May
2017

David Norman – Chief Economist
david.norman@aucklandcouncil.govt.nz
09 890 4106
Contributors
Harshal Chitale – Senior Economist, Chief Economist Unit
Ross Wilson – Analyst, RIMU

Funding Auckland’s growth
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Rapid growth in Auckland has created demand for a
lot more infrastructure.
New bulk infrastructure worth billions of dollars is
required to facilitate growth.
Traditional options for funding infrastructure don’t fit
Auckland’s situation, so more innovative solutions will
need to be implemented to deliver the infrastructure
we need.

Auckland is growing rapidly. In the year to June 2017, the
city is expected to grow by around 45,000, the third
consecutive year of this level of growth. That is equivalent
to adding a Tauranga to Auckland in three years.
It is fantastic that our city is a place where people want to
live, but it also creates challenges. Infrastructure – roads,
stormwater, wastewater and fresh water supply for
instance – is under pressure from the demand of this
burgeoning population.

What new infrastructure costs
Infrastructure is expensive. Even using relatively modest
growth projections, the cost of capacity and service
upgrades needed to service additional dwellings in
brownfields sites (i.e. in existing urban areas) will run
into billions of dollars over the next 30 years. And council
estimates that the bulk infrastructure needed for
greenfields areas will cost around $19 billion, 90% of
which has not yet been funded.
How do we fund this infrastructure? There are several
ways to boost revenues or increase cash on hand, but
the number of implementable options is not as large as
many believe, and several options carry significant tradeoffs.
Not an option: substantially increasing council debt
Some people ask: why doesn’t council just borrow more?
Council forecasts that by 2019, net debt will reach
around 260% of annual revenues. A ratio of 270% would
likely trigger a review of council’s AA credit rating and
potentially a downgrade by credit ratings agencies .

 This type of downgrade would result in higher borrowing
rates, and could erode confidence among lenders,
making them less willing to lend in future.
And if council were to be downgraded, it could trigger a
credit downgrade for the Local Government Funding
Agency (LGFA), and increase their borrowing costs and
the borrowing costs for the whole local government
sector because Auckland’s borrowing via the LGFA is
significant in relation to total LGFA borrowing.

Other options suggested as solutions may have similar
implications. Examples include public-private
partnerships (PPPs) with local government and targeted
infrastructure rates. Both these options result in a rise in
council debt, as they result in an increase in future
outgoings (annual management fees or upfront costs,
respectively) that council will need to fund. That is
simply not an option at the scale that would be needed
to meet the infrastructure need.
Technically possible, but with big trade-offs
There are other options that are possible, but are
unattractive. One of these is to increase general rates.
Much bigger rate rises would be required to meet the
infrastructure shortfall. But the mayor has committed to
keeping overall rates increases lower after several years
of sharp increases in Auckland.
The city could also sell non-strategic assets, particularly
those that occupy substantial land that may be underutilised. Selling this land for housing could achieve the
double goal of increasing housing supply and providing
funds for other infrastructure. Opinions on this are
mixed.
In terms of strategic assets like the council’s share of
Auckland International Airport, if a change to ownership
were ever to be proposed, it would require an
amendment to the Long Term Plan and would therefore
be subject to public consultation.
New ways to fund infrastructure
The limitations of the more traditional approaches to
funding growth mean we’re going to have to be more
innovative in delivering infrastructure.

