Allowing “granny flats” under 60m² to be built at the rear of existing properties without consent was a New Zealand First policy.

A discussion document released by the Ministry of Business, Innovation & Employment (MBIE) has put forward a proposal that will allow “granny flats” – small self-contained and detached houses – to be built on properties that already have an existing home on them, without a building or resource consent. The homes must be in rural and residential zones and meet criteria aimed at reducing the risk of structural failure, flood, fire, weathertightness and insanitary conditions.

A licenced building practitioner will have to construct the dwelling to a “simple straightforward design”, notified to councils.

There is talk that this move could be pivotal for the creation of additional housing stock - and offer investors a potential new income stream without too much fuss.

But Auckland-based property investor and Property Investors’ Federation vice-president, Peter Lewis, says it’s telling that the government is using the term “granny flats”.

He says granny flats are known as “minor dwellings” by property investors and the housing market in general. The use of “granny flats” in the discussion document gives the distinct impression their use will be restricted to family members only and will not be for the general rental market.

“This will not be of any benefit to the overall housing market,” he says. “There is already a nationwide shortage of rentals and a long waiting list for social housing, so any expansion of rental stock is critical. It will also keep rents at a static level.”

Making It Real

Making it easier to build small dwellings was promised in the National–New Zealand First coalition agreement late last year.

Housing Minister Chris Bishop says many district plans already allow granny flats without resource consent, but there is a lack of consistency and different standards across the country.

This will be rectified by a National Environmental Standard (NES) forcing all councils to permit a granny flat on sites in rural and residential zones without resource consent. Bishop says an NES means changes can come into force quickly.

Deputy Prime Minister Winston Peters says making it easier to build granny flats will make it more affordable for families to live the way that suits them best.

“Over a quarter of households that do not own their home spend more than 40 per cent of their income on housing. High housing costs have a greater impact on Māori, Pasifika, and people with disabilities, as well as seniors – so unlocking the space in the backyards of family members opens the door to new ways of living,” says Peters.

He says granny flats are a great option for seniors, but they are also increasingly popular with other families.

Bishop says removing “regulatory red tape” will not only speed up the build process but is also estimated to save up to $6,500 in the standard building and resource consent fees per build. “Not to mention all the savings in time and resource.”

Small dwellings could be useful for housing extended families.

Unspoken Intent

Lewis says the main point he picks up from MBIE’s discussion document is that any granny flat will be in common ownership with the main house. “In other words, it can’t be sold separately from the main house”.

According to Lewis, who owns about a dozen rental properties, the unspoken intent of the changes is any new granny flat on a property is to house a family member – for example, an elderly relative or a teenager. “If an elderly relative owns a home and moves into a granny flat on a family member’s property that will free up their property for somebody else. If that is the way the legislation ends up that will be of some help to the housing market, but not a lot.”

The real impact for the housing market will be if granny flats can be rented on the open market as a legal tenancy under the Residential Tenancies Act (RTA), but it’s unclear if this will be allowed under the new legislation.

“It will need a specific clause to allow this as I can see some local authorities restricting these new dwellings going on the market as ordinary or Airbnb rentals.

“Many local authorities now curb what can be rented as an Airbnb and it appears those same council restrictions will also apply to new 60m² structures when built under the proposed new conditions.”

Lewis says the legislation will need to be crystal clear if renting granny flats on the open market or as an Airbnb is acceptable use. This point will be raised, along with others, in the federation’s submission to the MBIE’s discussion document.

Lack Of Supply

MBIE’s discussion document says there is increasing demand and a lack of supply of small houses.

In 2018, just under 20 per cent of houses had two bedrooms with 6 per cent having one bedroom. In contrast, more than half of households had one or two people.

Housing has become more difficult and expensive to build – the cost has increased 41 per cent since 2019.

New Zealanders have been trying to solve the housing shortage and affordability issue with tiny homes for several decades, but land and a tiny home can still cost $200,000 to $300,000.

