Speech to the NZ Initiative Members’ Retreat

Housing and Urban Development

Tēnā koutou. Good morning. A salaam alaikum. Peace be upon you. And peace be upon all of us.

Roger Partridge and the Board, Oliver Hartwich and your staff, New Zealand Initiative members, honoured guests.

A week ago almost to the hour, an act of terror was etched into our collective memory.

It was the day that saw the simple act of prayer – by our compatriots practising their Muslim faith – lead to a terrible loss of life, and trauma.

Those who died were brothers, daughters, fathers and children. They were New Zealanders. They are us.

Fifty people killed. Twelve in the intensive care unit in a critical condition; one a sweet little four-year old girl.

So many hearts, so many lives, are broken. We are mourning. Yet our spirit is strong.

I am proud of how our nation has responded, and proud of our Prime Minister.

Now is a time for unity and healing. A time for love and compassion. Now is not the time to talk about politics.

Yet the topics you have asked me to cover are inherently political, provoking strident and divergent viewpoints.

In the circumstances, I thought carefully about attending this discussion today.

I am passionate about my role in housing, urban development and transport. There is so much work to be done.

So today, for me, like you, that passion is bound by a heavy heart.

Before I get started, can I thank those business leaders here today who have set aside commercial considerations and reached out to our Muslim community, the Christchurch community and the wider New Zealand community, with so many expressions of kindness.

To quote the Prime Minister, this is who we are. Again, thank you.

 

Now to the topic at hand.

There is a startling array of indicators that in housing and urban development are telling us we have a problem: severe housing unaffordability, falling home ownership, increased hardship and homelessness, ballooning household debt and increased intergenerational inequality.

As you’d expect, our Government is committed to:

* addressing the immediate hardship and social need (with record investment in emergency housing)

* building more public housing to ensure people are decently housed when the market won’t do it

* reining in excess demand by adjusting the tax settings to discourage property speculation, and banning foreign buyers, and

* modernising the tenancy laws to make life better for the one-third of Kiwis who rent.

We are also working with industry:

* to build a more productive and competitive construction sector

* to encourage developers to build more affordable homes through Kiwibuild

* on how we can work together to establish an offsite manufacturing industry

* and to get a build-to-rent market up and running.

We are tooling up a Housing and Urban Development Authority to cut through the red tape and lead large scale master planned urban development projects that build whole communities at scale and pace. Projects that have a scale and complexity, particularly in brown field sites, that means the private sector alone cannot make them happen.

The UDA is largely about training a piece of the Government to remove some of the risk and complexity in large projects that will then allow the private sector to invest.

And because we are a pragmatic Government who look for good solutions wherever they come from, we also have an Urban Growth Agenda which rests on the idea that sustained progress will rely on getting our urban land and housing markets to work better, to be more competitive.

In our view there are three big challenges that have to be addressed:

  1. A broken system for financing infrastructure
  2. A planning system based on urban containment
  3. The failure of governments until now, both local and central, to actively work with the private sector to enable urban growth and expansion.

Let me update you on progress we’ve made on each of these.

First, infrastructure funding and financing

I said before our infrastructure funding and financing system is broken.

Some of our high growth councils which provide most bulk infrastructure have tapped out their balance sheets.

And to a large extent local government politicians have been unable to convince their ratepayers to invest in growth, leaving a burgeoning infrastructure deficit for the next generation.

The unwillingness or inability to invest in the infrastructure to support development stops cities growing.  When a city cannot grow in response to demand, a pressure cooker effect is created, which is what has given Auckland some of the most expensive urban land and housing in the world relative to local incomes. 

What are we doing?

Our aim is to put in place a new system of funding and financing the infrastructure for urban growth that will turn on the tap for a limitless supply of investment finance for developers who are willing to take the commercial risk on a project.

We want to ensure that the costs of growth are properly allocated. So they fall on the beneficiaries of development.

And above all we want a system that is responsive to demand.

The intention is that we create a system where the viability of the project is the determinant of whether to proceed with a particular infrastructure project, and whether private capital can be accessed and utilised.

Funding and financing go hand in hand; you cannot decouple one from the other.  Whilst financing is currently the main bottleneck to infrastructure provision in New Zealand, we will always need a funding stream to pay back the costs of a project.

The key to alternative financing models is making sure that we meet rating agency requirements that the debt raised through the alternative financing model is ring-fenced or separated from the local authority.

In other words, that there is no moral and legal exposure of the local authority should the alternative financing model fail. 

If we can’t achieve this separation from the local authority then any debt raised through the alternative financing model will be included within the debt of the local authority and will be bound by the restrictions on local authority debt.

We are drawing on our experience at Milldale, where through a partnership between Crown Infrastructure Partners and Auckland Council, an alternative financing model enabled the delivery of infrastructure to support the building of 9,000 homes. 

In essence it is a project finance model that is ring fenced from the local authority through the use of a Special Purpose Vehicle, or SPV, to raise finance independent of the Council.

The SPV funding will be repaid over time from the landowners as an ‘infrastructure payment’ collected by the local authority as a separate line item on the rates bills. 

The infrastructure payment is secured by way on an encumbrance on the title of each section and is paid by section owners; in this case $650 for an apartment or $1,000 for a home per annum, inflated at 2.5% per annum over 30 years.

It is critical to bear in mind that this model allowed the infrastructure to be built sooner than would otherwise be the case without putting pressure on Auckland Council’s debt to revenue ratio.

The upshot is 9,000 more homes built and 9,000 families housed.

The new model

The Milldale project was the proof of concept but we are looking to evolve the model further as it has some limitations because it relies on a contractual negotiation with the landowner.