There are a couple of mechanisms to consider.
First, central government or the private sector could fund
new development, including bulk infrastructure, through
a special purpose vehicle (SPV). The current Urban
Development Authority (UDA) proposal is one such
example. Council has some reservations about the
current form of the UDA proposal, but an SPV that
accesses private and/or central government money for
building local and connecting bulk infrastructure could
overcome the current funding shortfall. The costs of that
infrastructure could be recouped by the SPV through
either development contributions, or though targeted
rates on that developed land.
A second mechanism would be to be more sophisticated
in capturing value uplift. Council policies and
infrastructure investments can provide hundreds of
thousands of dollars in value uplift for property owners,
the recent Unitary Plan being one such example. Council
is exploring ways in which it can access some of the
windfall gains to property owners in future to pay for the
infrastructure required. As soon as council or central
government announces its intention to build a new
transport link, or rezone an area, values are affected, so
a mechanism needs to be in place before major
announcements are made to ensure the benefits from
the policy accrue to private individuals as well as the
Council, which has to fund the infrastructure to deliver
the levels of service residents expect.
Using infrastructure more efficiently
One way to delay or even eliminate the need for some
new infrastructure is to manage demand rather than
boost funding; it’s more about optimising use of existing
infrastructure (especially roading) so we don’t need to
build new infrastructure as quickly. One way to do this is
to introduce demand pricing for road use, for example.
Work is underway between central and local government
to explore pricing of the road network to better manage
demand and improve congestion outcomes.
Where does this leave us?
Growing council debt and massively increasing the
burden on ratepayers are not realistic options. Instead, a
number of innovative tools would likely need to be used
in concert to achieve the best outcome, to maintain
council’s credit rating, and to minimise additional costs to
ratepayers.

 Auckland Economic
Commentary
Auckland’s population is continuing to grow strongly on
the back of robust net migration – 35,800 for the year to
March 2017 – almost exactly half the New Zealand figure
of 71,900 over the same period.
As we said in the last Quarterly, population increases help
fuel economic activity through demand for goods and
services. Auckland’s GDP grew at 4.4% for the year
ended December 2016. Construction, tourism and the
retail industry were the big drivers of economic growth.
The seasonally adjusted value of non-residential building
work put in place was up 42% for the year ended
December 2016. The corresponding number for
residential work was 31% higher in December 2016 than a
year ago. We expect commercial, accommodation and
infrastructure building work to drive the construction sector
in the coming months although NZIER’s Quarterly Survey
of Business Opinion (QSBO) reports an easing of the
pipeline of Government building work.
The tourism sector has been a strong performer in terms
of GDP growth, but the annual number of guest nights in
March 2017 was lower than in December 2016. The figure
was still 3.2% higher in the March year than a year ago.
The growth was driven by international guests while
domestic guest nights actually fell marginally over the last
12 months. Some have suggested that domestic tourists
are being priced out of major tourist centres like Auckland
and Queenstown.
Commercial vehicle registrations, a sign of business
confidence looking forward, were 13% higher for the year
ended December 2016, continuing a strong run. Retail
sales continued to grow strongly, at 7.0% for the year to
March, and we expect them to remain strong given the
population increase that Auckland is likely to see in the
near future.
Employment
Auckland’s job market was almost unchanged this quarter,
but it added 60,000 jobs for the year to March 2017. There
was a slight reduction in the overall labour force
participation rate this quarter, which meant that although
the quarterly number of people in employment remained
almost unchanged, the unemployment rate was slightly
lower at 5%. We would caution, however, that regional
level employment data does tend to bounce around a little
from quarter to quarter.
The QSBO reported that it had become harder to find both
skilled and unskilled workers in the March quarter
compared to December.

This might now be reflected in the rate of wage growth,
which is beginning to rise. As the unemployment rate
falls or remains low, pressure tends to be placed on
wage rates.
Housing and residential construction
The REINZ median Auckland house price rebounded
strongly to reach its highest ever point at $905,000 in
March 2017, 8.4% higher than a year earlier, and
reversing the downward trend since reaching a peak in
October 2016. But March is always a strong month, just
as January is always weak, so it is worth looking at the
seasonally-adjusted numbers. These show that prices in
March were around the same as at the October peak.
However, annual house sales are 12% lower than a year
ago, suggesting there is room for some price correction.
Typically, a slow-down in sales is followed by sellers
becoming more realistic on pricing. Still, as we pointed
out in our recent Insights paper, with the RBNZ
forecasting that it will keep the OCR at 1.75 percent until
2019, mortgage rates are likely to only increase on the
back of bank funding costs over the next 12 months.
With population growth remaining strong, and a shortfall
of around 40,000 dwellings and growing, we would not
expect a price correction of more than a few percentage
points without a major shock to the economy, even if
mortgage rates tick up a little.
The effect of the latest round of LVR restrictions on
investors appears to have been to shift investor activity
from those who need to borrow, to those who have the
cash to buy. RBNZ data shows that new mortgage
lending to investors in Auckland has fallen to 26% of
total lending, steadily declining from 37% July 2016,
when the LVR restrictions were implemented in spirit by
banks. However, investors have been more active than
ever. CoreLogic data shows that 44% of Auckland
properties were purchased by investors over the first
three months of the year.
New residential dwelling consents showed an
encouraging increase in March after several lukewarm
months. However, the annual consents figure gives us a
better picture due to the lumpiness of multi-unit
consenting and some seasonality in the data. Annual
new dwelling consents were 10,200 for March 2017.
Given that Auckland’s population growth is likely to be
around 45,000 on an annual basis, even assuming all of
the consents are converted into dwellings, we are not
keeping up with the growth in demand for housing.
The consent figures are displaying a shift away from
detached houses towards apartments, townhouses and
units. Attached dwellings made up half of all dwelling
consents over the last six months compared to just a
third of them over the corresponding six month period
three years ago.

