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Location affordability in New Zealand cities – is greenfield growth really affordable?

Several weeks ago I attended the annual New Zealand Association of Economists conference in Auckland. Geoff Cooper, Auckland Council’s Chief Economist, had organised several sessions on urban issues, and as a result there was a lot of excellent discussion of urban issues and Auckland’s housing market. You can see the full conference programme and some papers here.

At the conference, I presented some new research on housing and transport costs in New Zealand’s main urban areas. My working paper, enticingly entitled Location Affordability in New Zealand Cities: An Intra-Urban and Comparative Perspective, can be read in full here (pdf). Before I discuss the results, I’d like to thank my employer, MRCagney, for giving me the time and the data to write the paper, along with several of my colleagues for help with the analysis, and Geoff Cooper for suggesting the topic and providing helpful feedback along the way.

The aim of the paper was to provide broader and more meaningful estimates of location affordability that take into account all costs faced by households. In my view, widely-reported sources such as Massey University’s Home Affordability Report have too narrow a focus, looking only at house prices. However, a range of research has found that transport costs vary between different locations depending upon a range of factors such as urban form, availability of transport, and accessibility to jobs and services. And transport costs are pretty large for many households!

I used two methods to provide a more comprehensive estimate of location affordability in Auckland, Wellington, and Canterbury. First, I used Census 2013 data to estimate household housing, car ownership, and commute spending at a detailed area level within each of the three regions. This allowed me to estimate variations in affordability between areas within individual regions. Second, I used household budget survey data to get a sense of how New Zealand cities stack up against other New World cities.

My main findings were as follows:

  • First, rents (a proxy measure for housing costs) tended to fall with distance from the city centre. However, commute costs tended to rise with distance – meaning that outlying areas were less affordable for residents once all costs are included. This was consistent with previous work on location affordability in New Zealand and the United States.
  • Second, international comparisons suggest that Auckland and Wellington have relatively high housing costs and that this may be driving some of the affordability findings. While this finding lines up with previous research that’s focused on house prices alone, it’s important to note that the location affordability estimates suggest that a focus on greenfields growth alone may not save households money.
  • Third, while I didn’t identify any specific policy recommendations, I’d recommend that (a) policymakers should consider all location-related costs when attempting to address affordability for households and that (b) further research should focus on removing barriers to increasing the supply of dwellings in relatively accessible areas.

And now for some pictures.

These maps show two measures of location affordability within Auckland. The left-hand map shows estimated housing costs (i.e. rents) as a share of median household incomes at a detailed area level. Broadly speaking, this map shows that expected housing costs fall between 20% and 30% of household income in most of the city, although some areas are relatively less affordable.

The right-hand map, on the other hand, incorporates expected car ownership and commute costs. Overall location affordability is lower throughout the city. Expected housing and transport costs rise to 40-50% in areas of west and south Auckland, as well as the entire Whangaparoa Peninsula. The most affordable areas for their residents tend to be in Auckland’s inner isthmus suburbs.

Auckland map 1 Rent share Auckland map 2 HT share

(Click to enlarge)

I’ve also combined this data into a graph that presents location affordability by distance from Auckland’s city centre. The bottom (blue) line shows housing costs as a share of median household income, weighted across all area units within each 2-kilometre concentric circle radiating outwards from the city centre. It shows that, on average, households spend a similar share of their overall income on housing costs in both close-in and outlying suburbs.

The top (red) line shows that combined housing, car ownership, and commute costs increase as a share of household incomes with increasing distance from the city centre. On average, households that live further out of Auckland spend more on location-related costs, as lower lower rents are offset by added commute costs.

Auckland H_T distance chart

The results for Wellington and Christchurch were broadly similar – although with a few interesting differences related to their urban form and transport choices. However, as this is the Auckland Transport Blog, I’m going to suggest that you read the paper to see those results. It’s long, but it also presents a lot of new data on housing and transport costs in New Zealand.

Roading in Northland

There’s been quite a bit of discussion in the last week about roads in Northland following storm damage that saw part of State Highway 1 closed due to large washout. The severity of the slip saw traffic diverted on lengthy detours on roads clearly not designed to handle more than a handful of cars per day. Another series of slips have happened in the last few days, this time closing SH1 over the Brynderwyn Hills.

Understandably it’s led to people in Northland saying that their roads simply aren’t up to the same quality as roads in other regions. Oddly though it also led to Labour’s Kelvin Davis saying he supported the the Puhoi to Wellsford Road of National Significance.

“They want a safe and solid highway that’s going to get our people and goods in and out and that’s not at the whim of Mother Nature.

“This weather event has shown how vulnerable and susceptible the North is and it’s really important that we have a road where emergency services and whatever can get through, but also we’ve got to have a road that’s going to be able to export our produce outside of Northland and one that’s not going to be washed away in the next storm or flood.”

If the statement above was to be a blanket statement and not referring to P2W then I would be in complete agreement however I say it’s odd for him to bring up P2W as doesn’t even leave Auckland and would not have done anything to help with the slips that have occurred. In fact in many ways P2W is actually likely to be working against Northland as it will suck up funding that could be being used for widespread upgrades to address issues that exist in the roading network.

All up P2W is said to cost ~$1.6 billion with the first section to Warkworth estimated at $760 million. If the goal is truly about helping the Northland economy as the government love to claim then we need to be asking what else we could do with the money. What if we spent ~$300m on operation lifesaver to address the key issues with the existing road. We could then spend about $500 million on actual roads in Northland while still leaving up to $800 million which could be used for other projects – like part of the governments share of the City Rail Link.

But how would $500 million compare to what’s currently spent in the region and is it a significant enough amount of money?

Data from the NZTA can help to answer that question. Unfortunately the 2013/14 data isn’t available yet but this is for the 10 years to 30 June 2013.

