More of the same old building techniques for small dwellings ain't gonna deliver volume or quality...

So, so many common taters are expecting More of the Same when it comes to building techniques. Armies of self-employed tradies required, hopefully with apprentices tethered to their belts, same old clonking frames together out in the always-tropical Awkland weather. Four sub-classes of LBP needed for a simple build (unless you're a Carpenter - see here, and then there's Design and Site. Plus Elfin Safety. Plus Fencing, Scaff, Electrical tags on everything except battery tools (ever wonder why battery stuff is now up in the 54 volt range - no tagging needed if you charge the batteries off of an inverter in the double-cab ute...).

Plus you lose time to Weather, Working Habits of employees (or lack of them), Sick and Annual Leave, and you lose money to Kiwisaver employer contribs, ACC, GST and provisional tax. See the attraction of the sole trader?

Whereas a Factory build has to be the way forward for all of this. Site requirements come down to a foundation and landscaping, erection consists of a crane hire and a few bolt-togetherers, each for 2-3 days if it's a halfway decent design. Check 'Grand Designs' for some clues if unsure. Or (gasp) the Irish

There is just no way the current paradigms can continue, and deliver the volumes and build quality needed.

Yes, expectations need to come down to achieve 'affordability':

• Smaller spaces - nothing over say 140 squares
• Hip or gable roofs with actual eaves to ensure weathertightness
• Modular designs with maximal involvement from yacht and caravan designers to ensure space is used intelligently
• Zero involvement with architects to ensure weathertightness and intelligent use of space
• Multi-proof consented ex factory to ensure the stupid TLA's cannot introduce mucho time and therefore $ into the construction sequence

About the only two things Gubmint can do to speed this along is to grease the skids for the aforesaid factories and perhaps backstop the multi-proofing; and snooker the land-banker by doing a FIF-like tax on land value (deemed value is the key) plus maybe a coupla massive compulsory acquisitions at rural land cost, sold on at purchase price.

Kill the chicken, but make the monkey watch....

Welcome Home loans as a Universal Price Floor signal mechanism

The Interest article, as a sidebar, exposes an Interesting aspect of the housing market - the Welcome Home loans scheme.

This was implemented back in the glorious Helenista days - 2002-03 - as a 'solution' to the relative (even back then) inability of the battlers to get housing finance.

The unintended consequences (which, as most textbook cases do...) only emerged later.

Picking a figure at which to pitch the loan to the aforesaid battlers, took a regional price point. Of some derivation, obviously, but most likely a median/average/PDOOMA of recent sales.

This figure ($100K for Christchurch, around $350K for Awkland IIRC) ignored the fact that property could be had at very substantially less than that figure, particularly for battler purchase - small, run-down, 'needs TLC' etc.

So it served as an instant, universal oopards pricing signal for all sellers simultaneously, at that end of the market. After all, why sell that collapsing shack, for which one had privately estimated that a canny buyer would pay no more than $183K, at less than the Glorious WH loan figure plus a Modest Profit.

Which is exactly what happened. I've related my own case here - nice work if you can get it.

If we estimate the extent to which this new pricing floor conferred instant CG to tens of thousands of low-end houses, we could say an average increment of $100K, times say 30K homes in Awkland - that's $3 billion CG.

Now divide that CG thus conferred, by the number of WH loans ever advanced: say 10K.

It works out to $300K advanced via CG per WH loan.

It also explains the precipitate jump in the rate of increase in house prices thereafter, at least to some degree. Because the reaction to the re-pricing across the board was, oddly enough - 'hey, we cannot find a house for the current WH loan limit - better raise it'. E.g. here:

First home buyers can now borrow up to $350,000, up from the previous cap of $280,000.

Which, unsurprisingly - set off another round of universal price increases....which set off another WH loan limit increase which.....

The Welcome Home Loan was introduced in 2003. Between its inception and May 2009 a total of 4,482 Welcome Home Loans have been settled, translating into access to home finance of over $719 million.

The above works out to $160,420 advanced per loan. Compare this with my (quite possibly chimerical) figure of $300K given away in unearned CG via Universal Higher Price Floor, to all and sundry....

And even today, who, in their right Economic mind, would sell a house for less than the current WH loan limit? Because the essential qualification - 'can you fog a mirror' - is fairly straightforward.......

My contention is that this was easily the dopiest, most economically damaging policy, invented in recent times. Markets for houses are slick on the upside, sticky on the downside. They certainly don't need stoopid Gubmints incentivising mass upwards re-pricing....but that's exactly what happened.

