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Tauranga: Sunshine, sprawl, and high house prices

Back in 2014 I wrote a short paper exploring how population density had evolved in New Zealand and Australian cities. Among other things, the paper provided a rough estimate of the degree to which various cities were going “up” or “out” – i.e. whether population growth was increasing or decreasing the density of the neighbourhood that the average resident lives in.

Based on the data, you could divide New Zealand cities into a couple of different categories:

  1. Cities that are growing slowly or not at all, e.g. Dunedin, Whangarei, Gisborne
  2. Cities that are growing and becoming increasingly dense, principally Auckland but also Wellington to a slightly lesser extent
  3. Cities that are growing primarily by spreading out, e.g. Hamilton and Tauranga
  4. Christchurch, where normal urban processes were disrupted by the 2011 Canterbury Earthquake and the slow rebuilding effort since then.

There is an interesting comparison to be drawn between Auckland and Tauranga. They are both port cities with stunning natural environments, lots of sunshine, a fondness for urban motorways, and high growth rates. Tauranga is obviously much smaller, with less than 1/10th of Auckland’s population.

But whereas Auckland was the city that went “up” the most, Tauranga went “out” more than any other NZ city this millennium. Between 2001 and 2013:

  • The population of Auckland’s urban area grew by 23%, but its urbanised land area* only expanded by 11%
  • Tauranga’s urbanised population grew by 27%, while its urbanised land area expanded by 25%.

[* Defined as Census meshblocks with more than 3 residents per hectare. This isn’t a perfect measure as it tends to exclude industrial areas.]

In other words, Tauranga’s urban population expanded proportionately to its population, allowing it to remain a low-density suburban city. In order to accomplish this, the city opened up substantial new greenfield areas to the south, west, and east:

Tauranga urban growth 2001-2013

The future seems to herald more of the same. Tauranga-Western Bay of Plenty’s 2013 SmartGrowth Strategy identifies some opportunities for “possible intensification”, but largely commits to outward growth along motorways:

Tauranga SmartGrowth Strategy map

Tauranga’s sprawl serves as a useful “counterfactual” scenario for Auckland – does an abundant supply of greenfield suburbs necessarily result in cheap housing?

Perhaps. But it doesn’t seem to have worked out that way in Tauranga. According to the Demographia housing affordability survey, which compiles a range of useful data but is rather weak on interpretation of that data, median house prices in Tauranga-Western Bay of Plenty are currently 8.1 times higher than median household incomes – an increase from 6.8 the previous year. This is rather high by national and international standards.

Moreover, house prices in Tauranga appear to have followed a broadly similar trend to Auckland, with a run-up in the 2000s, several years of flat or falling prices after the 2008 Global Financial Crisis, and rapid price inflation in the last year or two.

What does this tell us about housing markets? Three things, I think.

The first is that people are willing to pay higher prices to live in cities with desirable amenities like harbours and sunshine. This shouldn’t be a surprise to anybody. We pay more to eat in restaurants that offer better ambiance and tastier food. Why wouldn’t we pay more to live in nice places? And Tauranga, like many other New Zealand cities, is undoubtedly an attractive location:

Source: Wikipedia

Source: Wikipedia

The second is that greenfield land supply is not necessarily a solution for house price inflation. Tauranga is less than one-tenth the size of Auckland and its house prices are already high relative to local incomes. Adding greenfield land supply hasn’t prevented or reversed previous price increases. In larger cities, where fringe locations are much less of a substitute for desirable central locations, it’s likely to be even less effective.

The third is that Tauranga (and many other New Zealand cities) may have to rethink their approach to housing policy.  This is especially true for cities experiencing rapid growth. According to Statistics NZ’s latest (medium) population projections, Tauranga’s population is expected to increase by a further 43% over the next three decades. So the pressure on Tauranga’s housing market is likely to continue unless something changes.

In this context, it’s worth asking a few critical questions:

  1. What is a reasonable expectation for house prices, given geographical constraints, environmental and man-made amenities, and demography and demand?
  2. If greenfield land supply isn’t sufficient to enable growth without accelerating prices, what other policies are needed? For example, how can planning policies facilitate choices of dwellings in various places at various price points?

