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?

Here's one solution to Auckland's housing issues

The Auckland Housing Enablement Bill, 2016

1. The purpose of this bill is to accelerate and increase the supply of well-built housing in the Auckland area.

2. Any house up to two storeys in height may be built anywhere within the Metropolitan Urban Limit without further planning approval, provided that the construction

• is carried out by, or supervised by, a Registered Master Builder or New Zealand Certified Builder, and
• the quality of construction is signed off in writing by two, arm's length, full members of either the New Zealand Institute of Architects or the Institution of Professional Engineers New Zealand

Those falling Auckland housing consents - an update

Last month I wrote about the downturn in Auckland housing consents and wondered what was going on (and is still going on, as yesterday's release of April data from Stats showed). Lots of people have been wondering, too: the post got (by my blog standards at any rate) a lot of views.

A helpful reader, 'energy24.7', left this comment:

Check the raw numbers for consents. You'll pretty quickly see the downturn in trend is due to reduction in the volatile apartment series. Houses are still on their way up (excepting a little seasonal variation). But I'm not saying they're anywhere near where they need to be, just it explains the downturn in dwelling trend

And energy24.7 is absolutely right. I'd steered away from the seasonally unadjusted numbers so as to get a better feel for the underlying trend, which is fine in many circumstances, but the baby that went out with the bathwater was the information in the raw data. So here it is*.

And as energy24.7 said, the fall is indeed down to apartment numbers dropping to virtually nothing, while house numbers have been gradually increasing.

Which all brings us to a new question, though: what's going on in the apartment sector? There are umpteen possibilities (and I'm hoping more housing-expert readers will chip in with their views). It could, for example, be happenstance: it's a fairly volatile series. But I'm not convinced: you'd expect apartment consents to be well above the minimal, credit-constrained levels of the GFC. Or it might be capacity constraints, though again that doesn't feel especially plausible.

Or are developers waiting for a potentially more intense-development-friendly environment under the new Auckland Unitary Plan? If so, we're in for at least a few more months of very low apartment consent levels, as the recommendations from the Plan hearings panel won't go public till July 27, and even then we don't know whether the Council will buy into them (they've got to notify their decision by August 19). And then there will be lags while developers go through the hoops of whatever planning process emerges from the whole debate.

Whatever it is, it needs to be fixed, pronto. Falling levels of apartment consents are the very last thing the Auckland housing market needs.

*An earlier version of this graph had the lines mislabelled (houses and apartments were the wrong way round). It's right now. Thanks to alert reader Mark who picked it up.

Why are Auckland housing consents falling?

Here's a rather worrying graph. It's the number of consents each month for new dwelling units in the Auckland region, on a 'trend' basis (the statisticians' best effort to remove seasonal variation and random noise).

I've put up the whole history of this series*, back to the start of 1995, because it tells us several interesting things. One is that, while people rightly point to a variety of reasons for Auckland's current housing shortage, one that tends to get forgotten is the GFC: at a rough estimate, at least 7,500 houses didn't get built in that period that would normally have been. And another is that despite the recent strong rise in consents, we're still not up to the best levels of the past (in the early 2000s), even though the need is much more pressing these days.

The thing I wanted to highlight, though, is the drop-off at the right-hand end.The number of consents has been falling since September and October - it was 812 in both those months - and has since dropped to 766 (in March, the latest date available).

It's certainly a very odd development. It seems at variance with what you see on the ground in Auckland. Sure, there are lags between consents and construction, and a lot of the current activity could be down to the higher levels of consents issued earlier last year, but if there was a genuine drop-off in the housing consent pipeline over the past six months, you'd think you'd be seeing some slackening off in actual construction activity by now. And you're not, at least on my subjective 'economics by walking around' assessment. Everywhere I go around Auckland's North Shore, there are new developments I hadn't seen before.

Given that the data, at least to me, don't line up with the reality I see, I've been doing a bit of tyre-kicking with the ever-helpful Statistics NZ staff, on this occasion Danielle Barwick in the Christchurch office (and I should say all views here are mine, not hers).

