Monday, 19 August 2013

How do you stop land banking?

The case of the land-owner in Auckland’s Flat Bush who stands to make  a profit of over $100 million on land he bought for less than a million eighteen years ago—and having done nothing to it—has everyone hating “land bankers.” So everyone hates “land banking,” but no-one apparently knows how to stop it.
But what if, with one hit, you could stop land banking and provide affordable housing? Guest Poster Phil Hayward reckons it’s a snip. You just stop ring-fencing the city …

Consider basic urban economics: if we draw a curve showing land values for an urban economy, it slopes up gradually from the fringe to the centre and is based, among other things, on the cost of transport that might be saved at a more central location.

Where there is no Urban Growth Boundary (UGB) and no bidding war for the land on which planners have imposed a quota, this curve's slope is gentle and continuous. It actually extends miles out into the country beyond the existing fringe, and the amount of land involved is massive; like 100 years or more "supply" for urban growth. If some speculator "corners" all the land within the first mile or two, which is quite some feat, then competitors can simply "leapfrog" the holding. It is only two minutes drive on an open road anyway, and about another $1,000 worth of real estate value versus "transport costs saved."

At least, this is how it works in cities without an Urban Growth Boundary. "Affordable housing" is basically an issue of whether or not people can "leapfrog" land bankers’ holdings to build themselves houses. When there is no Urban Growth Boundary, as is the case with affordable US cities, no-one bothers to land bank.  The "supply" of land in these cities that is economically accessible with only a few minutes and a couple of dollars worth of further car travel is far too big for anyone to "corner."  [And nor would there would be any expected economic windfall from landbanking, which only offers massive returns when land supply is artificially restricted.]

When the land supply is not constrained, land prices are determined more by the price able to be paid for alternative users of fringe land i.e. farming, forestry, etc. Therefore, there always ends up being houses available (or potentially available) with little or no "planning gain" incorporated into the price of land.

This anchors the price of all housing, in "rural value plus location/transport cost saving premium" – which is far lower than "planning gain" when there is a growth boundary.

Here then, based on the above understanding, is the basic flaw with the oft-argued idea that central planners have “released” rural land formerly outside the Urgan Growth Boundary, such that (as they might say) "X years supply of land has been zoned, or released."  The flaw is this: this newly “released” amount is not the amount that would normally come to market in the next X years on the "rural land" market. It is only the total quantity of land within the zone, whether or not it is economic to use at the prices it can now command.

To really have "X years of economic supply," it would be necessary to include in the zone enough land such that the quantity truly needed for "X years supply" would come up for sale anyway in a normal rural market, and at normal rural prices. Which is to say, at prices that would be affordable on which to build. This would mean a zone with about ten to twenty times as much land as the planners’ notion of "X years supply for urban growth," and without the high prices produced by the zoning constraints.

Note that the land parcels comprising "X years supply" (by the planners’ standards) is being used for something already by those parcels’ present owners, and no present owner has any inducement to sell their parcel at the value that it is worth in its present use. But property developers who need to secure land for new developments will rapidly exhaust the "supply" of land that is coming onto the market anyway.

Since each development takes years, and sites for the next development need to be secured before the previous one is completed, they will soon need to start "door knocking" to plead with land owners to sell.

Meanwhile, having become aware that they are part of a newly created oligopoly holding of the next "X years supply of land for urban growth," the land owners cease to think in terms of rural land values at all, and start thinking like
investors or speculators. Or land bankers.  None of them will be satisfied with a 10% capital gain, or even 20%.
Expectations of gains become a reason to hold land rather than sell it, just as with speculators in bullion or commodities in a rising market. So the planners’ "X years supply" becomes a lot less than the "X years supply" they thought it would be, purely because of typical investor psychology. By their interference in what would have been a natural process, the planners have actually reduced the likelihood that any one land owner within the zone will in fact sell the land within the "X" years at all.

Which means in order to make a purchase, developers will have to offer land owners an amount greater than the
"present value" of what the land owner thinks the value might reach if he holds the land. And every developer has to out-bid every other developer for the parcels that might go on the market.  Meanwhile, the rising prices paid by developers feed heightened expectations on the part of the remaining land owners. And so it goes on like a nuclear chain reaction, blowing up this time in the face of would-be affordable-home owners.

And as with a nuclear chain reaction, it is impossible to have "just a little, harmless explosion." Urban planners need to understand that an Urban Growth Boundary does not cause a little, harmless explosion in greenfields land values.
Setting time limits on land banks won't change this. Neither will land taxes or capital gains taxes. Regardless of the mechanism, the developers are the meat in the sandwich between land vendors and the ability of the consumers of housing to "pay." An increasingly thin slice of meat.

Hence the prices will always find their level at the point at which the population's ability to pay for housing is maxxed out [Are we there yet? – Ed] ; and developers are being sorted into winners and losers in what has become the gaming of the land supply, with some going broke and the rest making a killing.

The fact that no-one involved in modern urban planning advocacy has ever shown any evidence of having thought of this, is just a sign of how grossly unqualified they are to be dictating outcomes at all in the first place. These economic realities at least were far better understood decades ago, when the paternalists who devised the original UK Town and Country Planning System decided they would have to include in their proposed system compulsory acquisition of land. When an Urban Growth Boundary is set, they said, the government should buy the land within it compulsorily at the same prices as still apply outside it, and then seek proposals from developers regarding what they would put on the land and what prices they would sell it for, if they were allotted some at the government's cost price.

Horrible? Yes. But this is the logical economic extension of the mess the planners have created. Another demonstration of the dictum that controls necessarily lead to further controls, and on ad infinitum.

Then, of course, we could simply not "restrict" urban fringe growth in the first place…


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