48 comments to Tauranga: Sunshine, sprawl, and high house prices

  • JimboJones

    There are two factors to house prices – supply and demand.
    Yes Auckland and Tauranga will have high prices due to high demand. But they also have high house prices due to limits on supply (both up and out).
    Tauranga’s supply is limited – the council won’t let you build a house anywhere, it has to be within the urban boundary. I bet land outside of the boundary is much cheaper than within.

    • tuktuk

      Nice analysis Peter Nunns, based on this, it appears that the pro-sprawl advocates are going to find themselves with a case study that disproves their theory that sprawl = cheap houses.
      I suspect that any MUL in Tauranga is fairly flexible and operating under a council organisation that has a very “hands off” attitude. Really just a case of sequencing the sprawl to happen at the same time that the new roads are completed. Sprawl has not reduced the spike in house prices. Therefore other factors need to be investigated.

    • Peter Nunns

      As an empirical matter Tauranga has historically zoned (and provided infrastructure) to keep its land area expanding at the same rate as its population. They seem to be signalling a similarly flexible approach in the future. I find it a bit perplexing as to why this hasn’t resulted in lower house prices.

      • Angus Robertson

        I find it a bit perplexing as to why this hasn’t resulted in lower house prices.

        This is sarcasm, right? No one can possibly have missed the reason why property prices are rising.

        We are having a property investment boom fuelled by every major Western central bank setting very low rates and with capital outflows from China added into the mix. This has seen unprecedented inflows into the real estate sector in NZ / Australia.

        This will of course at some point end and property prices will fall. When that happens the impetus to construct new houses will recede and until the next boom.

        • Peter Nunns

          No, it’s actually genuine perplexedness. You may be confident that you know what the answer is, but I am often confused about what’s really going on.

          Basically, I’m a multiple-working-hypotheses kinda guy. When I encounter a phenomenon, I try to think of all the possible factors that might explain it. Rising house prices in the upper North Island is a particularly confusing phenomenon. There are a lot of potential explanations on both the supply and demand side. For example, when you look at Auckland and say, “MULs did it!”, I put that on my list. And when you look at Tauranga and say “land supply didn’t prevent low interest rates from doing it!” I put that on my list as well. But they are only two hypotheses on a longer list.

          Unfortunately, it’s often difficult to falsify hypotheses, as we don’t usually have enough data points to enable any rigorous statistical testing. So while I may think that some explanations are more likely than others, I can’t be that confident. Scientific method. You should give it a go.

          • Angus Robertson

            Okay, along with the North island of NZ, do individual area studies until you have worked your way through the entirety of all localities within Western Civilisation treating them all as isolated locales. Or avail yourself of the wealth of information that there is a global upsurge in house prices within western economies by comparing the many diverse market data sets and look to find commonalities between them. One of these systems is detailed exhaustive study of a limited system and the other a wide overview of varied systems. Please don’t stick just to one and pretend it is the only valid method. Be prepared to test your theories against as wide and diverse data as you can find.

            I don’t think that the MUL is causing high property prices, I believe the MUL is causing high land costs. Property prices are soaring in Brisbane and Melbourne and Auckland and almost everywhere else. Rising prices have almost nothing to do with the MUL or the amount of greenfield land or any other local condition. My belief is that when you have high prices in the property market it allows you the margin to build more valuable stuff. There are things preventing you from realising value and they are called costs – regulations, building materials, labour, taxes and land. As we make the costs higher we slow the rate at which construction occurs, because it becomes less profitable.

            Why is this important? Because when global interest rates go up or Chinese return to investing in China – our property prices will fall. In places like Tauranga, Hamilton, Melbourne, Brisbane they will have erected many valuable buildings for people to inhabit; but in Auckland we will have erected very few.

          • Peter Nunns

            Thank you for clarifying your hypothesis.

