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Does Auckland really have a land supply shortage?

The annual Demographia Housing Affordability report is out – this time with its forward written by Bill English – and just like every other Demographia study it suggests that more land needs to be opened up for urban sprawl in order to bring down housing prices. There are a number of different flaws in Demographia’s analysis (for example it’s based on pre-tax income, it ignores the infrastructure costs of servicing sprawl and it ignores the additional transport costs of living on the urban edge) but I’ll ignore those for now, instead focusing on a pretty simple question – does Auckland really have a land supply shortage?

I think it’s fairly widely agreed that an important factor in Auckland’s rising house prices is a lack of housing supply: simply not enough dwellings are being built. The Auckland Plan talks about the need to build around 13,000 houses a year, every year, over the next 30 years and the fact that we’ve only been building around 3,000 dwellings a year in recent times:dwellings-approvedWhat you can also see in the graph above is that Auckland was able to build its required amount of housing during the middle of last decade (the very years when housing prices increased the fastest from memory) and that the number of detached dwellings as well as the number of apartments built per year has fallen dramatically since about 2004. As large greenfield areas such as Silverdale North, Flat Bush, Hingaia, Hobsonville and parts of Takanini have become available for development over the past six or seven years, it’s interesting that we have actually seen a decline in detached structures built rather than a further increase.

Furthermore, Auckland has a lot of areas for future greenfield development working their way through the planning process at the moment or already operative. This is shown in the Auckland Plan’s development strategy map – with yellow indicating “pipeline” (which I assume means that it’s in the process of becoming operative) and “operative” (ready to go I assume) greenfield land. Operative is shown in red and pipeline land in yellow: future-urban-areasIn fact, the Auckland Plan states that the biggest chunk of growth in the first 10 years of the Plan will take place in these areas:aucklandplan-firstdecade
Personally I think it’s likely that Auckland won’t see anywhere near that amount of greenfield development over the next 10 years – not because there won’t be enough land available (as I said the process for opening up that land is underway already) but rather because there’s unlikely to be the market demand for houses in these peripheral locations.

But in any case, I don’t think that supply new houses in these areas is likely to do much about housing affordability because there’s actually not a housing affordability problem in peripheral parts of Auckland. For example searching Papakura area properties under $400,000 returns not far off half the houses for sale (224 out of 569) in that area:papakura-under400k
Auckland’s average house prices are dragged up by the extraordinary prices paid for places in the inner suburbs because that’s seemingly where people really want to live. If there’s heaps of available greenfield land on the urban edge, a significant number of relatively affordable houses already available on the urban edge and the planning in place for a huge amount more greenfield land on the urban edge, I just can’t buy into the hypothesis of Auckland having a land supply shortage.

What we have is a housing supply shortage, particularly in the inner suburbs where people want to live. And the way to fix that is by making intensification easier through getting rid of minimum parking requirements and getting rid of density controls. It’ll be interesting to see whether the Unitary Plan tackles this real issue rather than the non-existent land supply shortage spun by property developers who want to make a pile of money by bringing their land inside the urban limits.

Demolishing Demographia?

*** Spoiler alert: The title of this post is somewhat hyperbolic ***

Demographia’s “9th Annual International Housing Affordability Survey” has just been released and is receiving a lot of attention in various media outlets, such as the NZHerald. Indeed, NZ ‘s connection to the report is relatively strong – it was co-authored by a kiwi and the foreword is written by our very own Minister of Finance.

For those not in the know, the primary objective of the Demographia report is to evaluate housing affordability across a selection of “anglo” countries, namely Australia, New Zealand, Canada, the U.S., the U.K. and Ireland. This is a very admirable objective; after all if policy makers can better understand the complex range of factors affecting housing affordability, then this can in turn support more informed debate and policy settings.

Demographia measure housing affordability using the so-called “median-multiple” indicator, which they define as follows:

Housing affordability = Median house price / Median household income.

This is a pretty simple indicator: Take the median house price and divide by the median household income and, voila, you have a multiple describing the price of housing relative to incomes. Demographia then collect a swathe of data on house prices and incomes for all cities with populations of 1.0 million or more in Australia, New Zealand, Ireland, U.K., Canada, and the United States. Their results over time are shown below.

