Source: New Zealand Government
Good afternoon, everyone. Today I’d like to talk to you about progress the Government has made on our Going for Housing Growth agenda. I’m also excited to announce policy decisions that will improve infrastructure funding and financing to get more houses built.
Thank you to Local Government New Zealand for hosting this meeting. It is crucial that central and local government, work together in the areas of housing, planning reform, and transport to unlock New Zealand’s potential.
NEW ZEALAND’S HOUSING CHALLENGES
Let’s start with an overview of our housing challenge.
Over the last three decades real house prices in New Zealand increased more than any other OECD country. According to the OECD’s Better Life Index, we also rank 40th out of 41 countries for housing affordability – just in front of the Slovak Republic.
Put simply, our housing market has held us back economically and socially:
- New Zealanders spend a larger share of their income on housing – meaning less disposable income can go towards goods, services, and investments,
- In 2022, more than half of all household wealth was tied up in land and houses,
- Homeownership rates are near their lowest in 80 years,
- Young people are leaving New Zealand to find better opportunities, and
- There are 20,300 families on the social housing wait list.
But it hasn’t always been like this. Just 23 years ago in 2002, New Zealand had a house price to wage ratio of 3:1. Now, house prices outstrip wages by over 6:1.
The worst part about this is that we have known about our housing crisis – and how to fix it – for over a decade.
In fact, the first two recommendations in the Productivity Commission’s 2012 inquiry into housing affordability were:
- For central and local government to free up more land for housing in the inner city, suburbs, and city edge; and
- To ensure greater discipline around charging for growth infrastructure.
Since then, report after report and inquiry after inquiry has found that our planning system, particularly restrictions on the supply of developable urban land, are at the heart of our housing affordability challenge.
This Government has seen the evidence, listened, and is getting on with the job.
I am determined to fix our housing crisis by addressing the root cause of the problem, focusing on the fundamentals, and treating housing as a complete and dynamic system.
Getting the settings for housing and land markets right will do three things:
- Lift economic growth and productivity,
- Reduce the social consequences of unaffordable housing, and
- Help us get the Government’s books back in order.
HOUSING IS AN ENABLER OF ECONOMIC GROWTH AND PROSPERITY
I want to spend a bit of time focusing on the relationship between housing and economic growth.
Housing is a basic human need, and it is also an enabler of productivity, and for decades, New Zealand has suffered from a productivity disease.
As Paul Krugman so famously observed, “Productivity isn’t everything, but in the long run, it’s almost everything.”
Productivity growth is a key driver of our standard of living and prosperity.
It will probably surprise – and I hope alarm you – to learn that our productivity is closer to places like Poland, Hungary, and the Czech Republic than it is to Australia, Canada, the United Kingdom, or the United States.
In other words, our productivity rates are on par with countries that endured 40 years of communism.
To turn this around, the Government is focused on going for growth, whether that’s in trade, foreign investment, innovation and technology, competition, infrastructure, or housing – the whole shebang.
It is not going to be easy to really get growth and productivity going in New Zealand. But, in my view, getting the underlying settings housing and land markets right will do a lot of the heavy lifting.
There is now a mountain of economic evidence that cities are engines of productivity, and the evidence shows bigger is better.
In New Zealand, it is estimated that doubling a city’s population could increase output by 3.5%. And, on average, workers in cities earn one third more than their non-urban counterparts.
Throughout history, cities have been the hub of innovation. Think 15th century Florence, 17th century Amsterdam, 18th century London, and San Francisco today.
Cities are powerful engines of growth because they foster agglomeration economies – which are the benefits that occur when firms and people cluster together. When people are close, we can more effectively:
- Share infrastructure, supply chains, and capital,
- Match skills to jobs, and
- Learn from each through the exchange of knowledge and ideas.
A floor filled with smart people working next to each other and chatting over coffee, in a building filled with floors, in a city full of buildings, unsurprisingly, enables greater opportunities.
