How to ease rents and house prices

massey-university

Mon Feb 26 2007 13:00:00 GMT+1300 (New Zealand Daylight Time)

How to ease rents and house prices

Monday, 26 February 2007, 2:05 pm
Press Release: Massey University

Property analyst Professor Bob Hargreaves is proposing a solution to the problem of high rents and low home affordability – at no extra cost to the taxpayer.

Professor Hargreaves says by selling 10 per cent of the current state housing stock every year, and replacing it with new, high-density units, the Government could solve both problems – improving affordability and increasing the rental stock.

By international standards, New Zealand towns and cities have a very low density of population per square kilometre, he says. For example, Wikipedia shows that these densities are generally less than half those found in Australian capital cities and a quarter of densities in many North American and European cities.

Professor Hargreaves says Housing New Zealand (HNZ) currently rents out around 66,000 state houses. “Using conservative values, we can assume these houses will be worth on average $200,000 each, giving a total value of $13.2 billion. Let us say for each year over the next five years the government sells 10 per cent of its rental houses at market value. First option to buy would go to existing HNZ tenants and the next option to other first time buyers. For HNZ, the sale proceeds would come either directly from the purchasers’ deposits and private sector mortgages or the HNZ could offer vendor financing and then securitise the debt.”

Sale proceeds of $1.32 billion per annum would then be applied to building 6600 new medium density rental units (preferably a maximum of two-stories) in the areas of greatest need. “This is likely to mean building more medium density units in Auckland and having a wider range of bedroom types to cater for the increasing number of small families,” he says. “The land costs for each new rental unit would be minimised by clever infill, the rearrangement of existing state owned houses on land owned by the Crown, and some comprehensive redevelopment of prime sites. The net result should be that instead of adding, say. 1500 units to the housing stock each year HNZ could add around 8000 units.”

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Professor Hargreaves says this creates a clear win for the 6600 tenants who become home owners in well-built houses: they don’t have to move and without the need for real estate agents their transaction costs would be minimised. “There is a win for other would-be first time buyers, with 6600 additional houses added to the housing stock each year. People on the HNZ waiting lists also win because the construction of new rental units would target localities in greatest need.

“The taxpayer wins because income from property sales would balance expenditure on building new units. The building industry wins because guaranteed HNZ work would help to smooth out market fluctuations. The environment wins because with medium density housing the residents “footprints” are minimised in terms of land usage, energy efficient housing and commuting costs. The convenience of being able to walk to work and shops also offers a health benefit for residents in higher density areas. “

But there may be losers. “If the plan works, property speculators may not benefit from the sort of increases in rents and prices we have seen over the last five years.”

He says for the plan to succeed, some important questions remain. Could the building industry cope with this additional work? Would the private sector respond by simply reducing supply in other segments of the market, such as city apartments? Do HNZ and local government have the technical and regulatory expertise to achieve good quality medium density housing outcomes? Is there a case for a public-private partnership?

“The problem of increasingly unaffordable housing is an important one and these are all questions worth answering.” Professor Hargreaves says.

Professor Bob Hargreaves is director of the Massey University Property Foundation which produces a quarterly index on home affordability.

A longer version of his proposal is available here (76 kB pdf).

ENDS

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