construction of new dwellings (whether single or multi-unit).

The appropriate form of regulatory and planning processes that result in these outcomes needs to be a subject of close scrutiny in New Zealand, as it is currently in a number of countries experiencing housing market pressures.

The website can be accessed on www.chranz.co.nz

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