National results

Since 2004 the trend in the median-multiple measure has diverged between countries; it increased in Australia, New Zealand, and Canada; stayed broadly constant in the U.S.; but declined in the U.K. and Ireland.  While these are fairly innocuous results, the Demographia report then concludes (p. 3):

Overwhelming economic evidence indicates that urban containment policies, especially urban growth boundaries raise the price of housing relative to income. This inevitably leads to a reduced standard of living and increases poverty rates, because the unnecessarily higher costs of housing leave households with less discretionary income to spend on other goods and services. The higher costs ripple into rental markets, tightening the budgets of lower income households, who already suffer from lower discretionary incomes. The principal problem is the failure to maintain a “competitive land supply.” Brookings Institution economist Anthony Downs describes the process, noting that more urban growth boundaries can convey monopolistic pricing power on sellers of land if sufficient supply is not available, which, all things being equal, is likely to raise the price of land and housing that is built on it.

I read that and thought “hmm, that’s fairly strong stuff.” So at this point I thought it was worth stepping back a little.

First let’s examine the two key arguments the Demographia report advances in support of the median-multiple measure of housing affordability (p. 6):

  1. It is used by other reputable organisations, such as the World Bank, the UN, and Harvard; and
  2. It is simpler than other measures, which are “often not well-understood outside of the financial sector.”

The second reason given is rather vacuous and, frankly, a little condescending to anyone who does not work in the financial sector. And believe me, many economists do not work in the financial sector; at least not anymore.

On the other hand the first reason offered as justification for using the indicator is more understandable: If the median-multiple indicator is used by a range of reputable international organisations then it likely has more merit as measure of global differences in housing affordability.

At that point I tried to follow the sources provided in the Demographia report. Doing raised some fairly important issues: The World Bank link, for example, takes you to a relatively obscure web-page that appears to date from 1992, while the Harvard link appears to be an on-line catalogue of the indicators used in the U.N. report, rather than an independent publication attesting to the merits of the median-multiple indicator.

That leaves us with one “independent” reference, namely the U.N., lending credibility to the use of the median-multiple indicator of housing affordability. Following that link, however, reveals that the median-multiple indicator is but one of a myriad of indicators and checklists identified by the U.N. And perhaps more importantly, the U.N. do not present the median-multiple indicator in isolation, but instead consider it as one of two possible “housing affordability” ratios, as illustrated below.

UN report

 

Righto, so the median-multiple measure can be calculated using either median house prices or house rents. At this stage I was perplexed: Why does the Demographia study not (from what I can tell) mention the ratio of house rents to income as as a possible alternative indicator?

So I did some more digging, and found this graph in the Productivity Commission’s final report on housing affordability in NZ, which considered median rent to household  (disposable) income, as illustrated below. In many ways this indicator is more comprehensive than that originally identified in the U.N. report, because it considers after-tax income.

Productivity commissionBased on this graph the Productivity Commission concludes (p. 4):

During the house price boom, rents increased at around the same rate as generalised inflation. Across territorial authorities, rents grew in a relatively tight range of 2.3% per year (in Dunedin City) to 8.2% per year (in Buller District). In all cases, rent increases were significantly less than real house price inflation and the ratio of house prices to rents increased markedly, a departure from the long-term broadly stable relationship. 

This apparently benign aggregate situation disguises a more difficult position for renters on lower incomes. In particular, people in the lowest two income quintiles spend a much higher proportion of their income on rent than people on higher incomes (Figure 0.5). Even though the situation appears to have improved since the late 1990s, those in the two lower income quintiles still spend, on average, more than 30% of their disposable income on rent, after allowing for government assistance.

Oh dear Daisy: It seems that the Productivity Commission has – using the other housing affordability indicator recommended by the U.N. study referenced by the Demographia report – come to a different conclusion: That housing affordability in NZ has been improving since the late 1990s.

Now at this point I want to caution that these other indicators do not prove that Demographia is necessarily wrong, only that their use of indicators may be too limited. Usefully, the Productivity Commission includes another indicator of housing affordability, namely the “home affordability index” (compiled by Massey University). This index considers the relationship between the costs of servicing a mortgage on the median house and median household income:

Home affordability indexThis indicator suggests that home affordability has been declining for about the last 4 years. Perhaps more importantly, the 2008 peak in the home affordability index (indicating relatively unaffordable homes) does not seem to be significantly higher than earlier peaks in, for example, 1989 and 1996.

