Archive | Funding

Bennett rejects councils’ tourism infrastructure funding list

Deputy Prime Minister & Tourism Minister Paula Bennett thanked Local Government NZ yesterday for its $1.4 billion tourism wish list, but said she “rejects that most of these should be funded by Government”.

Local Government revealed details on Tuesday of a survey commissioned by Tourism Industry Aotearoa, which identified $1.4 billion of local infrastructure projects that might be useful in responding to ongoing tourism growth.

Mrs Bennett said: “I absolutely agree that there are some areas of tourism infrastructure that need to be addressed and that some of these will need help from central government. However, the list Local Government NZ has referenced includes things like town halls, council facilities, airport runway extensions, airport upgrades & expressways.

“These are either already funded by other areas of Government, are not considered a priority or should be funded by local councils. My priority is to support smaller councils with low rate bases with essential facilities. I am currently working with officials to establish how best to do this.

“Government is working with local councils to help with tourism infrastructure. Today we opened another round of the regional mid-sized tourism facilities grant fund of $5.5 million to help cofund things traditionally funded by local councils like public toilets, carparking facilities & freedom camping facilities. This comes on top of the $12 million announced in last year’s budget.

“I think most taxpayers would agree that restoring old council chambers is not a priority in terms of tourism infrastructure.”

Mrs Bennett said the Government “recognised the challenges that have come with growth in tourist numbers and are assisting where appropriate. With tourism now a $14.5 billion export earner, and 188,000 people working in the industry, these visitors are incredibly important to our economy, particularly in the regions.”

Local Government NZ says tourism needs well beyond communities’ resources

Local Government NZ said on Tuesday the survey of 47 councils revealed over 680 mixed-use infrastructure projects valued at $1.38 billion that were being developed.

Local Government NZ president Lawrence Yule said it was well beyond the resources of local communities to fund these projects, which included the development & ongoing operation of toilets, wastewater systems, carparks, access roads & wifi, and that a new funding mechanism was needed.

“The arguments for a new, sustainable way of funding infrastructure for tourism are undeniable. We just need to get on with it now, and these figures provided by just over half of our councils further illustrate the scale at which we need to act.

“There is much that could be done to protect & enhance the visitor experience, and provide some relief for our communities, many of which have a small ratepayer base. If we don’t act and with the right level of investment, we will be in no position to cope with the forecast growth of tourism – 4.5 million annual visitors by 2025. ‘Just in time’ infrastructure can mean ‘just too late’.”

For tourism, Mr Yule said: “Cofunding, with contributions from central government, councils & the industry in a way that allows for maintenance & operational costs, is required.”

He said the gst contribution from international visitors rose from $950 million in the March 2015 year to $1.5 billion in the March 2016 year.

Local Government NZ issued a discussion paper on funding in February 2015 and, last December, welcomed a report commissioned by the chief executives of Air NZ, Auckland International Airport Ltd, Christchurch Airport & Tourism Holdings Ltd on the tourism infrastructure gap.

That report called for the creation of a national tourism infrastructure levy which, between the industry and matching Government contributions, would generate $130 million/year to fund local tourism infrastructure needs.

Mr Yule said then: “The major issue for local government is ensuring that any new funding goes where it is really needed, which is not only on toilets, freedom camping facilities & carparks but also on major infrastructure like wastewater, which are some of the most costly pieces of work small communities are faced with.”

Link:
Local Government NZ funding review discussion paper, February 2015

Attribution: Ministerial releases, Local Government NZ.

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Property Council joins call for new infrastructure funding

Property Council chief executive Connal Townsend said today central & local government “need to develop a range of innovative funding tools beyond rates & individual project funds. To be sustainable those tools should be linked to growth.”

He agreed with mayor Phil Goff, who told a Property Council breakfast last week funding infrastructure with rates wasn’t sustainable: “Rates are a limited & extremely blunt way of raising income. The property industry continues to have issues with rates & the development contributions system. It is not an effective or sustainable way to fund local government.

“Yes, Central Government should & does make significant financial contributions to individual projects. But that is not sustainable either.”

Mr Townsend’s solution – partnership between the 2 levels of government – is at last on the way in 2 forms, though neither is adequate to meet the challenge.

One is the formation of the Auckland transport alignment project last year, when the Government & Auckland Council joined in establishing long-term priorities. However, there would be a long-term deficit and there’s been no resolution of how that should be funded – the project calculation has started with a $24 billion funding need, and a $4 billion shortfall projected.

Mr Goff said: “Auckland Council would need to come up with at least $200 million/year to meet the shortfall. I’m not going to ask ratepayers to shoulder that burden, it’s not viable nor is it equitable.”

Secondly, the Government has announced its proposal for urban development authorities, which would be project-related and combine the forces of both levels of government. Those authorities would focus on regeneration in a specific area and close down on completion, though it would make sense to retain the same governance structure and enable an authority to switch to the next project rather than start afresh.

The mayor has proposed in the council budget that the hotel sector be charged for tourism infrastructure. Mr Townsend commented: “If we are serious about Auckland becoming a global city we need a partnership between central & local government. They need to develop a range of innovative funding tools beyond rates & individual project funds. To be sustainable, those tools should be linked to growth.”

The flipside of that is that, when there’s a downturn, the industry wouldn’t pay for what would be long-term infrastructure provision.

And the other potential source of funds, not mentioned, is the hike in gst which the Government retains in good times, inadequately funding local infrastructure required to support the tourism growth.

My conclusion: It’s scary, really, that we have so many political & business leaders with not one new or innovative idea among them on alternative funding, that the same issue is raised often without any thought of resolution.

The one solution, a variation on a bed tax, is a more expensive way of doing what a slice of gst could do more easily & neatly.

The world has cities which have created infrastructure to meet these kinds of needs, and the world has potential infrastructure funders. They’ve been walking through the mayor’s office in Auckland for a decade.

Attribution: Property Council release, my thoughts.

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Housing infrastructure fund enters final submission round

High-growth councils have submitted $1.79 billion of proposals to the Government for support from its $1 billion Housing Infrastructure Fund, but ministers said on Wednesday they weren’t happy with what they’d seen.

The councils have until 31 March to submit final proposals for a share of the fund, and Infrastructure Minister Steven Joyce and Building & Construction Minister Nick Smith said they wanted councils to be more ambitious in their final proposals.

Mr Joyce said: “Only a small number of the 17 proposals received through the expressions of interest phase would result in projects being advanced earlier than previously planned by the councils. We want to see more ambitious projects that will have a greater positive impact on housing supply over the next 5 years.”

Dr Smith said the Government had set up the fund last year because council constraints in financing the necessary infrastructure – the water supply, stormwater, wastewater & roading – could slow the opening up of new housing areas. He said the fund could support construction of 50,000 new homes, depending on which final proposals were supported.

The 2-stage process had enabled councils to ‘test drive’ & refine their ideas before the final proposal stage: “The final proposals will be assessed by an independent panel, with priority given to those initiatives that enable the most new housing. We expect to announce the final allocations later this year.

“The Housing Infrastructure Fund is part of the Government’s comprehensive plan to grow additional housing supply alongside special housing areas, the new Auckland unitary plan, the national policy statement on urban development, reforms to the Resource Management Act, the Crown land programme & the HomeStart scheme. We have been successful in more than doubling the house build rate from 15,000 to more than 30,000/year.”

When the Government set up the fund, it highlighted the growth areas it was looking at:

Auckland: Helensville, Waiuku, Pukekohe, Pokeno (Waikato) & Clevedon
Tauranga: Tauriko (in the Kaimai foothills)
Hamilton: Taupiri & Cambridge
Christchurch: Kaiapoi, Rolleston & Lincoln
Queenstown: Arthurs Point, Lower Shotover-Lake Hayes-Arrowtown & Jacks Point.

Link:
Housing Infrastructure Fund

Earlier stories:
8 January 2017: Housing infrastructure fund call for final proposals imminent, and panellists required
3 July 2016: PM talks $1 billion infrastructure fund, English talks payback frame, Smith talks grabbing more power

Attribution: Ministerial release.