 This could be an indication that as the city intensifies,
higher land prices are making multi-unit development
more profitable for developers. It will likely have the
concurrent consequence of delivering more affordably
priced multi-unit housing to the market.
Business confidence

The survey indicated a lower overall level of confidence
in economic conditions than last quarter. With
construction activity elevated but appearing to plateau,
and tourism growth slowing a little, this indicates that we
may be in for a slightly slower pace of economic growth
than the stellar rate we have seen in the recent past.

Business confidence fell in the March quarter, with a net
4.5% of businesses feeling positive about general
business conditions compared to 24% in the previous
quarter according to the QSBO. Businesses still intend to
increase headcount, but only a net 9% are looking to hire.

Latest

Last
quarter

12
months
ago

5-year
average

Rest of
NZ latest

Annual employment growth (%pa)

7.3%

7.6%

2.9%

3.9%

4.9%

Unemployment rate (%)

5.0%

5.1%

6.1%

5.9%

5.3%

Unemployment rate among 20 to 24 year olds (%)

9.7%

9.0%

10.0%

10.6%

8.6%

Unemployment rate among 15 to 19 year olds (%)

25.6%

19.4%

23.8%

23.7%

18.8%

Annual nominal wage growth (%pa)

1.8%

0.7%

2.1%

2.2%

2.3%

Annual geometric mean rent growth (%pa)*

3.3%

5.1%

5.1%

4.4%

4.8%

Geometric mean rent to median household income ratio (%)*

29.1%

29.3%

29.6%

29.4%

26.1%

Annual median house price growth (%pa)*

8.4%

10.7%

14.4%

12.6%

9.6%

-11.4%

-5.7%

-7.3%

3.6%

NA

Annual new residential building consents growth (%pa)

6.6%

8.4%

20.5%

20.7%

12.1%

Annual m2 non-residential building consent growth (%pa)

36.2%

26.8%

18.9%

13.7%

8.3%

3.2%

4.4%

1.7%

3.2%

3.2%

35,772

33,916

31,230

22,381

36,160

Annual retail sales growth (%pa)

7.0%

8.0%

8.1%

6.3%

4.4%

Quarterly Survey of Business Opinion (net optimists)

4.5%

23.9%

10.1%

27.1%

23.1%

Westpac Consumer Confidence*

115.1

111.8

116.6

116.2

111.9

Indicator
Employment indicators

Earning and affordability indicators

Mortgage serviceability ratio (relative to Dec-06)
Construction

International connections
Annual guest night growth (%pa)
Annual net migration
Confidence

Sources: Chief Economist Unit, Auckland Council; Statistics New Zealand; Ministry of Business Innovation and Employment; Real Estate Institute of
New Zealand; New Zealand Institute of Economic Research; Westpac; Reserve Bank of New Zealand. * Rest of New Zealand figures are for all of New
Zealand including Auckland. Data is not seasonally-adjusted.

Disclaimer
This newsletter provides general information on economic issues in Auckland, and is not intended to be used as a basis for any particular course of action or as substitute for
financial advice. The views and opinions expressed are those of the relevant author, and do not necessarily reflect the views of Auckland Council. Auckland Council disclaims
all liability in connection with any action that may be taken in reliance of this newsletter, and for any error, deficiency, flaw or omission contained in it.

Find out more: visit the Auckland Council Chief Economist Page
or contact us chief.economist@aucklandcouncil.govt.nz