            However, I have a question (with no clear answer). If you think that there is currently a global / regional property bubble that will crash in the near future, resulting in significant destruction in demand for houses, isn’t there a potential case for restricting development to prevent resources (land, labour, fixed capital) from being overallocated to housing during the bubble? Building many houses (and training many construction workers, etc) during the boom can lead to a long hangover during the bust. The oversupply of housing holds can hold prices down, resulting in negative wealth effects and prolonged unemployment for builders.

          • Angus Robertson

            Near future is overstating it.

            I can’t see the benefit of a permanent under supply of houses, if they are to be restricted from being built during a boom and there is no willingness to build them during a bust – they do not get built. The builders who would have been trained, are merely unskilled unemployed sitting at home paying high rents to some landlord.

  • Driving back to Ak from the East Cape on new year’s day in the rain, we decided to take the new eastern corridor toll road.
    That’s a bizarre 20 odd km of motorway with no exits that takes you from farmland to nowhere in particular.

  • Josh

    Important to note the stage of development in Tauranga and Auckland. Auckland also in our early stages a city that went outwards like Tauranga currently is. As Auckland has matured (although some still have the backward mindset), the city has/is intensifying. Tauranga will also go through this as it develops. However its important that they learn from Auckland’s mistakes along this road. I’m not sure they have but that will remain to be seen, Tauranga certainly has advantages over Auckland, lets see if they harness them.

  • The Real Matthew

    Tauranga’s average citizen income is massively affected by it’s older population who receive minimal income.

    Data comparing house prices with average income will always be skewed as a result

    • Peter Nunns

      That’s certainly a part of the story. According to Census data, median household incomes in Tauranga are around 12% below the NZ median, whereas Hamilton is slightly above the median. So Tauranga may be a bit more affordable for working-age people.

      However, what this doesn’t explain is the trend – Tauranga’s median multiple has followed the same path as Auckland’s over the last half-decade.

  • Gster

    Tauranga has urban form issues. The long, narrow Papamoa sprawl (to the right/east of the City) must be incredibly expensive to service with infrastructure – but highly desirable place to live.

  • Early Commuter

    My 2 cents… is that it’s all about the age/development stage of the city.

    Auckland has reached the limits of sprawl (average commute times, congestion). It needs to intensify

    Tauranga can continue to sprawl, allowing people to enjoy the 1/4 acre paradise (and, all things being equal, if you could somehow fold time and space to allow for suburban living within urban distances, that’d be better than intensification), for a while yet. Then it needs to intensify.

  • kelvin

    Eventually tauranga road will be as congested as auckland and sprawl will be unsustainable.

    As a property investor, it is time to buy as much city fringe sections as possible when this limit is almost reached.

  • Ricardo

    Aucklanders are to Tauranga what the Chinese are to Auckland. Tauranga’s growth and recent rapid rise in prices is mostly due to Aucklanders quitting Auckland. Cashing up and moving. As simple as that.

  • Bruce

    I am a little surprised that Tauranga hasn’t had much increase in density considering it is the retirement capital of NZ.
    Typically retirement villages are medium-high density.
    Tauranga probably doesn’t “need” to focus on increasing density and decreasing sprawl (at least at this stage as it is still a relatively small city). It will however need to plan for this to start happening in a couple of decades time and should allow for higher density in central areas now so that it can happen naturally.
    Auckland on the other hand needs to remove replace all height restrictions in the former ACC area with 3 level height restriction overall and with larger pockets allowing for 5-6 level developments near transport corridors.
    Other parts of Auckland like Takapuna, Albany, Henderson, New Lynn, Manukau, Pakuranga etc need to also move to allowing 3 levels (or more in most of them).
    Auckland’s current urban area could easily support 3 million people if 35% was single dwelling (albeit on smaller sections), 25% 3 levels, 25% 3-6 levels, 15% high rise apartments let alone any planned sprawl.

  • “The first is that people are willing to pay higher prices to live in cities with desirable amenities like harbours and sunshine”

    Coincidence – there are thousands of sandy beach bays and harbours around NZ, and of course places like Gisborne excel in beaches and scenery – but people do not pay a premium for such things unless such things are coupled with growth.