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Housing infrastructure fund call for final proposals imminent, and panellists required

The Ministry of Business, Innovation & Employment will open its call for final proposals under the new $1 billion Housing Infrastructure Fund on 31 January and expects those proposals to be submitted by 31 March.

Meanwhile, applications close on Monday 23 January for membership of the independent assessment panel advising ministers initially on recommended proposals for the fund, and subsequently on the results achieved by those projects.

The final proposals will be evaluated from April to June, but the panel will be appointed for a 3-year term. Panellists will be appointed in February to start in late March. In the first year, the chair is expected to work 50 days and panel members 30 days, reducing to 20 days for the chair, 10 days for members, in the last 2 years.

The process so far

The Government announced the one-off fund in July, aimed at fast-tracking development for housing in selected high growth regions by providing interest-free loans to councils for new water & transport infrastructure construction.

When Building & Housing Minister Nick Smith called for indicative proposals in September, he said councils would be expected to include information on the type of development for which funding assistance is being sought & its location, estimates of how many additional dwellings the infrastructure is expected to help provide, and the estimated value of funding sought.

They must be related to roading projects (including public transport & council-nominated NZ Transport Agency projects), water, wastewater or stormwater infrastructure and intended to support the building of new dwellings.

Dr Smith said: “Funding will be available only for the capital cost of the projects and cannot be used for maintaining, replacing or running infrastructure.”

Government wants councils to find new funding mechanisms

He said the fund was a one-off because, “longer-term, councils need to find new ways of funding infrastructure through existing funding tools or potentially coming up with new ones. This is a short- to medium-term fund to enable the acceleration of new houses in high-growth areas rather than an ongoing subsidy to councils.”

A ministry explanatory note said urban areas would continue to be considered high-growth if, as at 2 December 2016, Statistics NZ projected population growth of over 1%/year for the next 10 years.

“For transport infrastructure, an accelerated approach similar to that used to bring forward some recent improvements to Christchurch local roads is expected to be used. This works by the NZ Transport Agency paying for all or most of a project upfront, with a council’s cashflows adjusting in subsequent years through reduced funding assistance for other projects.

“Use of a special-purpose vehicle is being considered for water, wastewater & stormwater infrastructure. Further information on funding mechanisms will be provided as part of the call for final proposals.

“For the transport component of any project or works for which funding assistance under the Housing Infrastructure Fund is sought, information will be required to satisfy National Land Transport Fund investment criteria relating to strategic fit, effectiveness & cost-benefit.”

Ratios an important aspect of assessment

It won’t be a case of biggest (Auckland) takes all. Assessment criteria include dwelling yield as a proportion of projected demand, the spend/dwelling, how far the fund support will enable a project to advance, and the degree the proposed infrastructure could support or complement other investments or economic growth.

“It is likely that some infrastructure projects will also have benefits broader than speeding up the supply of housing. In some cases, there may be benefits to businesses & the economic growth of an urban area through improved accessibility or additional water, wastewater or stormwater capacity. The ability to provide benefits broader than simply additional housing supply would be considered favourably in instances where 2 proposals are otherwise evenly matched.”

Government wants fast payback

In addition, the Government wants to know how soon it will be reimbursed, either through payback or by a council shifting the whole project into a special-purpose vehicle: “In providing assistance through the Housing Infrastructure Fund, central government takes on a degree of financial & development risk. That risk increases the longer the Government has to wait for reimbursement, particularly if there is a downturn in the property market.

“From the Government’s point of view, recovering its expenses within 10 years of incurring the costs is important to minimise negative impacts on Crown accounts. It is the general expectation that territorial authorities would seek, as far as practicable, to purchase water infrastructure from the Government’s special-purpose vehicle within 10 years.

Transport front-loading means less for later projects

“For transport infrastructure, it is intended that assistance would be provided through the NZ Transport Agency paying for all or most of a project upfront (front-loading the project) from the National Land Transport Fund by increasing the territorial authority’s funding assistance rate (FAR) payments for that project. Territorial authorities would match the NZ Transport Agency’s investment in later years through receiving reduced FAR payments on a further package of related works. The overall result would be that total NLTF/FAR payments over the 10-year period would be equivalent to what would have been received if no front-loading had occurred.

“Access to the FAR approach is dependent on territorial authorities formally agreeing to receive the reduced FAR over the period the NZ Transport Agency is offsetting its costs. This may mean the territorial authority reduces some programmes over the offsetting period, or otherwise increases its investment to cover the shortfall during this period.”

Implicit zoning override

The last 2 sections of the Government’s note on how councils can meet the new fund’s loan requirements relate to a zoning override and achieving national policy statement development capacity targets.

The assessment includes assessing councils’ commitment to removing barriers to development, with evidence on the current status of the land to be developed and any existing impediments to development, and a schedule of steps, processes & timing of initiatives to be undertaken to remove those impediments.

“Restrictions on development in an area may not be solely related to a lack of infrastructure. Territorial authorities will be expected to show they have removed, or have committed to removing, other barriers to development that are within their ability to control. Such barriers could include:

  • inappropriate zoning
  • lack of other types of infrastructure not covered by the Housing Infrastructure Fund
  • restrictive bylaws, and
  • other land use restrictions (for example, lifting reserves status where appropriate).

Councils will be expected to estimate how much more serviced land is required to meet the ‘sufficient development capacity’ targets under the national policy statement, and the land supplied by using the fund should be expressed as a proportion of that figure.

If a council already has enough development capacity under the policy statement, the ministry said it would want to know why they considered more infrastructure investment was necessary.

Highlighted growth areas:

Auckland: Helensville, Waiuku, Pukekohe, Pokeno (Waikato) & Clevedon
Tauranga: Tauriko (in the Kaimai foothills)
Hamilton: Taupiri & Cambridge
Christchurch: Kaiapoi, Rolleston & Lincoln
Queenstown: Arthurs Point, Lower Shotover-Lake Hayes-Arrowtown & Jacks Point

Links:
October 2016, MBIE: Call for indicative proposals
22 September 2016, ministerial release: Next steps
3 July 2016, ministerial release: $1b fund to accelerate housing infrastructure
Ministry for the Environment: National policy statement on urban development capacity

Earlier stories:
26 October 2016: Goff talks up growth along with cutting congestion and revising funding
19 August 2016: Government says it’s already implementing land for housing recommendations
11 July 2016: Little sets out 8 planks to remedy housing issues
3 July 2016: PM talks $1 billion infrastructure fund, English talks payback frame, Smith talks grabbing more power

Attribution: Ministerial releases, ministry documents.

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Goff talks up growth along with cutting congestion and revising funding

As Statistics NZ published its latest migration figures last Friday – a net inflow just 46 short of 70,000, and a net 32,700 into Auckland – new mayor Phil Goff was talking up growth while proposing faster measures to cut congestion, and telling the Government it needs to shift at least some of the financial burden from ratepayer to taxpayer.

The Government has been running a programme to encourage regional economic growth, but not in the concerted way needed to reduce imbalances. And it has done none of the exercise needed to restructure the funding of infrastructure.

The Auckland transport alignment project, between the Government & Auckland Council, is a very tentative step towards part of this necessary revision. But it’s predicated on Auckland continuing to grow apace, it’s a tally of tasks & setting of a priority order.

Transport alignment, and what it’s not about

It’s not about examining Auckland’s apparent needs from a wider perspective – looking at housing not just as a centre-outward programme but as part of the creation of communities & new economic centres, looking at local business as an integral feature of growth instead of being a chance occurrence, looking at access as an efficient way to move between economic centres and between those centres & homes.

Carpeting an overpriced landscape with homes is not the answer to a problem but an escalation of the problem. Growth for its own sake has rightly been characterised as a Ponzi scheme.

Silverdale, in the north of the region, is an example of how improvements to local government can send progress astray. Under the old Rodney District Council, which needed more sources of rates, some of the land now being gobbled up by an expanding Millwater housing subdivision was intended for a business innovation park. A tertiary education relationship would have followed, naturally.

The jobs in Silverdale & Millwater are in shops. The strength of the greater perspective has been defeated.