Transport Spending in Northland 2003/04 to 2012/13 NZTA Local Authorities Total
State Highways – New and Improved $163,617,783 $163,617,783
State Highways – Maintenance, Operations & Renewals $249,305,778 $249,305,778
Local Roads – New and Improved $174,917,159 $56,850,123 $231,767,282
Local Roads – Maintenance, Operations & Renewals $312,908,053 $226,434,207 $539,342,260
Public Transport $9,481,230 $8,440,738 $17,921,968
Walking & cycling $342,494 $90,300 $432,794
Other $24,816,399 $2,661,551 $27,477,950
Total $935,388,896 $294,476,919 $1,229,865,815

And here’s the new and improved road spending over that 10 year periodNorthland New and Improved Roads Spending

So spending $500 million (on top of what would normally be spent) would be more than all the money that was spent on new and improved state highways and local roads for over a decade.

That seems like it could deliver more game changing outcomes for transport in Northland than a motorway to Warkworth/Wellsford ever would. As an example of what might be able to be delivered, the governments Accelerated Regional Roading Package named two projects that would see road realignments happen. One was on State Highway 73 near Arthurs Pass and the other was just south where the large slip occurred the other week with the project known as the Akerama Curves Realignment and Passing Lane. The latter is a 3km section of road that will be upgraded and have an additional passing lane added for a cost of $10-13.5 million. Comparing the costs for each project it suggests that for $500 million we could probably get 100-150km of upgraded state highway which is a substantial amount.

I guess the big problem with this suggestion is that small scale projects like road realignment and passing lanes aren’t the types of projects that get politicians in the national media cutting turning a first sod or cutting a ribbon.

Poll shows people want more spent on PT

Stuff have released the results of a poll they’ve conducted asking about transport funding.

Auckland has sent a clear message to the Government over its transport priorities: Give us better public transport rather than better roads.

The latest Stuff.co.nz-Ipsos poll found that nationally people wanted a government focus on better public transport over roads by a margin of 30 per cent to 24 per cent.

Another 40 per cent wanted a focus on both.

In Auckland there was much stronger backing for public transport spending, which got the nod by a four to one margin over roads among those who had a preference.

Almost 43 per cent said the focus should be on both.

For Auckland in particular the results suggest a strong support for more being spent on PT with some quick calculations suggesting 46% of respondents wanted more PT spending, followed by 43% who wanted both with just 11% wanting more spent on roads alone. Understandably the support for PT isn’t quite as strong outside of Auckland but still saw a significant number of people supporting the call for more spending on PT. I’ve put together these graphs based on the results highlight the result

Stuff Poll - Govt Focus

Additionally when asked if the government was doing enough to address congestion once again Aucklanders voted differently to the rest of the country with the majority saying no – although to be fair I’m not sure if Aucklanders will ever think enough is being done.

There was a similar, but less pronounced, division between Auckland and the rest of the country when it came to traffic congestion.

Across the nation 57 per cent felt the Government was doing enough to ease traffic jams in their region.

Even in urban areas there was still a majority at 51 per cent backing the Government’s efforts with 42 per cent saying it was not doing enough.

But in Auckland a clear majority – 54 per cent – said the Government was falling short against 43 per cent who thought it was doing enough.

Perhaps unsurprisingly Brownlee has shrugged off the results suggesting that respondents are confused

But Transport Minister Gerry Brownlee called the result a “confused” message, saying Aucklanders did not use public transport to an extent that made it truly economic.

His response shows two things:

  • That he fails to grasp the difference between peoples aspirations and the reality they live in – we know that many people will only catch PT if it is rational for them to do. You could have a bus stop outside your front door but it isn’t likely to used if the buses that stop there take long convoluted and slow routes. My guess is most people probably want more investment in PT so that it becomes viable for them to use rather than the only realistic option being to drive.
  • That he is confused about the economic and financial viability of transport systems. Both roads and PT provide economic benefits to the country by allowing for the movement of people and goods. Neither roads nor PT are currently financially viable and both require subsidies. PT subsidies are well known and often pointed out by those opposing investing in it however roads also require subsidies. About $1 billion a year is invested in them by local councils – which comes primarily from property rates – and the government themselves are spending additional money from outside of the transport budget on many of their flagship roading projects like the recently announced Accelerated Regional Roads Package.

As the Stuff article says

The poll will be a blow to the Government’s transport policy which has emphasised road building, and in particular its flagship Roads of National Significance, and has rebuffed calls from Auckland Mayor Len Brown for an early start to the city rail link.

National also made its roading policy the centrepiece of Prime Minister John Key’s speech to National’s annual conference, with a promise to spend $212 million from the sale of state-owned assets to upgrade 14 roads across the country.

“Team Key has always been very focused on roads,” Key said at the time.

Cut projects or Increase Funding

The issue of how we fund transport projects has been in the news a lot recently with discussions of the council’s Long Term Plan (LTP). The Herald have been running a campaign basically suggesting the council finances are perilous and almost saying are bankrupt and trying to shift a lot of the blame on to the City Rail Link. The part about the council’s finances being in trouble was well debunked the other day by David Shand who was a member of the Royal Commission on Auckland Governance and chaired the 2007 Independent Commission of Inquiry into Local Government Rates.

Aucklanders should have an informed debate about the state of the city finances, given the $1.4 billion of rates collected annually and the total assets of some $40 billion managed by the council. However, the debate has not been well served by Herald articles which blithely use terms such as “spending spree”, “spending beyond its means” and “crisis point”.

This has led to the usual spate of letters from aggrieved ratepayers who are only too willing to believe that the council’s finances are in a “mess” and that we may be facing “bankruptcy”. There is no “crisis” in the city’s finances at the moment but there are major issues to be addressed.

He goes on to discuss 6 key points about the council’s finances and the heralds coverage and afterwards he notes:

While there has been no spending spree, the city’s finances are not in a mess and we are not presently at risk of bankruptcy, there are some big financial issues to be addressed.

The Herald has referred in the past to the “infrastructure deficit” Auckland faces over the next 30 years based both on coping with future expansion and addressing the past neglect of infrastructure expenditure.

 

The real problem is the sheer amount of projects the council has on the books from legacy councils. Many of the projects are good and critically needed – like the City Rail Link – while others like Penlink are at the other end of the spectrum. As a result there are two separate but combined issues at play when it comes to the next LTP. We need to:

  1. Make sure we’re building the right stuff – that means we need to review every project to see if it’s actually worthwhile building as what we don’t build can be just as important as what we do.
  2. If there is an funding deficit we need to work out how we address that which will likely mean new funding sources need to be found.

