Affordability — less is more


I was speaking at a luncheon recently on numerous topics, and one question that came up (and always tends to get raised) was housing affordability.
No surprises there as it is the topic for this year’s election, and everyone has a view on it.

However, it is interesting to note the assumption that construction is too expensive and that we are not innovative enough in our solutions, because if we were, house prices would be cheaper.

This is a common misconception, and one we have to dispel, notwithstanding that innovation can make construction less expensive and more productive.
But it will have no impact on general property prices. This is because the price of new homes is determined by the price of existing homes (as I have said many times before) and, thus, until existing property growth is arrested the cost of new homes will follow existing property price movements.

If a builder can make efficiency/innovation savings the property will still sell for its market price, and if big enough margins are to be had then vacant land prices go up etc, and the whole thing self-perpetuates.

Anyway, the issue is not so much one of affordable houses but starts with affordable land. We don’t have it. And because we don’t have it (in Auckland at least) we don’t have a dog’s show of building affordable homes, as we once knew them. Let me explain why.

The cost of construction has basically followed the CPI over the past 25 odd years. In the late 1980s the average size of a typical home was about 100 sq m. The average size now is 220 sq m or something close to that. And why is that?

Well, it is only partly answered by consumer preference but, more significantly, is influenced by land prices.
While construction costs have followed inflation, land values have grown exponentially over the same period. Land cost was about 25% of the typical suburban property’s value in the 1980s but now it’s 50%.

So, in order to not undercapitalise the land, we had to double the size of the house (to justify the land cost) as building the traditional 100 sq m home was “economically irrational” — for example, a $600k section with a $200k house on it.
And what has caused this rocketing land cost? Think urban planning that restricts land supply (urban containment policies), and hefty regulatory costs such as resource consents, time delays, development levies and so on.

Now there is still high demand for smaller homes but the only way they can now afford to be delivered in Auckland is by urban intensification, ie apartments and terraced houses.
We still build large homes on single house lots of 500 to 600 sq m because the economics stack up (large 220 sq m plus homes). But the days of the standard 100 sq m new home on a standard section are over — well, in Auckland at least.

Why? Because the cost of a standard section is too expensive and you “can’t afford” to build a small home on it.
So if that is what we want (standalone homes on sections at affordable prices) the market needs to lower its expectations on section sizes. They can only be in the order of 150 sq m or thereabouts, and the homes no more than around 100 sq m.

Otherwise the choice is an apartment or terrace house with party walls etc. Having said that, this concept is being trialled at Hobsonville Point in Auckland, and it is great to see.