The week that was for the long weekend

Labour cans roads that could have unleashed masses of new homes because it worries needlessly about govt debt and hasn't got a housing-rich carbon cutting plan. Plus a hoon with Thomas Coughlan

  
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TLDR & TLDL: This week the Government cancelled three big new road projects that could have unleashed tens of thousands of new homes because it’s needlessly worried about debt and doesn’t yet have a carbon emissions reduction plan that also incorporates masses of new compact and car-free housing.

This is creating Catch 22s that keep interest rates low and cement a rising floor under house prices. That is just the way median voters want it, and which Labour knows it must keep doing to get re-elected. Young voters wanting affordable homes and lower emissions are being ignored and/or told ‘something is being done’ when it is not.

The awful feedback loops

Exploding land prices helped drive a $6b cost blowout in the projects, which has created a perverse feedback loop where a failure to fix a housing supply crisis makes it even harder to fix a housing supply crisis, particularly when climate change policy is pushing the Government to completely change the way housing supply is expanded.

The Government is pivoting to a compact city model filled with smaller apartments and terraces, while the private sector is still set up to build standalone and large houses. Apart from Kāinga Ora’s own build programme, the Government has yet to lay out a strategy to make this massive switch happen.

Also this week, the Government warned councils they could be on the hook for up $185b of water infrastructure investment, unless they agree to a plan to amalgamate their water assets. This again emphasised the lack of a plan to restructure Council finances to ensure this happens.

Looking ahead, the Government will release the Climate Commission’s recommendations this week and its response, which is likely to include a return of the feebate scheme dumped in the previous term after NZ First opposed it.

There is a growing political risk of a ‘bikelash’ from the centre-right of politics, which argues New Zealanders don’t take their kids to netball across town on a pushbike and they don’t aspire to have their kids bring up their grandkids in ‘shoebox’ apartments. The prospect of having to pay more for double-cab utes so urban liberals can get discounted electric cars will add to this backlash in the week ahead.

Also, I talk with Thomas Coughlan above in a weekly ‘hoon’ (the collective noun for Kākā) about these announcements and what’s coming up.


Labour's housing and transport Catch 22s

Early on Friday the Government announced it had cancelled plans originally announced in January last year to build a $1.3b four-lane highway along Mill Rd in South Auckland, to build a $933m four-lane 7km highway from Te Puna to Omokoroa around the back of Tauranga, and to build a $700m four-lane high from Whangarei to Marsden Point. Developers had been preparing to unleash plans for tens of thousands of homes, often with double garages, to use these highways.

Finance and Infrastructure Minister Grant Robertson and Transport Michael Wood cited a $6b blowout in the original $6.9b New Zealand Upgrade programme, partly because of construction costs, but mostly because of land acquisition costs. The cabinet decided not to spend the money, but instead cancel the projects and swap some spending to two new train stations at Drury and to build a new $785m Harbour Bridge for cyclists and pedestrians right next to the existing one.

The tyranny of the Government’s self-imposed debt restraints and the explosive growth in residential land prices has created a perverse and vicious cycle for the Government and those hoping an expansion in housing supply might solve our housing affordability crisis.

To build a lot more houses, the Government has to fund transport projects such as railways, cycleways, roads and motorways, often as part of the state highway or national railways system. Suburb and housing project developers need these projects to go ahead with their own plans. But the Government’s cancellation of two big road projects in South Auckland and Tauranga respectively was because the cost of buying land for the motorways has exploded along with the price of residential land.

Hence, the extra housing supply needed to stop the upward spiral in land prices doesn’t happen, which adds fuel to the fire underneath the upward spiral in land prices … rinse and repeat. The other issue revealed in this episode is the Government is now pivoting to a compact city planning approach for carbon emissions reasons, which would see housing supply added through low-rise apartments, terraces and townhouses, often without car parks, instead of double-garage standalone homes in suburban cul-de-sacs.