Ultimately the solution is likely to be a bit of a combination of the two however unfortunately in ways similar to the density debate with the Unitary Plan talk only seems to coalesce around one option. Len Brown falls in to the second camp of wanting to find new funding sources but not wanting to make some hard decisions about what should be funded and he reiterated that again yesterday when speaking at the annual conference of the Road Transport Forum.

Auckland needs to work “shoulder-to-shoulder” with the Government if it’s to find a way out of a massive budget deficit and fund its much needed transport plans, Mayor Len Brown says.

The city was gearing up for “one of the most important funding debates Auckland has ever seen, and maybe even the nation”, he said today.

It needed to find $300 million-$400 million a year to fill a $12 billion funding gap, which would mean the difference “between steady-as-you-go typical Auckland or whether or not we’re going to seriously invest in infrastructure to deal with the shortfall and to deal with the growth coming at us to build this city as a real economic powerhouse”.

And

“Bluntly, we need to decide do we want a transport package based on current funding sources, which is not at all appealing and won’t deliver the city that we’re aspiring to and we know we need. Or do we find new sources of funding and deliver the transport programme Aucklanders asked for through the Auckland plan and in successive elections.

“Current funding sources would deliver us a transport system that’s half-way there. We need to be bold, innovative.”

funding-gap-analysis

Funding Gap from Keep Auckland Moving

A similar story was told by the Head of the New Zealand Council for Infrastructure Development (NZCID) which is a lobby group for the construction and infrastructure financing industry’s.

Note: we’ve also pointed out in the past the odd situation where the Council are a paid up member of a group who exists to lobby the council to spend more. Also the councils outgoing CFO happens to be on the board.

Head of the New Zealand Council for Infrastructure Development, Stephen Selwood, said the investment plans for Auckland’s public transport and roads are not great and the city must move quickly to avoid massive congestion within 30 years.

He believes a motorway charging regime is the best option for raising money to cover the $300-400 million annual cost of developing Auckland’s roads and public transport. He said users should pay about $3 a trip.

Mr Selwood told the Road Transport Forum’s annual conference on Thursday that he favours motorway tolls rather than the ring road option used in London.

He said a toll would also help clear congested roads by encouraging some commuters onto public transport while others would car pool.

But Mr Sellwood warned that authorities need to move in the next two to three years or Auckland will face much bigger congestion problems by 2040.

Stephen Selwood has been pushing this idea for some time now. Personally I’m  not opposed to using road pricing, in fact quite the opposite in that if done right it could be quite useful for managing demand however there are a number of problems with what Selwood keeps pushing.

  • Tolling only the motorways is likely to push a lot of trips that currently use the motorway on to local roads which aren’t tolled likely putting a lot more pressure on them. It’s also those local roads that carry the bulk of our bus services so there could be quite a substantial impact to PT reliability.
  • Would our PT system be able to cope with such an increase in demand. Even with the new network and new electric trains there isn’t likely to be enough spare capacity to be able to cope if significant numbers of people suddenly change modes. If we decide to go down the path of road pricing then we really need a concerted effort to get our PT improvements rolled through faster to help in giving us that capacity.
  • Perhaps most importantly is impact road pricing might have on travel demand. The likely result is that traffic volumes (on motorways at least) are likely to fall as people shift to PT or reducing the amount of travel they do. This could be significant as reducing traffic also reduces/removes the justification for many of the roading projects currently on the plans. With those roading upgrades no longer needed it reduces the overall amount we have to spend upgrading our roads and there reduces the funding deficit. There’s a bit of an irony about an infrastructure lobby group pushing a solution that will end up reducing the amount of infrastructure we need – not that they’re probably thinking that far ahead.

I think all three problems have solutions or provide us with good opportunities. Rolling out the new bus network supported by a large network of bus lanes could keep local roads flowing and as well as providing more attractive services.  Before introducing such a charging scheme effort can be made to increase the size of the bus fleet and get started on projects like the City Rail Link while the changes in travel behaviour as a result of tolls can help us work out exactly what projects are needed.

Guide to economic evaluation, part 2: What are the benefits of transport projects?

Debates over major transport investments often get caught up in arguments over benefit-cost ratios, or BCRs. In recent years, projects such as the Transmission Gully and Puhoi to Warkworth motorways and the City Rail Link have been criticised for their low BCRs. These debates have often raised more questions than they resolve. So it’s necessary to ask: What is a BCR, how is it calculated, and what does it mean?

The good news is that there is a manual that explains it – New Zealand Transport Agency’s Economic Evaluation Manual (EEM). The bad news is that it’s tediously long and not written for a general audience. This series of posts aims to provide a guide for the perplexed:

In part two of this series we examine a tricky topic – the benefits of transport projects. As in the first post, I’m going to focus on explaining the conventional evaluation procedures, rather than presenting challenges to said procedures.

Transport infrastructure projects are often expensive. The Waterview Connection will cost an estimated $1.4 billion; the proposed Puhoi to Warkworth motorway an additional $800m or so; the City Rail Link an estimated $2.8 billion, although this figure includes inflation and costs to buy and run new trains over a 30-year period; and so on and so forth. For these costly projects to be worthwhile, the benefits of these projects – the “B” side of a BCR – need to be of a similar magnitude.

What does that mean in practice? If we say that the CRL will have several billion dollars in benefits for Auckland, what sort of benefits are we talking about? There are three key things to understand about the economic benefits estimated in transport evaluation.

First, the benefits of transport projects do not translate directly into increases in GDP. Benefits of transport projects are estimated by assigning monetary values to a range of outcomes. But just because the EEM assigns monetary values to benefits does not mean the benefits actually manifest as more “money”. For example, a project that saves people a small amount of time on their morning commute might mean that those people work longer hours. But it’s more likely that they will sleep in a bit longer or read the morning TransportBlog post instead. Naturally, this makes people better off – and hence is ascribed a value – but it doesn’t increase GDP.

Second, there are a number of different categories of benefits, and it’s a bit misleading to combine them all into a single measure. Broadly speaking, there are three main categories of benefits that are quantified in transport evaluations:

  • Transport user cost/time savings tend to be quantified for all transport projects and make up the central component of most transport evaluations
  • Health and environmental externalities are often included to some degree; however, some types of benefits that are harder to quantify tend to be excluded from many evaluations
  • Wider economic impacts such as agglomeration and increased labour supply are typically only calculated for major projects.