“Growth is good”

New Auckland mayor Phil Goff.

New Auckland mayor Phil Goff.

Mr Goff told the Council for Infrastructure Development (renamed yesterday, now Infrastructure NZ) about his travails on the campaign trail of guessing when he might turn up, because of congestion.

But his central themes were that “Auckland is a great city – that’s why so many people want to live here”, “New Zealand needs a city of international scale”, and “New Zealand needs a major city which can retain the best & brightest of its own new generation and can attract talent from abroad”.

“Growth is good,” he told his infrastructure-oriented audience. Where have you heard a similar phrase, the first word changed?

Mr Goff has 3 central answers. First, the economic imperative founded on growth & skill; second, overcoming the housing price spiral and providing the infrastructure to support it; third, changing funding structures. They all need a lot more work.

“Auckland has to be a centre of learning & innovation,” he said. “It is our best prospect for building a diversified & high technology economy. To attract & retain the talent we need, the city has to provide high paid jobs in high value-add enterprises and also needs to be a good place to live.”

He said local & central government had to work together to address the infrastructure deficit underlying housing unaffordability & traffic congestion: “For housing, there are some issues of demand management which are largely within the scope of central government which could take some of the pressure off. Longer term, it is about increasing supply.

“Around 60% of housing costs are the land, and increasing the supply & better utilisation of land is vital. The new unitary plan, when it is fully implemented, is a big step towards tackling the problem of land supply and therefore cost.”

At that point Mr Goff raised the catch-cry: “We need to go up & out.”

“Up & out” inherently a conflict

Sounds great, but it’s inherently a conflict where pricing is integral. Old Auckland City wanted intensification because it had nowhere to expand, while the rest of the region’s old territorial councils wanted expansion in their areas to improve their economies by boosting their populations.

Without those old boundaries, the reasons for those numbers games change. Suburban intensification can be justified where there is amenity and where work is available at a range of skill levels, so concentration in centres well away from the cbd will then work. Carpeting the landscape without adequate activity centres – jobs, education, sports facilities, entertainment, not just shops – means the dominance of the car will continue.

Mr Goff said reviewing Auckland’s consenting process would be a priority. From the council’s perspective, “we need to have a resource consenting system that is fast, efficient & responsive to the needs of our city while maintaining the integrity of the process”.

Infrastructure funding

But, he said, the bigger problem was the cost of providing infrastructure so land zoned for housing can be developed: “I am pleased that central government recognises the cost of providing infrastructure cannot be funded from the narrow revenue base of rates. Nor can infrastructure needs be funded in local government as they are in central government by simply borrowing & increasing debt.

“Auckland is constrained in its infrastructure investment by the need to maintain prudent levels of debt, in particular in its debt to revenue ratio. Currently, the maximum ratio set by Standards & Poor’s is 270% and Auckland’s current ratio is approaching 250%. Our debt currently stands at $8 billion and will grow by another $2 billion over the next 3 years, and this is within the prudential limit by our credit rating agencies.

“With the need to meet half the cost of the city rail link – some $1.5-1.7 billion over the next few years – Auckland’s ability to take on new debt is constrained.

“Breaking the debt:revenue ratio would put at risk our AA credit rating and potentially add millions to the council’s interest costs. Treasury & central government agencies understand the scale of Auckland’s infrastructure needs, which come from unprecedented growth and the revenue constraints on the city to meet that growth.

“We can look overseas for better models, such as in Sydney, where infrastructure needs are met not just by local government but in large part by the state government, which has broader sources of revenue.

“I welcomed the Government’s announcement of its Infrastructure Fund a couple of months ago. It was an acknowledgement that high growth areas need additional assistance. However, that $1 billion spread over 5 growth areas won’t accelerate housing construction in Auckland to the levels needed to meet housing demand. I also acknowledge that the onus is on Auckland Council to demonstrate to the Government that we have our house in order for extra capital to be made available.”

Failure to solve funding hugely expensive

None of that spiel on infrastructure needs & funding matches what the “out” part of “up & out” will do to infrastructure demand. Auckland needs closer attention given to a mix of public & private infrastructure provision, and particularly to how it’s managed. Management needs to be non-partisan and, while the public sector theoretically has no favourites, it can be extremely partisan & jaundiced.

Funding by the taxpayer is no different from funding by the ratepayer: same pants, different pocket. Upfront funding by the developer adds hugely to cost, as does the uncertainty of how long getting consent will take. Plenty in the public sector continue to regard “the developer” as a greedy parasite, ignoring the cost of uncertainty and the value of that gift of upfront funding.

Those costs feed into land prices and into all inputs of housing. And they feed into the costs of business, and especially into transport.

Mr Goff said congestion was costing Auckland an estimated $1.5-2 billion/year in productivity losses: “Technology such as Uber car sharing & driverless vehicles will help, but we shouldn’t sit back and expect that to be the only solution when our population will grow by another million. Motorway investment can help, but no great city has built its way out of congestion with roads. Cycleways to allow kids to get safely to school could take up to 10% of traffic off the roads during rush hour. Increasing our public transport, heavy & light rail and busways is critical to relieving pressure on our roads, as it is in almost all international cities.

New transport priorities

“The developments we need here are, in many cases, not even within the next 10-year plan, 2018-28. As mayor, I will prioritise the development & signing off of a business case for rapid light rail in the isthmus to bring it into the long-term plan.

“Auckland must also plan for rail from the city centre to the airport, given we have 3.5 million tourists/year, growing to 5 million, and the airport region and cbd are our fastest-growing areas of employment.”

Mr Goff said funding was critical to bringing transport developments forward, but there was a national funding imbalance: “Many Auckland roads, which carry much heavier vehicle loads than roads elsewhere that are classified as roads of national significance, get half the funding of other regions. The city rail link, likewise, gets only 50% funding with the rationale not obvious for this.”

He said Auckland needed a regional petrol tax now and congestion charging later.

It might be unreasonably selective to focus on one speech out of hundreds made over an election campaign and into the start of a mayoralty, but this is when the speeches actually count, and this is when the detail needs to be provided.

Attribution: Goff speech, Statistics NZ.

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Infrastructure frailty puts US financial woes in perspective

Economist & financial commentator John Mauldin put a lot of US financial woes in perspective this week in his column, Thoughts from the frontline, where he highlighted the frailty of the country’s infrastructure and the likelihood that funding will prevent it being maintained or upgraded adequately.

Those infrastructure woes pitch the US into a role of coming from behind. One issue has been recognised but not resolved: funding of its road network has not kept up, the rising proportion of pensioners leaves fewer motorists to pay for it, and improved vehicles reduce the fuel use that taxes are levied on.

Other issues are arising, much the same as in New Zealand, except that more complicated governance structures make resolution harder. After 70 years of suburban development, water supply & waste removal are 2 areas of concern.

From afar, we see a streamlined country that knows how to run its affairs (apart from the temporary question of finding a president). What Mr Mauldin sees – backed up by a report from the independent analysts at the Congressional Budget Office in a report in August on the national budget & economic outlook for the next 10 years – are the likelihood of early recession and rising deficits which won’t go anywhere near covering infrastructure requirements.

Mr Mauldin summarised what is a quite long opinion piece, and I’ve reduced the summary further:

  1. The next president is likely to face a recession early in their term; current monetary & fiscal policy will ensure it’s fairly serious, and the recovery even slower than last time
  2. The fiscal deficit will swell to at least $US1.3 trillion and likely more. That will leave little room for fiscal spending & stimulus, and certainly not much for the usual infrastructure spending that is called for
  3. The state of US infrastructure is appalling. It needs at least $US3.6 trillion worth of repairs, and that does not even include what we need to do to prepare us for the 21st century. We have dug ourselves a very deep hole of massive failures on infrastructure upkeep, and we are continuing to dig
  4. His solution on where to find the money
  5. Necessary tax & regulatory reforms, and then he notes: “If we do none of the above but stumble along doing what we have been doing, the investment environment is going to be exceedingly stressful; and pension funds & insurance companies are going to have massive difficulties staying in business, not to mention meeting the needs of tens of millions of retirees”.