My first thought was perhaps the number of dwelling units per consent might have been going up. Ten years ago, perhaps the 'typical' consent was for one detached house: maybe, these days, one consent could be for 20 terraced townhouses? Some of the new developments are high-density indeed: here's one I snapped today at Silver Moon Road in Albany.

So consents, perhaps, could be going down but with increasing dwellings per consent, dwellings could still be going up? Nope. A single consent for a 30 house development gets counted as 30 dwelling units.

There is another possibility, though. At the early stages of a project, there can be a consent for the earthworks part of a project: at that stage the final shape of the development isn't yet known (so Stats can't put a dwellings unit number on it, though they will when it's finalised). You could have a single consent actually representing a very large project until the full size gets logged later. And if there are a lot more of those happening - and there are lots underway, here's another local one, off Spencer Road, again in Albany - then the consents numbers could be temporarily lower but the pipeline could actually be getting larger.

Maybe that's part of the answer, and we'll all be relieved when these earthworks-stage projects eventually get counted at their full value. Maybe something has fried the brain of the trend-identifying algorithm, and it'll all come right with a few more months' data. Maybe the planners have been experiencing some kind of consent back-up or logjam (though they've been handling higher numbers in the past, so why now?). And it could be that this recent drop-off in consents is just one of those things: there have been fluctuations in the past that went against the longer-term trend for a while before getting back on track.

At the moment, though, it looks distinctly odd. And if it keeps up for any further length of time, it will go from 'distinctly odd' to 'downright alarming'.

*You can find it for yourself, if you're minded, on Stats' Infoshare service, search for the series identifier BLDM.SF021100A1T

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 modest proposal

The Reserve Bank has been taking some stick recently about not getting inflation up to 2% - you have your choice of posts on Michael Reddell's blog, for example - and yesterday Stuff's Vernon Small weighed in with 'Monetary policy is bust, so why are we still banking on it?'

So here's a modest proposal to get us back on track.

First, we cut the Official Cash Rate to 2%, the same level as the Australian policy rate. Nice big demonstration effect right there, with a 0.5% move instead of the usual 0.25%, plus it would be a genuine surprise (the futures market has only one 0.25% cut in the pipeline).

Second, we signal we'll match any future cuts in the Aussie rate (the futures market figures the RBA will cut by 0.25%, some forecasters think there are two cuts on the way).

Third, we do some quantitative easing (QE). The RBNZ buys enough government stock to drive down our current 10-year yield (3.04%) to the level of its Aussie equivalent (2.40%). It would help if Treasury cancelled its scheduled bond tenders and instead placed Treasury bills direct with the RB.

At that point, no sensible investors will pick New Zealand over Australia (the Aussies have a slightly better credit rating, so if the interest rates are the same, you'd pick them). Investors in New Zealand will clear off, and the currency will depreciate. It wouldn't hurt to give it a judicious nudge with some thin-market currency intervention.

If that doesn't get us nearer 2%, well maybe Vernon's right, and nothing ever will, but we'll never know unless we give it a go.

Course, the Auckland housing market will have turned incandescent, but you can't have everything, can you?

More seriously, I can't help feeling that it's theoretically possible, in the current collapsing-commodity, competitive-devaluation, out-QE-the-other-guy world, that there may be no feasible or desirable setting of local monetary policy that is consistent with 2% local inflation.

I've had a go in the past at trying to put this into some kind of formal framework (if you don't mind some simple graphs). My conclusion back then was that, if there was overseas monetary policy loosening (and a great deal more has happened since I wrote in 2013), and the RBNZ wanted looser policy but would prefer if it didn't exacerbate the housing market, then something had to give:

the Bank's got a bit of leeway: it doesn't have to keep inflation strictly at 2%. It's got a band of 1% to 3% to work with (on average aiming at a longer term average of 2%). Where the logic of things leads you to, though, is this: in current markets, the Bank will need to use this leeway, and let inflation undershoot 2% for some time.

