Back in July, I went down to Wellington for this year’s New Zealand Association of Economists conference. I really enjoy NZAE – people attend because they’re genuinely excited about sharing their ideas and learning from other people. (Stu Donovan and John Polkinghorne were also there.)
I was presenting a paper on using hedonic analysis of property sales to assess and compare the costs and benefits of planning regulations. The empirical side of the paper was an analysis of the impact of dwelling size, lot size, location, and amenities such as the presence of old buildings on property sale prices.
I used these results to consider the rationale for heritage preservation policies. In doing so, I asked three key questions:
- Is there evidence of positive spillovers (“externalities”, in economese) associated with old buildings?
- How large are those spillovers relative to other things that people value, such as living close to the city centre or having more living space?
- Is a blanket heritage control that limits the demolition of building likely to be optimal? In other words, are the positive spillovers from old buildings large enough to justify making it more difficult to develop in some areas?
The first question is very important. As I discussed the other week, people argue that old buildings should be preserved because they are valuable to their inhabitants. To my mind, that is not a good case for government to get involved. If heritage buildings are mainly valuable to their inhabitants, then those people can probably sort things out without the need for any rules.
But if there are positive spillovers from heritage, there may be a case to regulate. That’s because decisions made by a property owner about whether to demolish a heritage property may not take into account the impacts that their decisions may have on other people.
Many – although certainly not all! – old buildings have aesthetically pleasing exteriors. Simply put, they’re nice to look at. (This may simply reflect a selection process – i.e. people built ugly buildings 100 years ago, but they’ve been demolished.) The presence of these buildings can make an area more attractive for passers-by and other residents.
Central Post Office – now known as Britomart (Source)
There are a number of ways that we can measure the public value of aesthetically pleasing old buildings. For example, people may visit areas with more old buildings more often and spend more time walking the streets. (Although I caution that there’s a risk of omitted variable bias here, as areas with older buildings also tend to have older, more walkable street networks.) They may spend more money in shops in these area. Or, importantly, they may be willing to pay higher prices to live around old buildings and enjoy their aesthetic characteristics more frequently.
In my paper, I used residential property sale data to identify the existence of positive spillovers from old buildings. I’ll spare you the details of the number-crunching, but basically, I used four years of recent property sales data to determine whether people are willing to pay higher prices to live near old (pre-1940) buildings.
The results suggest that there are modest positive spillovers from old buildings. On average, every additional pre-1940 building in a neighbourhood was associated with a 0.3% increase in the price paid for neighbouring dwellings. Some individual buildings are likely to have stronger spillovers, of course – not all old buildings are created equal! And there are likely to be some spillovers that aren’t captured in residential property prices.
But as heritage policy is often a very local event – people tend to advocate for the preservation of buildings in their suburb or neighbourhood – it’s likely that this measure captures many of the spillovers that matter. Which leads us on to the third question: When is a blanket heritage control likely to be optimal?
The downside of a blanket control is that it will make it more difficult (or even impossible) for people to redevelop sites or make additions to existing homes. My analysis of recent property sales showed that the quantity of floorspace has a strong effect on property values. I estimated that a 10% increase in the size of a dwelling was associated with a 4.8% increase in its sale price, holding all other factors constant.
Based on this result, I asked: How much additional floorspace would be required to fully offset the loss of aesthetic spillovers from neighbouring pre-1940 buildings? In other words, what’s the point at which people might be indifferent between preserving heritage and getting opportunities to intensify their properties?
The results are mapped below. Darker greens and blues indicate areas with larger positive spillovers from old buildings. Yellow colours indicate areas where there are few if any spillovers. Of course, there are likely to be a number of subtleties that I wasn’t able to pick up in the data, such as the quality of heritage properties in different areas.
Change in floorspace required to offset loss of heritage spillovers (Source: Nunns, 2015)
One interesting thing about this map is that it suggests that the value of heritage preservation may be relatively low compared to the value of opportunities for intensification almost everywhere in the city. Even in the most heritage-y parts of Devonport and Ponsonby, it would only take a 30-40% increase in floorspace to fully compensate for the loss of localised spillovers from all the pre-1940 buildings in the neighbourhood. That isn’t an unreasonable possibility given that these areas have standalone houses sitting on crazily expensive land. (And the fact that many of these buildings would be preserved by their owners anyway.)
So what should we make of this?