Same issues apply to Auckland

Some of that warning could equally be applied to Auckland, which is still spending less on infrastructure upgrades than it should, although the advent of the super-city has streamlined the ability to make that provision.

Auckland is also going down a new route of escalating suburban housing development, led by a government that wasn’t awake soon enough to the bottlenecks being created by insufficient land supply around the region. Those bottlenecks occurred as the regional council was responsible for monitoring land use and contested urban conversions while having no power to implement alternatives – such as the present move to intensification.

Changing land use was primarily in the hands of territorial councils until the super-city took over in 2010, and those councils had very different – and competing – intentions. As residential development is promoted ahead of all other uses, some of those pre-merger intentions should be kept in place, such as providing more local jobs and encouraging business clusters outside the centre.

At the moment, the helter-skelter rush to lay out new suburbs requires infrastructure to be in place, at greater cost/residence than more intensive development, and with long-term maintenance costs that are likely to be much higher.

Just as Auckland Council has worked out the costs & requirements of a steady growth in infrastructure, it is being pressured to meet hasty new demands based on an old model that the US is demonstrating has high risks when demography & funding systems militate against the “forever onward” approach.

US economy “running at stall speed”

Back to the US, where Mr Mauldin argues that the economy “is running at stall speed, and any shock that comes from outside the US – from Europe or Japan or China – or from an actual honest-to-God initiation of interest rate hikes by the Fed, which would force a repricing of bonds & equities, could set off a recession that would become self-reinforcing”.

One of those potential external disrupters is Deutsche Bank – in trouble, at the heart of the international financial system, not to be bailed out according to German president Angela Merkel, requiring a rescue according to Mr Mauldin.

“Pay attention to Deutsche Bank,” he wrote. “The bank is deeply connected with the entire global banking market, and just as Lehman Brothers triggered a rolling wave of panic, Deutsche Bank has a similar potential. Even though Merkel swears she is not going to bail out Deutsche Bank, she will have no choice. They will probably have to wipe out shareholders and maybe even some subordinated debt, but they cannot let the bank itself go under, because it is at the centre of a massive financial spiderweb. Which means that the German central bank will have to be at the centre of the rescue, and it gets its capital from the ECB (European Central Bank). Watch how quickly Italy, Spain & the rest of Europe demand that the ECB bail out their banks, too. So the last thing Germany will want to do is bail out Deutsche Bank.”

Projections are for escalating debt, no answers

The Congressional Budget Office, in its report on the state of US public finances, said: “The deficit under current law is projected to be larger this year, but smaller over the 2017–26 period, than the office projected in March. Since January, the office has reduced its projections of gdp growth & interest rates over the coming decade.”

It stated the obvious, that growing deficits projected through the next 10 years would drive up public debt, and it’s projecting the federal deficit will reach 4.6% of gdp by 2026, pushed upward by the continued growth in spending on social security, Medicare & net interest. It said these costs would outstrip growth in revenues, resulting in larger deficits & increasing debt.

In the Congressional Budget Office’s projections, federal outlays rise by $US2.4 trillion/year (or about 60% percent) from 2016-26: “Relative to the size of the economy, outlays remain near 21% of gdp for the next few years – higher than their average of 20.2% over the past 50 years. Later in the coming decade, the growth in outlays would exceed growth in the economy and, by 2026, outlays would rise to 23.1% of gdp. That increase reflects significant growth in mandatory spending & interest payments, offset somewhat by a decline, in relation to the size of the economy, in discretionary spending.”

The office said that, if current laws generally remained unchanged, revenues would gradually rise – by $US1.7 trillion, or about 50%, from 2016-26 – increasing from 17.8% of gdp in 2016 to 18.5% by 2026. They’ve averaged 17.4% of gdp over the last 50 years.

“As deficits accumulate in the office’s baseline, debt held by the public rises from 77% of gdp ($US14 trillion) at the end of 2016 to 86% of gdp ($US23 trillion) by 2026. At that level, debt held by the public, measured as a percentage of gdp, would be more than twice the average over the past 5 decades.”

In sum

In short, the rising infrastructure debt is not matched by an ability to pay, and the US Government is not producing ways to resolve what will become a critical failure at the heart of the international financial system.

Its effects will be widespread, right down to the number of wars the US can fight. A symptom at the moment is the level of interest rates, seen mostly from the perspective of a financial system struggling to get traction. The finance world has been promoting ever-lower interest rates, which support higher asset prices.

There is another side to this, not mentioned by Mr Mauldin or in the Congressional Budget Office report, and that’s the preference of governments to get interest rates down – and exchange rates rebalanced in their favour – when their repayments are high.

New Zealand’s Reserve Bank has been bleating that our exchange rate is too high, but it’s not going to beat the requirements of more powerful nations on that score.

Links:
John Mauldin, Thoughts from the frontline, 2 October 2016: Start moving some dirt
Congressional Budget Office
Congressional Budget Office, 23 August 2016: An update to the budget & economic outlook: 2016-26

Attribution: John Mauldin, Congressional Budget Office.

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Tracking ideas Sun27Sep16 – sprawl v compact, inclusionary housing, infrastructure funding, related pieces, Making NZ

Sprawl v compact research stops short
Inclusionary housing another debate that’s international
Infrastructure funding options
Related pieces
Making NZ a home for planning thinkpieces

Tracking ideas is a Bob Dey Property Report section devoted to ideas on property questions such as urban strategies & design, many from overseas but with relevance to Auckland.

This page today flits between foreign, mostly American, information and Auckland. I’ve listed a large number of links to work through – it’s a library piece, not a quick read. And I’ve mentioned a couple of points which may be true in the US but don’t apply in Auckland because circumstances here have changed.

Sprawl v compact research stops short

In another round of the sprawl v compact argument, US analyst Issi Romem produced an article a fortnight ago that’s already been taken by some notable news outlets as something approaching gospel.

Some of what I’ve read among the many links below leaves me mystified about the writer’s point, some of the complicated analysis requires more digestion, here & there I’ve spotted contributions worth taking further.

The first mystery, for me, is how Dr Romem’s figures (down to 2 percentage points) on housing development over the last 3 decades can point to a sensible way forward in times which have started to change very quickly.

An inappropriate template

The US – and New Zealand followed, though to a less extravagant extent – launched into suburban development in the 1950s, pushed along by the availability of cars for general consumption. That doesn’t mean the development of those suburbs was a perfect mechanism for housing fast-growing populations, or that in an isthmus-centred place like Auckland the carpetlaying grid template would be appropriate.

One side of the argument now is that central intensification should be used to provide a larger proportion of housing, that this will be cheaper than sprawl on the fringes of the region. On the other side, proponents of extending the urban footprint say this will provide cheaper land and thereby cheaper housing.

How you count the numbers, and which numbers, makes a big difference. Do you include a travel component, or not? Does it measure cbd to wherever, or some to more local workplaces? How many cars does a household have?

Housing comparisons undefined

All the research, and all the comments, refers to housing, houses, apartments…. You, the reader, can only guess at what kind of economic units are being referred to. At the start of the 1980s, the standard New Zealand house (used in Master Builders statistics) was 93m² (1000ft²). Standard houses now are more likely to be over 200m², perhaps over 300m² including garage, with indoor-outdoor flow to make it hard to assess actual, practical size.

Old sausage-block flats were small, commonly under 80m², and a high proportion of apartments built in the last 20 years will also measure less than that. But, in recent times, terraces, townhouses, cross-leases, standalones on small sections and a smattering of apartments will exceed 200m².

Section sizes have been shrinking for 20 years. From 809m² (one-5th of an acre, far more common than the ‘quarter-acre paradise’, 1012m²), sections now can be down at 200m².

In Auckland, now, the Government is a key participant in redeveloping at Hobsonville Point, in the Glen Innes-Tamaki area and at Northcote. The Government-owned Housing NZ is still contesting unitary plan decisions limiting what it can do on many other sites where it’s aggregated land, wants to reposition old housing or wants to do a mix of upgrade & new.

