Build Like the Boomers

ACT’s strategy for housing and infrastructure, Build Like the Boomers, offers real solutions to New Zealand’s building woes. We’d get politicians out of the building business and leave it to those who know best – locals on the ground and everyday New Zealanders spending their own money. We would bring New Zealand back to its building heyday.

ACT's Housing and Infrastructure Strategy

Since 1974, New Zealand’s population has grown by almost 2 million, and today we’re building fewer houses than we did then[i]. It is little wonder that house prices have skyrocketed, rates of homeownership have fallen, and levels of homelessness have increased. Indeed, never since 1954 have so few New Zealanders owned their own home[ii]. We are simply not building enough.

Our national infrastructure is also falling behind. The last expansion of road capacity across the Auckland Harbour took place in 1969, only ten years after the Bridge was first built. In 2017, the average water pipeline in New Zealand was more than 30 years old[iii]. That’s a story repeated across the country. Unsurprisingly, our infrastructure is straining under the weight of population growth and improvements in living standards.

Housing and infrastructure matter. Safe, secure, and affordable housing provides a platform for a stable family. Homeownership gives everyone a stake in society. Infrastructure doesn’t just get us to and from work and school; it also gets clean drinking water to the taps and power to the lights.   It also affects our futures: If working-age Kiwis can’t afford to live where the jobs are, they can’t get ahead. If we can’t provide a functioning transport system in our regions, no-one will invest there.  If teachers can’t afford to live in our cities, our children are short-changed. If university graduates have no hope of buying a house, they’re more likely to leave the country and take their taxpayer-subsidised education with them.

Our failures in housing and infrastructure are, at their core, government failures. This election, like every election, both major parties have proposed billions of dollars to be spent on pet projects. The current Government has strangled the private sector with higher taxes and red tape. Governments of both stripes have tinkered, subsidised, taxed, and regulated for the past 30 years. Every scheme has failed. It is time to give up on the experiment of leaving Wellington politicians in charge.

Resource Management Reform

If we are to build enough homes, we must allow new communities to emerge and existing ones to sensibly densify, as we once did. The restrictions on land use in the 1970s under the Town and Country Planning Acts were far less stringent than those which exist today and allowed many more New Zealanders to build the home of their dreams. Indeed, until the introduction of the Resource Management Act in the 1990s, the average house price hovered at around two to three times the average income[iv]. Today, the average house price is more than six times income.

We need only look to the Auckland metropolitan-urban limit (MUL) to see the extreme effects of land-use restrictions on the housing market. The Productivity Commission found that a section located 2km within the MUL was almost nine times the price of an equivalent section located 2km outside the MUL[v]. That is the value of being allowed to build.

ACT would repeal the Resource Management Act and replace it with separate Environmental Protection and Urban Development Acts. The Urban Development Act would be based on the recommendations of the Productivity Commission’s Better Urban Planning report and significantly expand the rights of property owners to build on their own land. The Environmental Protection Act would be rules-based, to provide property owners with certainty and confidence, and focus only on those environmental issues not addressed through other schemes (e.g., climate change considerations, already included in the Emissions Trading Scheme, would be expressly excluded).

Land use restrictions created under the RMA are based not on science or environmental protection, but the subjective desires of councillors and those who speak most loudly to them. That might be harmless, except that one analysis commissioned by Superu, the now-abolished Government think tank, found that more than 50% of the price of the average Auckland home was due to artificial scarcity created by land-use restrictions[vi]. Even the largest economic recession for 150 years has not yet managed to off-set these restrictions. If we wish to get more New Zealanders into safe, affordable housing, we must end these irrational restrictions.

But, RMA repeal does not need to be a recipe for unsightly development. New Zealand’s most beautiful heritage communities, including Leamington in the Waikato and Christchurch’s Merivale, were all built before the imposition of strict town planning rules and, in many cases, would be illegal to build today By subjecting architecture to the inconsistent whims of councillors, urban planners, and ministers, town planning creates the monstrosities; it doesn’t stop them.

ACT’s repeal and replacement of the RMA would not only accelerate housebuilding; it would also allow faster infrastructure development. The Government recognised the problems with the status quo when it bypassed the RMA for a number of its pet projects by ‘fast-tracking’ them. ACT says all infrastructure projects, not just trendy ones which the Prime Minister wants her photo taken beside, should be on the fast track. Our reforms to the RMA would increase the certainty for investors, developers, and local councils, giving them the confidence to invest in ambitious infrastructure projects, without living in fear of the Environment Court.

More sensible land-use regulations would also increase wages. Too many New Zealanders are locked out of achieving higher incomes in our fastest-growing cities by high housing costs. If we allowed more New Zealanders to move to higher-wage cities and boost their personal productivity, we could increase overall income significantly. That one effect on its own could make New Zealanders significantly richer: One estimate from the United States found that had they relaxed their planning regulations, GDP growth could have been 36% higher from 1964 to 2009[vii]. Given American planning regulations tend to be more liberal than those in New Zealand, we would expect the impact in New Zealand to be even larger.