Proximity encourages collaboration and innovation.
So, the question is, are we making the most out of New Zealand’s cities?
If we are honest with ourselves, the answer is no.
Quite often I experience ‘housing utopia whiplash’ – one article says, “don’t put intensification here, we need to protect the wooden villas”, another says “don’t do greenfield development, it contributes to more emissions”.
But if you can’t go up or out, you can’t go anywhere.
To make housing more affordable, our cities need to growth both up and out – we need bigger cities and, we need more houses.
Having more affordable housing would also free up more disposable income and capital for investment in businesses, capital, infrastructure, and people.
Modelling shows, that under an ‘ambitious scenario’ of removing all supply-side constraints, New Zealand could increase output per worker by up to 1.6%, increase workers moving from Australia to New Zealand’s high-productivity regions by up to 7.2%, and increase GDP by up to 8.4%.
Now, removing all supply-side constraints is not realistic – but what I do know is that we can do so much more than we are now.
ACTIONS ON GOING FOR HOUSING GROWTH SO FAR
In July last year, I outlined our Going for Housing Growth policy:
- Pillar 1: freeing up land for development and removing unnecessary planning barriers,
- Pillar 2: improving infrastructure funding and financing to support urban growth, and
- Pillar 3: providing incentives for communities and councils to support growth.
We have made good progress on Pillar 1 which includes Housing Growth Targets for Tier 1 and 2 councils to “live-zone” 30-years of housing demand, making it easier for cities to expand, strengthening the intensification provisions in the NPS-UD, putting in new rules requiring councils to enable mixed-used development, and abolishing minimum floor areas and balcony requirements.
Details about how Pillar 1 will be implemented will be announced in the coming months.
Today, I will announce policy decisions Cabinet has made on Pillar 2, which I will get to shortly.
Officials are also working away on Pillar 3 in the context of Pillars 1 and 2, which will ensure that councils and communities face strong incentives – carrots or sticks – for growth.
To help fix the housing crisis, the Government has also:
- Passed the Residential Tenancies Amendment Bill to make sensible changes to tenancy rules to encourage landlords into the market;
- Passed legislation to make it easier for international investment into “Build to Rent” housing;
- Passed the Fast-track Approvals Act which makes it much easier to consent large-scale housing developments;
- Funded 1,500 new social housing places delivered by Community Housing Providers; and
- Established a Residential Development Underwrite scheme to support construction during the market downturn.
Before the next election, we will have also replaced the Resource Management Act with new legislation. More on that next month.
ANNOUNCEMENTS ON PILLAR 2
Now let’s talk about Pillar 2 – improving infrastructure funding and financing to support urban growth.
I know central government has given local government a hard time about not zoning enough land for housing. I’ve done it once or twice before.
And it’s true, you haven’t.
But what I have heard from you and housing experts, is that freeing up urban land is not enough on its own. We also need to ensure the timely provision of infrastructure.
Put simply, you can’t have housing without land, water, transport, and other community infrastructure. It’s a package.
However, under the status quo, councils and developers face significant challenges to fund and finance enabling infrastructure for housing.
I hope you’ll agree with me that existing tools like Development Contributions (DCs), and the Infrastructure Funding and Financing (IFF) Act are not fit for purpose.
We want to move to a future state where funding and financing tools enable a responsive supply of infrastructure where it is commercially viable to build new houses.
This will shift market expectations of future scarcity, bring down the cost of land for new housing, and improve incentives to develop land sooner instead of land banking.
To achieve this future, our overarching approach is that ‘growth pays for growth’.
So, today, I am excited to announce five key changes to our infrastructure funding settings that will get more houses built:
- The first is replacing DCs with a Development Levy System,
- The second is establishing regulatory oversight of Development Levies to ensure charges are fair and appropriate,
- The third is increasing the flexibility of targeted rates,
- The fourth is improving the Infrastructure Funding and Financing Act, and
- The fifth is broadening existing tools to support value capture.
