Tuesday, 7 June 2016

Why “releasing” land doesn’t necessarily make land cheaper

 

There are many things to be said about the fatuous idea that simply having a National Policy Statement ordering the council to “release” land for housing is going to fix Auckland’s housing bubble, or take us any closer to making housing affordable.

Land has already been “released” for thousands of houses, but as that doesn’t mean that thousands of houses have been built. The reasons for that are complex, but can be relatively easily explained.

It’s true that the highly-restricted supply of land is one of the three major reasons whay young people can’t afford a house. But you can’t build an affordable home on a $500,000 section – so unless land costs drop savagely, simply “releasing” some planners’ chosen land by rezoning it doesn’t on its own transform it into land that can be built on affordably.

The problem really is that as long as planners constrain land supply at all, which they will continue to do, then the price of land zoned urban will remain well above the same or equivalent rural-zoned land – and the many dislocations and unintended absurdities of their “planning” will continue.

Recent comments by Phil Hayward posted at (then removed from) the Transport Blog capture the problem. Much new-home building is presently delayed in Auckland by the “regime uncertainty” of waiting to see what smoke signals emerge from behind the closed doors of the Unitary Plan’s Commissioners. But even when the Unitary Plans is finally finalised and enshrined, and even with the government’s new National Policy Statement in place enforcing the release of land when political trigger points are hit, people’s private property will still only be “released” to them in locations and under conditions of the planners’ choosing, and of political necessity.

“Upzoning” will tend to occur therefore not where there are better amenities and infrastructure, points out one commenter, nor where there is highest demand, but where there are fewer NIMBYs.

In my opinion [continues the commenter] they would be better off with sprawl than having density only in the outer areas areas (which is the perfect recipe for slums).

As Phil Hayward responds,

The result of this kind of perverse mix of planning actions is to distort the spatial distribution of population density in an urban area in the direction that average commute distances are increased. Alain Bertaud pointed this out about Portland more than 10 years ago. I believe it can be literally seen on Google Earth – every city with growth containment planning, has unnaturally dense developments near the urban fringe and even way out beyond it. In contrast, if you look at more naturally evolving urban areas, the density drops pretty uniformly from the centre to the fringe and beyond. A density curve on a graph looks like Mt Fuji. This is an efficient spatial distribution of population density. But the growth-containment cities tend to have spikes in density way out at the edge of the curve, and a concave look further in. Basically, the focus should be on intensifying in the right places, and NEVER arbitrarily prohibiting splatter suburban greenfields development, which always gooses the land values (and causes more intense developments where the opposition is less, which is usually “the wrong places”)…
    It is simply wrong to claim “30 years supply of land has been zoned [for housing], therefore [planners] cannot be responsible for the price inflation.” Is ANY of that 30 years supply of land still changing hands at prices reflecting true rural land prices? In the absence of the boundary policy, yes, land with development potential would still be obtainable at prices reflecting true rural land price, plus a “differential” reflecting its proximity. This is textbook stuff – the classical urban land rent curve with a slope like Mt Fuji.
    Every urban area with a boundary policy ends up with an urban land rent curve that looks more like a Mesa. The values are not “differentially” derived according to classical land economics assumptions, but derived “extractively”, or by “monopolistic competition.”
    A comparable hypothesis would be if a global governing body had the authority to decree which nations should and shouldn’t be able to drill and sell oil, based purely on the proximity of the oil to major consumers. Firstly, a lot of the “best sited” oil might be nowhere near the cheapest to actually extract. And the locals, land owners, and local governments, may not want oil drilled there either. The planners might well argue that they know “there is 30 years supply of oil in the zone we have drawn” but who would accept that oil price inflation would be no fault of the planning? Of course the “willing sellers” within the zone have far more power than OPEC, to price-gouge – without even having to collude. The large size of our average rural land holding does not help. It is different in European countries where rural land ownership is in myriads of absurdly tiny farmlets.

· As Phil explains, urban land economics are not easily explained in tabloid headlines.

If only more people understood the complex way urban land markets work.
    High, “extractive” urban land rents actually slow down intensification all by themselves, regardless of NIMBYs. Britain’s planners have been thwarted for decades by this effect, and never “get it”. Every “plan” upzones more and more existing built areas, but the assumptions that “x percent of this will translate into actual development” NEVER WORKS. Planner John Stewart is the author of a paper that estimates that new houses in the UK will need to last 2000 years because the rate of turnover of housing stock is so stagnant. John made a point of meeting me a couple of years ago when he was out here on holiday, because he wanted to understand why the plans never translated into actual housing supply (and he has decades of experience). Auckland’s planners need to be confronted with this evidence and asked why they think a different outcome is possible.
    The data for housing supply by city in the USA, shows the following regarding Houston [which has no zoning] versus Portland and New York [which have extensive zoning]:

        1) Houston’s total housing supply is, in proportion, several times higher than Portland / New York.
        2) Houston’s housing supply is made up of a mix of 1/3 intensification, 2/3 greenfields.
        3) Houston’s 1/3 that is intensification, is alone, higher than TOTAL housing supply in Portland / New York

The thing is that land markets are dynamic in ways never dreamt of by planners calcified zones.

