Did Special Housing Areas help?

A while back I went and had a looksie at some local Special Housing Areas near me in Auckland.

I wasn't hugely impressed. At the first one I went to look at, I felt that designating it an SHA didn't seem to have made any material difference either way. On the left, by the way, is the very latest state of play on that first SHA site I visited. Still a long way from being finished - no dramas, it's the developers' prerogative to set whatever schedule best suits them - but not an obvious example of SHA status moving things along.

On a follow-up visit I had more doubts, noting that non-SHA apartment blocks were going up all over the place but the SHA sites were somnolent. "I'd like to believe", I said, that "Special Housing Areas greased the wheels of the housing planning process, and either accelerated or increased new construction, or both ... But how will anyone definitively know? ... I'm hoping that someone - an economic consultant with an interest in housing, maybe? - will be asked to turn their minds to a proper 'with and without' exercise: matching a bunch of otherwise similar SHA and non-SHA areas, and checking to see if the SHA ones outperformed in speed or quantity".

Another visit left me asking the same questions. "it still leaves me with a nagging feeling that the interesting Special Housing Area initiative (faster planning approval in exchange for including some 'affordable' housing) didn't work out as everyone had imagined. We need to know whether this policy experiment worked, and if it did, repeat it or widen it, and if not, why. Otherwise we'll continue to blunder around with well-intentioned housing ideas that never get properly evaluated".

Lo and behold, someone's actually done exactly that "proper 'with and without' exercise: matching a bunch of otherwise similar SHA and non-SHA areas". It's just been published in the online version of New Zealand Economic Papers as "Price effects of the special housing areas in Auckland": the abstract is here and if you've got access to NZEP online, here's the link to the full article. It's by Mario Fernandez of Auckland Council's Research and Monitoring Unit and two co-authors, Gonzalo Sánchez at ESPOL in Ecuador and Santiago Bucaram at the Inter-American Development Bank.

They used a difference-in-differences approach which looked at what happened to house prices in SHAs compared to those in nearby non-SHA areas. Before the SHA experiment, prices in both areas had been rising at about the same rates: assuming (I think reasonably) that those trends would have carried on absent the SHA cunning plan, you can attribute any subsequent differences between SHAs and non-SHAs to the effect of the SHA policy.

The SHA initiative did not scrub up well:

Our findings indicate that the SHA programme caused price increases (inside SHAs) amounting about 5% on dwelling prices and 4% on the price per square metre, and had no effect on the probability of affordable transactions to occur but actually increased the probability of costly transactions. These results cast doubts on the reliability of the SHAs as a housing policy aimed at improving affordability (p11) ... the findings of this paper suggest that the effectiveness of the SHAs on improving affordability was questionable or negligible (p13)

The findings were robust to the usual econometric tyre kicking (eg allowing for the possibility that developers and buyers saw the SHAs coming and might have changed their behaviour accordingly, and making the comparisons only on SHAs and non-SHA areas that are very close neighbours).

The authors say, "the policy questions that arise are: what weakened the SHA programme? or why
were the affordability requirements not binding to developers?".

On the first, one possibility (they say) is that "the fast-tracking of the consenting process [the SHA deal was faster consents, in exchange for agreeing to build an element of affordable housing] resulted with the developers being able to offer an additional attribute to their products: rapid delivery of new constructions ... Hence, the SHA programme simply allowed developers to offer new homes with an additional attribute (a shorter delivery time), which consequently implied higher prices" (p12).

On the second, there was an element of gaming the system. Developers had the option of waiting to see what planning options might become available under the Auckland Unitary Plan, rather than forging ahead with their SHA consents: "there were expectations of greater profits under the rules of the AUP rather than the SHA programme. Therefore, this could explain why prices did not decrease inside the SHAs as the timing of development may have relied on building first the more profitable (and expensive) houses and later (or never) the affordable" (p12). Scuttlebutt I picked up at the time fits with this explanation.

I'm not going to bag the designers of the SHA: I'm more in the 'let a thousand flowers bloom' camp when it comes to policy experiments, and anything that sounded plausible (the faster consent / affordability combo) was worth a go. I think we all knew that it wasn't going to make much of a difference compared to the impact, say, of a large expansion in the supply of housing-zoned land. But at the margin it might have been a small help.

It wasn't. People more familiar than me with the intricacies of the housing market can carry on the conversation about why not. My takeaway from the whole exercise is that any policy experiment ought to automatically come with follow-up provisions to see how it went. Not rocket science, you'd think, but it's routinely ignored all over the place: we're throwing money in the air, and not checking to see where it drifts or who picks it up. It's time to realise that 'evidence based policy' isn't just about designing a plausible initiative: it also means seeing if it lived up to expectations, and if not, why not.

What did we learn?

Earlier this month I posted what I hope will be my last tiki tour of some Special Housing Areas (SHAs) near our place. And at the time I said I'd have a go at trying to put some figures on the effectiveness or otherwise of the whole SHA experiment.

I've had a look, and there's good news and bad news.

The bad news is that, using MBIE's latest Auckland Housing Accord Monitoring report (available here, with all the previous ones), I can't tell whether the SHA experiment made a difference.

There were 5,527 building consents in the SHAs over the October '13 to June '17 period covered by the report. That made up 16.4% of the total 33,639 consents issued. But whether you should think about this as 'big' or 'small' isn't obvious, because you don't know how many of these SHA approvals would have happened in any event, and were merely shifted from one box (ordinary consent) to another (SHA consent).

You can't tell whether there was any net addition from the SHA initiative. Nor can you tell (although this was one of its objectives) whether the SHA consent process sped up development. To date, 3,105 dwellings have been completed in the SHAs: the report says "The 154 Special Housing Areas are expected to eventually supply over 66,000 dwellings or sections over 20-25 years". At the risk of sounding snarky, this doesn't look like lightning progress towards that target.

I'm prepared to believe that SHAs may have facilitated some particular, large projects. As the graph below shows, more than half (56.6%) of all the SHA consents were in just 8 of the 154 SHAs (the 8 with more than 300 consents). If they were instrumental in getting the Hobsonvilles underway, excellent. But again it's hard to know whether the counterfactual is that Hobsonville would have gone ahead anyway, or faster without jumping through the SHA hoops.

