The New Zealand real estate problem, with reference to Palmerston North

From my email, from Ryan Reynolds:

I’ve worked in Palmerston North, as well as Tauranga and Auckland (all briefly). I’m Australian too, so my perspective may be shaded vs what a Kiwi or someone from further afield might say.

The major issue is just supply of new dwellings and the permitting and development process. All the rest of the factors noted point to increases in demand (immigration, natural population growth, easy credit, real income growth, tax structures, chinese buyers) – but without a limit on supply you would have expected those factors to result in a building boom not a rapid price appreciation. That’s obviously not the way reality has played out.

From a permitting side, the Resource Management Act heavily constrains lots of building decisions and imposes a lot of bureaucracy (and time delays and uncertainty). Less specifically, Kiwi’s appear to have strong preferences for careful building and urban sprawl in lots of dimensions. That includes specific issues like building heights, overshadowing, retaining views of specific hills or valleys (including Maori heritage sites) and retaining its environmental and cultural heritage (however brief it may seem to outsiders). These preferences are captured in major urban plans which set out acceptable terms for developments, but often even urban plans won’t contain enough zoned land to meet demand (see the bun fight over the Auckland Unitary Plan from 2016), and even then those plans took years to put together. This plays out in a strong community undercurrent and politicians of both stripes use scare campaigns about the horrors of inappropriate development. Anything two stories or over can count as ‘inappropriate’.

From a policy perspective there seems to be no understanding of the practical trade off between housing demand and conservation, except from economists outside the planning departments (see NZ Initative or Michael Reddell, ex RBNZ) or from the central government threatening to unwind urban plans.

The second issue is that NZ also has a lot of partly and wholly government owned and operated utilities (water supply, networks and wastewater; electricity and gas networks; electricity generation) and services provided under government monopolies required for new developments (roads, education, healthcare, and other social services). In many cases the entities charged with providing these services are capital and/or budget constrained and they don’t have the funds to provide major new capex works in the short to medium term. Furthermore, the revenues earned from providing these services are often inadequate to cover economic costs. For instance, water supply and wastewater is provided at below cost price in many cases in NZ, and in large parts of the country water supply is un-metered. And there is serious community opposition to either privatization or changes in tariffs. As a consequence though, capex projects in the water sector are effectively large donations of capital for no return for the water corporation. As is the case for virtually all roads, schools, or hospital projects, any of which could prevent or stall major new urban developments. So even if new land was zoned as ‘fit for development’ (which it won’t be), the entities required to facilitate that development don’t have the funds to do so and nobody else is allowed to fill that gap.

And yes, Palmerston North is still dull. But then people say that Switzerland is dull too. I’ve seen much worse.

Comments

Or it's a conscious choice to reduce the inflow of low-income outsiders.

Relatively high levels of immigration is one factor driving demand. There are many others including the increasing concentration of economic activity in the Auckland area. There has been a complete failure on the part of government to respond to these challenges and the current administrations “initiative” of banning overseas buyers from the residential market is cheap politics at best. A tiny percentage of New Zealand’s land mass is developed either for residential, industrial or infrastructure purposes. There is no shortage of land for development and it is nothing short of a disgrace that various NZ governments have done so little to relax pressure on the supply side whilst weakly meddling on the demand side. “Kiwi-build” is the latest, most absurd and wasteful response to this crisis.

Certainly cheap politics, but perhaps effective politics. The median resident of many places does not like low-income outsiders. Problem: the median consumer does like low-wage service staff.

Why?

To drive up the prices of goods and services and thus drive up living costs?

Or to limit growth in business revenue by capping the number of consumers?

Or is the policy to have the rich immigrate and takeover and make existing residents servants?

Economies are long term zero sum, but conservatives have convinced most people to eliminate time in any economic equation so free lunches are created by either changing just one side of a transaction for an instant in time and denying the existance of a future when the zero sum takes over.

Japan has cut the costs of both having children and of immigration, seeking to lock in Japan's global power in 1995. Zero sum is forced on Japan in an aging and dying population and declining population of workers. China is not far behind, but with higher costs coming due from their policy which led to costly female production being reduced. Both will see both production and consumption fall without changes in economic thinking by almost everyone.