This post will cover the first two categories of benefits and, returning to our Ruritanian case study, present a worked example of how one might go about calculating these categories of benefits. I’ll leave the wider economic impacts to the next post, as they require a fuller explanation.

The third important fact about transport benefits is that travel time savings make up the majority of measured benefits. Under conventional evaluation procedures, the main benefit of new transport projects is almost always that they save time for travellers. Other benefits, including vehicle operating cost savings and emissions reductions, are minor by comparison. Moreover, as alluded to above, travel time savings cannot be equated to increased economic activity.

I’ll illustrate this using the Ruritanian case study, which shows that the principal benefit of introducing a new bus lane is likely to be travel time savings for users. But before doing so, I’ll briefly run through several categories of benefits.

Transport user benefits

The central component of most evaluations is an estimate of the effect that new transport infrastructure or services will have on the time and monetary cost of travelling. Over in boffin-land, all of these factors are combined together into a figure called “generalised cost” (GC).

GC is a composite measure that covers all of the monetary and non-monetary costs of travel. It can be thought of as the “utility cost” associated with a trip:

GC = Travel time + Vehicle operating costs + Tolls + Parking Costs + PT fares + user amenity.

This measure is that it allows monetary and non-monetary costs to be converted to equivalent measures and compared. So, for example, the EEM provides conversion factors that allow you to place a dollar figure on an hour spent travelling. These values are in the range of $15-25 per hour for most trip purposes. While the EEM used to ascribe a higher value of time for car users than PT users, NZTA decided to equalise the value of time for different modes.

“User amenity” is a quite broad category that attempts to cover all of the subjective factors that people take into account when using transport. So, for example, the EEM provides values that allow you to estimate the value that people place on (say) each minute spent contributing to a traffic jam, or having a real-time board at a bus stop, etc.

Panmure Station 1

Panmure Station was built to provide a better transport experience for passengers

With that in mind, the following table summarises the components of GC and describes whether or not they are monetary costs. It distinguishes between household travel and business travel, as workers’ time does have a monetary cost when they’re travelling on employer business. However, business travel only accounts for a small share of overall trips.

Generalised cost component Household travel (e.g. commutes, retail trips) Business travel (e.g. freight)
Travel time Non-monetary Monetary
Vehicle operating cost Monetary Monetary
Tolls, PT fares, and parking costs Monetary Monetary
Trip amenity Non-monetary Non-monetary

Health and environmental externalities

Contrary to popular belief, NZTA doesn’t simply ignore environmental and health outcomes in its evaluation procedures. Indeed, the agency has progressively been attempting to build additional health/environmental elements into its evaluation.

As a result of their work in this area, which has included the development of new modelling approaches and commissioning of reports on the benefits of walking and cycling activity, the EEM now contains recommendations on how to value:

  • The benefits of reduced CO2 emissions from transport behaviours
  • The benefits of reduced emissions, and reduced road noise, which have an effect on amenity and health within affected areas
  • The health benefits of walking and cycling travel.

In practice, it’s not yet standard to value all of these benefits for all projects. Conventional evaluations usually include benefits from reduced CO2 emissions, as they tend to be closely related to vehicle operating costs. NZTA recommends valuing carbon emissions at $40/tonne – a value that seems high relative to current Emissions Trading Scheme prices, but which is low relative to other transport benefits.

Other emissions and noise impacts do not tend to be valued for many road and PT projects, as they’re hard to robustly estimate. Their effects depend upon a whole range of factors, such as population density around roads, topography, weather patterns, and so on and so forth.

Most people aren't that keen on vehicle emissions. Emphasis on "most".

Most people aren’t that keen on vehicle emissions. Emphasis on “most”.

Likewise, health benefits of active transport only tend to be considered for walking and cycling projects. These benefits aren’t necessarily small in value – the EEM states that each kilometre spent walking generates $2.70 in social benefits, which can add up quite quickly. This is potentially a problematic exclusion for evaluation of public transport, as people tend to walk to access bus and train routes. For example, given the size of the average walk-up catchment, each bus user could be walking an additional kilometre or more each day.

Back to Ruritania: Calculating the benefits of a new bus route

In order to give a sense of how these values come together in an evaluation, we return to our Ruritanian example. If you recall, transport planners in Streslau, the capital city, are trying to evaluate a new bus line between two suburbs (A and B). The road between the suburbs is getting increasingly congested, as it’s limited in size and lacking in public transport alternatives. At this point, they’re seeking to determine whether putting in a dedicated bus lane would be a good idea.

While this is a hypothetical exercise, I’ve tried to make it as consistent as possible with New Zealand evaluation practices to give a sense of what an evaluation might look like.

The first step for Streslau’s transport planners is to determine which categories of benefits to measure. After a bit of discussion, they’ve decided to hew to the conventional evaluation procedures, and focus on quantifying reductions in generalised costs of travel and carbon emission reductions. They’re also going to consider whether there are likely to be any health benefits associated with walking to bus stops.

The table below summarises the values that Streslau’s transport planners are planning on using. As Ruritania’s also a developed country, its valuation parameters are pretty similar to those in the EEM.

Valuation parameters Value ($)
Value of time ($/hr) $15
Vehicle operating cost ($/km) $0.40
Greenhouse gas emissions ($/km) $0.02
Health benefits of walking ($/km) $3

The next step in the evaluation is to determine the level of demand for the new PT service. There are a number of approaches to doing so, including integrated transport modelling, surveys of potential users, or desktop analysis based on known factors and historical growth rates. I’m not going to cover demand forecasting right now – that’s a knotty topic for a future post!

For now, all you need to know is that Streslau’s transport planners have reached into their black box and estimated that roughly one-tenth of the existing trips between the two suburbs will switch modes after the introduction of a new bus line. Changes between the Do-Minimum (the current state) and the Option (the new bus line) are summarised in the following table.