In most of the American research, apartments or other intensified housing in the city centre are compared to development on the distant suburban fringe, with no indication of how close they are to being alternative options, and no calculation of commute costs.

Commuting from Faraway

In Auckland, we have a 20km stretch through Dairy Flat, between the ridge above the Albany basin & Silverdale, and very large areas between Karaka, Pukekohe and west to the coast likely to be developed for housing. You can bet it won’t be turned over to housing at the US standard of 4 houses/acre gross (10/ha) – more likely a mix of standalones on sub-400m² sections, terraces and, a novelty, suburban apartment blocks.

Where will these residents work? Shop? How will they get there? Do we create new communities – or faraway dormitory suburbs? Will the commute be made easy first, or wait for an economic number of travellers to buy at Faraway?

What kind of local jobs will be there? Rodney District Council, in its last years before the super-city was created in 2010, envisaged an innovation zone of business & education as well as housing north-west of Silverdale, a strategy that would increase jobs & education and reduce the commute. That kind of thinking needs to be revived.

Completion of the Auckland unitary plan enables the course of infrastructure provision to be more clearly defined (the appeals still to be determined shouldn’t drastically alter this), but there will still be questionmarks over how much more intensive development might be put in train in the inner suburbs.

Back to Dr Romem

Today’s Ideas page traverses ideas on infrastructure funding, inclusionary zoning as a way of introducing some more affordable housing, and city shape (focusing on Auckland being linear, having satellites, or concentrated around nodes).

This journey over the weekend has taken me to a wide range of views on transport, land use, access – starting with American, returning to New Zealand via international links (Wendell Cox, co-author of the Demographia studies with Hugh Pavletich of Christchurch; and housing & urban development thinker Phil Hayward of Lower Hutt, whose comments appear in a couple of the international & local threads).

At my first stop, Dr Issi Romem’s Can US cities compensate for curbing sprawl by growing denser? offered 4 central points:

  • The link between housing production and outward expansion is unmistakable: cities that expand more produce proportionally more new housing
  • Throughout the country, housing production is skewed towards low density areas
  • Densification has slowed down across the board, and especially in expensive cities, undermining their ability to compensate for less outward expansion
  • Unless they enact fundamental changes that allow for substantially more densification, cities confronting growth pressure face a tradeoff between accommodating growth through outward expansion, or accepting the social implications of failing to build enough new housing.

While Dr Romem’s research shows his first point appears true historically in the US, in Auckland at least that may be much less so in the last 5 years. On his second point, land price & ease of development are the crucial factors. Auckland has a short history of apartment building (though a long history of much less intensive sausage-block flats), and it’s come in bursts. Building consents are now approaching the 2004 level, but the price range is limited – almost entirely above what’s deemed “affordable”.

Romem says less outward means less overall

Dr Romem is the chief economist at BuildZoom, a San Francisco website aimed at matching clients to construction contractors. He was previously an economist at OnPoint Analytics, earned his PhD in economics at Berkeley, and consulted for the Bay Area Council Economic Institute on matters involving transport, real estate & the regional economy.

In this report, he found that, when cities change their pace of outward expansion, their rate of housing production tends to change accordingly.

“Both expensive & expansive cities are economically vibrant and face pressure to grow, but whereas expansive cities like Atlanta, Houston & Phoenix continually provide ample new housing at affordable prices, expensive cities like San Francisco, New York & San Diego do not. Since the 1970s, expensive cities have failed to produce enough new homes to keep real housing costs steady, and as a result they have curbed their population growth and sent real housing prices on a long-run upward spiral.”

He saw 2 key reasons for housing production to correspond so closely with outward expansion:

  • Undeveloped & low density areas produce a disproportionately large share of cities’ new housing. Restricting the flow of undeveloped land “into” a city chokes off subsequent rounds of densification, because low density areas add new housing more readily than denser ones, and
  • Cities which curb their outward expansion are also likely to curb densification within the existing footprint, eg, through more restrictive land use policy.

“Housing production’s skew towards low density areas is important, because it is consistent with the notion that a greater inflow of undeveloped land helps cities produce more housing, through both initial development & subsequent rounds of densification. For reasons explained earlier, eg, with respect to vacant lots, such densification is easier in low density areas. Crucially, expansive cities’ namesake outward expansion keeps low density areas more plentiful there than in expensive cities. In contrast, expensive cities have limited their inflow of undeveloped land by curbing their outward expansion, thereby choking off the initial development of new areas as well as subsequent rounds of densification.”

Densification has slowed down across the board, but much more so in expensive cities

Dr Romem said an important development of recent decades was the increasing paucity of densification: “During the first post-war decades, it was fairly common for areas to grow more dense through construction on vacant lots, and in particular through the replacement of older structures with new ones containing more dwellings. The data show that densification has grown far less common over time, especially in the expensive cities.”

He said the results were similar for areas first developed before World War II.

“Aside from the slowdown in densification, the numbers also tell us that in the US today, substantial densification is the exception. Just 3.8% of areas adding over 1 home/acre (4/ha) and just 0.95% adding over 2 homes/acre over the span of a decade is not very much, and the fraction of areas that cross the 4- & 10-home/acre (16- & 40/ha) thresholds each decade is also exceedingly small. In fact, the vast majority of the developed area of US cities maintains a fixed level of density that doesn’t usually change much over time….

“By curbing their outward expansion, expensive cities have stemmed their subsequent supply of low density areas that are flush with opportunities for further development. A sizable share of densification occurs through infill – not the kind of infill for which planners reserve the term, but simply construction on vacant land scattered within developed areas. The best land is used first, and as densification progresses the remaining lots are fewer and increasingly more challenging to build on, until redevelopment ultimately becomes the only alternative.

“Expansive cities maintain a robust supply of fresh land that is in the early phases of the progression. In contrast, expensive cities’ reduced rate of outward expansion means that most of their land is farther along in the progression, and as a result it is getting harder for them to densify. It is no coincidence that builders today report an unprecedented shortage of vacant lots that is most pronounced in the West & the North-east, where expensive cities cluster.”

Dr Romem’s assessments may also have been true in New Zealand, Auckland in particular, but the intensification trend is strong at the moment. Building consent figures over the last 2 years show intensive housing (apartments, retirement village units, townhouses & suburban units) showed 29.4% of consents nationally were for such intensive development in the July 2015 year, falling to 28.5% of a bigger total (up from 7600 of 25,700 to 8300 of 29,000) in the July 2016 year. I don’t have the breakdown for each market segment for Auckland alone.

Auckland apartment pricing has risen since the market bottomed in 2011. The market in standalone homes has skyrocketed in that period, but the 2 markets differ in their foreign input. Overseas investors have strongly influenced recent house prices, but have had a much longer association with the apartment market, which has relied on marketing overseas in this boom & the last one to get projects started.

The path forward

Dr Romem saw 3 paths forward in the US:

  • Cities that expand with gusto will maintain housing at more affordable levels, but this will further entrench the ills associated with sprawl; today’s expansive cities are already on this path
  • Avoiding expansion, and maintaining the status quo with respect to densification, will divert population growth towards more accommodating cities and render housing increasingly unaffordable for a growing share of the population; it will unequivocally change the social character of these cities, while keeping their physical facade intact, and
  • Enacting fundamental changes to land use policy that prompt far more substantial densification than any US city has undergone to date; expensive cities would have to embrace redevelopment; if new transport infrastructure connects undeveloped areas to the city, or functionally tethers existing nearby cities to it, then such infrastructure amounts to a catalyst for expansion.

Cox says research supports stance against ‘forced density’

Wendell Cox, principal of Demographia, wrote the book War on the dream: How anti-sprawl policy threatens the quality of life 10 years ago. In an article on the New Geography website on Wednesday, The incompatibility of forced density & housing affordability, he said Dr Romem’s research “supports the conclusion that anti-sprawl policy (urban containment policy) is incompatible with housing affordability. He quoted Dr Romem’s finding: “Cities that have curbed their expansion have – with limited exception – failed to compensate with densification. As a result they have produced far less housing than they would otherwise, with severe national implications for housing affordability, geographic mobility & access to opportunity, all of which are keenly felt today as we approach the top of housing cycle.”