First, an important caveat: these results are not definitive. They’re based on a piece of quantitative analysis that captures overall trends but omits qualitative aspects of the aesthetics of old buildings. In some areas, it may under-estimate the contribution of individual buildings that are especially attractive. In others, it will over-estimate the magnitude of spillovers, because the old buildings in the area are simply not that flash.
But even taking that caveat into mind, there may be room to optimise heritage preservation by focusing blanket heritage controls in areas where evidence of positive spillovers is strongest. So it’s encouraging to see that Auckland Council is refining its position on heritage controls in the Unitary Plan. (And dispiriting to see the NZ Herald’s alarmist one-sided take on the issue. Pro tip to the editors: articles like this are why I do not buy your newspaper. I spend money on other print media, so you’re missing out.)
It’s also worth remembering that blanket controls aren’t the only way to preserve heritage. Heritage schedules can be used to target protections to individual buildings with notable aesthetic or historic value. And councils can directly fund the preservation of notable buildings by buying up and renovating them. In some cases, these may be a more efficient way of ensuring that we maintain the good bits of the city at a reasonable cost.
What do you think an optimal heritage preservation policy would look like?
Last week, I introduced the concept of elasticity of supply with respect to price as a useful measure of housing market dynamics. Supply elasticities measure how responsive builders are to an increase in demand. In other words, when people turn up wanting dwellings, how quickly do the tradies start building more?
Supply elasticity can in turn have a big, long-run effect on prices. If the building sector is consistently slow to respond, it creates the condition for an ongoing shortfall in supply, which means that people will bid up prices more.
My post last week took a look at some of the (limited) international comparisons of planning regulations, which seem to indicate that New Zealand is not an especially poor performer. For example, consent processing time is relatively fast and efficient compared with other OECD countries.
However, regulations are only part of the picture. For example, Patrick wrote a good post a while back looking at Auckland’s geographic constraints:
Intuitively, we’d expect Auckland’s limited supply of developable land to have an effect on housing supply dynamics. But how much of an effect should we expect?
The empirical literature provides us with a reasonable estimate. A 2010 paper by MIT economist Albert Saiz (Massachusetts, not Manukau) measures constraints on land availability in large US cities and uses them to estimate the effect on housing supply.
Saiz finds that there are large differences in land availability between different cities. For example, “flatland” cities like Atlanta or Houston have very little area constrained by lakes, rivers, oceans, or steep slopes. Over 90% of the area around these cities is available for development. Coastal cities like San Francisco, San Diego, or Miami, on the other hand, might be able to develop less than 1/3 of the surrounding area.
Saiz concludes that:
Quantitatively, a movement across the interquartile range in geographic land availability in an average-regulated metropolitan area of 1 million is associated with shifting from a housing supply elasticity of approximately 2.45 to one of 1.25. Moving to the ninetieth percentile of land constraints (as in San Diego, where 60% of the area within its 50-km radius is not developable) pushes average housing supply elasticities down further to 0.91.
Translated from economese, this means that cities with less developable land have housing markets that respond more slowly to increased demand. (Or, as non-economists might say, duh.) For context, an elasticity of 0.91 indicates that a 10% increase in house prices is met by a 9.1% increase in housing supply. Even if regulations are held constant, a “flatland” city is expected to have a more responsive housing market than a coastal city with lots of hills.
In other words, when people compare Houston’s house prices with San Francisco’s or New York’s, they’re not comparing like with like. Geography matters quite a lot!
So what does Auckland’s geography look like? A 2014 NZIER paper modelled the effect of geographic and regulatory barriers on the city’s house prices. The authors conclude that: “relative to even Australian cities Auckland’s twin harbours severely restrict the availability of well-located land close to the city centre.” Overall, they estimate that less than one-third of the area around Auckland is available for development – most of the rest is water:
In other words, Auckland has very severe geographic constraints. In terms of the availability of developable land, it’s similar to hilly coastal cities like San Diego. Saiz estimated that a city of around Auckland’s size with an average level of planning regulations would have a supply elasticity of 0.91. So: does Auckland perform better or worse than this in practice?
A 2010 study by Arthur Grimes and Andrew Aitken provides some relevant data. Using data at a district council level, they looked at how quickly new dwellings were built in response to “shocks” in demand such as increases in net migration. Their key conclusion was that housing supply in New Zealand’s urban areas tends to be a little bit more responsive than supply in rural areas:
If we divide regions into urban and rural, we find faster adjustment in urban areas (average γ1i = 0.0093) than in rural areas (average γ1i = 0.0064). This result is consistent with an active development industry, based principally in cities, facilitating new construction.