If I was facing a firing squad and had to guess to save my life, I would guess that the SHAs were an intrinsically nifty idea (faster consents for helping with social objectives) but that (a) the planning streamlining may have been more apparent than real (b) the dollar give-up by developers to meet the social objective became too expensive in a roaring bull market and (c) some developers weren't going to be swayed by anything (SHAs included) until they saw how the Auckland Unitary Plan played out. Goodish plan, somewhat sidelined by events. Story of all our lives.

And the good news?

People gave a new idea a go, in an area that badly needed moving along. It was an experiment. And we need more experiments like it, in housing and across the board. Not that our oppositional political structures are well suited to running them: we haven't exactly got a system that tolerates "mistakes" or "failures", when in reality they're nothing of the kind. They're opportunities to find out what works and what doesn't.

In that light, though, if you're going to run experiments, as you should, you have to figure out beforehand, in some detail, how you'll know whether the experiment was a success or not. Sometimes it's obvious - the laboratory explodes - but often it isn't. In the case of the Auckland Housing Accord, progress towards consent targets was not an adequate metric. It needed some sort of control group comparing SHA and non-SHA volumes and speeds. My little trek around Browns Bay but writ larger, and with a budget. And it would have been useful to get inside developers' heads to see exactly what mattered most to them.

A good start

The new Public Policy Institute at the University of Auckland kicked off yesterday with a public lecture by Professor John Hewson on 'The most risky and unpredictable global outlook in my lifetime'.

You'll most likely know Hewson not as a professor but as the former leader of Australia's Liberal Party. As Leader of the Opposition he lost the "unloseable" 1993 Aussie general election to Paul Keating and in the unsentimental way of politics was rolled in 1994 by Alexander Downer.

He left parliament in 1995 - inevitable, perhaps, but a loss. He was ahead of his time with his Fightback! economic policies, but as his Wikipedia entry notes, "apart from supporting right wing economics, [he] also supported abortion, gay rights and working mothers", making him one of that critically endangered species, the economically literate and socially liberal politician. And irrespective of where you stand on Fightback!, it's clear that Hewson would have made a better party leader and Prime Minister than several of the EQ-less muppets that followed him.

His arguments about high unpredictability? Economists' analytical tools have broken down: printing money hasn't led to inflation, the Phillips curve has vanished, "impossibilities" like negative interest rates have materialised. Europe: common currency stresses haven't fully played out out, and he's pessimistic about the Brexit endgame. US: on top of everything else problematic, notably the Fed's challenge of normalising interest rates without knackering the US or global economies, there's  now Trump. Hewson had a great line, that what worried him most about Trump's 3.00am tweets was that Trump wasn't drunk at the time. China: debt, pollution, demographics, corruption, faked GDP growth, foreign policy adventurism. Everywhere: a breakdown of trust in established political processes. Geopolitics: North Korea in particular, where we're now at the mercy of an accident or miscalculation, but also elsewhere.

He spoke for nearly an hour without notes and (as the old TV panel game used to say) without hesitation, repetition or deviation: a class act. There was time for a few questions: I snuck one in, about what structural reform still needs doing in Australia. Lots, was the answer, across all policy areas, but only limited prospects of progress given the "Nope!" style of Aussie oppositional politics, for which he rightly fingered Tony Abbott. Another in the audience asked if Hewson saw any way of reducing the growing political polarisation we're seeing in a range of countries: short answer, no.

Not comforting, in sum, as a seasoned take on the global outlook. Personally, I'm more in "the world economy will muddle through" camp: the latest JP Morgan / Markit composite index of global economic activity continues to show ongoing (and likely accelerating) growth in the global economy, and if you take a look at The Economist's collation of the latest forecasts for next year you find that virtually every country of any consequence is expected to keep growing in 2018 (ex the haplessly mismanaged Venezuela). But equally I wouldn't be too surprised if some of Hewson's scenarios came to hand, either.

It was a lively start for the new Institute, which has also posted a first batch of policy briefings and which now provides some competition to AUT's established Policy Observatory and its set of briefing papers. I'm hoping for a bit of intellectual diversity, too: the market for academic hand-wringing over the evils of "neoliberalism" is already well supplied.

Special?

Almost two years ago now, I went and had a look at a Special Housing Area (SHA) that had been set up a few Ks away in Browns Bay. Oddly, there was nothing happening at the supposedly fast-tracked SHA, while all around it non-SHA apartment blocks were sprouting like mushrooms.

I went back three months later. Still nothing at the SHA (and nothing happening at another one on East Coast Road that I also went and sussed out). Still full speed ahead on the non-SHA sites, though.

And a year ago I went back yet again. Signs had just gone up on the Browns Bay SHA site saying a very smart looking apartment block was planned, but there was no sign of any construction. Nor at the other SHA on East Coast Road. Meanwhile the non-SHA projects were all progressing nicely.

And today - you guessed it - I went and had another shufti.

Here's the SHA in Browns Bay. Best you can say is that at least it's started, though as you can see it's only at the very earliest stage of construction.

Meanwhile the non-HSA apartment blocks on the same street are all finished. Here are two I snapped before, 'The Pines' at 25 Bute Road...

...and the 'Norfolk' at 19-21 Bute Road. Both already have people living in them, though The Pines is still looking for tenants for its streetfront office/retail space.

And at the other SHA on East Coast Road? Nada. Still looks the same as ever. It hasn't made the original target, which was to have 39 apartments finished by "the early part of 2017", according to the blurb on the Auckland Council SHA site (it's the 'East Coast Road, Pinehill' one in Tranche 4).

And finally I thought I'd go and look at another SHA, currently the site of The Brownzy pub on the corner of Beach Road and Bute Road. Nope: nothing underway there yet either, which is a shame as it's a decent-sized pozzie. The Council write-up ('Beach Road, Browns Bay', in Tranche 10) says it will eventually carry 66 homes, with the first ones available by the middle of next year. Can the developers wind up the (still operating) pub, knock it down, and put the new housing up in seven months? We'll see.

