Let central government intervene on housing land, Productivity Commission says

Wednesday 21st October 2015

The government should be allowed to force local authorities to release land for urban development in the face of rampant house-price inflation and current land allocation policies cause "a number of harmful social effects", the Productivity Commission says.

"If councils are unable to deliver a sufficient supply of development capacity to meet housing demand, then central government should step in to ensure this occurs," the commission says in its 'Using Land for Housing' report. The best way to declare the conditions for intervention would be to regulate based on "the difference between urban land that can be developed and land that cannot."

“Government should set a limit for land price inflation which would clearly signal to councils, landowners and developers the conditions under which government would intervene to make more land available,” commission chair Murray Sherwin said in a statement accompanying the report.

Housing Minister Nick Smith welcomed the report, which he said would be subject to "careful consideration".

The commission says Auckland is among the most unaffordable in the world for housing and struggles with a web of restrictions on land development that stop New Zealand's largest city both sprawling and intensifying, leading developers only to invest in expensive new dwellings.

"Where a city has barriers to both growing up and growing out, the inevitable response to the demand for housing is higher prices,” the report says.

That has increased land values and made it only worthwhile to developers to invest in high-end property developments rather than affordable housing.

"The shift towards more expensive housing and the resulting decline in the construction of lower-cost dwellings has a number of harmful social effects," says the report, which includes recommendations to simplify and wind back the scope of local government planning rules that add cost without sufficient consideration of public benefit.

Harmful social impacts of current urban land release practice include "household crowding, barriers to wealth accumulation, and limits on the ability of people to move to areas with more expensive dwellings," says the report, produced in a consultative process over the past two years.

The report was ordered by Finance Minister Bill English in response to house price inflation in Auckland, where demand from population growth is out-stripping supply and pushed prices up 25.4 percent in the year to September, according to Real Estate Institute of New Zealand figures.

“There are many obstacles to the supply of land within and outside of cities," said Sherwin. "Local homeowners oppose developments that could increase rates, decrease the value of their houses or simply change their neighbourhoods."

Existing landowners were also more influential because they were more likely than renters to vote in local government elections.

"As a result, many council land use rules and policies effectively promote the interest and wealth of those who already own housing, to the detriment to those who do not."

The commission says "many councils prefer to house growing populations by encouraging greater density within existing city boundaries", but "some planning rules have the effect of inhibiting that increased density".

“The sharp increase in house prices that has occurred in recent years is a clear indication that rising demand for housing is not being met with rising supply. This needs to change.”

It calls current urban planning systems "sluggish", and says local councils are failing too often to provide adequate infrastructure, more of the cost of which should be borne by those benefiting from its provision, the commission recommends.

"In some cities, charges for new infrastructure are set too low, requiring cross-subsidies from existing ratepayers," the report says. "As a result, local authorities or their infrastructure providers tightly control the supply of new assets, to keep costs and risks down."

Poor council land release practice was also leading to losses at a national level, given the importance of well-functioning cities to economic productivity and national well-being.

“A sufficient supply of land for housing, an adequate supply of affordable housing, and the effective functioning of our cities, are topics of national importance. Central government has a legitimate interest in resolving those issues, where local councils cannot," said Sherwin.

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