Good morning. Nick Smith was certainly right to describe yesterday's [ National Policy Statement ...
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Good morning.

Nick Smith was certainly right to describe yesterday's National Policy Statement (NPS) on Urban Development Capacity as no 'silver bullet', given the reaction from all and sundry. The phrase 'firing blanks' was used by the Government's supporters and critics alike.

All the sabre-rattling and promotional activity from John Key and Bill English about the NPS last week in the immediate aftermath of the Budget's Auckland housing disappointment fell a little flat yesterday when it became clear it did not address the infrastructure funding issues underneath housing supply shortages and did not include any hard links or triggers to housing affordability measures to release land.

Nick Smith also quietened the rattling of sabres by appearing to take the threat of appointing Commissioners to Auckland off the table, saying the NPS and the RMA would be enough to ensure Auckland achieved a Unitary Plan to met its development goals. The highest growth big cities, Auckland, Hamilton and Tauranga, all said they were already assessing demand against supply and were meeting the targets of providing 15-20% more land supply than forecast demand. Wellington may have more of an issue, given its divisions between councils and the Regional Council.

Tauranga Mayor Stuart Crosby summed it up when he said much more needed to be done. He pointed to the need for better infrastructure funding tools, given the current Council funding tools created debt and rates stress for ratepayers in high growth areas.

"It doesn't address the elephant in the room, which is the cost of infrastructure, particularly for high growing areas. It doesn't address land banking and it doesn't address covenants on sections that drive up section prices as well," Crosby said.

Smith made no mention of Urban Development Authorities or Special Economic Zones in his news conference and again talked down the prospects for new infrastructure funding tools. He again thumped the table on the need for developers to pay up-front for local suburban infrastructure via development contributions, and for ratepayers to front up with the rest of the costs of linking up roads and pipes to centralised infrastructure.

The New Zealand Initiative described the NPS as 'firing blanks', a phrase also used around Parliament by Phil Twyford.

Jason Krupp said the NPS was unlikely to make a material difference to housing affordability in Auckland by itself because it failed to address the real constraint on councils of infrastructure funding.

"The reason councils trickle out land supply for housing is that infrastructure is costly, and it is existing residents that have to carry these costs upfront. Even Minister Smith admitted it’s not a silver bullet – but without provisions for infrastructure, it’s really just firing blanks," Krupp said.

The NZ Initiative has previously proposed Special Economic Zones and the creation of private debt vehicles, Municipal Utility Districts (MUDs), to fund urban infrastructure when Councils cannot.

Berry Simons Partner Andrew Braggins also highlighted the infrastructure funding and planning gap in the Government's thinking on land supply.

"The release of further land will simply not deliver the infrastructure needed to service new development – this is a matter that needs to be carefully planned by the Council and its key CCOs, Watercare and Auckland Transport," Braggins said.

“Not a single new dollar in the recent budget was allocated to Auckland’s transport infrastructure – but adding new zoned land without infrastructure and the funding to service it is only likely to distract Auckland Council and the Auckland CCOs from providing infrastructure to existing zoned land and SHAs – this is likely to slow everything down," he said.

Even the Government's own Regulatory Impact Statement for the NPS, prepared by Beca-Covec for MfE and MBIE, highlighted the infrastructure funding and coordination issue.

"A particular gap relates to the impact of limits on infrastructure supply. The coordination failures that exist between RMA planning and infrastructure planning - while addressed as much as is possible through the NPS-UDC - mean that there is a residual risk that the infrastructure needed to support more competitive and responsive urban development may not be supplied, or not supplied in a timely manner," they wrote.

"While the cost benefit analysis has taken into account the social costs of providing and using infrastructure, limits imposed under the legislation that governs infrastructure planning, or broader political incentives to under-supply infrastructure, have not been analysed as they are outside the scope of this work."

'What about the demand side?'

Others also questioned the NPS' focus on supply without addressing demand, particularly given the recent opening up of large numbers of sections under the Special Housing Areas Act had not restrained runaway land inflation.

Fellow Berry Simons Partner Simon Berry said young and low income New Zealanders were simply unable to compete with investors, both local and foreign.

"We are consistently seeing that a large proportion of Special Housing Area houses are being sold, generally off the plans, to overseas investors," Berry said.

"The same goes for the existing housing stock – I recently heard of an example of an overseas investor purchasing 55 residential properties in a single week. The Government’s scrutiny of the market has overlooked – unwittingly or otherwise – these basic facts, but all real estate agents and resource management practitioners know full well that this is happening every day," he said.

See more on this below in my opinion piece on Auckland's Gordian Knot on housing supply.