Building Act Reform

Existing building regulations are far too burdensome and hold back innovation without providing any security to homeowners. Councils, because of the joint and several liability imposed on them, are very risk-averse in approving buildings and, because of their monopoly position as building inspectors, face no countervailing incentives encouraging them to allow construction.

ACT would replace this broken system with compulsory 30-year building insurance. The scheme would require builders to purchase insurance for all new dwellings from an insurance company regulated by the Reserve Bank. Insurance companies could choose not to cover a given builder if he used risky materials or was otherwise too risky of a client for them to take on. With no insurer, a builder would not be permitted to build. Similarly, insurers could adopt risk-differentiated premia to account for the different risks imposed by different materials or building techniques.

Because this insurance would be attached to the house, not the builder, and backed by a reputable and reinsured insurance company, homeowners could be assured of receiving compensation if their home turned out to be poorly-built or use shoddy materials. This is in contrast to the status quo, where builders can use a variety of tactics to avoid liability and leave homeowners bereft of the compensation they deserve.

Secondly, because insurance companies would compete with each other for business and would be paid on a per-property-built basis, there would be a countervailing incentive encouraging them to approve development and accept innovation. This avoids the overly skittish approach of present council inspections and will get more houses built more cheaply. Insurance companies could, for instance, have ‘trusted builder’ programmes, where builders using certain standard materials and with good track records and certifications could be subject to fewer inspections than other builders.

ACT would also reform New Zealand’s building materials regulation. We would automatically approve building products which had been approved by high-quality regulators in jurisdictions with similar conditions to our own (e.g., California and Japan) for use in New Zealand. This would reduce New Zealand’s inherent price disadvantage as a small, distant market and encourage competition in the materials market.

Local Infrastructure Reform

New Zealand’s local infrastructure funding model is nonsensical. Politicians in Wellington control approximately 90% of tax revenue, while councils across the country own almost 90% of the roads, by kilometre. That leaves councils subject to the whims of central government, with its laser focus on the always-looming election. The result is an infrastructure system where project priority is determined not by economic analysis, but by political calculus, and is often totally misaligned with council plans.

ACT proposes a system of 30-year infrastructure partnerships between regional and central government. Local councils would partner with their neighbours to form coherent regional alliances (e.g., Auckland, the Bay of Plenty, and Waikato could form a golden triangle partnership). These alliances would then enter into long-term contractual arrangements with central government to provide them with funding for their infrastructure priorities. The regional partnerships would take control of the prioritisation of projects within the budget allocated to them by the central government. Meanwhile, central government, through the Infrastructure Commission, would be responsible for assessing the performance of these infrastructure partnerships against pre-determined and agreed metrics, like population growth, road fatality rates, and congestion levels.

The exact funding allocated to each region would be a matter for negotiation but could be based on a variety of revenue sources. For instance, the Government could agree to GST-sharing arrangements to provide councils with more resources to cope with a growing population. Local voters would continue to hold local governments accountable for their spending of taxpayer money. The Government would also be entitled to withhold funding from councils which consistently failed to meet road safety targets or congestion reduction goals.

These 30-year infrastructure partnerships would leverage the advantages of local and central government. Councils have the local knowledge to design and prioritise infrastructure intelligently. They are directly accountable to local voters and understand the particular needs of their constituencies. They also set town plans which guide how growth will happen. However, they are limited by inflexible funding rules, which make them heavily reliant on property rates and reduce their ability to cope with growth. By contrast,  the Government has access to cheaper debt funding and the ability to spread risk across a larger balance sheet. By matching Government funding with local knowledge, we can get more and better infrastructure built. A similar approach is currently paying dividends in Auckland through the Auckland Transport Alignment Plan, and we would expect similar results across the country.

Also, the long-term nature of these plans will insulate infrastructure from political pressures. Infrastructure, with its very long time horizons, is profoundly unsuited to decision-making by political leaders, beset by three-year tunnel vision. By setting plans decades in advance, we can avoid the on-again, off-again uncertainty created by the political cycle which deters councils and private infrastructure investors from undertaking ambitious projects.

Sound Infrastructure Investment

Taxpayers should not be the only source of infrastructure funding. Increasing the level of private sector funding will inject much-needed discipline into decision-making while allowing the Government to maintain prudent levels of public debt. Unlike the Government, which can always off-set shortfalls in project performance by increasing taxes, private sector investors expect and require real economic returns from the projects they invest in. That means, with the correct contractual design, they are unlikely to invest in white-elephant projects which, although they serve political egos, won’t return significant benefits to investors.