Essentially, we are developing a flexible toolkit of mechanisms to ensure growth pays for growth”. There is no funding and financing mechanism that will suit all developments. But the flexible toolkit I’m about to outline will help ensure a responsive supply of infrastructure.
Development Levies system
Let’s start with replacing DCs with a Development Levy system.
Under the status quo, councils can only recover infrastructure costs for planned, costed, and in-sequence developments. In effect, this means councils can only recover costs if they have certainty about when, where, and what development occurs.
But this level of certainty isn’t realistic. We don’t live in Ebenezer Howard’s “Garden City” or “planners paradise”, and we’re not stuck in the Soviet Union. We want growth to be demand-led, not planner-led.
We know DCs aren’t working, because councils haven’t been able to effectively recover growth costs, leaving ratepayers to pick up the cheque.
For example, Auckland Council estimates that $330m in growth infrastructure costs for Drury will be met by ratepayers, not by the beneficiaries of the infrastructure. Similarly, Tauranga City Council has reported 16 percent under-recovery for projects that were included in DC policies, which saw over $70m of debt expected to be transferred to ratepayers.
Not only is this unfair, but it makes existing residents resistant to growth.
The political economy of housing is stacked against actually building it. It is not surprising that existing ratepayers mobilise against new housing when they’re required to pick up the tab for the infrastructure required for it.
DCs were designed in 2002 for a world with a strategy of “urban containment”, where councils put rings around and ceilings on top of our cities.
The old model was to plan cities carefully.
So, we sequenced, and planned, and costed the infrastructure, then urban land was dripped slowly into the market. This meant that councils had lots of control over the release of urban land.
But these constraints also created a scorching hot land and housing market driven by artificial scarcity.
Pillar 1 is about upending the system by live zoning 30 years’ worth of housing demand at any one-time for Tier 1 and 2 councils, flooding the market with development opportunities and fundamentally making housing more affordable.
We are deliberately upending the artificial planning and zoning constraints that have made it difficult to use land for housing.
Once Pillar 1 goes live and there is an abundance of urban land, councils won’t be able to plan or cost growth in detail anywhere, everywhere, all at once – it’s simply not feasible.
So, we need a flexible funding and financing system to match the flexible planning system.
That’s Development Levies.
Under this new system, councils and other infrastructure providers will be able to charge developers for their share of aggregate infrastructure growth costs across an urban area over the long-term.
Development Levies will provide far more flexibility for councils and other infrastructure providers to recover costs for any in-sequence development – whether it planned and costed, or not.
Quite simply, this tool will respond to growth and recover costs, no matter where the growth occurs within land zoned for housing.
For areas that are zoned for housing – remembering there will be a lot more of it under our new system – Development Levies will look like:
- Separate levies that are ring-fenced for each specific infrastructure service such as drinking water, wastewater, and transport;
- Specific “levy zones”, which are expected to cover pre-defined urban areas that are larger than most current DC catchments;
- Discretion for councils to impose additional charges on top of the base levy in specific locations that require a particularly high-cost service;
- A prescribed methodology that councils and infrastructure providers must follow to determine aggregate growth costs and standardised growth units; and
- Consideration of different models of infrastructure delivery including support for first-mover developers and recovering council costs for infrastructure owned by another entity.
For out-of-sequence development, there will be a process councils or water service providers must follow to determine an appropriate levy – or Infrastructure Funding and Financing Act levies could be used. As I say, this is a toolkit of approaches to ensure infrastructure is funded and built.
The new Development Levy system has many benefits.
It will reduce financial risks for councils and could moderate rate increases, better incentivising communities to support growth.
It will improve the predictability of infrastructure charges. Where these charges are credibly signalled in advance, we expect developers will account for added costs in shopping for developable land, lowering the amount they are willing to pay.
It will increase transparency and reduce administrative complexity for councils.
Regulatory oversight
The second change is to create regulatory oversight of the development levy regime.