Let me finish by saying (as I've said before) that I'm not criticising the owners of these sites in any way. They can develop - or not develop - their own properties to whatever schedule they damn well like, and good luck to them. And as an economist I'm congenitally inclined to believe that they know their own interests better than any outsiders, and it's highly likely - subject to the current capacity shortages in the Auckland building trades - that they'll be making the most efficient use possible of these valuable properties.

But as for the Special Housing Areas as a policy experiment?

My working hypothesis is that they've been an almost complete dud. And I wouldn't rule out that they may even have been counter-productive, when you see the non-SHA sites have gone ahead at full speed while the SHAs have just been sitting there.

Guesses, sure. Small sample size, absolutely. And I'll try and put some numbers around the whole SHA scheme when I have half a mo, and see if I can substantiate what I suspect. But for now, who am I going to believe: the original hype, or my own lying eyes?

Can it keep going?

There was good news today about the volume of new housing consents in Auckland: as Stats pointed out in the release, "Monthly building consents for new homes reached a 13-year-high in August 2017, driven by a spike in apartments and retirement village units in Auckland...Some 10,265 new homes were consented in Auckland region in the August 2017 year. This compares with a peak of 12,937 new homes consented in the June 2004 year (the highest number since the series began in 1991)".

Stats included long-term graphs which put the latest numbers in some perspective, but I've gone back a bit further again (as far as the data series go on Stats' Infoshare database). Here's what the story looks like.

The 'actual' numbers in the graph are an excitable series, mainly because of chunky apartment block consents  turning up in some months but not others. They're volatile enough to turn the seasonally adjusted and trend series into best stabs at what's going on behind the noise, rather than definitive sightings of the underlying reality, so you can't be entirely sure they're on the right track. But after some wavering around the start of this year the trend series (also shown in the graph) now looks to be definitely heading in the right direction.

I've been trying to guess - no stronger - whether the numbers tell us anything about whether we can up the pace any further or whether we've hit capacity constraints. 

On the downside, over the past 25 years we've only briefly been able to keep up 1,000+ periods of monthly consenting.  Something or other has always knocked it back again. Either we've hit some sort of capacity constraint, or the business cycle has put the kibosh on it, with the GFC in particular decimating activity. The latest ANZ business survey wasn't much fun in that regard: only one month, the election and all that, but I particularly didn't like the finding that "A net 26% of businesses expect it to be tougher to get credit". That's bad news for housing developers.

On the plus side, the Auckland labour force has grown quite a bit, and there are more people around these days with building trades skills. Here's what the Household Labour Force Survey shows for people employed in construction in Auckland since 2009 (as far back as Infoshare went, and I haven't time to fossick the Census if it's got longer/better figures).

There wasn't a lot of movement till 2014, but since then employment has lifted from around 50,000 to around 80,000. Recent immigration probably plays some part in this (and maybe people shifting back from Canterbury building sites): where we live on Auckland's North Shore, a good deal of the in-fill development is by Asian developers with Asian crews, including the one literally across the road.

The unknown unknown is probably the impact of the planning process. I've no idea whether the number of consent-approvers is keeping pace with consent applications; I can surmise that (certainly over a time-scale of 25 years) the regulatory requirements to get a consent have risen; I would bet that land-use constraints have got a lot tighter. Net net - who knows, but I'd lean towards a view that planning is at a minimum no less a constraint than previously.

Overall, I'm glad to see the recent pick-up in consents to over 1,000 a month, and it might be a bit curmudgeonly to add "at long bleeding last": it's here, and it's something. But I'm not exactly jumping for joy yet. At this pace (12,000 dwelling units a year) we're still a little adrift of the numbers (14,000-ish?) that people think we need to meet new demand, let along eat into the existing shortfall (20,000-ish?). And while I'd be pleased to be proved wrong this time round, our recent track record suggests we can't keep delivering, or are blown off course from delivering, before we get the job fully done.

Who pays?

On Tuesday evening Harshal Chitale, senior economist in Auckland's Chief Economist Unit, spoke at the latest LEANZ seminar on 'Funding Auckland’s greenfield infrastructure: 'Efficiency, incentives, risk and fairness'. Tell you what - the chair for the evening, Richard Meade, didn't have to do much to encourage debate: this was one fired up audience. In a  nice way: our infrastructure deficit, especially in Auckland, is one of the hottest current issues for the economy, and gets at least a best supporting role nomination in the national slow productivity debate. Plus Harshal's talk raised knotty back-pocket and equity issues on who pays for what.

Harshal's paper will go up on the Auckland Council website in the near future* - probably here - and I should add (as he said) that the talk reflected Harshal's views and not necessarily those of the Council.

The key points I took away (and from here it's as much me as Harshal talking) were that there's a massive $20 billion infrastructural bill coming up to service greenfield development, of which the Council's share for the likes of water, waste, local roads and community spaces is some $13 billion (NZTA road funding pays for a lot of the rest). But Auckland Council's own ability to pay for this greenfield infrastructure is severely constrained. Putting the bill on the rates faces a political commitment not to raise rates more than 2.5% a year. Borrowing faces a credit rating limit: debt beyond some 270% of revenue (and it's currently 255%-ish) jeopardises the Council's AA/Aa credit ratings.

The political constraint may reflect electoral reality: my suggestion that rates should be a fixed proportion (0.25% a year?) of the market value of a house, which has the pleasant property that those who've benefited most from the housing shortage will pay most to relieve it, was not met with universal delight. So we're lumbered with inadequate rates revenue: if the Council's costs are mostly wages (I'd guess they are), 2.5% rates increases will struggle to keep capex spending constant in real terms let alone boost it. And we're lumbered with the debt ceiling, too, as the ratings agencies are unlikely to buy the argument (though it's correct) that the spend today will boost the debt servicing tomorrow, plus it's not silly for the Council to stay a highly rated borrower.