English starts talking DTIs with RBNZ

Meanwhile, Bill English confirmed before question time yesterday that discussions had begun with the Reserve Bank about including the option of a debt to income multiple control in the Reserve Bank's Memorandum of Understanding on its 'Macroprudential Tool Kit', which already includes Loan to Value Ratio controls.

"Discussions have started, but we haven't had a formal request yet," English said.

"He's (Graeme Wheeler) just said it's a tool they want to have a look at. They haven't asked for an inclusion yet," he said, adding he had an open mind and had yet to see the analysis.

The Reserve Bank signalled on May 10 it would look at limiting debt to income multiples, which is already set at 4.5 in Britain. Over 60% of New Zealand investors have borrowed more than six times income, while over 30% of owner-occupiers here are over that six times threshold. See more here in our May 12 Hive News.

Grant Robertson said he would prefer any debt to income multiple control was targeted at property investors and speculators.

"We would support any measure that targets speculators, but the risk here is that a blanket provision will mean that first home buyers will find it even harder to get into the property market," Robertson told Corin Dann.

Meanwhile, English warned first home buyers about the risks of buying in Auckland.

"Right now they do need to be careful about buying at what could be the peak of the market," English said.

Parliamentary Exchange of the day:

Phil Twyford:

"Why, after years of talking tough and blaming councils for expensive housing, and 8 years after he promised a national policy statement in the National Party election manifesto, is he not embarrassed and humiliated that this is all he has got to show for it?"

Nick Smith:

"The member may be interested that the first urban development national policy statement was promised by one of his colleagues in 2001—2001. I would also say to the member, when he asks me to be bold—is it not interesting that he challenges me to break the Metropolitan Urban Limit, I bring legislation before this House with special housing areas to do just that, and he delays the legislation in the Parliament and argues against it at every stage through Parliament. That just shows that that member on housing has had every single position that the Kama Sutra could have invented."

Twitpics of the day:

Bill Bennett on the CRL ceremonial pic: "You can't unsee this."

People's Daily of China: Chinese firm monetizes #USElection by making toilet paper w/ candidates' faces & #Trump is outselling #Clinton 6-1

Dominic Hoey's poem about Auckland housing

Tweets of the day:

Russell Brown on the bonhomie between John Key, Simon Bridges and Len Brown at the CRL launch:

It’s like some alternative future where the government and Auckland Council are on the same page and Len Brown is still a thing. #CRL

Have a great weekend (with a great crop of reads below) and my only hope is that Nick Smith's mention in Parliament of a certain sacred Indian text made it through your email filters.

cheers

Bernard

3 June 2016


Opinion: Auckland's Gordian Knot
Weekend Reads


Opinion: Auckland's Gordian Knot

Auckland's housing market now has so many strands tied up in so many knots that it will take more than an airily waved finger from Nick Smith to untie it. Not even a barely concealed middle finger from Bill English will do the trick.

It seems every time someone tries to unravel a solution to this Gordian knot of a problem, there's another knot that blocks the way through to affordable housing. The latest intervention is no different.

The Government's National Policy Statement on Urban Development will require fast-growing Councils, especially those beginning with 'A' and ending with 'd', to ensure there is 15-20% more land available for housing than is needed over the next 10 to 30 years.

So far, so good. It's all standard Economics 101. If there's a lot more supply of land than demand, then the price should fall, or at least stop rising so fast. Auckland has become the safest and richest of tax-free havens for land bankers over the last 25 years because section prices have more than quadrupled. Over the same period, building costs rose 78% and consumer price inflation rose 71% so something was horribly wrong with the market. The old Auckland Regional Council's Metropolitan Urban Limit ensured land bankers could be safe in their knowledge the supply of developable land was limited, while the refusal of the old city councils to allow much intensification meant Auckland could not grow either up or out.

Therefore it makes sense to require or prompt or nudge or even suggest that the still relatively new Auckland 'Super' City Council open up more land for development and loosen those limits both up and out so that land-bankers can be stripped of their complacency about limited land supply over the long run.

But here's where the knot tightens. Councils can't simply wave a rubber over a map and redraw the lines to get developments cracking. Firstly, they need to plan to put pipes and roads and footpaths and bus routes into that map, and this is where it gets expensive and difficult.

The Auckland Council has estimated it needs NZ$17 billion to build that infrastructure to handle all these new developments on the fringes over the next 30 years. The trouble is the Council has run out of borrowing room and its ratepayers and creditors won't allow it to load up on more debt for the infrastructure. Auckland's borrowing costs are close to 12% of its revenues and its debt is near 275% of those revenues. Those numbers matter because the Council has agreed with ratings agency Standard and Poor's that it can't go over those limits if it wants to keep its AA rating. Every single notch credit rating downgrade costs the Council NZ$10 million in extra interest costs per year, which adds an extra 1% to rates.

