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Government aiming to drive down Auckland land prices

The Government hopes its new fund will reduce land prices by removing the political and funding roadblocks to opening up vast swathes of land for housing. Bernard Hickey reports.

There is an elephant in the room of the Auckland housing debate: land prices need to fall sharply to make housing affordable, and that's what the Government is quietly working to achieve.

The Government has acknowledged its new Housing Infrastructure Fund and its Crown Infrastructure Partners special purpose vehicles are designed to help free up enough land supply for housing and create enough competition to drive down land prices, possibly substantially.

The new vehicles are designed to work in tandem with targeted rates and extra charges for water for the residents in new suburbs. These extra rates and charges act like body corporate fees for apartments, in that home buyers capitalise the extra cost into the value of the home, effectively reducing its value up front.

Prime Minister Bill English agreed at his post-cabinet news conference that the targeted rates would "quite possibly" reduce land values and house prices.

He pointed to a report published by the Government's Social Policy Evaluation and Research Unit (Superu) that showed that land use regulation could be responsible for 56 percent of the value of Auckland's house prices.

"There was a report that came out from Superu the other day showing that land had a premium of over 50 percent due to regulation. Looking ahead, if the policies are right, then you will tend to see land being less expensive, but there being a bit more paid for marginal infrastructure," English said.

"Overall, whether that means the overall price of housing stays the same or goes down is yet to be seen, but clearly, better regulation of our land market and more competitive land markets tend to take the pressure off the price of land," he said.

"This vehicle, alongside the Housing Infrastructure Fund, are important elements creating more competitive land markets, which will in time, with better regulation, lead to on average lower land prices."

Asked if the new infrastructure funds could only work to reduce housing costs if they reduced land values, he said: "That's what we're going to be testing. These are steps in the right direction. The magnitude of those steps are yet to be seen. We'll get the test that as the market realises there's greater availability of finance and that the usual bottlenecks, such as Council debt ceilings, which have helped to underpin land prices, are gradually being freed up, so we'll see what the magnitude of those effects are."

The Government announced on Sunday it would stump up $600 million to turn its Crown Fibre Holdings entity (originally set up for funding the broadband rollout) into Crown Infrastructure Partners. It would create special purpose vehicles that would invest in tandem with the private sector in the roads, pipes and other infrastructure needed to open up new housing developments in cities where councils have hit their debt limits, which includes Auckland. Tauranga and Hamilton are also interested in using the vehicles.

But a key element in the creation of the special purpose vehicles is the use of targeted rates. They achieve both a funding aim and a political aim, particularly for the Auckland Council. One if the biggest constraints on new house building has been the reluctance of the Council to open up large swathes of greenfields developments because it has been hard up against its debt limits to retain its AA credit rating.

Existing ratepayers in established suburbs such as Epsom, Remuera, Point Chevalier and the North Shore don't want their rates to go up to pay for the pipes and roads in new parts of the city such as Drury South or Wainui that they are unlikely ever to visit, let alone live in.

The other restraint is a wider financial restraint on councils. The Auckland Council is the largest Council borrower and the cornerstone of the relatively new Local Government Funding Agency (LGFA), which borrows on behalf of other councils around the country and is able to lower their borrowing costs. But it can only do that if Auckland retains its AA credit rating.

If Auckland were to go above its limits for a AA credit rating, it would increase Auckland ratepayers' borrowing costs. Every notch downgrade would increase Auckland rates by one percent. But any downgrade for Auckland would also increase the borrowing costs of every council in the country that uses the LGFA. Currently, there are 49 councils who have borrowed $7.5 billion.

So the creation of the Crown Infrastructure Partners vehicles has the potential to remove two massive roadblocks to housing supply: the political roadblock of other ratepayers and taxpayers having to pay for new developments and the removal of the council debt limit constraints.

Until now, land bankers could be confident that Councils would only eke out new supply of zoned land, which effectively kept land prices high at the fringes as very fast population growth put immense pressure on limited supply.

The Government and the Council are hoping that a significant increase in land supply will change the expectations of land bankers, forcing them to sell their land for housing development now rather than wait for prices to fall.

The price of new house and land packages is crucial for house prices generally, given the prices of new homes effectively sets expectations for prices generally as they are often the marginal house sold. A fall in new house and land packages would put downward pressure on prices throughout the city.

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