Change councils' incentives too

Dr Eric Crampton
21 August, 2018

Housing Minister Phil Twyford’s address to Infrastructure New Zealand’s Building Nations Symposium last week made it very clear that the current governing coalition is very serious about fixing Auckland’s housing affordability crisis.

But the conference also made a few other things clear. Solving the current mess will not be speedy. And maintaining housing affordability over the longer term requires changes to local governments’ incentives around facilitating growth.

Twyford opened the conference with a strong moral case for restoring housing affordability. Where New Zealand has spent years in arguments between pro-density urbanists wanting to ban urban expansion and urban NIMBYs wanting to force development to the suburbs, Twyford confirmed that New Zealand’s cities need to be able to grow up and out. The costs of trying to be Copenhagen are simply too high – a message he had previously delivered to a less-friendly crowd at the Environmental Defence Society’s conference earlier this month.

Legislation likely in 2019
But substantial numbers of new homes are still a long way away.

Twyford talked about legislation enabling better infrastructure financing solutions, but it would be surprising to see draft legislation much earlier than the end of the year.

He talked about the proposed Urban Development Authority that can override overly restrictive Council plans, but it is still only on the drawing board – and still has its own problems around worrying powers of compulsory acquisition.

He said Government needs to re-examine legislation around land use, but nobody would bet that RMA reform will happen anytime soon.

While Twyford pointed to the need for proper road pricing to facilitate urban expansion, that can was kicked ten years down the road with the Auckland regional fuel tax. A presentation by Karen Lyons from The Ministry of Transport suggested the ministry is in absolutely no hurry to progress road pricing. Her emphasis on equity issues around congestion charging where the ministry ignored more substantial equity issues in the Auckland Regional Fuel Tax suggests the ministry is using equity as a stalling tactic.

Infrastructure and Associate Transport Minister Shane Jones later announced a new independent infrastructure agency to develop and coordinate 30-year infrastructure plans, providing greater certainty to infrastructure providers about the path of future projects – but those plans also remain a long way off.

Even were the legislative and Crown agency ducks in their appropriate rows, capacity constraints in the construction sector make fast fixes implausible. The Prime Minister’s address to the conference pointed to capability-building initiatives like Mana in Mahi , but training up apprentices will take years.

'Change expectations'
Fixing the housing shortage simply won’t happen anytime soon. But fixing housing affordability could come sooner. Prices of any asset depend on everyone’s future expectations of what prices will look like. If Government can credibly demonstrate that, at least in the longer term, land and housing supply will be able to adjust to meet demand, expectations around future house prices will come down – and current land prices with them.

The Government’s response to the current crisis is understandable. The Urban Development Authority approach is something of a sledgehammer; the current problem is substantial enough to need a sledgehammer. But we need to change things so housing can remain affordable after the current crisis is solved.

Fundamentally, the housing affordability crisis resulted from a lack of council willingness and ability to respond to rising demand for housing. Local councils bear the costs of enabling growth but see little of the upside benefit. And one of the themes running through the two days of the Infrastructure New Zealand conference was whether it is possible to get sustainable housing affordability without reforming local government.

Auckland Deputy Mayor Bill Cashmore’s presentation, which focused on the constraints of Auckland’s debt limits and the need for greater density as a solution to Auckland’s affordability problems, suggested that the Council’s incentives are neither in line with the Government’s priorities nor conducive to growth. Auckland needs to be able to grow in all directions; upzoning to increase allowed density is necessary, but on its own will never be enough.

New York University’s Solly Angel explained to the conference attendees that, out of a set of 200 cities he examined, Auckland had had the third smallest expansion in urban area from 1990 through 2015 despite high population growth. Satellite imagery showed that 62 percent of cities had at least doubled in area, and just over a quarter had at least quadrupled in size. Over the same period, Auckland’s urban area only expanded by 18 percent. Auckland’s constraints against urban expansion have increased Auckland’s density, but have killed housing affordability. Competitive land markets on the city’s fringes are necessary.

Change councils' incentives
Getting cities to enable growth requires changing the incentives councils face; local government reform should be part of the Government’s Urban Growth Agenda. BECA’s poll of symposium attendees showed that two-thirds agreed that we cannot reform planning and local government funding without reforming local government itself.

When councils see growth as a cost rather than a benefit, simply changing the RMA invites pouring the old planning wine into new legislative bottles. Addressing local government finances and incentives has to be part of any longer term initiative to restore and maintain housing affordability.

Without that change, we will likely again be arguing about housing affordability after the supply expansion enabled by the current Government’s push has run its course.

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