In other words, the authors estimate a supply elasticity of around 0.93 for NZ’s urban areas (principally Auckland). This is almost exactly what we would predict based on Auckland’s geography. The implication of this is that Auckland’s housing market functions more or less as expected given its geography – we don’t have to assume unusually restrictive planning regulations to explain the observed outcomes.
There are a couple lessons we can draw from this.
First, Auckland’s geography is a primary driver of the city’s housing supply dynamics. If we have higher house prices than we’d like, it’s partly because we have less land for housing. As I’ve written before, some analyses of Auckland’s high house prices fall prey to omitted variable bias – i.e. ignoring important causal variables and thus over-estimating the impact of specific policies. This can result in flawed policy recommendations.
Second, we shouldn’t compound constrained geography with bad policy. Because Auckland doesn’t have much developable land, there is an even stronger incentive to use land efficiently. (A fact with implications for transport policy, planning policy, tax policy, and publicly-owned land.) Land-hungry policies might not be too bad in a land-abundant place like Houston, but requiring Auckland to follow a similar pattern is economically calamitous.
As most New Zealand cities are also heavily constrained by geography, this challenge isn’t unique to Auckland. But it’s also not all bad: the interplay of mountains, volcanoes, harbours, and oceans is what makes New Zealand such a beautiful place to live. Let’s build cities that enable us to get the best out of it.
How should we think through the dynamics of housing markets?
Conceptually, there’s a very simple answer and a very complex one. The simple version is that housing is just another market, shaped by the interaction of demand – i.e. people turning up with money to buy dwellings – and supply – people building new dwellings to meet demand. Policies can affect the supply side (e.g. by making it more costly or difficult to build new dwellings), the demand side (e.g. by subsidising home ownership), or both (e.g. by imposing supply restrictions to produce local amenities like parks).
And then there’s the complex story, in which we have to think about things like:
- Interactions between owner-occupation, renting, and property investment
- The impact of mortgage lending practices and asset values on housing
- The durable nature of housing, which means that prices can overshoot in a declining market
- The geography of jobs, amenities, and housing supply – not all locations are equally desirable, which means that houses in the wrong place don’t do much good
- Government provision of housing services (e.g. state homes) and subsidies for property ownership or renting
- Industrial organisation in the building sector, including firm size and structure and supply of skilled labour
- A wide range of local and central government regulations covering building materials, performance standards for dwellings, and the bulk, form, and location of dwellings
- Etc, etc, etc.
So it’s not usually possible to fully explain housing market dynamics with a simple supply and demand story. However, it’s often useful to start with a clear understanding of that story.
So with that in mind, here’s a key concept for analysing housing market dynamics: elasticity of housing supply. In an earlier post on public transport fares, I introduced the idea of elasticity of demand, which measures how responsive people’s demand for a good or service is to higher (or lower) prices. Supply elasticities are much same idea, but on the supply side of the equation.
Elasticity of housing supply is an important concept because it provides an indication of how many new dwellings will be constructed in response to an increase in prices (or demand). For example, an elasticity of less than 1 would indicate that developers are relatively unresponsive to increased demand – i.e. if prices rise by 10%, it will cause new housing construction to increase by less than 10%.
It’s easy to see why this is an important metric. In the aggregate, a relatively “inelastic” supply will mean that the housing stock will struggle to meet demand in a growing city. But aggregate lasticities aren’t everything – if new dwellings can’t be built in areas that are proximate to jobs and amenities, bad things will still happen
Supply elasticities can be measured empirically by looking at how markets have evolved in the past. In fact, a number of people have done just that.
In their 2012 housing affordability inquiry, the Productivity Commission surveyed some of this literature (see pages 33-34 of their final report). They published this chart comparing long-run elasticity of housing supply in 21 OECD countries, including New Zealand. Remember, higher numbers indicate more responsive housing supply:
New Zealand’s elasticity was around 0.7 – on the inelastic side, but still within the top 1/3 of the countries in the study. In other words, neither terrible nor fantastic. We have historically had a more elastic supply of housing than the UK or Australia, but we’ve lagged behind several Scandinavian countries as well as Japan, Canada, and the US.
