Guest post by Phil Hayward
Now that a “housing accord” between the government and Auckland Council has been announced it’s worth asking, what’s been agreed and will it make any real difference. Last year after the NZ Productivity Commission released its findings and recommendations over its Inquiry into Housing Affordability, Phil Hayward said they
completely fail to identify the extent of market freedom surrounding property development and the supply of land for it that is essential to ensure housing affordability and economic stability. There is a very real danger that “releases of land” will not be of sufficient quantity to eliminate the “gaming” by incumbent land owners and land bankers that leads to very high levels of planning gain, and hence may merely shift NZ from being a “housing bubble market” as a consequence of outright under-supply, to one in which over-building is possible along with the price inflation.
The crucial factor determining the success of any “solutions”, is whether it is possible to forestall by market means the power of the original owners of land zoned for development to “hold out” for whatever prices the market can stand.
To restore affordability, within the area in which development is permitted to take place there needs to be enough willing vendors of land (at prices un-inflated by expectations of capital gain over and above normal rural values) to meet the “supply quantity” required for growth in the housing market. Of course any growth boundary that meets this requirement would have to be so loose that it might as well not exist. But there is no example in the world of a city with a “20 year” growth boundary (or less) that does not have a problem with unaffordable housing stemming from “planning gain” in the price of greenfields land.
There is not one "urban fringe property developer" who is interested in fighting for reform of growth containment regulations once they are entrenched. None of these people anticipated the consequences in the first place. If they stay in business at all subsequently, it was by becoming hostages to the racket and becoming rent-seekers themselves. That is, they are forced into a gladiatorial bidding war for the available land within the Urban Growth Boundary (most of the owners of which had no intention of selling it within the planners alleged "20 years supply" period or whatever) and once they have secured "land banks" at massive cost (including finance carrying costs), reform would bankrupt them.
In any case, their industry has become very high risk and many of them will become casualties anyway.
Within any given area of farmland, there is only ever a fraction of land owners intending to sell anyway - due to retirement or change of occupation - and the closer to the existing city fringe the land is, the closer to zero is the probability of the owners of that land are not anticipating considerable capital gain.
Academic analysis frequently misses the point that the price of housing in new developments does not inevitably have to be set by “what participants in the market can stand” – if it is set by “the most competitive price at which developers can turn farmland at farmland prices into developed housing,”, you will then have a happy condition of “consumer surplus” in housing just as you have in cars and computers and cellphones. The absence of consumer surplus and the pricing at “what participants in the market can stand” is a case of what some economists call “super profits” or “monopoly rent.” 1
There is no justification to be found by analysing real-life data for banning the “splatter” development that results from the absence of an urban growth boundary or prescriptive zoning. The cities that have freedom to develop in this way do not suffer from any worse traffic congestion, or any less efficient commute times, or any less sustainable fiscal position than cities that suppress this freedom. In fact, all the analytical literature indicates that the end result is greater efficiency of the urban economy, along with a vastly greater housing affordability; this is because the best use of still-undeveloped land and the most cost-effective provision of infrastructure is far clearer after some years of gradual market-led conversion of land from one use to another.
By contrast, planners’ insistence on contiguous “carpet” development and heavily centralised infrastructure networks brings a whole host of negative consequences, not least for the cost of infrastructure – the very thing that their central “planning” allegedly minimise….!
In fact the best solution to our housing affordability, planning, and NIMBYism impasse, would be “new towns”—towns, hamlets and new villages built outside the rural-urban ring-fence with their own self-contained infrastructure. Ebenezer Howard, the “father of urban planning,” was obsessed all his life (in the first half of the 20th century) with the elimination of “planning gain” by building his “new towns” on legally purchased farmland far enough away from cities that no higher land price expectations existed. He also intended each “new town” to have a balance of residences, jobs, and amenities.
Ironically, it is modern free market versions of this that have been far and away the most successful in the USA. For example, “The Woodlands”, near Houston. The initial purchase of rural land at dirt cheap prices, means that all sorts of “amenity” can be provided at minimal opportunity cost that needs to be recouped in the price of the sold sections. A combination of housing affordability, low urban density, short average trip times, high local amenity, and high fiscal sustainability sounds too good to be true. But our intuitions are too shallow. The expectation that really IS too good to be true, is the expectation that it is possible to achieve housing affordability, high urban density, short average trip times, high local amenity for all, and high fiscal sustainability; through “planning” – when the first effect of the planning is the inflation of the raw land cost by over a thousand percent.
The best solution to our housing affordability woes and associated unintended consequences, such as an epidemic of ultra-long commutes from rural towns to jobs in the unaffordable city, would involve a few new towns like “The Woodlands” springing up in the superabundant stretches of undeveloped land with which NZ (one of the world’s most lightly populated countries) is blessed. The existence of these highly competitive alternatives – for both home buyers and businesses (hence the excellent jobs-housing balance) – would soon take the pressure off the market in the existing cities, strangled as they are by NIMBYism as well as misguided planning.
Planned “releases of land” however for a specific 10,000+ new homes per year in highly specific locations, could be a failure as a “housing affordability” policy per se. When we analyse previous housing bubbles and crashes around the world, we find that the most volatile ones are those in which the price inflation was accompanied by frantic amounts of building. This seemingly contradictory combination is the result of insufficient market freedom to convert cheap rural land to urban use without its original owners holding out for “planning gain.”
“Housing affordability” is achieved most spectacularly post-crash under these conditions, as in Ireland and Spain; but this victory is a Pyrrhic one.
It is actually a lesser evil, economically, to have an outright undersupply of homes.
Phil Hayward is a Wellington housing researcher and commentator.
1. I hate using terms commonly associated with Marxism, by the way, but they are the technical terms understood by the economics profession, and no others have been devised instead.
NOTE: The problem Phil describes above is exacerbated by the way money is borrowed into existence , with the monetary inflation this produces occurring first in heavily indebted assets like land. Which means a large part of what is thought of as “capital gain” is in reality just early-stage price inflation.