Regulatory compliance costs for consenting and building are part of the picture. Building consent fees for a small house are estimated between $2,000-$5,000. Where a resource consent is required for a small house, it’s estimated to cost about $1,500.

Homes consented in the June 2022 quarter took, on average, more than 16 months to reach their final inspection – up from over 14 months in the June 2021 quarter – and a further two months to receive a code compliance certificate.

MBIE says this has an impact on the number of small houses being built. If there were fewer costs and processes, more smaller houses are likely to be built and if more are built, unmet demand will drop, and the cost of housing should decline.

Challenges, Risks

AUT construction management professor John Tookey is unsure if costs will decline substantially.

Talking to The Platform, Tookey says the general idea is good, as it gives the opportunity to create more housing supply in an affordable bracket. But he has one reservation: stormwater.

“A 60m² house equates to about a 75m² roof, which means that with every 10 millilitres of rain there is 750 kilos of water. Rainstorms occur regularly, meaning three or four tonnes of additional stormwater runoff that instead of soaking into the ground ends up in the local reticulation system, causing potential localised flooding problems.”

Tookey says if the plans go ahead, stormwater retention tanks need to part of the new builds. “A free for all is not a good idea for anybody ever.”

He supports new granny flats having to be built to code by a licenced building practitioner. “We should actually embrace the fact that we should be building to code. We get better insulated homes that are more structurally robust so they can cope with earthquakes and other issues.”

This will provide more confidence in housing stock generated and avoid stuffing people into a glorified sleepout come lean to, on the side of a house. “Let’s build proper houses. Let’s do it to a good standard.”

But it comes back to finance and Tookey says the bigger picture is that 99.99 per cent of all housing is done with borrowed money. “When the cost of money goes up, the amount of construction goes down. We’re now at a point where people are under pressure, there’s a recession going on. How many people actually want to extend their mortgage in the existing environment and take on board the additional risk of building a granny flat on their property?”

He says it’s going to take a three, four, five-year window before there is any significant building of these smaller homes.

It is uncertain whether homes and “granny flats” would be treated as separate tenancies.

Densification

Despite the time it may take for granny flats to proliferate across the country, New Zealand Property Investors’ Federation president, Sue Harrison, says they will add to densification and not by stealth. “It’s a good use of back yards that are often left unkempt. The proposals also increase new housing stock that is going to meet the Healthy Homes standards. It will be far better than an unconsented tiny house or other structure that doesn’t have connections to power, sewer and water. It circumvents those types of dwellings.”

Taking The Plunge

Anyone taking the plunge and building a 60m² granny flat should be able to obtain a bank or non-bank loan.

Squirrel Mortgages founder John Bolton says banks will adapt their policies. They already lend on home and income. “Banks have already had experience with this type of product as there was a prolific ‘granny flat’ lending era in the 1970s, although these were typically part of the main dwelling.”

He says banks will likely apply a similar framework to their existing approach and treat them as “home and income”, but there could be issues if the dwelling is on a rental property.

They will not be a legal second dwelling, Bolton says, and a tenancy agreement will need to be determined.

Currently, granny flats are normally treated as boarder income, and this is included in their lending assessments. Their value will be included in a property valuation. “Squirrel hasn’t had problems financing such situations,” Bolton says.

It will be an attractive opportunity for investors with spare land, but Bolton says it will come with a bunch of challenges. For example, can the home and any new granny flat be legally treated as two tenancies. “If they can then that’s gold; if not then it is a bit more convoluted.”

For first-home buyers it will be different again. Many are often looking at this type of opportunity as a way of getting into the property market, but Bolton says it’s only realistic if the granny flat already exists on a property. “They won’t have the borrowing power to buy and then add a granny flat. Over time, assuming there are a lot more of these, it will be an attractive way to make a property more affordable for a first-home buyer.”

MBIE has asked for public submissions by August 12 on changes to the Building and Resource Management Acts. “We want to hear from everyone who has constructive suggestions that will help us ensure we get the policy right.”

Final policy decisions will be made later this year, with the legislative changes expected to be in place from mid-2025.