Daily travel demand between A and B (in Y1) Do-Minimum Option
Car trips 50,000 45,000
PT trips N/A 5,000
Average walking distance to PT stop (m) N/A 500

Likewise, it’s necessary to forecast the effects of the change on transport speeds. The road between the two suburbs is roughly 5 kilometres long. At present (under the Do-Minimum) it’s quite congested – traffic flows at an average rate of 25 km/hr.

After further rummaging around in the black box, Streslau’s transport planners have determined that the introduction of the new bus line will result in travel time savings for all users. Drivers will have a bit less road space, but congestion will drop due to reduced vehicle traffic. The net effect is that car speeds are forecast to increase to 30 km/hr after the introduction of the new bus line – saving the average driver roughly two minutes per trip.

Buses will also be faster, but some of the effects will be offset by the need to stop and pick up passengers. As a result, average speeds for buses will increase to 27 km/hr, saving the average PT user almost one minute per trip. (In this simple analysis, I have ignored PT fares and PT user amenities such as real-time message boards, assuming that they approximately offset each other.)

Estimated travel distance and time Do-Minimum Option
Distance (km) 5 5
Average car speed (km/hr) 25 30
Average bus speed (km/hr) N/A 27
Change in TT for car users (min/trip) 2.0
Change in TT for new PT users (min/trip) 0.9

In short, the new bus line is expected to remove 5,000 cars from the road every day, while improving travel times for remaining users. This is expected to result in:

  • Cumulative daily travel time savings of roughly 1,500 driver hours and almost 100 bus user hours (remember, these travel time savings are valued at $15/hr)
  • A cumulative daily reduction of 25,000 vehicle kilometres, which is expected to reduce vehicle operating costs by $10,000 every day and reduce the social costs of carbon emissions by $500 each day

The total estimated benefits of the project are reported in the following table. For the sake of simplicity, we have assumed that benefits are experienced only during working days. As there are approximately 250 working days in a year, the total annual benefits of the new bus line are expected to be approximately $8.5 million.

Almost two-thirds of these benefits actually arise from travel time savings for car users. This is actually fairly common for public transport projects, as the removal of some cars from the road gives everyone else a much easier ride. For example, some of the biggest beneficiaries of the City Rail Link will be people commuting by car to the city centre or through Spaghetti Junction.

Estimated benefits from a new bus line Daily benefits ($) Annual benefits ($m)
Time savings for car users $22,500 $5.6
Time savings for new PT users $1,111 $0.3
Reduction in VOC $10,000 $2.5
Reduction in greenhouse gas emissions $500 $0.1
Total $34,111 $8.5

Finally, Streslau’s transport planners want to understand whether there are likely to be any significant health benefits. We’ve assumed that bus users walk an average of 500 metres to their stop. As we are expecting an estimated 5,000 bus trips per day, this means that bus users are walking a cumulative 2,500 kilometres every day.

Walking catchments to stations. (Source: Human Transit)

Walking catchments are larger when street grids are well-connected (Source: Human Transit)

That’s a surprisingly large number! At a value of $3 in health benefits per kilometre, it adds up to an additional $1.9 million in annual benefits. In other words, including these benefits raises our estimate of the benefits of Streslau’s newest bus line by 20%. That’s potentially a big category of benefits that’s being ignored in many PT evaluations.

Next time: But wait! What about these “agglomeration benefits” I keep hearing about?

House prices vs rents: the effects of inflation

As we all know, house prices have gone up massively over the last couple of decades, and much faster than inflation. On the other hand, rents haven’t gone up so quickly – lucky for the 35% of Kiwis (or 38% of Aucklanders) who don’t own the home they live in.

As someone with more than a passing interest in inflation, rents, yields and prices, I’ve thought for a long time that the growing gap between rents and house prices must have a lot to do with the switch from a high inflation environment to a low inflation one. It’s exactly what economic theory would predict. And luckily, another economist, Rodney Dickens, has come along and taken a look at it (hat tip to Bob Dey for the link).

First, some background. Up until the 80s, New Zealand often had very high inflation, as per the chart below:

Inflation

Inflation was particularly high through the 1970s (oil prices sustained at much higher levels than ever before, plus the switch to a floating exchange rate, and various other factors besides) and the 1980s, except for a brief period in the 1980s where Muldoon thought price freezes were a good idea. The 1989 Reserve Bank of New Zealand Act put a new focus on inflation targeting, and it wasn’t long before inflation rates dropped to well below 5% a year, where we’ve been more or less ever since.

Unsurprisingly, mortgage rates tended to follow a similar pattern to inflation, although they didn’t fluctuate as much:

Inflation and mortgage rates

Floating mortgage rates topped out at more than 20% in the late 80s, and fell dramatically through the early 90s. They’ve stayed below 10% for most of the time since.

So, if you’re an investor in the 1970s, and inflation is at 15%, and you can borrow money at around 15% (or put it in the bank and earn at least 10%), what kind of return do you expect on your rental property? You might expect a yield, or return, of 20%, say. Flipping that around, the property value is five times the net rent you receive.

OK, so now it’s the 2000s. Let’s put aside thoughts of capital gain for now – assume you just want a fair return on your money. You can borrow it at 8%, and put it in the bank at maybe 5% or so. Property seems like a fairly safe investment, so perhaps you’d be happy with 6% return. That means your property value is now nearly 17 times the net rent.

Of course, we wouldn’t expect the runup in asset values to happen just for property. We’d expect it for all types of income-producing asset – shares, capital goods, human capital. You’ll see it as a drop in yields for these assets, as for Rodney’s graph below, which shows yields both for residential property and for government bonds:

Rodney graph 1

As Rodney says:

“CPI inflation has been consistently lower since the early-1990s. In the first house price boom after 1990 – between 1994 and 1996 – rental price inflation increased much as had been the case earlier. But it would seem that by the time of the 2002 pickup in house price inflation the low inflation environment had taken over. It would appear that landlords began to struggle to justify or achieve higher rental inflation in an environment of sustained low general inflation.

This new, inflation-constrained behaviour is reflected in CPI and rental inflation living in similar ballparks since after the government interventions resulted in rental inflation turning temporarily negative in 2001. The result was that the relationship between house price and rental inflation largely broke down”.

