Planning for affordability

Dr Eric Crampton
30 September, 2020

Wellington City’s Draft Spatial Plan, currently out for consultation, asks where the city might find room for another 50-80,000 people over the next thirty years.

The challenge is bigger than that. The city does not just need to permit future growth. It must also deal with substantial existing shortfalls in available housing.

How can we tell there is a substantial shortage of housing? Don’t look to population projections or wait for Census data on overcrowding. Prices are the best signal.

In 2002, the median house in Wellington sold for about three times median household income, according to the time series maintained by Prices rose to five times the median household income by 2007, easing slightly out to 2016. Since then, prices have risen sharply. The median house now costs just over seven times the median household income.

This is not solely the fault of quantitative easing by the Reserve Bank this year; the jump in prices started before those policies. Neither is it a result of foreign speculators doing bad things; it is hard to see any change in the upward path of prices after the ban on overseas buyers. Housing construction simply has not kept up with demand. If it were easier to get new housing consented and built, then looser monetary policy and overseas investors (if they were allowed) would be helping fund new construction rather than bid up the price of existing housing.

Rising house prices suggest not only a shortage but also an expectation this shortage will not be easing anytime soon.

The shortage matters. Housing shortages do not just push up rents, they also worsen conditions for renters.

Economist Stuart Donovan likens it to a giant game of musical chairs. If you have 10 players and nine chairs, the last heritage chair will find a tenant even if it is mould-ridden with two legs about to fall off – and at least one of the chairs will be overcrowded. But add two more chairs and the rickety seat can go unused. It doesn’t matter if the new chairs are luxurious thrones, standard-issue dining room fare or thriftier models: adding more means everyone gets a seat. And if the owner of the mouldy chair would like some rental income, the chair will need a trip to the repair shop first.

When houses, townhouses or apartments outnumber folk needing a place to live, landlords must compete for tenants. And that competition, when housing is plentiful, is the best protection tenants can have. In a well-functioning rental market, tenants don’t need to go through lengthy adjudication processes to get a fair deal. They can insist that unless the landlord fixes the rotting weatherboards, they will choose another house.

And it all matters for the city’s ability to attract those workers seeking to buy rather than rent.

When our family sold in Christchurch to move to Wellington in 2014, the new house cost just over 1.75 times the Christchurch sale price. Prices in Christchurch have been flat since then, because the local councils enabled a lot more building. But price increases in Wellington mean our home is now 2.8 times the value of our old house. Selling in Christchurch to buy in Wellington today, instead of 2014, would mean massive amounts of debt, a substantial downgrade or a combination of the two. More likely, we would have declined the job offer in Wellington.

Wellington with one fewer economist probably does not matter all that much, but how many teachers can afford to move to the capital or live near the schools where they work?

The only cure for a housing shortage is to build more housing. The Draft Spatial Plan provides for a lot more expansion, higher density near transit, more city centre apartments and for development in places with older houses. These provisions will be opposed by many neighbourhood homeowners’ associations, so they desperately need the support of those who see the harms of the housing shortage.

While opponents of greater density often point to its very real costs, careful planning is the key.

If a new development might shrink on-street parking, that isn’t a good reason to block it. Instead, try rezoning the street to resident-parking only. If a street with five houses can hold ten cars, for example, each house could get two resident parking permits. A new build would be an opportunity to sell unneeded parking permits to someone willing to pay a fair bit for them. Development can then be an opportunity rather than a threat.

Problems highlighted by those concerned about greater density are reasons to think about solutions rather than reasons to lobby against development.

The Draft Spatial Plan is a good start, but it remains constrained.

For decades, urban policy has been stymied by an RMA-enabled combination of pro-density advocates opposed to suburban expansion, suburban NIMBYs and an overarching set of institutions that mean that local governments see growth as a cost rather than as an opportunity. The result is growth is opposed everywhere and councils have few reasons to push back against the opposition.

Getting to affordability requires allowing developers to build up and out.

While those opposing new subdivisions on the city’s fringes, or in rural areas like Ohariu (only a 20-minute drive to downtown!), will point to potential effects of urban sprawl on climate change, New Zealand’s Emissions Trading Scheme caps net emissions and every litre of petrol or diesel used is covered by that cap. Banning sprawl cannot reduce emissions, or at least not emissions that are covered by the ETS. ETS units not used by better-housed commuters will be used by someone else instead. But banning urban expansion can and does increase the cost of housing.

Wellington housing is on an utterly unsustainable path. Unless the city enables substantially more development where people want to live – whether downtown, the inner suburbs or further out – the housing shortage will only worsen. If those things matter to you, let the Council know.

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