Houston Downtown

New Zealand Adopts Texas Municipal Utility Districts (MUDs)

New Zealand home prices are among the highest in the world relative to incomes and rents, with the capital city of Auckland having a median home price of $830k and a house price to income median multiple of 8.6 – in contrast to Houston’s far more affordable 3.6 – as documented in the Annual Demographia International Housing Affordability Survey. These prices have been growing at one of the fastest rates in the OCED: 266% since 1991. At the root of the problem, new land was only developed when city councils allocated budget to build out new infrastructure like roads and sewers, which they almost never chose to do or were unable to do due to debt limits. The result of that limited supply was skyrocketing home prices. In 2018, Infrastructure New Zealand sent 42 delegates to the USA to study urban development in Portland, Denver, Dallas and Houston, with a focus on revenue bonds and municipal utility districts (MUDs) in Texas. MUDs allow developers to issue new infrastructure development bonds paid back by property taxes on the new properties. Hosted by the Greater Houston Partnership, the delegation learned from Houston in particular how housing and infrastructure can be supplied much less expensively when markets (particularly land markets and the supply of local public services) are designed to be competitive and well regulated.

The delegates brought the Texas MUDs model back to New Zealand, and after two years of work, passed the Infrastructure Funding and Financing Act in July. Similar to MUDS, the law allows the establishment of Special Purpose Vehicles (SPVs) to enable the private sector to raise debt for infrastructure paid back by up to 50 years of levies on those properties, without adding to the liabilities of the local city council, thus holding down their debt levels and protecting their credit ratings. There are some differences – for example, Texas MUDs allocate the risks to developers, who don’t get reimbursed until they’ve successfully built houses, managed uptake risk, and the ‘greenfield’ infrastructure matures into ‘brownfield’ infrastructure; only then does the district levy a property tax and issue the equivalent of revenue bonds. In contrast, the New Zealand SPVs can levy taxes before any value is created, so risk can sit with landowners, not developers. In that case, those that pay the tax aren’t benefiting from it, and didn’t vote on it. But overall, both approaches make it far easier to develop new housing, allowing supply to keep up with demand so prices stay affordable.

If all goes well, there should be a tremendous increase in New Zealand housing supply in coming years which will help to ease prices. Texans and Houstonians should be proud to serve as a model to the world for market-based approaches to affordable home ownership.

This piece first appeared in the Houston Business Journal.

Tory Gattis is a Founding Senior Fellow with the Houston-based Urban Reform Institute – A Center for Opportunity Urbanism, and writes the Houston Strategies blog.