It's possible that the sub-2% undershoot that we have indeed experienced isn't such a bad result, in the round. It could be the best we could realistically achieve in current world market conditions - or at least the best we could achieve short of having slavering buyers stampeding from auction to auction to snap up the last house under $3 million.

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.

That house price "fall"

Barfoot & Thompson have just come out with their latest sales report on the Auckland housing market. Early media commentary has tended to latch onto the fall in median price in August - as in 'First Auckland house price fall in six months' (Herald) and 'Have Auckland's house prices turned?' (NBR). Here are the B&T results, for the median price.

But hang on.

First of all, these numbers aren't seasonally adjusted, and there's always a drop in August. This year, though, the fall was minute (-0.3%) and noticeably smaller than previous years' (2011: -1.7%, 2012: -2.5%, 2013: -4.1%, 2014: -2.3%). On its face, the smaller than usual fall in a winter month is more compatible with a strengthening market than a weakening one.

And secondly there isn't much sign of a slowdown in the year on year rate of increase, which I've graphed below.

B&T say that you need to be careful with these year on year comparisons:

August’s average price [they're using the average rather than the median here] is 15.4 percent higher than the average price at the same time last year, but making this year-on-year comparison is misleading as it infers prices are continuing to rise, when they are not. Most of the increase that has occurred year-on-year did so in the first four months of the year.

In applying year-on-year price comparisons over the next quarter also requires care, as last year sales patterns were interrupted by the run in to the 2014 general election

Fair enough, but even if the underlying increase is only 15%, or even 10%, you struggle to see a clear break with the trend of the past year and a half.

B&T's own conclusion is that "The most likely scenario is that prices will increase modestly in coming months from where they are at present", and I'm perfectly happy to go with their judgement call. All I'm saying here is that people may be leaping to premature conclusions that the August data don't properly support.

A cautionary tale

I've just finished reading The Fall of the Celtic Tiger (Oxford University Press, hardback 2013, paperback 2014), a fine book cowritten by my old classmate at Trinity College Dublin, Donal Donovan, and our former monetary economics lecturer, Antoin Murphy. Well worth reading from many perspectives: the story of how the best performing economy in Europe became a financial basket case is gripping, and it's got many lessons for countries elsewhere, including for us.

One is the importance of keeping a very close eye on the structural fiscal balance - the true shape of the government's books, shorn of cyclical influences. The Irish government of the first half of the 2000s spent up large on the back of a cyclical and unsustainable boom in revenue, a lot of it emanating one way or another from the massively overheated Irish property sector. In reality, its spending (and the future commitments it also entered into) left it hugely exposed, financially, when its revenues plunged.

At the time, as the book explains, watching the structural balance wasn't much in vogue, and it didn't help that when the first estimates were eventually made of the true Irish position, they didn't correctly pick up the sheer awfulness of the fiscal books. These days we're more on the ball - though the media attention at Budget time is still disproportionately on the government's headline fiscal numbers and not enough on what's really happening under the bonnet - and I was pleased to see that Treasury continues to beaver away at improved ways of calculating where we really are.

I was also struck by how quickly the Irish fiscal situation deteriorated when the balloon finally burst, and there's a lesson there too. Here is what the level of Irish government debt looked like before things went to hell in a handbasket (based on the data in Table 6.1 of The Fall of the Celtic Tiger).

That looks good, doesn't it? Despite the big spendup, revenues were so large that the government could scatter cash to the four winds and still have enough left over to work government debt down to what looks like a conservative level of just under 25% of GDP. You'd think that debt at that level was low enough to be able to cope with anything the domestic or global economy might throw at you, wouldn't you?

But it wasn't.

So when our Fiscal Strategy Report says,

The Government has five fiscal priorities:

...

2 Reducing net government debt to 20 per cent of GDP by 2020, including repaying debt in dollar terms in 2017/18

...

...

5 Using any further fiscal headroom – including from positive revenue surprises – to get debt down to 20 per cent of GDP sooner than 2020 

I say, right on.

And finally there is the whole issue of overheated property markets: as you read the book, you find yourself asking, are we on the same slippery slope to a property bust as the Irish were?