Now, elasticity of supply is influenced by a number of factors. Building industry capability and productivity plays an important role. So do geographic constraints – a topic I’ll come back to in a future post. State house construction can also play a role, by ensuring that building activity doesn’t bottom out when prices dip. And, of course, planning regulations and consenting processes play a role. But how much of a role?
Unfortunately, we don’t have any good international comparisons of planning policies. However, the World Bank’s annual Ease of Doing Business report publishes some data on the ease of obtaining building consents, which provides a rough indication of the stringency of countries’ planning processes.
Here’s the upper echelons of their 2015 rankings. As you can see, New Zealand is ranked as the second easiest place to do business. When it comes with dealing with construction permits, we’re ranked 13th – ahead of countries like the United States (46) and United Kingdom (45) but behind Hong Kong (1), Singapore (2), and, oddly, Iraq (9).
Here’s a bit more detail on how Auckland’s consenting processes stack up. We have fewer procedures, a shorter consenting timeframe, and a lower consenting cost than the average OECD country:
So what does all this data mean? I think there are a few lessons we can – and can’t – learn from it.
The first is that perhaps we don’t have as many problems as we think we do. I have to admit that I was surprised by these figures. I was expecting our elasticity of supply to be lower and our consenting processes to be ranked lower. But perhaps – as with Auckland’s congestion – our problems aren’t that bad when put in international perspective. Kiwis do tend to prefer doing things efficiently, and NZ’s not large enough to require overly cumbersome bureaucratic machinery.
The second thing is that there is room to improve. There is almost always room to improve. New Zealand’s housing supply is still inelastic, which suggests that we may have trouble accommodating growth. Although the World Bank’s data on the ease of obtaining building permits seems to suggest that regulatory processes are less onerous here than many other places, who really knows? There are likely to be gremlins in any bureaucratic process.
The third lesson is that there are multiple paths to a well-functioning housing market. The countries with the highest elasticities of housing supply don’t have a lot in common with each other when it comes to policy frameworks. The US has a different set of policies than Japan or the Scandinavian countries. And it’s also the case that some countries have affordable and livable housing even though their elasticity of supply is low – Germany or the Netherlands, for example.
This is, in a way, really good news. We don’t have to go searching for a single “silver bullet” policy framework. There are different paths we could go down to improve the functioning of our housing market.
What do you make of these comparisons?
Last month, I took a look at the costs and benefits of publicly owned golf courses (Part 1, Part 2, Part 3). A few key findings from that analysis:
- Golf courses are different from public parks, as they can only be used by a small number of paying customers
- The benefit of redeveloping golf courses to offer a mix of new neighbourhoods and public parks could be as much as nine times higher than the benefit of the status quo to golfers
- Publicly owned golf courses don’t pay their fair share of rates, meaning that the rest of us have to pay higher taxes.
A key concept running through this analysis is the idea of an “opportunity cost“. We often face mutually exclusive choices – i.e. if we choose one thing, we can’t have the other. In those situations, the “cost” of getting one thing is giving up the opportunity to have the other.
Calvin and Hobbes illustrate the concept of mutually exclusive choices quite nicely:
In the case of publicly owned golf courses, our choices are fairly simple: If we keep them open for golf, we give up the opportunity to have public parks, other sports fields, or housing on them. And if we convert them to other uses, we give up the opportunity to golf now, and the option to choose a different set of uses at some future date.
However, there are other ways to think about the opportunity cost of publicly owned golf courses. For example, what happens when a local government wants to sell down assets, e.g. to free up capital for new investments? If they refuse to consider selling the golf course, what else do they sell instead?
(This isn’t to say that asset sales are necessarily a good idea – that’s really an issue that must be assessed on a case-by-case basis. When politicians propose to sell assets, I think that it’s essential that they are specific about (a) exactly how a sale would lead to better outcomes in the affected market, (b) exactly why they need the money – no vague promises of wish-fulfilment slush funds please! – and (c) how they will avoid losing money on the sale through poor timing.)
In 2002 the former Auckland City Council decided to sell down some of its publicly-owned assets, including some of its shares in the Auckland Airport and its entire public housing stock. The proposed sale of the public housing, most of which housed elderly Aucklanders on low incomes, stirred up opposition. As a result, central government got involved, and purchased the properties through Housing New Zealand:
The Government has offered to buy Auckland City Council’s pensioner and residential property portfolio.
On Monday, 30 September 2002 Cabinet approved an agreement negotiated between Housing New Zealand Corporation and the council.