He goes one step further, and looks at an issue closely related to housing affordability, as Stu has written before. Here’s Rodney on the issue:

This can also be viewed from the perspective of rents compared to incomes. This is another means by which lower general inflation, including lower income growth, will put a ceiling on rental inflation. The [chart below] compares the ratio of the national average house price to the average annual gross income (black line) with the ratio of the average national annual gross rent to the average annual gross income (blue line).
Prior to 2000 the two ratios largely moved in synchrony while since then the rent/income ratio has fallen and the house price/income ratio has skyrocketed.

Rodney graph 2

I quite like the way Stu puts it: housing is a commodity like anything else, and “you don’t measure the  affordability of cookies based on the cost of buying the cookie factory”.

How should we value the future?

Transport networks and urban planning can have extremely long-lived effects on society, the economy, and the environment. The government’s decision to invest in an electrified commuter rail network for Wellington in the 1930s led to an early form of transit-oriented development in the region. Wellington’s post-war urban growth has been concentrated in areas served by rail lines – providing the region with long-lasting benefits.

800px-WellingtonRailMap

Source: Wikipedia

In Auckland, of course, things were very different. After the role that rail played in Auckland’s early development, successive governments decided to:

And, of course, these years of refusal were coupled with a decision in the 1950s to invest heavily in a motorway network for the region. The Master Transportation Plan of the era contains some truly awe-inspiring concept designs, including an elevated Quay St motorway that would have doomed any chance of Auckland’s recent waterfront revival:

1950s Transportation Master Plan Quay St

Leaving aside a few extremely white elephants, many elements of the plan are quite familiar to modern Aucklanders. The Southern and Northwestern Motorways and the Harbour Bridge were built, kicking off development booms in Manukau, the North Shore, and West Auckland. In a 2010 Policy Quarterly article, Andrew Coleman assessed the effects of motorway development in Auckland and the US, concluding that:

transport infrastructure choices can have long-term and potentially irreversible effects on city form. A city that chooses to invest in roads rather than public transport infrastructure to improve its transport system is likely to reduce the efficiency of any subsequent public transport investments, by causing population and employment in the city to disperse widely over space. When making decisions to build roads, therefore, the city planners need to take into account the way roads affect the operation of subsequent transport infrastructure investment choices.

So it’s worth asking: Are we valuing future outcomes in the right way? In economese, this means asking about our “rate of time preference”, or the degree to which we value present-day outcomes over future outcomes.

A 2011 NZIER paper by Chris Parker provides a fairly accessible introduction to this topic. (Transportblog reviewed the paper when it originally came out.) Parker highlights how much of an effect different discount rates can have on our decisions about the future. As Figure 1 below shows, an 8% discount rate – recommended by the NZ Treasury – means that we place no weight on outcomes that occur 40 years in the future. (To put that in perspective, the average New Zealander lives twice as long as that. I certainly expect to be alive in 40 years!) A 3% discount rate, by comparison, means that we place a much higher value on outcomes that far in the future.

NZIER discount rate comparison

Last July, NZTA decided to lower its discount rate from 8% to 6%. This change means that transport evaluations now place a slightly greater weight on future outcomes than before. However, as NZTA’s documentation showed, we still discount the future to a much greater extent than countries like Germany (3% discount rate) and the UK (1% to 3.5%).

NZTA’s new discount rate might still be too high to properly account for the long-lived effect of infrastructure development on urban form. As we’ve seen, Auckland and Wellington are still benefitting from, or coping with, with the effects of investment decisions made 60 to 80 years in the past. Under current evaluation procedures, we wouldn’t have considered such long-lasting effects.

A new research paper by economists at the University of Chicago and New York University suggests that people place significant value on outcomes that occur dozens or even hundreds of years hence. The authors measure long-term discount rates using an innovative method that relies upon observing differences between the prices for freehold and leasehold houses in the UK and Singapore:

In Giglio, Maggiori and Stroebel (2014), we provide direct estimates of households’ discount rates for payments very far in the future, by studying the valuation of very long (but finite) assets. We exploit a unique feature of residential housing markets in the UK and Singapore, where property ownership takes the form of either very long-term leaseholds or freeholds. Leaseholds are temporary, pre-paid, and tradable ownership contracts with maturities ranging from 99 to 999 years, while freeholds are perpetual ownership contracts. The price discount for very long-term leaseholds relative to prices for otherwise similar properties that are traded as freeholds is informative about the implied discount rates of agents trading these housing assets. This allows us to gather information on discount rates much beyond the usual horizon of 20-30 years spanned by bond markets.

This analysis suggests that long-run discount rates are significantly lower than those we use for project evaluation – in the range of 2.6%. In other words, people making significant financial decisions today place some value on outcomes for future generations that they will never meet:

We use these estimated price discounts to back out the implied discount rate that households use to value cash flows to housing that arise more than 100 years from now. We find the discount rate for very long-run housing cash flows to be about 2.6% per year. Interestingly, we find similar implied discount rates in both the UK and in Singapore – two countries with very different institutional settings.

The authors suggest that their findings have implications for intergenerational fiscal policy and climate change policy. They’re also likely to have implications for the way we evaluate transport projects. Today’s planners should take care to preserve and improve transport options for future generations, rather than “locking in” a particular urban form.

Finally, with that in mind, it’s worth recalling the findings of the 2012 City Centre Future Access Study, which compared options for improving transport capacity to Auckland’s growing city centre. In Section 7 of the Technical Report, the authors found that when a longer evaluation period (60 years vs. 30 years) and a lower discount rate (5.7% vs. 8%) were used, the benefit-to-cost ratio of the City Rail Link almost doubled. In other words, the CRL looks even more valuable for Auckland if we take a longer-term view.

If our great-grandparents had decided to invest in Auckland’s rail system in the 1930s, we’d still be thanking them for it. Because they didn’t, though, we’re just getting around to electrifying Auckland’s rail network and still debating whether to build the CRL to unlock greater frequencies across the entire network. It is essential that we take a longer-term view on transport investments than we have previously done.

So, what’s your discount rate?

City centre parking rates: economic literacy versus special pleading

This weekend the NZ Herald’s motoring correspondent Matt Greenop published an article denouncing the “insult” of parking fees. Now, at Transportblog we’re always up for a good debate over the merits of different parking policies, but this doesn’t add much to the conversation:

Parking used to be a doddle. Now it’s just another cost of car ownership that makes us feel we’ve committed a heinous crime against humanity by daring to buy and use our own vehicle.