Separately, ratepayers in the Eastern Suburbs and the North Shore don't love the idea of borrowing more and paying more in rates to pay the costs up-front for all those developments in Albany and Drury. They could (and may well) vote in councillors in October who refuse to borrow to fund that infrastructure, or simply refuse to allow the intensification of housing needed to help strip the land-bankers of their power. Nick Smith can huff and puff all he likes, but if the money is not there for the roads and pipes and buses then the for sale signs on the sections won't appear.

Just quietly, there's a whole lot of property owners who like things just the way they are. Restrictions on land supply and intensification keep driving up land prices and the tax-free wealth of property owners, who are much more likely to vote in Council elections than renters.

The Government's finger-wagging doesn't solve the infrastructure funding problem or the political reluctance to borrow to fund growth. John Key has already suggested the Auckland Council start selling assets to pay for that infrastructure. Cue the latest twist in the tale. The next fight will be over why the Council isn't selling its port or its airport shares to pay for roads and pipes and buses.

And so the knot tightens again....

Ultimately, the Government is the only player with the balance sheet, the long investment horizon and the economic necessity to step in and slice that knot right open with a big dollop of infrastructure cash and orders for tens of thousands of new affordable houses. It is also the only player with the power to change the tax and borrowing incentives for both local and foreign investors.

Until Wellington is prepared to start slashing and spending, the Gordian knot of Auckland's housing supply will remain tight and painful for Generation Rent, and a thing of beauty for landlords.

(This opinion piece was also published on RNZ.co.nz and is published here for the convenience of subscribers.)


Weekend Reads

For the profit and pleasure of subscribers, here's a few longer reads for the weekend on economic, political and social matters from around the world.

China's Wealth Management Products (WMPs) are among the least stable and most worrisome parts of China's financial system at the moment, reports NZ's own Paul Panckhurst at Bloomberg. Here's their least attractive feature: "The most common source of funds for repayment of WMPs is the issuance of new WMPs..." Now where have we seen that before? Quick hint: it starts with a P and rhymes with Fonzi.

This BusinessInsider piece on the growing practice of Chinese banks engineering debt-for-equity swaps also highlights the risks to small investors of being swamped with worthless paper. It twas ever thus, for Chinese investors in Chinese banks and companies. There's not a lot of protections for small shareholders, and it increases the bias towards overseas property.

Economist Richard Duncan reckons China started a hard landing in 2015 and its economy is now wildly unbalanced because of the astonishing growth of investment and very little growth in consumption, as the SMCP reports with a Duncan video.

His gives this comparison: " In 2014, investment in the US was US$177 billion higher than 2007, a growth rate of 6%. In 2014, the level of investment in China was US$3.2 trillion more than it was in 2007, representing growth of 236 per cent."

Money laundering has been in the news a lot lately. This WSJ piece (unpaywalled at Marketwatch) on the Philippines' casinos is an eyeopener. "The Philippine Amusement and Gaming Corporation, which is both the industry regulator and a casino operator, succeeded in exempting casinos from new anti-money-laundering regulations when they were introduced in 2013."

Julian Barnes writes in the WSJ about America's new 'super guns' about their power and how they could upend a delicate strategic balance out there right now. These are 'rail guns' that use a 25 MW power plant to accelerate a projectile so it can travel 125 miles and blow apart whatever it hits. "“You can’t ignore the fact that Russia has great ability to mass conventional munitions and fire them over great range. We have to be able to fight through those salvos,” said Mr. Work, of the Pentagon. “And the railgun potentially will give us the means to do that.”

Mary Meeker's annual and epic slide pack on the state of the Internet and media is always worth a read. Slide 45 showing how US advertisers still spend four times more on newspaper advertising than would be justified by the time spent reading newspapers suggests the industry has further to fall. I'm sure it will be forwarded to the Commerce Commission as it considers the NZME/Fairfax NZ merger application.

The latest Pagefair report on the growth of ad-blocking should also be forwarded to the Commerce Commission. Over 400 million mobile phone users now use ad-blocking software, it estimates. And for good measure, Nieman reports 44% of Americans now get to their news from their Facebook news feeds.

Bloomberg reports here on Pew's latest research showing 18-34 year olds in the United States were more likely to be living with parents than with a partner or spouse in their own household for the first time in 134 years.

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