Journal accepts the sprawl argument

In the Wall Street Journal, Laura Kusisto wrote: “Building sprawling suburbs is better at making cities affordable than building tall towers, according to research released Wednesday. Environmentalists, urban planners & economists are pushing cities such as New York & San Francisco to build more housing to help combat rapidly rising rents and home prices that are crowding out the middle class.”

At CityLab, Richard Florida noted the expansive versus expensive comparison and said if most development was low density it would amount to sprawl even if the overall urban footprint didn’t increase, and asked: “Do we continue to try to sprawl our way to the American dream, or do we add the density that powers innovation & economic growth?”

A Planetizen report said Dr Romem’s research “shows that housing affordability increases with a region’s ability to build outwards, as opposed to upwards. Densification largely has not accompanied efforts to curb sprawl.”

The Planetizen take was that the research found “sprawl may be bad for the environment & liveability, increasing dependence on the automobile and making transit less practical, but in terms of housing affordability, it’s a winner”.

In comments on the Romem report, Phil Hayward of Lower Hutt wrote (in a much longer comment): “I believe that everywhere that intensification & redevelopment have been adopted as significant proportions of planned housing supply, the results have been the opposite of the anticipated ‘affordability’. Site values increase to incorporate ‘development potential’ as soon as any rezoning occurs, which increases the costs that developers need to sustain while at the same time reducing their margins. All the gain falls to the incumbent owners of sites. In many cases, the expected ‘supply’ does not materialise.”

Hard boundaries go as immigration spike continues

Auckland, as a region with urban boundaries for 20 years – and “hard” boundaries for most of that time, in that they weren’t easily changed without going through protracted litigation – has been the main host for 2 immigration spikes, in 2003-04 and the present one that began with the turnaround from net outflow to net inflow in January 2013.

The latest annual net inflow was 69,000, of whom 32,200 were destined for Auckland. Neither inflow has been matched by an adequate rise in housebuilding. Consents for new homes issued in the last 12 months, 29,000 nationally, 9600 in Auckland, would barely house the national inflow while the Auckland consents would be inadequate to house all the new migrants, let alone internal migration & natural increase.

That can be turned into an excuse, aided by slow consent processes. Auckland was also behind during the 2003-04 immigration spike, but builders worked to catch up

For the first of those migration spikes, Auckland’s policy statement on land use was in the hands of the now-gone regional council. For the second, it’s in the hands of the successor unitary council, and the spike has coincided with the 3 years it’s taken to get the council’s unitary plan from start to almost finished. The housing accord with the Government through that period has enabled a lift in consents, though still well short of demand, and a finalised unitary plan will make intensification easier in many areas.

The “forced density” Mr Cox writes of is not what we have in Auckland, although the Government is leading rebuilds & newbuilds in 3 suburbs – Hobsonville Point, Glen Innes-Tamaki & Northcote. 2 of those projects involve rejuvenating Housing NZ properties, with additional intensive housing, while Hobsonville Point is all new (except for repositioning of a couple of handfuls of former Defence Force houses) and is being built by private contractors.

Current consents for apartments are no longer just in the central city, and include a number of high-price projects – upward of $10,000/m² for some consented 2 years ago, higher than that for more recent projects.

Occupants of those, and of new retirement villages, will free up existing housing, much of it in city fringe suburbs. The question, then, is: Where is the supply for lower market levels?

The answer is that it’s not going to appear until land prices ease, interest rates rise, speculation diminishes and developers & designers adjust their sights.

Links:
Issi Romem, BuildZoom, 14 September 2016: Can US cities compensate for curbing sprawl by growing denser?
Wendell Cox, New Geography 21 September 2016: The incompatibility of forced density & housing affordability
Planetizen, 16 September 2016: If housing affordability is top concern, let metro regions sprawl
Wall Street Journal, 14 September 2016: What if urban sprawl is the only realistic way to create affordable cities?
Richard Florida, CityLab, 14 September 2016: The difficulties of density
Phil Hayward comment, 18 September 2016

Inclusionary housing another debate that’s international

Debates over housing affordability, inclusionary zoning, sprawl & urban boundaries are international and can often relate to what happens in Auckland.

Jamues Brasuell wrote on the Planetizen website this week that Portland, Oregon, was considering a new inclusionary zoning policy – ending a statewide ban – but some believed it would have the opposite effect to that intended.

The inclusionary zoning policy is up for debate following a decision by the state to repeal a statewide ban on inclusionary housing requirements. City Observatory columnist Joe Cortright, a panellist at an Urban Land Institute forum on it, suggested ending parking requirements instead, saying inclusionary zoning & weakened urban growth boundaries weren’t effective tools for reducing the price of housing.

Mr Cortright focused on the consequences of “bursting” Portland’s urban growth boundary, saying that possibility, combined with new inclusionary zoning, could make Portland’s affordability worse.

He argued 7 points:

  1. Affordability is about growing up, not out
  2. The market demand/affordability problem is in the urban core
  3. Adding more supply in the core is the key to addressing affordability
  4. Inclusionary zoning increases market prices
  5. Inclusionary zoning creates only token numbers of affordable units
  6. Inclusionary zoning requirements would encourage further sprawl. (Because inclusionary zoning is likely to apply only to housing built in Portland, but not in suburban jurisdictions, it will effectively be a way of penalising & disincentivising dense development in the city relative to housing on the periphery)
  7. If we want to make housing more affordable, let’s get rid of parking requirements. (Oregon actually does allow inclusionary zoning – for cars, in the form of parking requirements. Requiring parking reduces the amount of land that can be used to house people, and directly drives up the price of new homes & apartments. These costs get passed on to homebuyers & renters. Studies show that in urban centres, parking requirements drive up rents by something in the order of about $US200/month. If we want to increase affordability we ought to be getting rid of this kind of hidden housing tax).

Links:
Planetizen, 19 September 2016: Inclusionary zoning & unintended consequences
Planetizen, 4 February 2016: Cortright: Oregon legislation would make housing affordability worse
City Observatory, 3 February 2016: Bursting Portland’s urban growth boundary won’t make housing more affordable (and a number of counter points in the comments)

Infrastructure funding options

Only when it doesn’t work does anybody think about infrastructure, says Just Economics LLC director Rick Rybeck.

In an article for Revitalization News, Funding infrastructure to rebuild equitable, green prosperity, said divorcing payment from infrastructure from payment for it made it harder to understand how the money was spent.

People also didn’t understand that, when infrastructure was designed & implemented well, it often inflated the price of well-served land. Where does that lead? “The infrastructure we create to facilitate development pushes development away and is partly responsible for sprawl,” he said. User charges, including road user charges, could help focus the mind on cost.

Just Economics says on its website it helps communities harmonise economic incentives with public policy objectives to:

  • reduce blight by putting vacant & boarded-up properties back into use
  • enhance business & employment opportunities
  • fund transit & other public infrastructure
  • reduce parking & traffic congestion
  • enhance housing affordability
  • enhance the environment, and
  • reduce sprawl.

The company says it accomplishes these goals by helping communities re-engineer taxes, fees & regulations so:

  • incentives embedded in taxes, fees & regulations encourage the private sector to create jobs, affordable housing, transport efficiency & sustainable economic development
  • needed public revenues are obtained, and
  • government sustainability, efficiency & competitiveness are enhanced.

Related pieces

These articles led me to several related articles on various websites. Check them out:

Charles Marohn, Strong Towns, 19 September 2016: Infrastructure spending for dummies
Revitalization News, 15 July 2015: Funding infrastructure to rebuild equitable, green prosperity
Rick Rybeck, report for Washington DC Tax Revision Commission, 2013: Funding long-term infrastructure needs for growth, sustainability & equity
Just Economics LLC (Rick Rybeck)

Making NZ a home for planning thinkpieces

A group of professionals who want to raise the level of public debate & understanding about housing, infrastructure, cities & planning launched the Making NZ blogsite in July.

I’ve quoted some of them below about the launch & their reasoning, but Making NZ cracks a mention today because of links to a number of its contributors who’ve commented recently on topics above – notably intensification & affordability.