Since Reagan, political economy has taught that people are too costly and to have a high growth economy, people need to be eliminated except for low cost workers, and high spending consumers. Eliminate children, too costly. Eliminate mothers, too costly. Eliminate 80% of the old as too costly. Stop immigration as it only adds costs. Don't build roads, too costly. Don't build schools, too costly. Don't build water and sewer, too costly. Don't build Levittowns, too costly.

And what could be lower income than a newborn baby. Stop babies being born.

The caricature you are describing here doesn't describe the American "since Reagan" I see in the real world.

"Stop immigration"? Want to check the actual numbers on that?

"Don't build schools/water/sewer/roads"? I see all of these things being built all of the time.

"Don't build Levittowns". I seem to remember empty developments as far as the eye can see waiting for buyers in 2009, and I still see them being built today.

It's mulp. He's delusional.

Completely agree. But it is cheap, effective politics.

As has been continually pointed out to you in the past, and which you're unable to respond to coherently, economics aren't zero sum.

For example, the vast majority of people are tremendously better off than they were just 20 or 30 years ago, without requiring others to be worse off. The per capita wealth of the world continues to grow.

1) "Resource Management Act"..."retaining its environmental and cultural heritage."

2) "The second issue is that NZ also has a lot of partly and wholly government owned and operated utilities and services provided under government monopolies."

3) "For instance, water supply and wastewater is provided at below cost price in many cases in NZ, and in large parts of the country water supply is un-metered."

Preserve the environment while limiting competition and providing low cost or free services while striving for perfect development and at the same time not scaring me with new proposals or things that might reduce my property values but that also don't include protectionist economic policies all the while acknowledging the 'need to do something...just not that'.

Tales as old as time, song as old as rhyme.

The writer mentions the increase in demand and specifically from Chinese buyers. Not mentioned is the limitation on foreign ownership of real estate in New Zealand. I recall that when Peter Thiel bought property in New Zealand, it took special dispensation from the government. All of the other factors mentioned by the writer suggest the rapid increase in price stems from government. Sure, that may be a contributing factor, but the very limited supply available to foreign buyers seems the greater problem. I understand that New Zealand is a beautiful place. I also understand it will be the last refuge in the event of Armageddon. That seems to have been one of Mr. Thiel's motivations. It seems that lots of folks are preparing for the end time and it's causing a spike in real estate prices in NZ.

I think a much more likely explanation, versus Armageddon, for rising real estate prices in NZ:

Constrained supply

External demand due to need to dispose of cash in stable assets

Public choice economics !! Which doesn’t get anywhere near enough press from Tyler, although he clearly bases many of his opinions on this discipline. Can’t blame him, his opinions already inspired an entire book about how he’s evil for teaching Buchanan.

Only certain purchases, such as large blocks of land in scenic areas that are affected by national park zones, right of access and conservation encumbrances require a government sign off. If Thiel just wanted to buy an existing house somewhere he would not have needed permission.

The current administration has banned overseas buyers of residential property as a populist response to the NZ housing problems.

The NZ governments figures were 3% of all real estate purchases were made by non residents.

I agree with the comment below about this being a way to restrict low income buyers to move in. Funny how the left found roundabout ways to accomplish this in a more "politically correct" way and no one really calls them out on it because, well, everyone pretty much agrees with the intent.

Business and young entrepreneurs will just eventually go somewhere else.

They tend to move to West Island (or even London).

I was recently in New Zealand for three weeks--mostly on the South Island, but briefly on the North Island. Driving into Auckland from the east following a visit to a rural garden I was struck by housing development in the rather distant suburbs--a large number fairly small two story single family houses being built on lots that seemed to have only about five feet of outside space on all four sides. Seemingly not even enough room to have a barbeque in the "back yard". There were hundreds either newly built or being built. (Some duplexes too, but single family seemed to dominate).

It's amazing how badly the developed world is screwing this up across a broad spectrum of polities. Don't think that the non-English speaking world has this figured out either. The real question to me is how things are different from 50 years ago. Population growth is slower as a percentage, isn't it? Is the rural-urban shift running any faster? One of the few places where development is meeting demand and urban/suburban planning progressing to support it is Texas. It seems like an easy way to address some of these problems is to let developers pay a negotiated fee for development to cover infrastructure capital costs. Has this been introduced somewhere and I just don't know about it?