There are a long list of issues being considered as the model evolves, not least of which is moving from a contractual model to a legislative model which will enable this model to work where there are multiple landowners or in a brownfield scenario.

We also need to consider enabling the financing and funding of a wider range of infrastructure and urban development projects, important to building thriving new communities, such as the provision of transport facilities and other amenities.

We may need to strengthen the powers of the SPV to collect the levy or charge, so as to minimise finance costs, and to develop monitoring, reporting and disclosure regimes to ensure the SPV use of any such powers is appropriate and there are the necessary safeguards.

Flexibility may be needed to allocate the cost to beneficiaries on a differentiated basis either by phasing a larger payment up front and smaller payments in out years, or by the extent to which they benefit from infrastructure projects.

We are also taking a close look at increasing local government borrowing and their development contribution and targeted rate regime.

I will have more to say about this as thinking evolves around the model over the coming year.

The second challenge I identified was a planning system based on urban containment.

That containment has acted to hobble vertical growth.

Height and density restrictions have stopped our cities growing up, preventing efficient land use, blocking the development of more affordable housing options like flats, terraces, town houses and apartments.

Environment Minister David Parker and I are working on national direction under the RMA that will set clear parameters for Council plan making to incentivise quality intensification.

The aim is to encourage density done well particularly around rapid transit interchanges and corridors.

It will also inject a significant increase in the quantum of development opportunities in the market.

That is vertical expansion. Now for the horizontal.

Our aim is to bring down urban land prices by flooding the market with development opportunities.

We want to break the current land market model which sees the planning system and infrastructure financing logjam create an artificial scarcity of land.

Incremental relaxation of the Urban Growth Boundary and zoning changes simply drip feed small amounts of new land, and new subsivisions, into a highly speculative market.

This is the land banking and speculation model that characterises the greater Auckland land market.

Instead of urban containment our policy is to develop a new planning approach based on the idea of Making Room for Growth.

We now have work underway to open up Auckland’s southern growth corridor, from the economic powerhouse of south Auckland down into the northern Waikato where Pokeno is living testament to the power of growth pressures to defeat urban containment.

Making Room for Growth replaces the Urban Growth Boundary with a more expansive approach to spatial planning.

It sets aside areas of special value, like growing soils or native bush or coastal strips; open spaces for future generations; acquires land for network infrastructure including road and rail and schools and hospitals; and then allows people to develop and build – as long as they can carry the true costs of growth, including infrastructure and including transport.

If we are not rigorous about internalising the true costs of growth, then we risk subsidising development in places where it shouldn’t happen, locking in long-run inefficiencies, and undermining the market for urban intensification in existing urban centres.

We have work underway now designed to model this new approach, working initially with local government and mana whenua, that will open up thousands of hectares of land in Auckland’s south.

It is our belief that we can allow our cities to make room for growth – up and out – and through good design and better planning, we can deliver density that will reassure the NIMBYs who are fearful of poor quality intensification, and development on the fringes that is well planned and serviced by transport connections to reassure all those who are fearful of sprawl.

The third challenge I identified was the failure of governments until now, both local and central, to actively work with the private sector to enable urban growth and expansion.

I was in Australia a couple of weeks ago meeting with Ministers and agency heads and senior public servants in NSW and Victoria about transport and housing and urban development.

It struck me that state governments there have decades of experience of active hands-on intervention to open up land for development, drive urban regeneration, that we simply haven’t had in New Zealand.

The philosophy of the RMA was to create an effects-based regime that assumed the market would work its magic. Two critical things were overlooked. Successive governments failed to provide national direction on urban growth, and left Councils to their own devices. Councils who by and large didn’t have the balance sheets or capability or appetite to be drivers of large scale development.

And central government simply didn’t see it as its job.

It is time for that to change. Our Government recognises our cities are failing.

The housing crisis is exacting a massive fiscal and human cost. Think about a generation of kids growing up in cars and garages, and with respiratory damage caused by cold damp sub-standard housing. And the $2 billion a year the taxpayer is spending on rent subsidies.

Because of this manifest failure we are consciously inserting central government into urban development – to work alongside local government, the private sector and the community – to create an environment that supports growth.

The new Housing and Urban Development Authority is one expression of this.

The other promising tool we have is spatial planning for growth. Comprehensive medium to long term planning that includes land use and infrastructure, seeing the future through social economic and environmental lenses.

It has to be collaborative, involving central and local government, community, the private sector, and mana whenua.

We are now doing this, not only in Auckland’s southern growth corridor, but also in the Waikato and the Hamilton metro area.

We are applying the Making Room for Growth approach. And recognising that transport infrastructure is the most powerful driver of urban form.

Road and rail investment, with planning rules that encourage development in transit corridors, can unleash a far more efficient and liveable urban form than the random splatter of housing subdivisions that has characterised much of recent urban growth.

And between these two powerful growth areas we are developing the case for modern rapid rail that would get you from Hamilton to the Britomart in an hour, effectively uniting these two labour markets.

 

I talked about the land banking and speculative economy, and the pressure cooker that has given us some of the most obscenely expensive housing in the world.

These moves are designed to change that.

If we free up height and density restrictions in the city. And we allow the city to grow on the fringes as long as development internalises the true costs of growth. And if we recognise that Auckland is already a linear city and we facilitate a growth corridor to Hamilton.

If we do these things we can truly flood the market with development opportunities. We can break the land banking economy, and drive down the cost of urban land.

We can achieve more competitive urban land markets. And industry that is more focused on development and building places of enduring value instead of land banking and speculation.

That is the pathway to more affordable housing, and a systemic fix of the crisis that has caused so much hardship, and sucked so much of our national wealth into residential property instead of the productive economy.

 

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