So Harshal's talk looked at what other options there might be - the big ones being developer 'contributions', targeted rates, and off-balance-sheet vehicles - and how they stack up on various criteria including efficiency, having the beneficiaries pay their full whack, and incentivising development rather than land banking. Of that lot, targeted rates maybe scrubbed up best, but it's not an easy area. Apportioning the benefits created and costs incurred, for example, is not straightforward. If new Suburb A gets developed alongside existing Suburb B, for example, it may make it feasible for a new bus route to service both A and B. Who is credited with the benefit? Who ought to pay? And who actually pays in the end: will developers simply pass on all 'their' costs to the housebuyer? And are finely calibrated but expensive and complex attributions any better at the end of the day than cheap and cheerful approximations?

Personally I was left with the impression that local resourcing won't cut it, and some central government funding may be required beyond the Housing Infrastructure Fund (announced here, updated here), which while helpful doesn't get past the debt ceiling problem, since it counts against councils' debt. Relatively limited-scope entities like territorial authorities may not be well equipped to handle step-change demands like these. And Auckland's issues are an outcome in substantial part of the country's national immigration policy (a policy which I don't have an issue with, just to be clear).

Here, and everywhere else where we're short of infrastructure, the government ought to use its considerable leeway to borrow internationally on once in a lifetime cheap terms. Take a look at the chart below: at a wild guess, would you say this looks a good time to tank up? And not just on an interest rate basis, either: we could ease the capital repayments, too, by borrowing for a longer maturity. Last week Austria, a country rated similarly to us (AA+/Aa1 with S&P/Moody's, while we're AA/Aaa), issued 100-year debt. We're getting a bit better at getting longer stuff away than we used to be, but our longest current maturity is 23 years (the September 2040 issue).

Which, by the way, is also what the latest (June) OECD report on the New Zealand economy said:

The government is aiming to reduce net core Crown debt as a share of GDP from 24% in 2016-17 to 10-15% by 2025 to help cope with future periodic global shocks and natural disasters. Nevertheless, it should be possible to finance some high-priority tax reductions or expenditure increases without compromising its fiscal strategy.

So full marks to Harshal for a thoughtful presentation, to Richard for organising, and especially to David Walker of PriceWaterhouseCoopers who generously provided the venue and hosted the drinks and nibbles. Keep an eye out for future meetings: if you've got an interest in the intersection of law and economics, there's bound to be something that'll interest you.

*Update - Harshal's paper was indeed published online, on September 27

Bums on diggers

The other day I was poring over the NZIER's latest compilation of consensus forecasts - an invaluable resource from many perspectives, not least for establishing the base scenario underpinning current financial market pricing - and I came across something really interesting*, which I've highlighted in the table below. It's the one that helpfully shows not only the consensus expectation, but also the high and low stabs at each variable.

That's a pretty remarkable range of views on the outlook for housebuilding. At one extreme you've got a scenario where - I'm abstracting here, but I think it's okay - the wind-down of the Canterbury rebuild will outweigh new housing starts in Auckland, detracting from overall GDP, while at the other end the Auckland market will go gangbusters, growing far more than Canterbury will contract, and boosting GDP.

To put some numerical perspective on it, the cumulative difference between the bullish and bearish housebuilding scenarios is $4.9 billion by March '20, which is equivalent to 2.1% of our current annual GDP. That's the difference between an expansion that's vigorous enough to keep the unemployment rate trending down, and one that would see it drift back up again.

If we assume that the wind-down in Canterbury is the relatively predictable moving part, then much of the forecast uncertainty boils down to differing views about the likely strength of house construction in Auckland. Presumably the bearish view is based on either low starts to begin with, or capacity constraints of one kind or another (labour, land, planning chokepoints) preventing potentially higher numbers of starts from getting underway.

And then this morning I saw MBIE has just published the latest vacancies data. Here it is, showing vacancies by occupation (there's a similar pattern by skill level). There's strong and rapidly increasing demand for the occupations you'd likely be looking for on the building site.

It could be that employers are having no trouble filling these vacancies: all we know for sure is that the hiring signs are out, and we don't know whether they're actually finding the people they're advertising for. And so far the Auckland numbers aren't flashing red lights: as the table below shows, Auckland is in the middle of the pack for year on year increases in vacancies.

It's also encouraging (although it was a few months back now) that the NZIER's March quarter Quarterly Survey of Business Opinion found that

Building firms...report a continued easing in the shortage of unskilled labour, although skilled labour remains very difficult to find. With the surge in net migration driven by an increase in the numbers of people coming in on work visas in the trades profession, this is helping to alleviate some of the labour shortages as construction activity continues to grow.

Though the QSBO can be read different ways: as the Reserve Bank put it in its latest Monetary Policy Statement (p21)

As suggested by the March Quarterly Survey of Business Opinion (QSBO), capacity constraints are tightening. Firms are reporting labour shortages and, more recently, some increased difficulty in obtaining finance. This appears to be related to the tightening in bank lending standards for residential property development and pressures created by rising construction costs

My instinct is that capacity constraints in Auckland are likely to be a worry. I'm not temperamentally inclined to restrict immigration in the first place, but if people are minded to, they ought to be careful about the risk of impeding the housing build we need to do, and the equally necessary infrastructure build, which calls on much the same labour force skills.

The Labour Party in its latest immigration policy at least had the wit, albeit in a clunky Gordon Brownish micromanagement way, to realise there's a potential issue here. It proposed that

Residential construction firms could hire a skilled tradesperson on a three-year work visa without having to meet the Labour Market Test if they pay a living wage and take on an apprentice for each overseas worker they hire. The number of places will be limited to 1,000 to 1,500 at a given time, which we expect will be additional to the construction work visas issued under the existing rules.

At the moment, I wouldn't give two hoots about Labour Market Tests and apprenticeship quotas. If there's an Irish lad on his gap year after secondary school, or anybody else prepared to get the roof on the house or pour the cement on a road, bring it on.

*Bearing in mind that this is an economist's idea of  'interesting'

Has planning been worth it?

There was a big turnout on Tuesday night in Auckland at the latest Law and Economics Association of New Zealand (LEANZ) event - a panel discussion featuring three members of the Auckland Unitary Plan Independent Hearings Panel. In fine interdisciplinary LEANZ style, they were Judge David Kirkpatrick (the Panel chair), planner Jan Crawford, and economist Stuart Shepherd.