On balance I'm inclined to think not. We do have some of the same characteristics as the Irish did: a surge in property demand from growth in incomes, strong net immigration, and a monetary policy imported from elsewhere that doesn't suit our circumstances (in Ireland's case it was the common eurozone monetary policy, in ours the Fed's which has, for example, helped drive our fixed rate mortgage rates to low levels). But we don't have others, notably the reckless lending of the Irish banks in general and their huge lending to property development companies in particular.

But sorting out what's happening in real time is as hard here as it was in Ireland. You can easily miscategorise things: what looks to you like a 'genuine' increase in housing demand meeting a near-fixed short-term supply curve could as easily be the early to mid stages of a speculative bubble. And often enough there may be elements of both stories happening at the same time.

Which is why I thought this chart was so interesting. It's by Ronan Lyons, an assistant professor at Trinity, and it appeared a few days ago in this article on the Irish economy blog. It's his estimate of the strength of the different factors that were driving the Irish housing boom/bubble.

As you can see, different things mattered at different times. As the boom started (1995-2001), you had decent sized contributions from a variety of sources - people's incomes (blue), demographics (green), bank lending (red), and those too-low eurozone interest rates (yellow) all played a part. The bubble period of 2001-2007, however, was driven overwhelmingly by loose lending.

Wouldn't it be useful to see the same analysis done here?

We are not alone

We all know that demand for housing in Auckland is high, and supply is scarce. As the Governor of the Reserve Bank put it in a speech in February

Auckland’s housing shortage is estimated to have increased over the past year to between 15,000 and 20,000 dwellings, and the Auckland Council estimates that 10,000 houses a year will be required for the next 3 decades. Residential building permits are currently running at an annual rate of 7,700 – a 70 percent increase over 2012 and twice the 2011 level, but well short of the increase that needs to be sustained over a long period.

What people may not know is that our problem is not unique: Sydney's exactly the same, as a recent report prepared by MacroPlan Dimasi for the Property Council of Australia shows. Here's the guts of the findings, from the Property Council's press release, and the full report is here as a pdf.

• In the first decade since housing targets were set for councils, they have collectively come up over 51,000 homes short – or 23 percent
• Annual approvals over the past decade averaged 17002 – against a target of 22,178
• Against population growth, the annual shortfall increased to 5632 – or 56320 over the decade
• Population projections show Sydney will need to produce 31,076 new homes each year – but based on the current rate of approvals, the annual shortfall is 14,073
• Even in the favourable market over the past three years, Sydney has averaged 23,350 approvals per year
• Only five councils in Sydney are currently issuing enough approvals to keep pace with projected population growth.

 Here's an extract from the key Table 2 in the report which seemed to me to be quite interesting.

While the report, and the Council, are rather critical of local authorities' performance in issuing enough building consents, that doesn't seem entirely fair to me. Look at Canterbury in the table. According to the Great Plan From On High, Canterbury was supposed to issue building consents for 263 dwellings a year (column 1 of data). In the event it actually issued 324 (column 2), and got a gold star for achieving 123% of target (column 3) with 61 more than needed (column 4).

Unfortunately for the Canterbury planning office, however, those damn cussed humans weren't following the Great Plan when it came to deciding where to live. Far more of them were actually living in Canterbury than the Great Plan favoured: ideally there should have been 611 new dwelling projects consented to house the actual inhabitants (column 5). Building consents were 287 less (column 6) than actually needed, or only 53% (column 7) of what they needed to be. So rents and prices soared, and living space became tighter, as people were forced to scrunch up with their families, friends and flatmates. People, in short, didn't want to buy what the Great Plan was selling.

So yes, there is still an issue of local authorities not reacting to the actual demand for housing with enough consents in good time (though to be fair, the likes of Canterbury may well have felt constrained to stick to somewhere in the general vicinity of the Great Plan). And the planning process in Sydney is as rickety and slow and expensive and inconsistent as it is here: if you're into the microminutiae of planning processes the MacroPlan report has some detailed suggestions for improvement on page 28, most of which look as if they would be equally applicable to us, including "A broad scale review of employment trends and new employment needs in conjunction with housing needs — to identify land-use opportunities for housing development such as rezoning disused
industrial lands to residential", and "A more responsive development assessment system that curbs costs and recognises that ‘speed to market’ is crucial".