These "negotiated fees for development" are frequently used in California on new housing projects (called "impact fees").

Unfortunately, impact fees have become a way to raise taxes on newcomers while leaving incumbents unaffected. Without any electoral constraint on raising them, the fees have become so high (over $100k/unit in some places) to prohibit development in even high cost markets.
https://ternercenter.berkeley.edu/blog/it-all-adds-up-the-cost-of-housing-development-fees-in-seven-california-cit

Raising property taxes to allow for public works capital costs would align incentives of new entrants (pay their share) and incumbent landowners (spread capital costs by allowing building).

In most countries, politicians withdrew a range of pre-2010s fiscal supports for homebuyers to pay for other political priorities, most recently of course in the USA. Young homebuyers just aren't a big constituency any more. It is the middle-aged versus the retired.

Dumping money into the hands of new home buyers merely drives up the price of real estate. It is a supply problem in New Zealand. They simply won't build enough new housing to satiate demand. https://croakingcassandra.com/2016/08/29/21959/

Point is that there was never enough private-sector money to call forth lots of housing supply. It always relied on government money, which has dried up in favour of, broad brush-strokes, healthcare.

"Negotiated fees for development" are common in economically regulated utilities in Australia and the UK such as electricity, water and gas (they're called connection charges). The marginal cost of network expansion per user is passed on as an up front charge. They're not used for other 'free' services though which can still hold up a development, like roads, schools or hospitals.

They're often also politically sensitive because they can become very high (I wouldn't be surprised with $100k). In several cases in Australia connection charges have been legislated to zero, which resolves the political pain, but means that you're rationing supply by some other measure.

And the argument above, that they're inequitable because they fall fully on a new resident, gets a lot of traction too. Nobody talks about recovering the costs of historical network expansions from prior generations who receive that free of charge.

Of course you might not mind so much about a high connection fee if you didn't also have to pay a scarcity induced premium on the land itself. But paying both is a pretty raw deal.

I always feel that we're mis-accounting for existing capital assets v's new capital assets (things like roads and network connections).

The existing home owners haven't somehow magically paid the capital costs of their connections. They should be effectively providing a return on capital for those connections. As should those newly connected. Logically there should be no difference in property taxes associated with the two situations - in NZ most of these assets are funded through property taxes (called rates). If we could fix this mis-pricing, we could allow as much development as we wanted, because new connections would cost no more than old ones. This might also have the side effect of creating some funds for upgrades of existing assets (given that we'd be giving a return on capital for some assets that were actually fully depreciated, and potentially due for replacement, upgrading or maintenance).

Lots of issues there though. Firstly, those rates that you mention, they're implicitly set by negotiations between councils and residents via elections, not by the costs or market value of the assets held. And the threat of repricing rates in future will act as a brake on investing in new assets if 'prices' are set via elections. Those rates are also collected and distributed by councils and then spent on a range of other services in negotiations with other internal and external stakeholders: it's not a hypothecated revenue stream. So even if the council gathered revenues from an old network, it might be radically under pricing its current return (because rates are unpopular), and spending the returns on something totally unrelated, and the council/network still doesn't have a clear marginal incentive to invest in a network augmentation either.

Secondly, the return on assets used for existing assets is typically based on written down historical cost (sometimes inflation adjusted), but that's generally nowhere near depreciated replacement cost. You could pay the utility on the basis of depreciated replacement cost, but then everyone's bills would be much much higher (think multiples higher) and almost certainly politically unpalatable. The underlying logic of written down historical cost is that regulators consider that a utility shouldn't earn more over time because its network location has become more desirable - it should earn the risk adjusted return on its original investment. (Ie: a utility shouldn't make more money because its network happens to be in downtown San Francisco and not Detroit.)

The attraction of a connection charge is that it provides a clear incentive for the utility to invest in expanding the network. Those costs could still be averaged across all users while still maintaining the marginal incentive (ie: everyone's bill goes up by 5% next year because the network connected 1000 new customers, instead of an up front $20k charge to new connections and no change to everyone else). That would be the easier way to achieve your intended outcome.

As a conservative, you advocate hiking taxes to build roads, warer, sewer, schools, so buildings can build like Levittowns, cheap single family housing which then placed a burden on taxpayers, either in congested roads and overcrowded schools, or in tax hikes to fund building infrastructure, schools, etc?