Councils can have monopolistic pricing power as the sole provider of certain infrastructure.
The new levy system will restrict local authority discretion about various matters, such as setting the methodology used to allocate project costs.
But it is important that prices are fair and appropriate, so we will also establish regulatory oversight of Development Levies, which will be integrated with the regulatory oversight of water services and rates.
While the wider system is being designed, we will put in interim oversight arrangements, which may include requirements around transparency and information disclosure, and having an independent assessment of proposed levies.
Work is underway on this area right now and the government will be engaging with councils and developers in the coming months to get the details right.
Increasing the flexibility of targeted rates
Now moving onto targeted rates.
I understand that not everyone, particularly small councils, will be up for using the Development Levy system. So, we are also making changes to targeted rates to support urban growth.
We will allow councils to set targeted rates that apply when a rating unit is created at the subdivision stage. This will enable councils to set targeted rates that only apply to new developments. And, for small councils, this could be used as a good alternative to Development Levies.
Additionally, this change will enable targeted rates and Development Levies to be used together where projects benefit existing residents and provide for growth.
Infrastructure Funding and Financing Act changes
Fourth, we will be making changes to the IFF Act.
The IFF Act was passed in 2020 so that developers could freely arrange private funding and financing solutions for enabling infrastructure. It was supposed to allow developers to bypass the issue of relying on councils for the timely provision of infrastructure.
However, in the five years since it was passed, no levy proposals have been received for new residential developments, likely due to its complexity and administrative burden.
My Undersecretary Simon Court has been leading the work here and he will speak to the full suite of changes we are making shortly.
But at a high-level, the Government has agreed to make several remedial amendments to improve the effectiveness of the Act, particularly for developer-led projects. These changes will remove unnecessary barriers and make the overall process simpler.
Broadening existing tools to support cost recovery and value capture
But what I am really excited about is broadening existing tools like the IFF Act to support value capture and cost recovery.
As a general principle, those who benefit from publicly funded infrastructure should help contribute to the cost of it. New state highways, for example, create benefits for private landowners by unlocking capacity for new development or improving journeys for existing households.
New busways or rail lines clearly create benefits for those located near the stations.
So, we will enable IFF Act levies to be charged for major transport projects, e.g., projects delivered by NZTA.
This change has the potential to kickstart our embrace of Transit Oriented Development or TOD.
TOD promotes compact, mixed-use, pedestrian friendly cities, with development clustered around, and integrated with, mass transit. The idea is to have as many jobs, houses, services and amenities as possible around public transport stations.
This is not an untested theory: transit-oriented development has been adopted across world-class in cities like Stockholm, Copenhagen, Tokyo, and Singapore – all of which use some form of value capture.
We looked at establishing a complicated new tool that tries to calculate land value uplift to essentially tax windfall gains, but we have concluded that it is fine in theory but much harder in reality.
Our preference is for a much simpler solution that builds on existing legislation – getting beneficiaries to pay for some proportion of the cost of the investment through infrastructure levies.
Henry George would certainly approve.
Conclusion
Today’s announcement outlines our plans to establish a flexible funding and financing system – Pillar 2 – to complement our new flexible planning system – Pillar 1.
These are some big changes, and it will take some time to get them right. Our aim is to have legislation in the House by September this year, to come into effect next year.
What I can promise is that my officials will engage with councils and developers to ensure we create a future state that works:
Where urban land is abundant, the supply of infrastructure is responsive, and where there are loads of development opportunities and housing choice for New Zealanders.
Today’s changes to funding and financing tools, together with freeing up urban land both inside and at the edge of our cities is a massive feat for:
- urban nerds,
- proponents of economic growth,
- champions of housing affordability, and
- all New Zealanders really.
Solving our housing crisis is my top priority. It will mean a more productive, wealthier, and more prosperous New Zealand and I won’t rest until that’s done.
Thank you.
MIL OSI New Zealand News –