But there's also the bigger issue of getting a better match between the Great Plans of this world and what people will actually sign up for. I can see value to a Great Plan from a variety of environmental, social and economic perspectives (coordination with infrastructure investment, for example). And no doubt many planners would say that their Great Plan is the end result of extensive community consultation, and at some level is what the people want. Well, maybe. But in Sydney at least - and maybe Auckland planning aficionados will chip in about the situation closer to home - it hasn't turned out that way.

More house lending controls to come?

As we all know, the Reserve Bank is in a difficult spot.

It can't easily raise rates. It probably doesn't want to anyway, since (as I've argued before), overall monetary policy conditions are already too tight. But even if it did, the Kiwi dollar would appreciate, or at the very least not fall to the levels the RBNZ would like: "The upward pressure on the TWI reflects several influences but primarily investors have been attracted by the broad strength of the economy and our higher interest rates", as the Governor's speech last week said (it's here as a web page and here as a pdf), and wider interest differentials in NZ's favour would clearly make the fight on the NZ$ front more difficult (as is already the case with the A$/NZ$ cross rate after the Aussies' cut in interest rates).

It can't easily lower rates. There's an argument that the low oil price has lowered any inflation risks, and another (which I'm partial to) that, in hindsight, it overtightened with its latest OCR increases, but cutting rates in the middle of a boom would still be rather odd. "New Zealand is the only country among the advanced economies that has had a positive output gap in the past two years, our unemployment rate is low and falling, net inward migration and labour force participation is at record levels, and business and consumer confidence surveys remain strong", as the Governor said, plus it would make the housing market even more exuberant - "we have already seen some effective easing of credit conditions with declines in fixed-rate mortgages, at a time when we have financial stability concerns about accelerating house prices in Auckland".

So by default it's stuck with leaving interest rates where they are, which means that its financial stability headache over Auckland house prices doesn't go away, or even gets progressively worse - floating mortgage rates stay where they are (or even drop a bit if the banks' marketing wars heat up a bit more), while fixed rates fall as long maturity bond yields remain very low overseas (essentially we're lumbered with importing world bond yields, plus a credit/risk premium).

All of which leads you to think that there may be another round of "macro-prudential" regulation around the corner. We've got the existing regulation - only 10% of new bank lending on houses can have a loan to value ratio (LVR) higher than 80%, or put another way, 90% of new lending must have at least a 20% deposit - but while it's had some impact, it doesn't look as if it's been enough to rein in the Auckland market in particular. Prices in an already expensive market are up another 13% in the year to last December (on the latest REINZ data),

Yes, there's more going on than just easy credit. As the Governor said, Auckland prices reflect a melange of "rising household incomes, falling interest rates on fixed-rate mortgages, strong migration inflows and continued market tightness". But there's still a financial stability issue. When these factors ease, or reverse (eg when housing supply finally come on strong), banks risk being left with big loans on lower priced assets. So you'd reckon the RBNZ must be looking in the cupboard for another macro-prudential stick.

As it happens, there's a brand new model for them to have a look at, and that's the Irish Central Bank's. The Irish had one of the biggest housing market busts of all time - the national house price halved, almost exactly, between the peak in September '07 and the trough in March '13 - and, to put it very mildly, are not keen to see a repeat. With Irish house prices up 16.2% over the year to last December, they've just stepped in with a package that combines LVR ratio limits and loan to income ratios. You can read the whole thing in the Bank's FAQ here: the gist is a 3.5 times income limit for all new loans except loans to buy rental properties, a 20% LVR ratio limit for most mortgages, a 10% first time buyers' LVR limit up to €220,000 (about NZ$340,000), and a 30% LVR limit for rental property loans. There's room for the banks to do some business outside these limits (20% can be outside the income limit, 15% outside the LVR limits).