Blog editor Matthew Webster said the group of contributors saw affordable housing, economics, infrastructure & design as important components.

Phil Hayward, an independent researcher, writer & lobbyist on urban policy issues, said: “A lot of urban policy is based on plausible assumptions that actually are not supported by real-life experience anywhere. For example, changing zoning to allow more intense development is always forecasted to unleash far more supply of housing units than what actually ends up being built. This is mostly because these zoning changes cause land values to increase even faster than otherwise and, as Arthur Grimes pointed out in a 2010 paper, all the profit potential is captured in land values rather than in newly constructed buildings.

“We should learn from the decades of over-estimated housing supply by urban planners in the UK, and avoid a replay of their costly & now-irreversible blundering.”

Development planning consultant Phil McDermott said: “Transport policy in our largest & most troubled market aims to focus investment in already intensively developed urban areas, raising environmental & financial risks. It’s a double whammy for unaffordability. Existing urban areas with limited capacity for growth receive expensive improvements. While that will increase the desirability of living there for some of those that can afford the higher costs & inflated property values, it leaves many more stranded without access either to traditional suburban housing or to multi-unit dwellings of any quality.

“One key, in the case of Auckland, is to free up for development sufficient greenfields land so the land value/rent curve is at least stabilised from the fringe back into the inner city, allowing more affordable & better quality housing to be developed citywide.”

Links:
Andrew Atkin blog, Building Utopia, 12 June 2013: Auckland versus Los Angeles
Making NZ, for urban planning that works
Phil Hayward, Making NZ, 1 September 2016: The myth of affordable intensification
NZ Herald, 29 February 2016: Dushko Bogunovich & Matthew Bradbury: Curing Auckland’s growing pains
Peter Nunns, Transport Blog, 7 March 2016 (and a long line of comments): The linear city and other science fictions

Attribution: BuildZoom, New Geography, Planetizen, Wall St Journal, CityLab, City Observatory, Strong Towns, Revitalization News, Just Economics, Making NZ, Andrew Atkin, Phil Hayward, NZ Herald, Transport Blog

Regular leads: Planetizen.

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PM talks $1 billion infrastructure fund, English talks payback frame, Smith talks grabbing more power

Prime Minister John Key announced a new $1 billion housing infrastructure fund today “to accelerate the supply of new housing where it’s needed most”.

The one-off contestable fund will be open to applications from councils in the highest growth areas – currently Christchurch, Queenstown, Tauranga, Hamilton & Auckland.

Mr Key & his ministers said in background to the fund: “Why a one-off fund? Longer-term, councils need to find new ways of funding infrastructure through existing funding tools or potentially coming up with new ones.”

The fund announcement comes 3 days after Auckland Council approved a $770 million increase in its annual budget to $8.77 billion, which right-wing critics of the council say is already too big.

The budget includes $705 million of capex for growth, numerous water & wastewater projects aimed at expansion in existing areas and for greenfield growth, and provision for the council development manager, Panuku Development Auckland, to work on transformation of about 18 centres & suburbs, including regeneration & new development.

English at odds with prudent policy

Finance Minister Bill English said the new fund “will help bring forward the new roads & water infrastructure needed for new housing where financing is a constraint. The Government will invest up front to ensure the infrastructure is in place. But councils will have to repay the investment or buy back the assets once houses have been built & development contributions paid.”

That’s to say, the Government is offering councils a programme forcing them to incur extra debt beyond long-term plan provision, on a timetable they can’t control, when, in Auckland’s case, the council is struggling to maintain its debt at a prudent level.

It’s a determined continuation of the Government’s intention, in Auckland, to dismantle the urban boundary and enable more greenfield development – 3 weeks before the panel which has spent 18 months hearing & working through submissions on Auckland’s first unitary plan delivers its considered recommendations to the council, including recommendations on that urban boundary.

Property Institute chief executive Ashley Church was quick to applaud the Government for its fund: “The move will go a long way toward overcoming Auckland Council’s major objections to opening up residential land on the fringes of the city.

“It follows a recent directive from Housing Minister Nick Smith, which required councils to open up enough land to cater for the growth in our fastest growing centres. The 2 measures have stripped Auckland Council of most of its excuses for inaction.”

Fairgray spelt out growth reasons which government could control

Mr Church’s view – and the Government’s intent – are at odds with research by the economist who led much of the council’s research on growth capacity & urban boundaries for the unitary plan hearings, Doug Fairgray.

Dr Fairgray said in a column run on this website on 24 June: “So what is driving this latest upsurge [in house prices]? Simply, the conditions which underpinned the price boom through the pre-GFC period have returned, but with greater effect. The principal drivers again include the ease of securing finance to purchase dwellings, stimulated by the strong competition among banks & financial institutions to increase their loan books, together with historically low interest rates making loans more affordable, and in particular the record levels of population growth in Auckland driven by record in-migration.”

The Government was able to address all those factors. It could also have addressed the heightened investor demand for houses throughout the 5 years since the market hit the global financial crisis bottom in mid-2011.

And, if Dr Fairgray is right in saying land supply is not the central problem, the Government’s move to hasten greenfield residential development will exacerbate long-term costs for commuters and council costs for the provision of community infrastructure.

Smith stretches Government talk to power grab on planning & consents

Building & Housing Minister Nick Smith said: “The fund will be available only for substantial new infrastructure investments that support more new housing, not to replace existing infrastructure.

“To access the fund, local councils must outline how many new houses will be built, where they will be built and when they will be available. Ideally, they will have agreements with developers on these issues.

“Funding may also have other conditions attached, such as faster processing of resource consents. All of this will require close collaboration between central & local government.”

Mr English said: “Infrastructure, and its financing in particular, is one of the 3 key constraints to building more houses – alongside land supply & consenting requirements.

“Councils have strict debt limits, which means some lack the headroom to invest in infrastructure now, and then wait for future development contributions to recover the costs. The fund will help provide more infrastructure sooner by aligning the cost to councils with the timing of revenue from development contributions.”

Depending on the number & timing of applications, it will require the Government to temporarily borrow up to $1 billion, which will increase net debt until it is repaid.

Dr Smith repeated Mr Key’s recent statement that the Government was also considering establishing urban development authorities to help further speed up the supply of new housing: “Urban development authorities have streamlined powers to override barriers to largescale development, including potentially taking responsibility for planning & consenting & other powers.

“These changes are just the latest steps in the Government’s ongoing, comprehensive programme to increase the supply & affordability of housing.

“They will complement the work of the housing accords & special housing areas, our social housing build, our emergency housing programme, the expanded HomeStart scheme for first-homebuyers, the development of surplus Crown land, the national policy statement [on urban development], Resource Management Act reform and the extra tax measures we took last year.

“We are making good progress in facilitating increased investment in housing with a record $11.4 billion of residential building work underway this year. This initiative to support councils with infrastructure provision is the next logical step in this programme.”

The council budget & infrastructure projects

Auckland Council’s budget for the year that started on Friday includes a rise in debt from $8 billion to $8.77 billion, but with interest costs held below 12% of revenue (11.3% for the last year, 11.5% for the next year).

Capex for 2016-17, up from $1.8 billion for the year just finished to a budgeted $1.95 billion, includes $1.375 billion for new assets, ranging from multi-year projects such as the city rail link & Ameti (the Auckland-Manukau eastern transport initiative) to a spread of local projects.

For just under $2 billion of capex & other outgoings, including $705 million for growth, the council budget includes $835 million to come from borrowings, $644 million from an operating cash surplus, $163 million in development contributions, $87 million from asset sales & $240 million from subsidies.

Key projects include $81 million on expanding the water collection system, $71 million on expanding wastewater treatment, and a number of other expansions & replacements of infrastructure.

The new Hunua 4 watermain will run 32km from the Redoubt North reservoir at Manukau Heights to the reservoir on Khyber Pass Rd, Grafton, costing $23 million this year.

Design will continue on the central interceptor for wastewater to support growth, replace aging assets and reduce overflows into the Waitemata Harbour.