I live in NH where the dominant policy is no tax hikes, and only government spending for a limited few, with restrictions on immigration designed to keep out costly mothers and children with working class fathers by requiring two and four acre housing lots. Refugees have been welcomed because the government decides where they live, so they become low cost hard workers with costs paid for by Federal taxes and services delivered by NGOs focused on employer needs.

Now do California. That's probably the most hilariously under-developed real estate on the planet.

And indeed as a coastal Californian, it is remarkable, and at once consoling and depressing, how similar the two situations are. Perhaps affluent, liberal-minded people living in spectacularly beautiful places tend to converge on a similar set of institutional failure modes.

Yet California is highly desirable and culturally envied around the world, while Texas is not. Just like London - Generating cultural externality, prestige and power is hard work, and the places best at that will not be best at providing a basic, handy life. You need both.

Desirability and cultural envy are highly lagging indicators, I think.

Clearly, but so's a housing stock. What're you getting at here?

I see. Being affluent is a failure. But is it?!

London and California were better at that (being "culurally envied") when they were also better at providing a "basic, handy life" of course. The Zurichisation of London has not been to its benefit as a centre of culture or an icon of lifestyle.

Not really. London in the 80s versus today is like thinking back on a bombsite, sometimes literally, thanks to the IRA. It was certainly not a place that generated well-being for as many people as it does now, nor do I think it was particularly looked up to in the UK as much as in the 21st century (the cool factor was with Northern cities in the late 20th).

I think the people who have really been following this, with an open mind, have come to a rather surprising conclusion.

The problem with coastal California is that it is largely built, and largely occupied with exactly what people want, single-family housing.

People from outside the state imagine that San Francisco or Los Angeles should develop, but the thing they may not recognize as external libertarians is it there implicitly requesting redevelopment, and confiscation of single-family housing by eminent domain.

Who would have thunk huh?

(There is a lot of redevelopment going on that is increasing density, but it is generally converting low-rise commercial to high-rise residential.)

The State has beautiful climate, dramatic geography, and lush flora, and is scrupulously maintained as a low-development playground for affluent Boomers.

Big Sur, Marin County have tons of room. So does Malibu. Revealed preferences.

I notice you didn't name flatland close to jobs.

Take Lakewood for example. It was largely built out at the density it's at in the 1950s, with $5,000 starter homes, they go for $600,000 today.

Greedy boomers didn't lay out those streets, their postwar parents did.

http://calihist.weebly.com/postwar-era-suburbanization.html

Like I said ...

You said what?

This is kind of serious. If density decisions were made 1-2 generations ago that makes it more established path dependency than recent choice

Whatever lets you sleep at night.

That would be the deep silence of low-density housing, to be honest.

Again, revealed preferences.

How is upzoning "confiscation . . . by eminent domain"?

Upzoning is fine, but it is TBD how easily builders can accumulate enough single family lots to make a higher density development.

If only we had a medium of exchange to trade the owners of said houses.

Go ahead. Make conditional bids on a six house block.

He can't. Zoning restrictions. If what you say is true, there should be no issue with relaxing those because density would not increase anyway. Everyone knows that's not true. The idea of eminent domain is laughable and makes you sound like a clown.

You aren't a great one for following threads. Here we are discussing whether open zoning by itself would be able to drive conversion of single family homes.

I would like to think this is not the choice I would make if I were a voter in New Zealand, but I think that libertarians should really stop looking for the worst cases, and flip the equation.

Surely there are good open freedom-loving places you want people to move to?

Kansas?

Flat, hot, and landlocked.

If a bunch of people made a private city (a huge ranch with enough water, and multiple housing units), and only invited members that would not be a burden on the society, how long before their right of association would be infringed upon?

You did indeed loose the "freedom-loving" part.

The most basic freedom being the ability to come and go.

Sorry, so people are free to come and go from your house? Where do you live? I will be sure to exercise my freedom to walk out the door with your valuables.

You aren't a great one for following threads. I asked about cities, or towns. Viking for some reason introduced that they should be closed, invitation only. I said that was not my idea of freedom.

Flip the script!

NZ is mostly freedom loving, look at our ratings on international surveys, and inward migration of libertarian types such as Peter Thiel. Our planning processes, however, are largely controlled by local councils, and they are politically the domain of the left, and employee-wise staffed by those who grew up playing SimCity and believe that top down planning is the only way to make a liveable city.

