The importance housing affordability can be readily gauged considering the unprecedented level of attention rightly given to this issue over recent years. One way or another, it is an issue affecting all New Zealanders. However, one matter that is seldom canvassed in this complex topic relates to holding costs.

What are holding costs?

Holding costs can take many forms; but put simply, it represents the cost of outlaying capital expenditure without receiving any return – at least for a period. Why is that so important? Because in the case of housing developments, this period can represent a long time; and more often than not, a very long time. Although sometimes considered a “hidden” cost, it is clear that holding costs represent a major determinate of value. It is therefore important in the context of housing affordability.

The nature of holding costs and their impact

Unfortunately, various elements of holding costs are sometimes not even included in the housing affordability equation. An assessment of their relative contribution is nevertheless critical if data presented on housing affordability is to have any validity. Perhaps this hesitancy may in part be explained by their nature: such costs are not always immediately apparent. Most people understand that the costs of new housing relate to a wide variety of factors including the more obvious ones such as construction costs, regulatory fees, infrastructure charges, original site acquisition costs, various professional fees, and developers profit for risk-taking. However, holding costs are usually not as visible as these.

Holding costs are also more difficult to evaluate since for the most part they must be ultimately assessed over time in an ever-changing environment. They can occur over any or even all stages involved in a property development pipeline - from initial strategic identification of a site, until construction completion and beyond. The relationship and interplay with opportunity cost - which is in turn dependent upon prevailing inflation and / or interest rates – can also be confusing. More importantly, they can be significant. Research undertaken suggests that they could account for up to 10%, or potentially even more, of the final purchase price paid by a home-buyer.

Land banking behaviour and its relevance to housing affordability

Another form of holding cost is house price volatility due to restriction, or otherwise, of land supply by governments. Commonly referred to as “land banking behaviour”, this strategy impacts not only the behaviour of property developers, but also housing prices – and therefore, affordability. Constraints due to planning decisions also impact the supply equation – in fact, along with land supply, development processes and marketing practices, they all act as important determinants of housing supply.

Opportunity cost

Of course, whilst the opportunity cost of holding might well become an opportunistic gain, it ignores risk - since holding lots longer prior to release may not always produce a positive result. What’s clear enough though is how easily it may be demonstrated any burgeoning of interest rates can seriously erode housing affordability. In uncertain economic conditions, there may be greater uncertainty about future housing price appreciation which could actually have a negative effect upon the land-holding costs:  i.e. uncertainty increases the expected future value of the vacant land.

Policy makers - attention!

New measures for housing affordability (such as “HAM” – touted as a “world first”) continue to be introduced. I would be the first to agree that having a more robust picture of affordability will better inform decisions around housing for New Zealanders. It is therefore timely that policy makers’ and others, if they have not done so already, also start thinking more seriously about issues raised herein – especially given that the prospect of increasing interest rates, and accompanying inflation, seems more likely than not.

Indeed, in some overseas locations, including Australia, significant resources have been poured into policies designed to specifically inhibit the holding cost effect as part of addressing the broader issue of housing affordability.

Conclusion

Whilst recognising that holding costs are only one contributor to the housing affordability equation, there needs to be significantly more research into its underlying nature and effects, and in particular analysis over time.