Chatham House rules, so I can't say anything specific about who said what, but I can safely say that all three were very good speakers - informed, persuasive, congenial, thoughtful, and able to put technical stuff into plain (or at least a good deal plainer) English. So full marks to the organisers, Richard Meade (AUT and Cognitus Advisory) and Andreas Heuser (Treasury) for putting it all together. Special thanks to Simpson Grierson who kindly hosted the event: the LEANZ caravan would be unable to travel on without these corporate oases.Though you can help, too: here's that LEANZ site again, so you can pay your $75 sub ($50 for students).

So, noting again that these are my views and not what the presenters may or may not have said, what did I take away from it?

Clearly the members of the Panel did the best they could with the machinery they had to drive, and in particular they aimed to get the availability of housing land up to where it needs to be (though there may be a developing, and less known, shortage of land for business purposes). And they had the added complexity of having to amalgamate the previous jumble of territorial authority plans into one overall plan for the new one-city Auckland, as well as being lumbered with a process not of their choosing. In the circumstances, they did a fine job.

But it's also clear that the planning process for Auckland has become enormously top-heavy and inefficient. Like other parts of our regulatory apparatus (such as the price control 'Part Four' bits of the Commerce Act) it badly needs paring back to something quicker, more targeted, cheaper, and more efficient.

In part the current clunkiness comes from importing an industrial-strength First World planning policy infrastructure, without paying enough mind to what might work for a small distant economy with not-quite-First-World incomes to pay for it. And in part it's because plans have been allowed to become voluminous grab-bags of miscellaneous agendas (price control, income redistribution, architectural design preferences). I've written previously about one bonkers 'food security' provision, where growing vegetables was prioritised over housing development.

The complexity largely speaks for itself, but here, as just one tiny example, is the legend you'll need to understand the Unitary Plan maps.

Six kinds of residential zone. Five kinds of 'open space'. Ten - ten! - kinds of business zone. Five kinds of rural zone (not counting the Waitakeres and the Hunuas, which are two more zones of their own). And seven kinds of coastal zone. 'Micromanagement' doesn't even begin to describe it.

And it's not just a matter of economic inefficiency, though the purely economic costs must surely be substantial: a fair slab of potential housing development, for example, reportedly got put on hold until the Unitary Plan finally saw the light of day at the end of a nearly three year process. It also carries social costs. The process is now so cumbersome and protracted that it is very difficult for non-experts to have their say - a level of difficulty that could threaten to undermine the perceived legitimacy of the outcome amongst the wider public. .

I'm also not sure that the planning process has fully got to grips with what you would imagine would be one of the core outputs of any plan: integrating the plan, infrastructure provision, and the intentions of owners/developers of resources. All three need to be aligned for anything significant to happen. Nor are enough people making even back of an envelope attempts to estimate the net benefits (widely defined) of plan provisions. What about those 'volcanic viewshafts', for example, which protect people's ability to see (say) Mount Wellington from their home? I wonder how Tokyo would have got on if it had to be designed so everyone could see Mount Fuji: not very well at all, I'd say. And if people were given the choice of their kids getting houses (say) $200,000 cheaper but without a view of Mount Albert, which would they pick?

Which brings me to my final point - the role of markets. Yes, we all know that plans may be needed to help address the externalities and coordination issues that can crop up in dense conurbations. But the role of markets and prices (and indeed economic analysis) hasn't been so much assisted as largely displaced. In particular, the housing market has been distorted and suppressed.

The Salvation Army's latest State of the Nation Report, for example, says (p50) that

based on an average occupancy of three people per dwelling...and given that Auckland’s population grew by an estimated 45,000 people for the year to 30 September 2016, accommodating this number of people required 15,000 additional dwellings. Consents for new dwellings over the same period lagged this number by 5000.

Over the past five years, the cumulative shortfall in new housing to cater for Auckland’s population growth is estimated to be almost 18,000 dwellings. 

The Sallies snarked that the recent level of consents (10,000 a year) "has been celebrated as proof that Auckland’s housing problems are being resolved by the market", but that "in a slightly longer context this record is, however, not remarkable". The reality isn't that the market has delivered, but inadequately. The reality is that the market has not been allowed to work properly, or, for some places and activities, not allowed at all.

In sum, on the one side, you have an uncertain quantum of planning benefits, and on the other, clearer and large costs. I wonder what the net outcome has been?

Finally...

At last.

Last month, workers arrived and started to put advertising hoarding up...

...announcing that this former New World supermarket in Browns Bay...

...is going to be transformed into this (artist's image) very snazzy apartment block...

...of 56 apartments and 8 penthouses, with "impressive sea views" (and they will be) from level 2 up. A much needed boost to the housing supply and a much better use of prime land.

Finally.

And I say 'finally' because this is one of those Special Housing Areas where development was meant to be expedited, but where there has actually been a lag of over a year between designation as a Special Housing Area, in August 2015, and anything at all happening on the ground. The pretty pictures have been put up, and there's a sales office opened around the corner, but not a sod has yet been turned by way of actual construction.

And as I mentioned in previous posts (here, here and here) the delay in the supposedly fast-track site is all the odder, because non-Special-Housing-Area apartment blocks have been going up like billy-o in Browns Bay, including down the same street.

Now, I don't have any beef with the developers. It's their precious, and they can take their own good time to do whatever they want with it, and it looks like they're going to deliver something very nice indeed. And as we learned today (from pages 24-5 of the latest Monetary Policy Statement), there are severe capacity constraints in the Auckland building trade:

The construction industry is reportedly facing several constraints that may impede future activity, such as access to labour, materials, and funding. Most contacts are struggling to find labour to fill a wide range of positions. The labour shortage is reportedly most acute in Auckland,where high living costs are deterring construction workers from relocating from Canterbury or immigrating from overseas.

Contacts note that it is also becoming increasingly difficult to access construction materials, with shortages becoming acute for some materials. This is leading to some construction firms facing long wait-times and cost increases.

