In June 2010 QV reported that the latest average house price in Auckland is $534,639. In May, REINZ reported a median figure of $455,000.
Either way, these prices represent an impossible home-ownership dream for most of the population of New Zealand.
In June 2009 Statistics NZ reported average weekly earnings of $786 for the Auckland Region. For the same month Auckland Regional Council (ARC) reported average weekly earnings per household of $913. Presumably the two figures differ because the average number of persons per household is greater than 1.
ARC also reported that the overall average of income committed to housing is 31.7% and for those paying rent it is 45.8%. Ideally this figure should not exceed 30%.
Using the single individual figure of $786 per week and the housing expenditure factor of 31.7%, then the weekly affordability factor for housing is $249 per week per individual. For those paying rent it is $360. For households the corresponding figures are $289 and $418.
Assuming mortgage interest rates around 6.5 % and affordable weekly housing costs averaging $274 per week (30% of gross income) for a household, the cap for home affordability is $219,200. In other words this in the maximum price an average household could comfortably afford to pay for a home.
This then is the maximum target price for affordable housing in Auckland.
Apart from a few distressed sales the lowest section prices in the Auckland region start at $149,000. That leaves just $70,200 for the house including all the extra costs and levies associated with house development and a development margin. In short, it is not possible to build affordable housing on traditional sized sections because the section cost alone absorbs most of the available budget.
Some believe that housing prices can be forced down through financial mechanisms such as manipulating interest rates and eliminating investors from the residential market.
This won’t happen because the underlying base costs of section development (subdivision) and of housing construction (current consumer prices) do not allow room for significant downwards adjustment. In addition, the financial impact of a substantial reduction in house prices would severely impact most financial institutions which rely on the underpinning of residential values to support their lending.
The only practical way to reduce house prices is by reducing the total cost of both the section and the house. The focus changes from trying to reduce the cost per square meter to reducing the total cost. In fact, by changing the focus a much higher quality housing product can be provided at a higher cost per square meter but a much lower total cost.
The question is – “How can that be achieved without affecting values of existing section and housing stock?”
The section component of house prices can be reduced by increasing the intensity of development. Infill housing offers a partial solution but is restrictive as to ownership, title and use. Usually the dwelling is classed as a secondary dwelling to meet the needs of the existing family. They are often described as granny flats. The result is a building that is out of scale with surrounding buildings.
An alternative is to allow similar scale multiple housing developments on a common shared site. This allows the section cost to be spread over several households, bringing the cost per household down. Because each house is smaller and has fewer occupants the site per-person density remains the same.
These developments are best described as Cluster Housing or Cluster Villages. They haven’t appeared in New Zealand yet. The closest equivalent is Trailer Parks which are not known in NZ but are common in Australia. But Trailer Parks have a bad image for most people who equate them to the run-down parks portrayed in movies. That is unfortunate as often the pride of ownership shown by home owners in Trailer Parks is more dedicated than much of suburbia.
The second cost component, the house cost, can also be reduced in a number of ways – good design, reduction in size, reduction of areas that are only used occasionally (bedrooms, for instance) and using commercial building techniques and materials. There are examples of these already appearing with several house builders offering good quality homes which comply with current or higher building specifications including double glazing and full insulation at less than $1250 per square meter which is the current Government target for affordable housing.
A significant trend which is also happening is the move to steel or aluminium framing which reduces materials costs and trade labour costs, often substantially.
However, there is even more scope to reduce costs.
The Government is implementing a program to encourage lower housing costs by eliminating the red-tape as much as possible. The Building Act has been amended to facilitate that. One important change was the establishment of National Multiple-Use Approvals from 1 February 2010.
This enables building designs that are to be replicated several times to be ‘pre-approved’ for Building Code compliance, removing the need for the designs to be assessed by each individual Building Consent Authority (BCA).
The BCA’s role will be to check site-specific details, such as foundations and utilities; to review the conditions of the National Multiple-Use Approval and how they relate to a particular consent application; and to undertake normal inspections once building work has begun.
Finally, one further step is required to create an affordable housing environment.
There is an inherent obstacle in existing town planning rules, specifically the limitations on section sizes and intensity of development which when combined operate to maintain the total cost of housing above the affordability level for most people. Town planning rules need to change to allow for more intensive development in a Village format.
So in summary here’s what needs to happen to make truly affordable housing a reality.
1. Build smaller homes that are efficient in design
2. Design for specific target markets, singles, couples, families
3. Develop cluster villages to utilise land more efficiently
4. Legislate if necessary to compel Councils to allow the establishment of cluster villages