A compact city conundrum

The trouble is our house-building sector is not set up for these more complex housing types. Most houses are built by smaller builders or franchisees who don’t have the engineering and earthworks skills or equipment to do this type of building. These types of projects are also more complex from a consenting and planning point of view, which further delays housing supply. Their entire business models are based on buying lumps of land, building spec houses on them and making profits from land price appreciation and a margin from building a large house. Only a few private builders, such as Mike Greer Homes, Jennian Homes and Fletcher Residential, are building these more complex developments, and even then mostly as terraced townhouses than low-rise apartments. These bigger house builders still have less than 30% of the market between them. Most houses are built by builders doing less than 10 homes a year, as this Infometrics chart shows.

It’s as if the Government, Fletcher Building, Barfoot and Thompson, Bayleys and Harcourts have formed a committee and are writing a book combining the best of Kafka’s The Castle and Catch 22 in order to create the perfect environment for never-ending inflation in house prices, land prices and rents.

Here’s the nub of the catch 22s. The Government and Councils have set themselves debt limits that stop them from investing in the road and public transport infrastructure needed to build housing supply in compact cities quickly. Those same debt limits are now stopping them from building the roads and highways that would expand housing supply more quickly at lower initial cost on the fringes of cities, albeit without the proper climate accounting analysis that would show they’re more expensive in the long run.

The slow housing supply increase increases the upward pressure on land prices, which in turn increases the pressure on debt limits, which makes it harder to solve the problem …. you get the picture.

The tragedy of early-1990s thinking on debt

The tragedy is these debt limits are not based on any up-to-date Treasury analysis and are completely disconnected from what financial markets and bond investors are saying. They are effectively screaming at the Government and Councils to sell them some bonds. Older, risk averse investors globally have plenty of cash and want to put it into something with a non-negative real return.

The only investors with a balance sheets large enough and potential returns large enough to take those risks is the state, which also has the power to tax. Yet the Government has decided it cannot borrow not much more than 40% of GDP, even though that is half that of other AAA-rated borrowers and our interest costs are forecast to be less than 1% of GDP, which is less than a quarter of the amount budgeted next year for NZ Superannuation alone.

The other dirty little secrets in the debate about debt is the Reserve Bank has bought all the bonds issued by the Government since the onset of Covid-19 because it needed to push longer-term interest rates down. The Government has sold $46b worth of bonds since March 2020 and the Reserve Bank has bought $57b worth of Government bonds since then.

It said last week it planned to hold those bonds for decades and would not necessarily sell them back into the market, which means the Government will ‘repay’ the Reserve Bank when they mature, rather than domestic and foreign investors. Meanwhile, the Government has actually borrowed more than it needed in cash over the last year. It currently has almost $40b sitting in cash in its (Crown Settlement Account) with the Reserve Bank (the large grey chunk in the right hand chart).

Median and older suburban and provincial voters win again

Think about that: the Government just decided not to unleash tens of thousands of houses because it said it could not afford to build the infrastructure for them, even though it has $40b sitting in the bank, and, anyway, it adds, those houses with that infrastructure would unleash lots of carbon emissions.

That would be fair if it had an alternative plan to build that many houses in a less carbon intensive way. Instead, it has fudged on both measures because it is more focused on keeping debt and interest rates low. Why? Because a rise in interest rates would reduce the value of houses and residential land, which would be politically unacceptable. Although it would make building more houses cheaper…

In essence, the Government is choosing high house prices and rents over state borrowing and investments and planning that would lower both housing costs and climate emissions. Why? Because median voters don’t want to give up their high house prices and double cab utes, and can’t imagine a different way of living. Renters and the younger generations hoping for more affordable city-centre housing and lower carbon emissions are being ignored or spun with empty promises about a climate emergency and ‘we’re pulling all the levers to increase housing supply’. That’s because the young don’t vote in large enough numbers to matter, in large part because about 500,000 18-39 year olds don’t vote at all.