To be fair, I spent some time in Brisbane recently, and they were doing many of the things I would normally say local govt should stay out of. Actively encouraging festivals and cafes along the waterfront, building parks and spaces people can be in. It was lovely, and much better than the sterile city that Brisbane used to be. There's a place for central planning, I'm just not sure it's place is to have it's fingers in everything.

Flat, hot, cold, and landlocked.

FTFY

I would like to read something about why NIMBYism is so particularly acute in the english-speaking countries. It always seems to involve the same feelings. Sometimes it is explained by self-interest, but the actual rhetoric presents a fairly complete philosophy. To name a few elements of this philosophy:

+Neighborhood character is defined, tautologically, to be the exact present state of the neighborhood.
+The entire neighborhood counts as the "backyard" of every homeowner or long-term tenant. Even the phrase NIMBY concedes that my land is your backyard.
+ One's moral claim to the backyard grows the longer one lives there, or if one's ancestors lived there, or if one is working class. Thus, people at meetings will say "3rd generation San Franciscan here!"
+Quaintness is moral. Thus, if you build an apartment in your backyard, you'd do well to call it a "mother-in-law" unit or a "backyard cottage" to conjure up the type of cheesy painting you'd see in a calendar.
+Making profits by building new units is immoral (because it involves conniving and greed) but making money by selling a unit whose value has appreciated is fine (because it just fell in your lap and you didn't ask for it). I saw this in the Kavanaugh affair when Ford felt compelled to say she added an apartment unit to her house because Stanford students needed a place to stay: she couldn't just say "I wanted to make some money."
+Affordability is a semi-physical essence that exists within structures and has nothing to do with supply. So if new condos are expensive, it is because the greedy developers built them with the "luxury" essence, even if they are significantly smaller and cheaper than the homes nearby them. Sometimes new micro-units are both "luxury" and "unfit to live in."
+The only environmental impacts are local (i.e., out of sight out of mind). Making a neighborhood dense and walkable is bad for the environment because trucks that bring materials emit fumes, or because four trees (even invasive species like eucalyptus) have to be cut down.
+"Process" means "giving more people vetoes" and "soliciting more people's opinions," even though doing so easily makes it so there is no process at all. Thusly defined, process is a good unto itself, and thus it is always better to have more.

Acute compared to France? No, but the knee-jerk YIMBY, sneering at the unenlightened on principle, like a cultist of a subversive religion, may indeed be unique to the Anglophone countries. Clearly residential externalities are a thing people think about in their lives from day to day, and furthermore much infrastructure is now rivalrous in a way that wasn't true when mass ownership of the automobile was merely incipient, and unskilled labour was cheap.

okay thanks for your input. all good points. let me add a couple other principles:

+ Only the welfare of current residents should has moral standing. If it inconveniences current residents---for example by crowding the free street parking---new buildings should be banned, even if they yield benefits to non-residents and profits to developers/workers. The municipality is akin to a small nation-state and should abrogate property and migration rights as much as needed to help current residents. Whether locals should also have their own border patrols remains an open question.
+ Infrastructure costs as a force of nature independent of policy---i.e., thinking that infrastructure cost increases are due to the rising price of "unskilled labor."
+ People who want to permit apartment buildings amid single-family homes are sneering, knee-jerk, cultists of a subversive religion. (added speculatively, as this seems new, but it could easily catch on)
+ Reciting terms like "rivalrous" and "externalities" as sort of spells, while ignoring the consensus of actual urban economists that overregulation of land use is on net harmful.

Res ipsa loquitur. There is no sincere engagement with externalities or revealed preference as to why people want to live in a certain place, just a belief that tiny flats for the proles are meritorious in and of themselves, even if no actually existing human started out wanting to live there.

This comment is about NZ specifically. I'm surprised that so many people want single family homes and all the costs and headaches that come with them. The long commutes. The need for two cars. The yard work and general maintenance on weekends. The clutter that collects in the extra rooms and spaces of the house, and that eventually has to be sorted and discarded. And so on. it's interesting that people generally don't seek out cheaper, easier alternatives.

Oops. Meant to write that this comment ISN'T about NZ specifically.