The Waikato water treatment plant expansion will be completed and preliminary work, including getting consents, will be done for the North Harbour 2 watermain.

The budget includes $4.5 million on the start of the northern interceptor wastewater pipe, which will support northern & western growth and free up capacity at the Mangere wastewater treatment plant, supporting central & southern growth.

Upgrades to the regional water network include 2 new reservoirs at Pukekohe East, the first to start in 2017 and take 2 years to complete, and the second to follow depending on population growth.

The council’s development management arm, Panuku Development Auckland, had 2 transformation projects approved last December for Manukau Central & Onehunga, 8 other transformation projects to work on and another 8 to support, including development at Pukekohe, intensification at Avondale & New Lynn and redevelopment at Otahuhu.

Institute wants initiatives to encourage builders

The Property Institute’s Ashley Church said neither the Government nor the council should build the volume of houses required to address the shortage. He said the next step for the Government should be announcement of a series of initiatives designed to encourage the private sector to start building.

“Such measures could include a return of the ability to claim depreciation on dwellings constructed from now, removal of all loan:value restrictions on the construction of new dwellings, and an exemption from the ‘bright line’ test where the seller had built a home, rather than purchased an existing home.

“Moves such as these would very quickly create private & investor activity in new home construction and would lead to a focus on the construction end of the market – which has got to be preferable to the current situation where 42% of all purchases in Auckland are made by investors selling existing homes to each other.”

Mr Church acknowledged that the high cost of land, particularly in Auckland, meant these measures wouldn’t lead to a reduction in housing prices – but said they would “very definitely” contribute to slowing the growth in those prices.

Link:
Housing Infrastructure Fund – Q & A.pdf

Earlier stories:
1 July 2016: New house consents hit 9-year high but other sectors quiet
24 June 2016: Fairgray works through the question: Who’s really the house price villain?
6 December 2015: How Panuku proposes to lead transformation of Auckland

Attribution: Ministerial & Property Institute releases, council annual plan.

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Government & council start lining up on tolls but transport report still has big failings

The Government seems to have changed its mind about tolls as a mechanism to regulate Auckland traffic, though that’s still to be confirmed in the final report of the government-council Auckland transport alignment project (ATAP).

But the huge failing of the whole exercise is in ignoring potential to redirect traffic to suburban centres. The focus is on getting people into the central business district, but then disturbing business activity by using variable toll pricing to encourage non-peak travel.

Yet one of the supposedly significant values of the city rail link, now under construction, is that it will get people not just into the centre but through the centre to many other points around the region.

When the project’s foundation report was released there was a great turnout of new transport minister Simon Bridges, mayor Len Brown & numerous executive types associated with the project. Mr Bridges & finance minister Bill English were along yesterday to “receive” the second report of the project’s envisaged 3 reports. Private show, just the release & report links.

The mayor said: “The good news is that ATAP shows road pricing, where road users pay to use parts of the network, particularly during peak traffic periods, is an important part of the solution.”

That’s been a council position for some time, but the Government had been ruling it out.

Mr Bridges said the second report “has found that achieving a step change in the performance of Auckland’s transport system will require a range of interventions.

“It concludes that, while ongoing investment in new road & public transport projects will clearly be needed, greater use of technology and, in the longer term, road pricing – or directly charging for road use – will also be part of the toolkit.

“The final stage of ATAP will look at what additional projects could be brought forward in the next 10 years to support Auckland’s growth. If the benefits of early investment in these projects are significant, there may be a case for the Government & council to make extra funding available.”

Mr Bridges said exactly how that funding could be provided would need to be considered after the project team provided its final report.

Cllr Bill Cashmore, who’s working with the mayor in the governance of the project, said: “We’ve made such good progress with the Government because we’ve got the process right. Together, we’ve agreed the goals, we’ve agreed the data & the modelling approach and applied common sense to the results.”

The final phase is a prioritised investment programme, to be delivered in the final report in August. The council’s current interim transport levy paid by all business & residential ratepayers expires in 2018, so a replacement for that will be needed.

Cllr Cashmore said the project team would undertake final modelling, apply different budget scenarios and assess the results against the agreed goals before delivering the final report.

“It’s important that the third step springboards into a funding discussion, because this must get sorted before the 2018 Auckland Council long-term plan,” he said.

Mayoral candidate John Palino – a supporter of satellite development to disperse traffic around the region – said the transport project report highlighted the failure of the council’s Auckland Plan and demonstrated a new growth plan was needed.

Mr Palino said: “The ATAP report is an indictment upon 6 years of supposed integrated planning under the Brown-led council. Worsening congestion, high costs & disappointing public transport uptake are the key findings of ATAP work to date. Has anyone stopped for a moment to ask why, in spite of a more than doubling of our transport budget over the past 15 years, things will get so much worse so quickly?

“Growth has been strong recently, but not that strong. Something else is wrong and that is the compact city. The compact city model constrains land and forces intensification into suburbs not designed for it. We cannot and must not intensify established suburbs which can’t handle the growth. Our communities must push back against efforts to impose development in areas not fit out for it. This kind of growth serves no one.

“Growth should be focused into new satellite centres and close to employment where we can model new cities on an identified & planned balance of jobs, homes & travel.

“We must stop channelling trips into the cbd. This is the problem. New centres in our north, north-west & south will reduce growth in trips to the cbd, provide affordable housing and reduce the squeeze on cars & buses into the central city.

“New centres can be fit out with the kind of technology we need to manage transport effectively and deliver thousands of affordable homes.”

However, the project report’s authors have accepted that most of the region’s future transport network already exists, and that changing the investment mix isn’t going to achieve a step change. What the report’s authors said was that the existing network needs to become more productive to support growth: “This requires a combination of better network optimisation, continued improvements to asset management and a greater focus on intelligent transport systems (ITS). It is possible to deliver better results by changing the mix of investments within existing funding constraints, but this will not deliver a major improvement in regional outcomes over & above the current plan (the Auckland Plan transport network, or APTN). However, there are differences in impact at the sub-regional level, and specific interventions can help improve accessibility in the west & south, which were identified as problem areas in the foundation report.”

Links:
Auckland transport alignment project
Interim report

Earlier story:
23 February 2016: Transport alignment starts off-track

Attribution: Ministerial & mayoral releases.

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Joyce hunts for foreign direct investment in Singapore

Economic Development Minister Steven Joyce talked foreign direct investment (FDI) yesterday on a visit to Singapore, outlining what it is but not how to go about it.

Mostly, this investment has gone into capital assets providing a return, effectively displacing the next investor.

The unanswered questions, however, have been: How to use direct investment to lift economic performance, and on what terms.

In the almost 6 years of the Auckland super-city and its central infrastructure aims of upgrading the underground piping network and lifting the performance of the non-road transport network, a string of executives from foreign sovereign funds has visited Auckland Council, so far without result.

Mr Joyce has been on a quest to lift interest in New Zealand in new technology & innovative scientific business and said from Singapore, in a release out yesterday, he wanted to explore ways to strengthen the bilateral science & innovation relationship between the 2 countries and meet high net worth investors to promote New Zealand as an investment destination: “There is huge potential to grow the economic links between New Zealand & Singapore. Singapore is one of our most valued partners in the Asia-Pacific region. Whether it is in terms of tourism, 2-way trade or foreign direct investment, Singapore consistently ranks in our top 10 countries.

“Singapore has become a major source of foreign direct investment. Year-on-year foreign direct investment from Singapore has increased from $4.3 billion in 2014 to $5.6 billion in 2015 – growth of more than 30%. These investors are choosing New Zealand because they see opportunity. They see our growing economy, booming tourism, strong migration and a large pipeline of construction projects which will continue to stimulate growth.

“The Government wants to attract more high value foreign direct investment in our most competitive sectors, with a target of facilitating investments with a potential direct economic impact of $5 billion over 3 years. That investment would mean many more high value jobs for Kiwis.

“FDI creates jobs & businesses and provides funding to get infrastructure projects off the ground. High quality international investment can also help New Zealand firms to grow by forging international connections and enhancing access to export markets & complex global supply chains.”

Attribution: Ministerial release.

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