There has recently been a tightening in credit availability in the construction industry, constraining some firms’ ability to increase activity.Contacts note that new and small firms, as well as apartment developers,have been impacted most severely 

So maybe the developers couldn't have got it going any faster, even if they were dead keen to. And as I've said before, this is a sample of one, and maybe other Special Housing Areas have been bounding along faster than their non-SHA counterparts.

But it still leaves me with a nagging feeling that the interesting Special Housing Area initiative (faster planning approval in exchange for including some 'affordable' housing) didn't work out as everyone had imagined. We need to know whether this policy experiment worked, and if it did, repeat it or widen it, and if not, why.

Otherwise we'll continue to blunder around with well-intentioned housing ideas that never get properly evaluated - not a good enough approach to one of our most pressing national issues.

Auckland and Canterbury housing: what next?

The latest statistics on building consents came out this morning, and I've been keeping an eye on them mainly because Auckland housing consents at the start of this year actually declined for a while - a deeply worrying development, given that consents even before they dipped were not keeping pace with new demand for accommodation, let alone eating into the backlog of existing unfulfilled demand.

Here are the latest data for Auckland dwelling consents. I've included the 'actual' data and the 'trend' data': the 'trend' version is Stats' best effort to abstract from the (quite considerable) month to month volatility and to show us the underlying picture. I've gone back to 1995, partly because that's where the 'trend' series starts in Stats' database and partly to put the current rate of building into context.

It's good news as far as it goes. That dip has gone away, and it's onwards and upwards in recent months. It's still not clear why we had that earlier dip: some people I've spoken to said that developers were waiting to see the shape of the Auckland Unitary Plan, and maybe that's true. But it's somewhat at odds with the recent rises, which predate the publication of the Plan (it went public on July 22 and was only signed off by the Council on August 19). Perhaps there'll be another hiatus as the Plan is appealed, or maybe developers aren't fixated on the Plan at all: we'll have to wait and see.

Another possibility is that the trend-detecting algorithm at Stats had a temporary hissy fit and is now back on track, though the downside of that thought is that if it detected dips when there weren't any, maybe it's finding surges when there aren't any, either. And yet another possibility is that the month to month numbers (especially for apartment blocks) are just too volatile to find a reliable signal in all the noise, even if your trend-spotting software is up to scratch.

But in any event, let's bank it - as far as it goes, which isn't far enough. You can see for yourself that this recent rate of consenting is getting closer but still isn't back up to the levels of the early 2000s, and on a per capita basis it's still well adrift: urban Auckland's population was around 1.2 million in the early 2000s, and it's nearer 1.5 million today.

And it's not just an Auckland problem, either: nationally we seem to have had increasing difficulty in getting homebuilding activity up to the level it needs to reach. This chart (from Stats' info release today) shows that we are currently consenting some 30,000 dwellings a year (and that's inflated quite a bit by the Canterbury rebuild), but we were regularly clocking 30,000 and more in the early 1970s when the population was only around 3 million compared to today's 4.7 million. There are more sophisticated ways of measuring it, but I doubt if they'd shake the basic conclusion, which is that we need to get the supply side of the market operating a good deal more responsively.

I hadn't been following the Canterbury rebuild numbers closely: I had a vague impression that peak rebuild was somewhere around now. And indeed it is, on these figures from the June Building Activity Survey: the total value of building work in the Canterbury region is still going up a bit, but looks like it is plateauing.

Within the overall total, the housing rebuild is actually past its peak, which was back in late 2014 and early 2015, while the non-housing rebuild is still growing.

Today's dwelling consents figures for Canterbury show the same picture: consents also peaked back in the second half of 2014.

There's still a lot of housebuilding going on in Canterbury, and self-evidently the job can't be finished, but hopefully the recent modest drop in activity is a signal that the bulk of the demand has been met and there's less left in the pipeline still to do. 

The other thought that emerges from these data is that as far as the impact on overall GDP growth is concerned, the boost from the Canterbury rebuild has largely run its course. Ideally the construction sector would swing more or less smoothly from meeting demand in Canterbury to meeting demand in Auckland, though as noted above our national ability to meet demand has become progressively creakier. We could even see further GDP growth if the Auckland build started to become larger than Canterbury's. But overall it's beginning to look as if we're going to find something else to do with our resources if we want to keep 3% growth going.

Bonkers. Barking. With a capital B

Auckland Council staff have been working through the Proposed Auckland Unitary Plan that an independent hearings panel delivered to them last month, and they've recommended some changes (there's a good summary in the Herald). Councillors will start their deliberations tomorrow: the agenda document is here if you fancy taking on the 618 page brute (and without a proper table of contents, either).

Everyone will have their own hot topic - 'shoebox' apartments are up there for some, housing in volcanic craters for others, plus there's the perennial Long Bay development controversy - but what caught my eye was the staff's view on protection of rural land (it's item 6.4 starting on p35).

The original draft plan that the independent panel considered had included "an objective seeking to achieve food security for the region". That was self-evidently bonkers. "Food security" makes little or no sense for countries in general, where it's usually a protectionist device to protect local farmers. It makes spectacularly little sense for a huge food producer like New Zealand. And it has no logic at all at a sub-national level for any economy with roads and trucks.

The independent panel correctly gave "food security" the flick, and the Council staff concur: they're recommended to councillors to go with the flow and junk it. So far so good.

Unfortunately both the panel and the Council staff have left in a planning objective of "making a significant contribution to the food supply" for Auckland and New Zealand. And that has fed into the staff's recommendation not to accept the panel's proposals to make it easier to do rural sub-divisions, because it would result in "loss of rural production".

There may be other reasons for opposing urban spread into rural areas - the Council staff mention some, including their ideology of a "compact city" which is one of the reasons we've got the problems we have - but let's be clear. Loss of farm production shouldn't be one of them. It's barking mad as a criterion.

If Auckland in the morning were to swallow up 10,000 hectares of prime farming land, we wouldn't notice the slightest difference. It would be less than 0.1% of the total agricultural land in the country*. It's nonsense to think you're making a "substantial" contribution to food production by restricting Auckland's spread.