So where does this leave the Demographia report? Well on I’m afraid to say that a first investigation throws up very little corroborating evidence to support their key conclusions, namely that the current price of housing in New Zealand is “unaffordable” relative to historical norms. That’s not to say that they’re wrong, only that their conclusions are not fully supported by the available evidence.

Nor is this to suggest that more affordable housing is not a valid objective: I certainly think it is. And just because the current price of housing is comparable to historical trends, we should still be interested in making housing more affordable, because as Deomgraphia note it is perhaps the most basic of human needs. So while I question Demographia’s analysis and conclusions, the subject is nonetheless very important and worth considering in more detail.

I only wish that 1) they had the time/energy to analyse these issues in more detail within their existing research and 2) news organisations did a little more research before reporting the results of studies like this. While I have more to say on this issue (and hope to do so in future posts), it’s now time for me to up stumps and head for tea (i.e. bed). Until next time …

Auckland’s population density: killing off the myths

One of the common excuses for why public transport supposedly “won’t work in Auckland” and why we need to continue to plow money into motorways, is that Auckland is supposedly “too low density” for public transport. In fact, aspiring Auckland Super City Mayor John Banks went so far as to say that Auckland was the “second most spread out city in the world” (after Los Angeles) in a Guest Post on Aucklandtrains. He used this “fact” to justify why Auckland needs to “compete its motorway network” as quickly as possible.

But is this true? How does Auckland’s population density compare with other cities around the world? How does its land area compare with cities in Australia and the USA – for example? Is Auckland anywhere near the second most spread out city in the world? What about Los Angeles?

Fortunately, Demographia (who I am often quite sceptical about when it comes to planning matters, but who seem to have a reasonably good grasp of this issue) have undertaken an enormously in depth study into city sizes, city population and population densities. Perhaps what is most interesting about their work is how they calculate where each urban area begins and ends – which actually fits together quite nicely with how I tend to think of the issue: I like the idea that we’re not measuring “bits of cities”, such as simply the inner part of the New York urban area – which of course has very high densities but isn’t just what New York is made up of.

For a start, I suppose that it makes sense to look at what the biggest cities in the world are by population – here are the top 20: Auckland doesn’t even make it into the top 200, which roughly corresponds with the number of cities in the world with more than 2 million people.

The next thing that’s very interesting to look at is the physical size of cities in the world – which of these urban areas covers the most space. I remember as a kid hearing that Auckland was physically the same size as London, but is that true?

Well according to the table above, the Auckland urban area was 531 square kilometres in size, making it about a third the size of London. Also interesting to note that Auckland’s about half the size of Perth, and less than a third of the size of the Brisbane metropolitan area. At the top of the list, we see that the New York metropolitan area is the biggest built-up urban area in the world, by size, followed by Tokyo. The New York metropolitan area is about 22 times the physical size of Auckland. By size, Auckland is actually the 181st largest city in the world.

Turning to population density, it is really interesting to see how Auckland compares with other cities in Australia and the USA. Most of the really high density cities in the world are in developing nations, which shows why Auckland and many other large and well known cities end up ranked so low. Yet we still see that Auckland’s population density is a bit higher than Sydney’s and significantly higher than all the other major cities in Australia. Interestingly enough though, one city that has a higher population density than Auckland is Los Angeles. In fact, Los Angeles has the highest density of any city in the USA – not because it has a really dense core like New York does, but because throughout Los Angeles the lot sizes are generally pretty small, a similar situation to what we have in Auckland.

So what does all of this mean? Well for one it shows that any time someone says “Auckland’s population density is too low for public transport to work” you can absolutely say that they’re talking rubbish. It also probably means that simple population density isn’t necessarily the ultimate defining issue about whether a city’s urban form is suitable for public transport or not. The way in which that population density is structured (small lots evenly spread throughout the city or higher and lower density nodes) might matter more, the concentration of jobs in certain areas might also make more of a difference (although remember that Vancouver has a lower percentage of jobs in its CBD than Auckland).

Ultimately, what this all probably means is that the popularity of public transport is likely to be based more on the quality of the system than it is on the urban form of the city. Sure, there are many things we can and must do to structure our city more efficiently and sustainably, but let’s stop making the excuse that Auckland is too spread out for public transport to work. Because, as the above tables show, that’s complete rubbish.