One of the fundamental factors affecting the price of housing is the availability and cost of land. The land component makes up 30% to 50% (depending on location) of the overall purchase price, and there is a relationship between the land cost and the “value of the improvements” one puts on the land (aka the house).
Essentially, if you buy a section for, say, $250,000, then you really need to put a house on it of about the same value (at least) to justify the land cost.
If you invest too little or too much in the improvements you risk under or over-capitalising. If the improvements are too low they get written off quickly (as the capital gain is all in the land and the house investment is wasted), and if too high it takes a long time for values to catch up with the cost of construction.
So if we can produce land cheaper then we do not need to spend as much on the house, and affordability is improved.
Now, if we can also produce land faster to meet market demands, that too, has potential to address affordability matters.
In New Zealand we have essentially a “build to order” society. We do not have a large speculative element to our market and, as such, we do not suffer during housing slumps from a huge over-supply of houses and, subsequently, collapses in house prices.
Sure, we experience house price dips and periods of slow or nil growth, sometimes for long periods (eg, the 1990s) but we do not have excess stock to dispose of and, if prices fall, most home owners just simply won’t transact if they have to sell at a loss, so market activity declines.
The troubling part of all this though is when housing demand does pick up (and it can happen quite quickly), we are slow to respond on the supply side.
Once the pool of existing houses is exhausted, it requires new homes or more existing homes to satisfy demand and, if they are not available, up go prices.
Unless you have a declining population long term, demand can only be accommodated by building new homes. So if we don’t build any, the competition for a finite number of houses forces prices up — great if you already own one, but not so good if you don’t.
New homes form about 20% of all house sales and, obviously, rely completely on the availability of land. If we can make land available much quicker, we can supply houses to the market much sooner, ease housing demand and, thus, price increases, and improve long-term affordability.
One of the Government’s responses to the Housing Affordability report is to try and increase the supply of land. It proposes to do this by requiring resource consents for certain developments (eg, subdivisions) to be processed within six months.
At present, time frames for processing resource consents are variable, and some take many years to finalise. So having a set period is a good step.
The price of land is influenced significantly by time delays, holding costs, interest on outlay etc and, thus, large risk margins need to be factored in — which also adds to the cost of sections.
If these factors can be reduced by providing more certainty then, in theory, land will be cheaper, developers will be able to secure returns sooner by selling sections earlier, and the market supply is increased.
At the end of the day though, the councils have to play their part and ensure land is identified for residential development well ahead of time. There are always local community issues to consider (metropolitan urban limits etc), but fast affordable land supply does work — just look at property prices in places like Dallas and Houston in Texas. Check out open2view — you will be amazed.