Between 2007 and 2017, more than NZ$300bn was raised by funds globally to invest in infrastructure[viii]. Most of that capital was raised from insurance companies, pension funds, and sovereign wealth funds (including our own New Zealand Super Fund) looking for long-term investments with reasonable returns. Unfortunately, New Zealand’s regulatory framework makes it difficult for us to attract much of that capital to our shores, despite our obvious need for infrastructure investment.

At present, New Zealand is rated as the most restrictive country in the OECD for foreign direct investment[ix]: Our restrictions are comparable to those of China, Russia, and Saudi Arabia. Overseas investment restrictions don’t just restrict initial investments from overseas; they also suppress investment by New Zealanders and New Zealand institutions at home. If they cannot be assured of the right to sell their investment to the highest bidder, New Zealand investors may prefer to invest abroad, for instance, in Australia or the United Kingdom, where the value of their assets isn’t subject to the whims of Overseas Investment Office officials and cabinet ministers.

ACT would reform the Overseas Investment Act to make us a much more attractive destination for investment. We would exempt investors from countries within the OECD from the need to receive Overseas Investment Office approval to invest here, except where national security interests are at stake. Membership of the OECD is restricted to countries committed to preserving and advancing democracy and market capitalism. Many OECD nations are already our allies on national security issues. They are, therefore, the least risky sources of investment and, in many cases, have large amounts of money ready to be invested.

Under their infrastructure partnership agreements, regional alliances would receive significant Government funding each year to support the development of infrastructure. However, funding above those taxpayer investments would have to be raised from private investors at home and abroad. The regional alliances would not be permitted to pledge Government guarantees for their projects, ensuring that the private sector would take a fair proportion of the risk of their investments and creating the discipline required.

Where taxpayer money is invested, this should be done sensibly and with similar levels of rigour to those used by private infrastructure investors. ACT’s plan for local management and central government oversight would ensure sensible management of the taxpayer money provided to councils, but central government itself currently holds around $42bn in infrastructure assets on its balance sheet[x],[xi]. Those assets shouldn’t be managed for the Government’s petty political interests. Instead, experts, subject to rigorous democratic scrutiny, should control them.

ACT would establish a state-owned Infrastructure Corporation to own, manage, and expand the Government’s existing infrastructure assets, e.g., the state highway and railway networks. Just as the Governor of the Reserve Bank is directly accountable to the Minister of Finance for achieving transparent and pre-agreed inflation and employment targets, the Managing Director of the Corporation would be directly accountable to the Minister of Transport for achieving congestion reduction and road safety targets. These congestion targets would resemble those of the Land Transport Authority in Singapore, which is expected to keep expressways travelling in the target speed range of 45-65 km/h. Apart from reporting on and being held accountable to targets, however, the Managing Director would be operationally independent from politicians, to ensure that economic analysis, as opposed to political pressure, was behind the management of the state’s infrastructure assets.

Similarly to local councils, the Infrastructure Corporation would enter 30-year infrastructure partnership agreements with the Government for funding. Just as with councils, any funding in excess of the Government funds would have to be raised from the private sector on unguaranteed terms to ensure fiscal discipline.

Conclusion

New Zealand’s pioneering spirit has not changed since the 1970s. We have simply suffocated it under layer upon layer of government regulation and intervention in the name of ‘sensible’ town planning and other well-intentioned, but ultimately foolhardy attempts at social engineering. We can’t fix that by spending more or by repealing the RMA and replacing it with substantively similar legislation. We need fundamental reform in our regulatory settings to allow building and attract investment. We need sensible apolitical management of local and central government infrastructure assets. That is what ACT’s strategy for housing and infrastructure will deliver.

 

 

BUILD LIKE THE BOOMERS

Change Your Future. Party Vote ACT.

 

 

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[i] https://www.stats.govt.nz/news/45-year-high-for-new-home-consents 

[ii] https://population.org.nz/app/uploads/2019/07/3d-HomeOwnAge_Bentley2019_session3d.pdf 

[iii] https://www.waternz.org.nz/Attachment?Action=Download&Attachment_id=565 

[iv]https://nzier.org.nz/static/media/filer_public/98/7c/987c99b1-d879-48ca-ac2c-58e05307ac5c/nzier_public_discussion_document_2014-04_-_home_affordability_challenge.pdf  

[v] https://www.productivity.govt.nz/research/the-effect-of-auk-met-urban-limit-on-land-prices/ 

[vi] https://thehub.swa.govt.nz/assets/documents/Impact_land_use-fullreport_110717.pdf 

[vii] https://www.aeaweb.org/articles?id=10.1257/mac.20170388

[viii] https://www.pwc.com/gx/en/industries/assets/pwc-giia-global-infrastructure-investment-2017-web.pdf

[ix] https://stats.oecd.org/Index.aspx?datasetcode=FDIINDEX#

[x] The state highway and rail networks and the land on which both sit.

[xi] https://www.treasury.govt.nz/sites/default/files/2019-10/fsgnz-2019.pdf