Every little bit that gets added on to the cost of driving a car in the city is an insult — and the next insult we’re facing is another hike in parking fees.

From an economic perspective, this is a totally absurd statement. It completely ignores the supply and demand dynamics at play in urban areas. Parking takes up space, and as anyone who’s been downtown in the last decade has noticed, there’s a limited amount of space in the city centre. Demand for commercial and residential space in the city centre is increasing. The residential population tripled from 10,200 to 31,300 between the 2001 and 2013 Censuses; over the same time period, employment in the city centre rose by a quarter, from 81,000 to 100,100.

Using prices to manage demand for scarce resources is an efficient and sensible response. This is basic Econ 101 material, and we accept it in most areas of life. City centre office space is priced, and priced highly, due to the fact that a lot of people want to locate there.

It would be ridiculous if companies leasing space in the city centre to complain that a rent increase was an “insult”. And if they insisted on paying no rent at all, we’d recognise it as special pleading for a market-distorting subsidy.

It’s the exact same thing with parking. Essentially, the Herald’s using emotive language to demand a costly, distortionary subsidy for a small number of people.

If the Herald wants to avoid printing such embarrassing nonsense in the future, I strongly recommend that they run their articles by an economist first.

Auckland’s Chief Economist speaks up for future generations – Auckland needs to grow “up and out”

Auckland Council’s Chief Economist Geoff Cooper was in the paper on Thursday with a few interesting arguments about urban planning. The article is refreshing because in it Cooper challenges a few of the many sacred cows in the debate over growth and housing affordability.

In particular, Cooper discusses the “up versus out” narrative that has been wrapped around Auckland’s urban growth. In recent months, for example, both the New Zealand Initiative and consultancy NZIER have published research papers arguing that Auckland should open up greenfield land to improve housing affordability.

Cooper argues that these analyses have failed to notice the fact that the proposed Unitary Plan already does this:

Despite this complexity, discussion on Auckland’s urban policy is often reduced to “up” (intensification) or “out” (sprawl).

This simplification overlooks three key issues — Auckland Council’s proposed urban limit policy, the policies underlying a compact city, and the political economy of urban policy.

The proposed plan vastly extends the urban limit, aiming for an average of seven years infrastructure-ready land supply available at all times. Once implemented, around 20 per cent more urban zoned land will be available.

This is enough for up to 76,000 new dwellings (roughly equivalent to all of Hamilton).

Calls for more land supply miss the solutions being implemented.

In my view, a policy of greenfields growth could result in not insubstantial economic costs. These risks are discussed in a range of new studies,evidence which present evidence suggesting outlying locations are not necessarily more affordable once transport costs are taken into account (often difficult to do in advance). So while house prices might be cheaper, the costs of getting around can offset those savings. Not to mention the external costs of congestion wider society must bear from more development in peripheral urban locations.

On the other hand, Cooper also critiques debates over residential intensification. He points out that removing *restrictions* on urban intensification development, so as to enable more compact and diverse forms of housing, doesn’t amount to “forcing intensification upon communities”, as some have claimed. Instead, the Unitary Plan tends to remove barriers that prevent people from living at higher densities in locations that provide the attributes they seek, such as amenity and accessibility. Cooper comments:

Proposed policies for a compact city are also misunderstood.

Compact living policies are about creating choices, by reducing existing regulations that stop people living in higher density areas, when they want to.

The inherited planning framework by Auckland Council is heavily biased towards the “quarter acre section” through rigid regulations. This creates a push for urban sprawl.

The city’s rules prevent the supply of housing people want in the areas they want to live in – close to the city, with good transport and other amenities.

These preferences are clearly shown in soaring house prices on Auckland’s isthmus.

The draft plan was designed to create greater housing choice. But this has been scaled back significantly during public consultation.

Residents want to preserve their lot, but it comes at a cost to future Aucklanders. New height limits have been introduced in many suburbs, while existing height limits have been tightened, as have density constraints which means it will be harder to gain access to attractive suburbs.

The important thing Cooper highlights here is how policies that restrict housing  supply in desirable areas come with a significant cost. There’s a wide range of international evidence suggesting restrictive planning regulations, such as minimum parking regulations, density controls, and building height limits, tend to raise the cost of housing. A 2002 paper by Edward Glaeser and Joseph Gyourko, for example, found American cities with more restrictive zoning were less affordable:

The bulk of the evidence marshaled in this paper suggests that zoning, and other land use controls, are more responsible for high prices where we see them. There is a huge gap between the price of land implied by the gap between home prices and construction costs and the price of land implied by the price differences between homes on 10,000 square feet and homes on 15,000 square feet. Measures of zoning strictness are highly correlated with high prices… [I]f policy advocates are interested in reducing housing costs, they would do well to start with zoning reform.

New evidence from Auckland suggests that our planning regulations may have a similar effect, driving up housing costs above construction costs. While the proposed Unitary Plan loosens some regulations, it arguably doesn’t go far enough to truly improve housing choice and housing affordability. Indeed, in some locations it proposes much more onerous regulations than exist under existing district plans, such as on minimum size requirements for apartment. Such requirements have the potential to exacerbate housing costs for the households that can least afford it.

Finally, Cooper also highlights the sometimes perverse nature of the political economy of urban planning. As many people have pointed out, planning regulations have significant effects on intergenerational equity. While restrictive regulations might be good for existing homeowners, they’re extremely bad for new homeowners – and by extension future generations.

It seems fairly obvious to me that if a city is systematically unwilling to allow new housing supply to be built in desirable, accessible areas, then skilled young people will increasingly face a Hobson’s choice: Either pay too much for housing in an accessible place, or pay too much for transport in a cheaper fringe location. And in the long run, we can expect these people to choose another city to live in. Indeed, unaffordable cities place will tend to be disadvantaged in the increasingly global competition for skilled young labour. In this other recent article Cooper actually makes this very point: Auckland competes for people, business, and capital more with Brisbane. Sydney and Melbourne than with other places in New Zealand.

Unfortunately our political system seems especially bad at solving the intergenerational problems even though this is arguably one of its core functions.