Why house prices took off 2002-3

The graph of house affordability wonderfully clearly illustrates the way in which Ms Market end-runs stupid politicians.

The immediate cause of the 2002-3 jump in unaffordability was a choice by the newly elected Labour Gubmint to 'help' poor people into their homes. The Welcome Home scheme was a typical politician's gesture to cement its electability.

Unfortunately, this was achieved (to the extent possible - the number of WHL's eventually taken up is in the low thousands) at the much wider price - gently hinted at in this 2007 article http://www.stuff.co.nz/southland-times/news/34275/Southlanders-welcome-h... - of cementing in price floors all over the country.

As the article suggests but does not pursue, if a guaranteed loan (criterion for issue - can ya Fog a Mirror?) of say $100K is plugged into a market where low-end prices are well below that, then what's a vendor gonna do?

That's right, folks, tack a '1' in front of what they were asking for the shack in question.

And once ya starts this boondoggle a'rollin', it gathers speed (higher prices), it affects most of all the exact constituency it purported to assist (the poor Labour voter) and the only way out of the mess is to raise the value of the loans on offer. Which promptly sets off another round of asking-price inflation.

After all, what vendor is not going to sell for the available guaranteed-loan value plus a Modest Margin?

The secondary cause of the price inflation was the familiar one thrashed about on these here august pages for a decade: the dreadful co-incidence of spatial planning (supply limits) and more regulation (Building Act, revised in 2004, Elfin Safety mania). The planning debacle conferred a Planning Gain to developable land (paid for by the buyer, who else) and the Regulation mania increased construction costs substantially. But that only affects new builds - the price explosion I am focussing on here is for existing older stock.

A personal example will suffice - I would invite an Auckland example (where the whole thing has exploded most spectacularly) to sit alongside my experience.

We bought a shack in 2001 for my son, just around the corner, in an eastern suburb of Christchurch, for $47K. Yes, Virginia, prices like that for 'needing TLC' properties were not uncommon. We straightened it up (it had a pronounced lean to the Left as viewed from the front - ironic, innit) tarted it up with paint, ply, grass and improved the stormwater drainage plus added a foundation to replace the rotted stumps that greeted us. All Like-for-Like, all done by my son and yours truly, a nice if small unit (around 70-80 squares, we never did measure it up) basically in our spare time.

We spend around the same amount - $40-odd K - to achieve of all this, so it owed us perhaps $85-90K.

Then, mirabile dictu, the Welcome Home scheme came along.

Overnight, it was impossible in the whole of Christchurch to buy anything that did not start with a '1'. Vendors treated the WH scheme as a universal pricing signal.

We cashed the little house in for $123K and split the proceeds 50/50. This proves the point about screwing up the low-end market by a naive and economically dopey funding scheme.

Only 18 months prior, a deserving young FHB could have gotten it at auction for $47K - it was quite livable as is provided one trod lightly over the missing-stumps bit.

That difference - $47 to $123K or 161% in original cost - is exactly what the stoopid politicians wrought by introducing a massive re-pricing incentive. And, of course, offset by the improved condition that we provided.

And the real pity is that as noted, the pricing structure this triggered off was universal, whereas the WH Loan applied only to a comparative few.

If one had the figures and divided the overall price adjustment NZ-wide by the number of WH beneficiaries all time to date, the figure would shock and horrify - it is most probably in the hundreds of millions or even low billions per such WHL recipient.

Ms Market is a stern mistress.....

Awkland Social Housing - bring in the Robots....

What would help buildings affordability (land prices aside, because they are a direct result of planning zoneration and strangulation over decades, following failed Brit-style planning fads) is a concerted effort to:

1. Establish factories for mass production of entire houses. Panelised, SIP etc. Little labour, mainly robots, CNC and lotsa clever software, all of which exists right now.
2. Isolate products of these factories from the incompetent hands of Councils by multi-proof consenting them at source. This leaves only founds and services to the inept ones.
3. Contract with these factories to produce social and affordable housing, so as to guarantee volumes - factories need certain volumes above the break-even point to have any future.
4. Crank it all up - the point of factories is fast, cheap, reliable quality, all done under cover. Great contrast with the current way of 'building' which has components clonked together by (wait for it) drug-addled hammer hands, out in the Awkland weather for weeks, and subject to the beady eyes of Inspectors who (rightly or wrongly) suspect that every single house is a Disaster in Waiting.

There's some real Social Investment, Next problem?