People want the well-being of their children not to be contingent on the goodwill of come-and-go tenants next door. Broadly, people want to buy good neighbours and the option to retreat. Priorities for adults: raising your children >>>>> reducing clutter.

That excerpt could also describe the greater San Franscisco Bay area issues with housing supply.

I love it that Tyler wants us to think he gets email from celebrities (Deadpool, no less!), but Ryan Reynolds is from Canada.

Many levels of nuance here, and not many of them positive for getting lower house prices...

In terms of infrastructure, at least in Auckland there is a $12,000 connection charge for Watercare (the water utility) and a general development levy of c$25,000 per dwelling... so for an apartment building with 50 dwelling that $37,000 x 50... we have a regulated lines company structure for power, so depending on the available load in an area a developer may be charged for the power connection (mainly for the upgrade of the trunk service) and there may be a fibre connection charge of around $1,500 per dwelling also... Central Govt has announced funding to help build core infrastructure in Auckland and the Council is also looking at targeted rates to help offset some of the cost (rates = property taxes).

Issues:

1 - Councils hate innovation. Any attempts to lower costs by innovating with building products or processes is effectively blocked by local councils interpretation of the rules. They are VERY risk averse and do not want change... without Council sign off of materials and building process there is no insurance and not right to occupy... so building methods common overseas are just not available in NZ, and particularly in Auckland.

2 - Auckland Council is capricious. Developers have to pay for multiple inspections through the building process, sometimes several each week... And what Inspector A agrees to may be objected to or changed by Inspector B... so what one builds is very much open to individual interpretation by the inspectorate... This adds cost and in particular time. Other Councils are less awful than Auckland Council, but that is where the demand for new housing is greatest.

3 - Borrowing money is hard. The local banks (mostly Aust owned) are and have tightened up lending to developers, particularly residential developers. I am aware of a developer who has pre-sold an entire development to the Govt's KiwiBuild operation (34 dwellings, and lets not get started on the clusterf**k that is KiwiBuild) where the funding is coming from a US hedge fund... the local banks do not want to know about it... the US hedge fund can't believe their luck..

4 - There is a labour and skills shortage. There aren't enough builders/hammer hands etc etc to do the work... construction prices are rising c5% per annum against c1% for general inflation.

5 - The construction industry is dominated by mom & pop operators. There is one listed land developer and one listed building company in NZ. The country is dominated by small players and low capital and limited ability to expand. There is no institutional large scale pool of developers and builders. A number of building companies (mostly mid sized) have gone bust over the past 12 months and the largest company, Fletcher Building has lost close to $1 billion on construction projects (large scale commercial developments) in NZ...

There is no quick or simple fix to any of this... but Councils being less capricious might be a start...

To add to over-regulation, NZ government insists on reinforcing steel standard that can not be produced by anyone... Any government isnpection results in huge fines to all processors....

https://www.stuff.co.nz/business/108077668/steel--tubes-record-19m-fine-for-misleading-over-steel-mesh, https://www.stuff.co.nz/business/industries/106359694/biggest-fine-yet-in-steel-mesh-investigation

As a result - prices for reinforcing are astronomical because all parties know, that they have to cover possible future fines...

echoes of leaking building. .. I would not want to be a developer in NZ.

Everybody here seems to be missing the elephant, no? Anyway if I were an incumbent homeowner there, I'd stall too, to fund that cruise ship retirement for when I'm ready to sell...

Yo has a very good point.

Non residents (ie often Chinese blamed) were blamed for buying homes and driving up prices.

But the vast majority of homes purchased for the purpose of investment, not residence - were by Kiwi's themselves.

The government figures even noted 3% of home purchases were by non residents (like me).

The fact that there is no capital gains tax on real estate profits is a big incentive for Kiwi's to buy and rent out multiple homes as a retirement investment strategy ..... and want to restrict supply.

Interesting point. This should also have the complementary effect of driving down the cost of renting, shouldn't it?

In Palmerston North (I don't own rentals anywhere else) vacancy rates are fairly tight. However, I haven't raised rents for several years either, as my costs (ie mortgage, rates, repairs etc) haven't gone up and my current crop of tenants are good, and I'd like to keep them.

The last property I purchased in May (before the ban) - rented within a week of ownership.

This is just anecdotal evidence of course ... doesn't count for much. But FYI.

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