Plans that assume an unrealistic proportion of supply by way of intensification merely end up collapsing not only total housing supply, but even the likely amount of intensification that COULD have happened in the absence of the distorted urban land market.
    The reality in the UK, Portland, New York and now Auckland, is that the Planning, including the upzoning, causes site-value inflation, and this is an incentive to site owners to “hold” in anticipation of more inflation, not an incentive to develop.

Simple economics explains that when a product can be reproduced at will, then its supply price tends toward its cost of production—as we seem in markets for widgets. By contrast, when a product’s supply is restricted, its supply price tends to be set by the competition among buyers for the limited supply on offer – just as we see in markets for art and gold and bullion. And sure enough, we have it here too with land:

As the LSE’s Prof. Paul Cheshire says, Britain’s urban land markets function like markets for gold and bullion, not land markets classically “allocating land to best uses” at all. [And we see the same thing with land under every restrictionist regime.] In contrast, if you own a site in [unzoned] Houston Central, the best way to make more money out of it, is to develop the site with more floor area, assuming that the demand is there for it. The rate of price inflation is not enough to make “holding it” the best option. And the site values are NOT “elastic to allowed density” as they are in the UK and Auckland. Putting more units on a site really DOES mean that the site value is divided up over more units. But obviously there are many cities where this is not true, otherwise Hong Kong would be the shining example of affordability rather than Houston.

[NB: Most of Phil’s comments posted above originally appeared as comments posted at the Transport Blog, which were removed by that blog’s moderator.]

RELATED POSTS:

  • “WHAT DOES THIS MEAN for our own housing market? It means that no matter how many people with Chinese-sounding names are standing around hoovering up local houses, that matters not a jot to prices just as long as local houses are reproducible at will. Put it another way, it’s better if our housing market looks more like the market for posters than it does the market for fine art.
        “Guess which one it most resembles now?”
    Labour and the Law of Costs: But doesn’t “Yoda” sound Chinese?
  • “The most sophisticated economic argument about how prices are formed might include a distinction between two kinds of markets: those in which a good’s supply is severely restricted (in which case, like Remuera property and rare Grand Masters, the bidding war from buyers prevails), and those in which a good’s supply is unrestricted and the good is virtually reproducible at will (in which case, like hamburgers and the Houston housing supply, the cost of their production looms large). In both the distinction and the manner in which prices are formed then, supply has everything to do with it.”
    The continuing delusions of Gareth Morgan: Part XVIII, The RMA edition
  • “So the story is: people are generally staying put more because new opportunities elsewhere can’t be outweighed by the new places’ higher price of housing. And when they do move it’s generally to poorer places. Like NZ.”
    No, neither house prices nor immigration are high because we’re prosperous

3 comments:

  1. The article by Phil Hayward [ printed originally in from the Transport blog ] gave me a better insight into urban land costs than any other single article I have ever read. I ask why the article was removed from the Transport blog by the moderator. Too much light ?

    ReplyDelete
  2. The bureaucracy in trying to develop land (even when appropriately zoned) is beyond belief in its complexity until you've experienced it, and seems to be getting worse every year. My biggest client has a large 100 ha site that was zoned appropriately in 2009 after lengthy Environment Court hearings, but some 7 years later still does not have all the appropriate resource consents and permissions required to start construction. Admittedly not all this delay can be attributed to regulatory matters, but the majority of it (about 4-5 years) can. Land banking aside, and even with the developers intent to bring product to the market as quickly as possible, it will take many years before any "freed up" land can actually have a house built on it.

    ReplyDelete
  3. Mark T. Yes, we must go back into that darkness and have the RMA stripped out, preferably rescinded.
    I am not sure of @ appropriate zoning @ How can there be appropriate zones, when zones in themselves are a major problem . We need a simplified code, one page, which outlines objectives of resource development .
    I think I understand individual situations. Say someone wants to build a 30 level concrete block next to your farm hous. All I am saying is we have to start again. The latest twinks to the RMA reinforce race based privilege, and nostalgic belief systems .

    ReplyDelete

1. Commenters are welcome and invited.
2. All comments are moderated. Off-topic grandstanding, spam, and gibberish will be ignored.
3. Read the post before you comment. Challenge facts, but don't simply ignore them.
4. Use a name. If it's important enough to say, it's important enough to put a name to.
5. Above all: Act with honour. Say what you mean, and mean what you say.