This Government’s inability/unwillingness to make headway on carbon emissions being the prime example. As a young Aucklander with many Kiwi friends living overseas. I am fairly sure that the people who will benefit from better housing policy are, for the most part, not voting in elections or going along to consultation meetings. Many more may have not even been born yet. It is these voices that are so often not heard, nor even acknowledged, in the debates on the Unitary Plan.

Responsibility for this issue lies jointly with our political representatives and mainstream media outlets, who tend to lack the courage to push back on even the most blatant self-interested objections to urban development.

Ultimately I think it’s really useful to have Auckland Council’s Chief Economist speaking out on these issues and highlighting that Auckland needs to both grow “up and out”. Now it’d be nice if more people at a central  government level started to champion the same issues.

Looking back at the existing LTP

Yesterday it emerged that the council is taking a knife to its next Long Term Plan and potentially start cutting projects completely in a bid to keep rates down. One comment that came through clearly yesterday was that the council will have to be careful what projects they cut because if they cut the wrong ones, like many of the PT and walking/cycling projects they should also cut the worlds most liveable city slogan too. Below is a press release from the council on the subject, the key point being that the public won’t get to hear what’s planned till late August.

The next phase in Auckland Council’s Long-term Plan (LTP) process is underway as elected representatives and officials meet to consider what the council should do during the next 10 years and how to fund it.

In March, Mayor Len Brown set the direction for a full review of the budgets and work plans of Auckland Council and its CCOs, and today’s workshop provides an overview of the sorts of things to be considered as Auckland plans for significant growth over the next decade.

“We need to make some tough choices to find the right balance between progress and affordability. Today we begin the conversation about how much we spend, when we spend it and what we spend it on to ensure Auckland’s communities and economy continue to prosper and the city remains a great place to live for all Aucklanders,” says Len Brown.

“In the months ahead, we’ll be asking Aucklanders about which major investments are the most important and affordable over the next decade to deliver Auckland’s vision to become the world’s most liveable city.”

The LTP is reviewed every three years. The next 11 months will see an extensive consultation process involving the council, its CCOs and the people of Auckland. The revised LTP 2015-2025 is due for adoption June 2015.

“Aucklanders want progress, especially on affordable housing and transport, but we know there is no appetite for large increases in debt and rates, so the next phase we begin today challenges us to find the trade-offs over the coming months to ensure increases are sustainable while still delivering on our promises – we can’t afford to do it all.”

Auckland’s first LTP in 2012 was based on the new council’s objectives but was still working with numbers carried over through amalgamation from the legacy councils.

This LTP provides the united Auckland Council with its first opportunity to realign those budgets and develop a 10-year programme of work based on a single plan and vision for Auckland.

Auckland Council Chief Executive Stephen Town says:

“The current LTP contains carry over numbers from the legacy councils and projects an average rates rise of 4.9% for each of the remaining years until 2022. To limit rate rises to between 2.5% to 3.5%, we need to be innovative and bold in looking at alternative revenue sources, reprioritising spending and finding cost savings to achieve our financial targets and take the pressure off households.”

“Auckland’s AA credit rating is testament to the careful and responsible approach we have applied to financial management. But we don’t have a blank cheque book to fund Auckland’s growth, and so we need to be clear about the priorities in the Auckland Plan.”

The LTP covers everything we do and how we pay for it – from collecting rubbish, building cycleways, delivering community services to investing in technology and innovation to ensure Auckland is a competitive global city for investment.

Detailed workshops will be held throughout July and August to help inform the Mayor’s Proposal for what activities should be prioritised, how to reduce total spend to keep rates low and alternative sources of funding for the 2015-2025 plan.

The Mayor’s Proposal will be presented in late August, and will then go out for public consultation so Aucklanders can have their say on shaping Auckland’s future.

The Long Term Plans is a 10 year budget but it gets reviewed every three years. In this post I’m just going to highlight what transport spending is planned in the current LTP which covers the period from 2012 to 2022. In particular I’m going to focus on the 2015 – 2022 parts as that’s what the council will likely be making substantial changes too.

When it comes to transport the current LTP is split into three sections:

  • Public transport and travel demand management
  • Roads and footpaths
  • Parking and enforcement

They can be summarised below (note: these are just the costs and ignore revenues and and money from other sources e.g. the NZTA or government)

LTP 2012-22 All headlines 3

 

 

Delving deeper each section can be broken down as below

Public transport and travel demand management

The one thing that stands out the most is that rail OPEX is expected to jump substantially which is primarily related to running more services, post electrification and then from 2020 for the CRL. We do know that the new electric trains cost about half as much in maintenance and fuel costs as the current trains and that Auckland Transport is about to go out to tender for a new rail contract from 2016 onwards. Those two things will hopefully combine to reduce those costs.

Rail costs feature strongly on the CAPEX side too which is comprised mostly of the costs for electrification and the City Rail Link. One thing not covered is the bus infrastructure that will be needed to support the new network which hadn’t been created – at least not publicly.

LTP 2012-22 - PT

Roads and footpaths

On the CAPEX side there are a couple of really large projects in the form of AMETI, Penlink and the Mill Rd corridor however most of the ones on the list are arterial upgrades that are/were expected to cost around $30 million each.

LTP 2012-22 - Roads and Footpaths 2

 

 

Parking and Enforcement

LTP 2012-22 - Parking and Enforcement

Note: you can see a list of all the projects that were included in the figures above in this old post.

I suspect that until plans are released in August that there will end up being a lot of rumours flying around about just what projects are going to be funded and which ones won’t. The herald yesterday suggested some projects that might be cut include:

  • Electrification to Pukekohe which will be essential to the proposed greenfield development in the area.
  • Penlink
  • A 20% cut in the already meagre cycling budget
  • A North Western Busway – something the NZTA should really be building as part of the Western Ring Route project and that is going to be needed to support the greenfield growth in the North West.

To me this also process is also going to highlight one of the glaring inconsistencies in how we fund transport. Local projects have to go through years of debate and cuts to get them to starting line but when it comes to state highways we have the government who can just come in and build stuff even if it isn’t what the city wants or needs. I imagine our funding priorities would be quite different if the city was able to choose how to spend the money we’re pouring into state highways.