    Tauranga’s costs are going up for the same reason Auckland’s are – the bigger a city gets, the more expensive everything becomes. Gisborne offers the same desirable beach-going lifestyle but isn’t growing, and so remains affordable.

    Growth = More Expensive.
    No Growth = Remains Affordable.

    • Actually, parts of Gisborne are not cheap at all. And growth is limited by location and the relative isolation.

    • Geoff again you offer your preferred and baffling vision of cheerful poverty for all. I can assure you the people of Gisborne would like some growth; and jobs, and income, and wealth. Gisborne etc is affordable to you and me, because we live and work in a thriving place, it sure as hell isn’t affordable to many locals, because they have no/low income. It doesn’t matter how cheap property gets if there’s nothing to do and no one to sell or trade with. You don’t think this is the case?; then why do all these ‘affordable’ places you praise suffer from population loss; that model isn’t working no matter how lovely and cheap property looks to the outsider.

  • Kleefer

    “Sprawl increases affordability” is an oversimplification of the anti-smart growth argument. It is more accurate to say that artificial constraints on land supply raise land prices and therefore housing prices. There are lots of low-density cities with high prices (Boston, Brisbane, Portland etc) but the “sprawl” in these cities tends to be drip-fed, enabling a large chunk of planning gain to be incorporated into the land cost before it is developed. Tauranga most certainly takes this approach and the situation is worsened by the large number of cashed-up ex-Aucklanders fleeing the fourth most unaffordable city in the Western world.

    As for Tauranga growing “up”, I think it is unrealistic to expect a city of just over 100,000 people to suddenly start densifying even if the zoning enabled it.

  • Angus Robertson

    Tauranga’s sprawl serves as a useful “counterfactual” scenario for Auckland – does an abundant supply of greenfield suburbs necessarily result in cheap housing?

    Wrong question. When there is a property investment surge prices go up, this is a price signal that exists no matter if there is lots of greenfield supply or none.

    Does an abundant supply of greenfield land result in an increase of building activity? Yes, yes it does, in places where there is a low cost supply path there is a strong growth in the rate of supply. Tauranga is in the midst of record level building 30% higher than the previous peak in the mid 2000s, Auckland is building at a rate 40% lower than the previous peak. The loss in activity in Auckland is mostly a massive reduction in the supply of apartments. In the last 5 years – Tauranga, Hamilton, Toronto, Vancouver, Sydney, Melbourne, Brisbane – have reached their highest rates of construction ever recorded. Auckland is exhibiting pathetically low levels of construction by all means of local, regional and global comparison.

    http://www.nzherald.co.nz/bay-of-plenty-times/news/article.cfm?c_id=1503343&objectid=11563602

  • Angus Robertson

    2.If greenfield land supply isn’t sufficient to enable growth without accelerating prices, what other policies are needed? For example, how can planning policies facilitate choices of dwellings in various places at various price points?

    None exist, what you are asking is impossible.

    But planners can interpret price signals as price signals. Maybe a simple line diagram of one single line will dumb it down enough for Auckland: “prices up —- supply up”.

    Planners have been able to convert record prices into record constructive growth in many places, the world over. Housing shortages in Australia shall become an oversupply in 2018, meanwhile in Auckland we look forward to shortages through till the 2030s.

  • kris

    Hamilton city has seen a 7% increase in house prices in the last 12 months.

    Tauranga house prices have increased by 9% over the last 12 months.

    As New Zealand’s 4th largest city, Hamilton is tipped to see an rapid increase in house prices and rents, as upgraded sections of Waikato Expressway are finished.

    Cambridge has seen a rapid increase in house, more in the high end of housing since the Hamilton to Cambridge sector of the Waikato Expressway has been completed.

  • Gster

    It would be interesting to see if you can repeat this type of post for various provincial cities around New Zealand 🙂

  • Ted F

    Is “Economics” a science?

  • Ted F

    How is Tauranga dealing with the service supply to these expanded areas, ie sewerage, water, storm water supplies, PT etc, and how is that impacting on the rates/property taxes of the established residents. Are there lessons here for Auckland?

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