And even if you were, which is the bigger problem: making a microscopically tiny difference to a country already awash in agricultural capability, or making quite a big difference to the huge shortfall of land available for housing, the consequent stratospheric housing prices, and the serious social issues they are causing?

*The data in the 2012 Agricultural Census land use tables show total agricultural land of 14.4 million hectares, from which I've subtracted the two categories of bush and the 'other' category, which makes the core supply of agricultural land as 12.9 million hectares (the biggest component is the 7.9 million hectares of grassland). 10,000 hectares deducted for Auckland housing would be 0.077% of the total. You could make it 100,000 hectares for housing and it would still be less than 1% of the total farmland.

It's. Still. Too. Slow

Let's start with the positive: Stats told us that building consents in Auckland rose by 16% in the year to June, to 9,651 homes.

Right, having got that out of the way, another perspective is that the consents (when they eventually translate into construction) are still running some 4,000 to 5,000 a year below the level to keep pace with demand - the conventional wisdom is that something like 14,000 a year are needed - let alone eat into the existing shortfall of perhaps 20,000. We will need to keep growing at 16% a year for the next three years just to reach match-new-demand levels, by which time the shortfall will have risen to around the 25,000 mark.

I'm also rather concerned about this - it's the 'trend' estimate of what's happening to Auckland consents, after Stats has waved its magic smoothing wand over the (very erratic) monthly data. On this measure, Auckland consents peaked towards the end of last year, and have been falling steadily since.

I've wondered about this before. It could be, for example, that there's something strange in Stats' smoothing algorithm. Or - and I'm leaning more to this view after having a quick natter with someone who's been closely involved with Auckland's Unitary Plan - it could be that developers (and apartment block developers in particular, I'm  told) - have been holding off to see what the Plan allows. You would, too, if your Plan A had been a two-storey development but the Unitary Plan might allow a six-storey one.

So the upside is that if the Plan goes through, the developers will go ahead with their best options, and the previously deferred projects will eventually boost the numbers in the right direction (possibly by a lot if the Plan goes the right way on allowable heights). The downside is that if the Plan runs into NIMBY or other flak, and there's no near-term finality, some developers are going to leave their plans on the shelf. A protracted period of uncertainty would have very unwelcome consequences: in that case. and even though I'm a jafa these days, if Auckland Council can't get its act together then I wouldn't have the slightest problem with central government taking over the job.

All up, even on the 16% increase view,  it's pretty clear that supply is responding slowly, and part of the solution will involve figuring out why (capacity constraints? deadweight planning?), and fixing it.

At the same time we should realise that not all of what's going on is down to New Zealand specific issues. People have been pointing fingers at our land use and land availability planning restrictions, our current net immigration flows, our tax regime and hence or otherwise our love affair with rental property, and our easy access to bank credit. There's something in all of those. But they also miss a wider point: our booming housing markets are just one further symptom of globally ultra-easy monetary policy.

One of my other gigs involves talking to chief investment officers at some of the big fund managers, and from those conversations, it's become clear that just about every income-producing asset, including housing, has been bid up to expensive levels. Global government bonds, higher quality corporate bonds, physical and listed global property, dividend-paying equities (especially the more defensive sectors such as infrastructure) - every one of them has been bid up to historically expensive valuations by investors desperate for yield, at a time when central banks have effectively driven short-term interest rates to zero (or even below).

And we're not even at Peak Global Ease. The Aussies have just cut their policy rate; the Brits are likely to; Japan has upped its 'quantitative easing' programme; China might well want to support its economy a bit more. We're probably going to have to as well, especially after that Aussie cut. The only economy where policy might be tightened anytime soon is the US, and even there the current futures pricing is betting that there's a 60% chance that the Fed funds rate will still be at its current 0.25-0.5% level at the end of this year.

So by all means fix the things we can fix, and try to pull what demand and (especially) supply levers we can. But I wouldn't be too sanguine about dealing to historically high prices until global monetary policy starts to creep back to more normal levels.

Still nothing

Nine months ago I went and had 'A visit to a Special Housing Area' near to us. Three months later I went and had another look: nothing had happened on site, which led me to wonder, 'How 'special' are Special Housing Areas?'

And yes, you've guessed it, I went along again, over the weekend. The big tree has lost its leaves, but otherwise all is as before - still no sign of the apartment block that the Special Housing Area was meant to fast track.

On the other hand the non-fast-tracked apartment block at 1/23 Bute Road, just down from the Special Housing Area, is coming along just fine, as you can see below.

So: I'm prepared to believe that Special Housing Areas were a well-meaning initiative. And I agree, this is a sample of one. But my question would be: where is the evidence that they have made any positive difference?

How 'special' are Special Housing Areas?

Three months ago I went and had a look at a Special Housing Area (SHA) that had been set up not too far away from us in Browns Bay (if you're not au fait with the whole SHA thing and the Housing Accord, you'll find Auckland Council's guide handy).

As I said then, I came away thinking that calling it an "area" was pushing the ordinary meaning of the word: it was actually one site, at 4 Bute Road. I wasn't convinced there was much "special" about it, either. Lots of other mixed retail/residential blocks had already been developed along Bute Road, and giving accelerated planning permission to something that would likely have sailed through in any event didn't seem to me to be much of a nudge towards faster housing supply. In any event, 4 Bute Road didn't seem to have benefitted much: nothing was happening on site.

Over the weekend I went back to have a look and see how things have progressed since then. And the answer is, they haven't. The big tree next door has had a good summer, but that's it.

All of which is a bit odd, as the supposedly fast-tracked SHA site is still sitting there, while further along Bute Road, non-SHA developments are coming along fine. Here's a big new five-storey one, for example, at 1/23 Bute Road.

So I went to have a look at another local SHA, at 586 and 588 East Coast Road. This is an earlier one: it was part of a batch that were designated SHAs in September 2014, whereas 4 Bute Road got the nod in August 2015. Here's what it looks like: it's the bungalow with the grey roof in the centre of the picture, plus the house with the orange roof behind the pine tree.

