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1.
2.
The two main concepts that I rely upon to understand the housing market
are the fundamental cost of production (supply) and the price elasticity of
demand for housing (demand). There are of course many other principles;
however, these are in my opinion the two key principles.
3.
4.
The principle is that the price of new housing should reflect its fundamental
cost of production in an efficient market.
consumer should pay for housing should reflect the cost of construction,
technical consultation, consenting fees, finance, raw land purchase price and
a normal market profit.
supply side of the equation (i.e. at what quantity and price can dwellings be
supplied).
5.
6.
At present the raw price paid for a development lot is in the order of
$150,000 - $200,000. This means that once the land developer undertakes
the development of the lot itself, the end price of the lot is in the order of
$250,000 - $400,000, and much higher in the higher end of the market. To
put this in perspective, the value of one hectare of raw development land in
Auckland is now in the order of $2 million to $4 million, and it is this high
land price that flows through and underpins the high price for new dwellings.
By comparison, one hectare of raw development land is in the order of
$500,000 to $700,000 in Hamilton, Tauranga and Christchurch, which are
the other main growth areas in New Zealand, and these cities are able to
deliver relatively affordable dwellings, with new three bedroom dwellings
available for around $400,000.
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When evaluating the results of the ACDC15 model, Dr Fairgray does not
consider the issues the cost of production, and although he identifies that
there will be a shortage of dwellings for less than $500,000 in the urban
area, he ultimately concludes that the housing market will work efficiently
under the PAUP. Therefore, Dr Fairgray does not acknowledge the significant
economic benefits of a housing market that can produce dwellings at a
marginal price that reflects the cost of production.
9.
10.
11.
For the reasons outlined I do not believe that this conclusion can be reached
because it is contrary to the economic principle that the price of housing
should reflect its fundamental cost of production in an efficient market, and
Dr Fairgray has previously established in his evidence that the price of
housing would substantially exceed its fundamental cost of production, in
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that no new dwellings are possible for less than $500,000 in terms of the
highest percentage profit criterion.
Price Elasticity of Demand for Housing (Demand)
12.
13.
14.
I would re-
emphasise that this is not because households do not want their own
dwellings; rather it is because they choose to overcrowd or leave the City as
a result of the high prices.
15.
I would note that Dr Fairgray has put forward the opinion that an increase
in the average price of dwellings would lead to a higher rate of construction.
This is contrary to the literature on the price elasticity of demand for housing.
16.
I would also highlight that Dr Fairgray has not considered the price elasticity
of demand principle in any of his evidence, and in my opinion, if he did
consider this principle it would not be possible for him to reach the conclusion
that feasible dwelling capacity is likely to be considerably in excess of
demand. This is because of the principle that rising prices lead to lower
Polinsky A. M. and Ellwood D.T. (1979) An empirical reconciliation of micro and group
estimates of the demand for housing, Review of Economics and Statistics, vol. 61, pp. 199
205, Maisel S.J., Burnham J.B., and Austin J.S. (1971) The demand for housing, Review of
Economics and Statistics, Vol. 53, pp. 410413.
1
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demand (due to high prices) and therefore fewer dwellings are built, with
the implication being that if dwellings are not able to be built by the market,
they cannot be considered to be capacity.
17.
18.
19.
This provision would in effect require the development of models such as the
ACDC15 models.
Cheshire, Paul, Nathan, Max, and Overman, Henry (2014) Urban Economics and Urban Policy:
Challenging Conventional Policy Wisdom, Edward Elgar Publishing Ltd, Cheltenham
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the 013 Expert Group (013EG) or the Property Development Expert Group
(PDEG). Dr Fairgray has therefore effectively developed his own version
of the ACDC15 model and relied upon this for his evidence.
21.
I have communicated with the PDEG members and all of these members that
have responded have confirmed that they are not comfortable with the use
of the ACDC15 model version 3.7 results because they have not been peer
reviewed by the PDEG, which was the agreed process.
22.
Within Dr Fairgrays version 3.7 model, he estimates house prices will reach
$2.0 million by 2026 and $2.6 million by 2030, under what he refers to as
the general market conditions, or in other words a business as usual
housing market. This is an increase of $90,000 each year over the next
decade. Dr Fairgrays estimates of capacity can only be achieved if this rate
of price growth occurs. In other words, if a lower rate of annual growth was
built into the model, substantially fewer new dwellings would be feasible.
Such an outcome would have unprecedented adverse economic and social
effects, the nature of which are largely unknown.
23.
Dr Fairgray
consequently concedes that first home buyers will need to rely on the
existing housing stock for affordable dwellings.
25.
Dr Fairgray estimates that around 23% of the Citys housing stock is sold for
less than $500,000 (although I would note that the percentage of the total
stock would be a lot less because lower priced dwellings tend to sell more
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predict a future in which dwellings for less than $500,000 will be extremely
scarce or generally not available by 2018.
26.
He does not account for the fact that some developers will not
28.
Residential Capacity Results, Methodology and Assumptions Produced by Topic 013 Urban Growth
Expert Conferencing Group, At the request of the Auckland Unitary Plan Independent Hearings Panel
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30.
Dr Fairgray has relied on his own version of the ACDC15 model that
has not been peer reviewed or accepted by the 013EG or the PDEG.
The ACDc15 model is a property development simulation model and
should be built and interpreted by property development experts.
I agree with Peter Nunns conclusions. The main reason Auckland will build
too few homes is because it is not able to build lower-priced dwellings in the
lower end of the market under the PAUP as concluded by Dr Fairgray.
32.
I believe that the most important issue for the PAUP to address is the supply
of lower-priced residential dwellings, particularly in the sub-$500,000 price
range. Dr Fairgray has concluded that this issue will not be addressed in the
form of new housing, and relies exclusively on the existing housing stock to
provide lower-priced housing. Given Dr Fairgrays estimated dwelling price
growth of 7% per annum, which equates to $90,000 per annum, it is
reasonable to conclude that all existing dwellings will be priced above
$500,000 within 1-2 years.
mean that the Citys housing crisis will be exacerbated and the risks to social
and economic wellbeing will reach a level that is probably unprecedented for
any city.
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______________________________
Adam Jeffrey Thompson
14 March 2016
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