Does “flooding the market with development opportunities” make sense?

5 July 2019

In last Thursday’s Herald, Dr Douglas Fairgrave seemed to argue that, when it comes to determining the price of houses, supply doesn’t matter.

He didn’t put it quite like that, but that was what he appeared to be saying.  He noted that the Minister for Urban Development, Phil Twyford, was seeking to reduce urban land prices by “flooding the market with development opportunities”.  He said that Mr Twyford wanted to get rid of a planning system based on urban containment and to replace it with a “more expansive approach to spatial planning”.  In particular, he accused Mr Twyford of wanting to get rid of the urban growth boundary.  Dr Fairgrave favoured retaining the urban boundary and approved of policies designed to “densify” Auckland.

Far be it from me to defend Mr Twyford: his attempt to build thousands of houses in the KiwiBuild programme was a spectacular failure.  But in seeking to reduce urban land prices in Auckland (and indeed in other New Zealand cities, such as Tauranga) he is absolutely right.

When the National Government established the Productivity Commission some eight years ago, the very first issue which the then Minister of Finance asked the Commission to investigate was the price of housing.  The Commission concluded that there was no single cause for house prices being as high as they then were but the biggest single cause was the restriction on land supply as a result of city council planning rules.

And this continues to be the case in Auckland to this day.  When 400 square metre sections in Flat Bush – a long way from the CBD – cost $600,000, it simply is not possible to build an affordable house on it.  Even adding just the cost of a tent to that section leaves it well beyond the financial capacity of most wage and salary earners.

Research undertaken by highly esteemed economist Arthur Grimes and Yun Liang more than a decade ago established that, after controlling for all sorts of other influences on the price of land, the price of land just inside the so-called Metropolitan Urban Limit was between eight and 13 times the price of land immediately outside the Limit.  And of course the price of land just outside the Metropolitan Urban Limit was itself pushed up by speculation that, eventually, the Auckland Council would be obliged to extend the Limit beyond its then current boundaries.

The Productivity Commission found a similar effect: the price of land two kilometres inside the Limit was, in 2010, nearly nine times the price of land two kilometres outside that Limit.

Arthur Grimes has pointed out on several occasions that cities can be either compact or cheap – they can’t be both.

We hear a lot these days about social distress and the economic pressures on many families.  We hear complaints about the price of electricity.  We hear concern about rising income inequality.  Actually, income inequality has not changed significantly in the last two decades.  What has changed is the price of housing relative to incomes, and that has put enormous stress on a very significant proportion of the total population.  Whether a family is trying to service a mortgage or paying rent, the cost of keeping a roof over the family’s head now consumes far too much after-tax income.

I met somebody recently who has a five bedroom, four bathroom, home near the centre of a major US city.  He told me that its current market value is about US$300,000, say NZ$450,000.  He told me that if the house were located in a better part of the city, it might be worth US$500,000, say NZ$750,000.  In Auckland such a house would cost at least NZ$1,500,000, and probably more than NZ$2 million.  And on average our incomes are lower.

The restraint on land supply is not the only factor explaining why house prices in Auckland are so ridiculous – the very long delay in getting council consent to build and the way in which infrastructure is financed are other factors contributing to the problem – but the restraint on land supply is the key issue.  If Mr Twyford can deal to that problem, he will be forgiven for the failure of KiwiBuild, and will be remembered as the person who solved arguably New Zealand’s greatest source of social stress.

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Copyright © 2020 Don Brash.