Again, this is stretching "area" a bit, but I suppose two average-sized sections make an "area" of some sort. Whether it needed or benefitted from "special" designation is anyone's guess. It's true that there aren't other apartment blocks in the immediate vicinity, so maybe the developer would have been attracted by faster-track consent (under the SHA process) for a 39-apartment development, instead of some more protracted bunfight. But on the other hand there's already a 2-storey business park thingie next door (you can see the edge of it in the left hand side of the photo), so putting in a smallish apartment block wouldn't be that much of a planning consent hill to climb.

In any event, nothing's happened on this site, either, though to be fair the original SHA announcement in September 2014 talked of a timeframe of "the next 24 to 36 months", and said "There is an intention to have the residential housing project completed in the early part of 2017".

Where all this leaves me is this. I'd like to believe that "Special Housing Areas" greased the wheels of the housing planning process, and either accelerated or increased new construction, or both. That would  be a great outcome on one of our largest national infrastructural challenges: skyrocketting Auckland house prices, as we know, have had ramifications all over the place.

But how will anyone definitively know? At one level, it's not that hard to create an anecdotal trail (as I've just done) of slow SHA development and as-fast or faster non-SHA development, and to convince yourself that they've had no impact on supply at all, or even held it up. It's possible, for example, that the central quid pro quo of, broadly, faster planning consent in exchange for inclusion of some "affordable" units within the development, never took off enough to make any difference.

But for a policy this important, I'd like to think there'll be some more sophisticated analysis of whether it's working. Granted, MBIE and Auckland Council have, between them, come up with a series of informative monitoring reports: you'll find the latest one, covering the period October 2104 to September 2015, the second year of the Housing Accord, here. It's got lots of useful data, such as this graph (on p15) of what's happened to housing consents since the Housing Accord kicked in.

The problem, for me, is that the data, while useful, don't really answer the question, did the SHAs make a difference? We don't know how much of this recent consenting and development would have happened in any event - in fact, while consenting has picked up substantially in the Housing Accord era, it hasn't yet consistently reached the levels that Auckland managed without Accords and SHAs in 2002-04 (and in a smaller Auckland back then, too). So I'm hoping that someone - an economic consultant with an interest in housing, maybe? - will be asked to turn their minds to a proper 'with and without' exercise: matching a bunch of otherwise similar SHA and non-SHA areas, and checking to see if the SHA ones outperformed in speed or quantity.

Incidentally, the monitoring report mentioned, in passing, a couple of truly appalling facts about the slowness of the normal planning process. It was giving some case study examples (on pp6-9) of where SHA planning processes have got things moving faster: it said, for example (p9) that "Within two years of the start of the Accord, homes are being delivered in SHAs like Weymouth and Northern Tamaki and sections delivered in special housing areas like Whenuapai Village".

Jolly good: but the report also noted that these were "processes that would normally have taken 4 or more years", and earlier (p6) it said that "Under the Resource Management Act 1991...the rezoning of brownfield sites to enable more intensive development can take between 2 and 6 years".The Second World War took six years. I don't think a planning consent needs to.

A visit to a Special Housing Area

A while back, I saw that a Special Housing Area (SHA) had been set up quite close to us, in Browns Bay. So I went and had a nosey, as you do.

It wasn't what I'd expected, from a number of perspectives. I'd had at the back of my mind that SHAs would be reasonably substantial sites - it's rather implicit in the term 'area', you'd think - so I was somewhat surprised that the SHA consisted of a single, small to medium sized commercial building at 4 Bute Road (pictured below).

To be fair to Auckland Council, this must be an unusually small SHA. Their guidelines for approving SHAs say (at point 5) that "The council has a preference for SHAs with a yield of at least 50 dwellings", and this one just scrapes in. The Council's SHA web page says that "The site at 4 Bute Road, Browns Bay will be developed for retail at ground level with four levels of apartments above, comprising 54 residential units plus accompanying car parking".

And if you're wondering how you get 54 apartments onto the former site of a not very large New World supermarket, the answer is that they'll be - I don't know the best real-estatese to use here, but "snug" might do. As the webpage says, "The residential units are a mix of one-bedroom (77m2) inclusive of balconies and two-bedrooms (88m2) inclusive of balconies".

I've got no problem with any of this. If people want to buy fairly small apartments, why not? And as the Council web page says, apparently people do: "The proposed scheme has been developed in close liaison with local real estate agents who have identified significant demand, particularly from older residents seeking to downsize and remain in the suburb". While I still think "area" is pushing the ordinary meaning of words a bit, let's park that.

But it also got me thinking about the meaning of "Special". From a land use point of view, there's nothing in the least bit "special" about 4 Bute Road. The area around it has already got lots of multi-storey mixed retail/residential apartment blocks. Here are two of them, also on Bute Road.

I'd have thought the planning approval discussion at the Council would have gone something along the following lines.

Trev: "Hey, Kev - you know Bute Road?"
Kev:  "Yep".
Trev: "Is that the one with all them apartment blocks?"
Kev:  "Yep".
Trev (picks up rubber stamp): [Thunk]

So I don't know whether this site was ever going to be a goer under the SHA regime, where developers get faster-track approval in exchange (in particular) for including a component of "affordable" housing (section 6 of the guidelines has the definitions of "affordable"). Personally, if the social objective was solely a faster build, I think I'd have preferred a simple, "accelerated consent" process without side conditions, but I can also see the planners' wanting to get a social quid pro quo. But I'm not sure any of this applies to 4 Bute Road: the developer, I'd imagine, would have figured on getting planning approval fairly readily, given the past approval of several projects just like it, and without giving up any potentially expensive concessions.

Not that its being an SHA, or not being an SHA, seems to have made any material difference either way. The site's been vacant for some considerable time, and (I drove past a few moments ago) is still vacant, with no signs of imminent activity. Don't know why: if I had to guess, I'd say it's because the Auckland construction market is at or beyond full capacity, and projects are just going to have to take their turn in the development queue. But in any event, I don't think I'd be proposing 4 Bute Road as a poster child for the SHA initiative.