Interestingly, one of the questions in the FAQ reads, "Has the Central Bank considered that these measures may be discriminatory against people looking to buy in Dublin and the surrounding areas?" The Irish Central Bank preferred to downplay that aspect - it says, yes, but only a bit - but that's exactly the sort of selective impact we'd like to see happening in Auckland.

"We will be talking more about the housing market over the next few months", the Governor said last week. I wonder if they'll be talking with an Irish accent?

Too many rules, not enough houses

Last month I wrote about some residual absurdities in Australia, where there were still bizarre examples of nutbar regulation of the retail trade, and this despite decades of economic reform that one might have expected would have swept away the last of the most egregious nonsense.

It left me feeling that "there are still thickets of regulation that are absolutely bonkers". At the end of the post I said that "the good news is that both Australia and New Zealand now have Productivity Commissions that are able to turn over the flat stones and tell us what they're finding underneath", and wondered "what we'd find if, for example, we turned over some flat stones of our own".

I didn't have long to wonder.

Along came the Issues Paper (pdf) for the Productivity Commission's latest project, on the availability of land for housing. And even at this early stage it has found multiple examples of over-prescriptive, inconsistent, complex, inefficient, expensive and (I would say) largely rationale-free regulation.
Here are some examples, direct quotes from the paper.

(1) A Ministry for the Environment review of Christchurch City Council planning and resource consent processes described the two Christchurch District Plans as:

…large, cumbersome and difficult to navigate. The City plan is effects-based, while the
Banks Peninsula plan is activities-based. There are a total of 109 different planning zones,each with varying provisions (p28)

(2) Auckland Council is currently in the process of developing its first Plan as a unitary council. The Proposed Auckland Unitary Plan (PAUP) will replace the existing Regional Policy Statement and 13 district and regional plans. Given the breadth of the material covered in the PAUP it is not surprising that the document is lengthy, but at 6 961 pages (at the time of writing) the PAUP is very unwieldy. Supplementary documentation acknowledges that the Plan is complex, but also suggests that users must read the full document:

       The Unitary Plan is a complex document that consists of many interlinked parts. One        must not look at any provision in isolation, but read it as a whole (p29)

 (3) the Ministry for the Environment notes that plans prepared by “the eight largest
territorial authorities showed 123 different terms were defined, with more than 450 variations of those definitions”...

A comparison of two Plans’ rules around car parking demonstrates the variation. The Käpiti Coast District Council’s Rules and Standards states that "All buildings shall be designed so that wherever practicable sufficient manoeuvring space on site will ensure no reversing onto the road is necessary." In contrast, Nelson City Council’s Residential Zone Rules state that "Reverse manoeuvring is encouraged on unclassified roads and is part of ensuring a low speed environment and people orientated streetscape." (p37)

(4) One way of enabling new types of land use is to change a Regional or District Plan. Changes to Plans can be sought by a local authority or a private party...

The average timeframe taken to complete a Plan change in 2012/13 was 24 months. This was an increase from 2010/11, where council-initiated Plan changes took 17 months to complete and privately initiated Plan changes took 16 months (p47)

No doubt some processes are working well, but in spots we've got regulations of a complexity that would tax a Talmudic scholar, a glacial pace of administration, and an absence of compelling logic, with things forbidden in one jurisdiction being encouraged in the next. And all this against a background of a bloated local administration superstructure. We're a small country, but even after a programme of local authority consolidation, we're still left with this (p16):

No wonder we get this outcome (p7).

The Issues Paper isn't all about the dead hand of local authority micromanagement - I've focussed on those aspects as I've got an interest in good regulation - and it canvasses a wide range of other factors affecting the availability of housing land. The Productivity Commission is looking for people to tell it whether it's on the right track with its initial ideas, and whether it's missed anything: in particular it has a list of 74 specific questions where it is looking to get feedback and information, though people are also welcome to submit their views outside the 74-question format (contact details are in the paper and here).

The state of the housing market is one of the bigger economic issues right now: take the opportunity to have your say on what's going on and what should be done about it.