‘Striking a balance’ equals choosing low interest rates

Michael Wood argued the Government needed to manage debt and reduce emissions, while Robertson also used his ‘striking a balance’ phrase when talking about ‘cutting the Government’s cloth’ to fit its debt track.

“If Government had proceeded with Mill Road as originally scoped, it would have cost up to $3.5 billion and at peak produced six tonnes of CO2 emissions a day. Instead, we’ve focused on delivering important safety improvements to Mill Road, upgrades to SH1 and rail, and new rail stations connected to public transport, walking and cycling infrastructure,” Wood said.

“Fully funding the new estimated costs for every project would have cost up to $6 billion extra on top of the original $6.8 billion, so instead we've taken a balanced approach with a mix of additional investment and a handful of projects being re-scoped while also keeping a lid on debt,” he said.

"We are using an additional $1.9 billion set aside in the multi-year capital allowance to support our targeted investments – this is being used so we can keep delivering projects and creating jobs across the country to support our recovery. This rebalanced package helps manage debt, reduces emissions and supports housing growth.

But does it support housing growth?

I asked how many houses would not be built because of the decision not to build the roads. They did not have an answer. But the developers I speak to talk of their frustration at not being able to move forward with development plans because of the road decisions. Their models are built on selling double-garage homes and townhouses to people with equity in previous or other homes, not selling affordable apartments to people without equity or cars. Most New Zealanders are nowhere near the cultural shift needed to aspire to not have a car and to live in 50 square metres.

There is a trade-off here between emissions and speed of new housing development, but the Government is doing little to restructure the house building sector to cater for the new type of homes, or more importantly, educate and convince the public about this massive cultural shift to come. To see more on this read my piece from March on Why our ute culture will eat our climate strategy for breakfast.

The coming culture clash

Opposition leader Judith Collins suggested this week how that clash might play out:  “The Government’s fixation on walking, cycling, and forcing people out of their cars is out of touch with modern New Zealand. Grant Robertson should try cycling across the harbour with groceries, sports gear and the kid’s netball team and see how that goes.”

“Cancelling Mill Road will leave South Aucklanders fighting gridlock for decades to come, all because the Government is pushing ahead with a half-baked add-on to the Auckland Harbour Bridge,” Collins said.

Green Transport Spokeswoman Julie Anne Genter emphasised how that culture clash is already playing out.

“Rebalancing the NZ Upgrade investment to more rail and safe walking and cycling is a positive step, but this programme still puts way too much money into a few over-specced highways,” Genter said.

“The Government must take this opportunity to invest in transformational inter-regional rail services, public transport and safer walking and cycling infrastructure in communities,” she said. 

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Where’s the housing priority?

Wood underlined the Government’s priorities in comments on Checkpoint late on Friday. He emphasised carbon emissions reduction over new house building. In fact, new houses didn’t get a mention.

"Let me be really clear about this, this country has declared a climate emergency. The opposition even stood up in Parliament and declared it and voted for the Climate Change Response Act. We cannot carry on doing the same things that we did before that and expect different outcomes,” he said.

"I'm actually really proud of the fact that we have said in this package that we are going to rebalance, we're going to figure out transport investment that doesn't continue to contribute to climate change and doesn't continue to contribute to congestion."

He signalled a feebate scheme was coming over the next couple of weeks. The most obvious venue is the Government’s response this Wednesday to the Climate Change Commission’s report.

"To be very clear, if we're going to make this transition to decarbonise transport - which is one of the biggest things we can do to meet our climate change objectives - we are going to have to have a range of changes. We're starting to make those changes today,” Wood said. 

The trouble is those changes have not been analysed with an eye on achieving housing supply growth at the same time as reducing emissions. Only Kāinga Ora is building compact homes at a scale needed to do it quickly, and it is doing less than 3,000 homes a year when 50,000 are needed.

That’s it for the week. I welcome your comments below.

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