Housing New Zealand will pay a total of $83 million for the Council’s two portfolios:
1542 pensioner rental units, on 50 sites, with a book value of $101 million. 129 residential units, with a book value of $31 million.
This reflects the full market value for residential housing and a discount for pensioner housing – which takes into account the fact that these sites will always be retained for social housing and that Housing New Zealand Corporation is committed to a fast tracked redevelopment programme.
In short, Auckland City Council earned $83 million for the sale of 1671 public housing units. The deal didn’t increase the total amount of housing in the city, as it didn’t release any land for new development or more intensive redevelopment. Furthermore, although Housing New Zealand was able to keep the units available as social housing, it probably had a bit less money to build new social housing in Auckland that year.
However, as I found when I looked at the benefits of alternative options for Chamberlain Park, the Council could retain a third of the golf course as a new public park and still earn more from selling the land for housing development. Even accounting for the fact that house prices have approximately doubled since 2002, it’s not even close – the golf course is worth about 50% more than the council housing ($240m vs ~$160m).
In 2002, when Council decided to sell some assets, the “opportunity cost” of not considering selling a golf course was having to sell the council housing instead. But the same choice also applies in reverse in the present day. If Auckland Council wanted to get back into the social housing game, to alleviate the impact of the city’s current housing affordability challenges, perhaps it could fund it with the proceeds from golf course sales?
1600 council flats or a single golf course: which do you think has a greater social value?
Last week, I took a quick look at the relationship between gentrification and the preservation of historic buildings. People often argue that preserving old buildings as they are is a good way of preserving the culture and community of an area.
This does not seem to be true in practice. For example, regulating to preserve villas in Ponsonby didn’t prevent the suburb from gentrifying. It may have actually contributed to gentrification by making it more difficult to build new housing to serve increased demand for living there. In this context, every lawyer moving into the area inevitably displaced an artist, musician, or working-class family.
So there seems to be some confusion about what exactly is accomplished by historic preservation. And unfortunately, this confusion seems to get worse, not better, when people start using the language of economics to talk about the issue.
To give an example, here’s an article on the topic written by Donovan Rypkema, an internationally recognised consultant on the economics of heritage. (He gave an Auckland Conversations talk here in March 2015.) Rypkema identifies five “economic values” generated by heritage preservation.
I want to focus on the last two “values” that he identifies. On the one hand, he says, we know that old buildings are valuable because they sell for higher prices than similar, newer buildings:
The United States is a country obsessed with property rights. As a result, the area that has been studied most frequently is the effect of historic districts on property values. The most common result? Properties within historic districts appreciate at greater rates than the local market overall, and they appreciate faster than similar non-designated neighborhoods. The worst case is that historic district houses appreciate at rates equivalent to the overall local market.
In England, they’ve found that a pre-1919 house is worth on average 20% more than an equivalent house from a more recent era, and the premium becomes even greater for an earlier historic home. On the commercial side, the Royal Institute of Chartered Surveyors has tracked the rates of return for heritage office buildings for the past 21 years and found listed buildings have consistently outperformed the comparable unlisted buildings. Similar analyses in Canada demonstrated that 1) heritage buildings had performed much better than average in the market place over the last 30 years, 2) there is no evidence that designation reduces property values, and 3) the price of heritage houses was not affected by cyclical downturns in property values.
And on the other hand, he argues that old buildings are valuable because they provide cheap space for start-up businesses:
Small Business Incubation
An underappreciated contribution of historic buildings is their role as natural incubators of small businesses. In America, 85% of all net new jobs are created by firms employing less than 20 people. That ratio is similar in Europe and even greater in the developing world. One of the few costs firms of that size can control is rent. A major contribution to the local economy is the relative affordability of older buildings. It is no accident that the creative, imaginative, start up firm is not located in the office park or the shopping center–they cannot afford the rents there. Historic buildings become natural incubators, usually with no subsidy of any kind.
Pioneer Square in Seattle is one of the great historic commercial neighborhoods in America. The business association asked firms why they chose that neighborhood. The most common answer: it was an historic district. The second most common answer: the lower cost of occupancy.
Now, I hope you see the problem with Rypkema’s argument. Old buildings cannot simultaneously be both cheap and expensive, like some kind of Schrödinger’s historic preservation district. Either the buildings are commanding high prices – and thus attracting well-heeled tenants – or they aren’t.
Due to its internal inconsistency, Rypkema’s argument would seem to imply that there is always a case to preserve any old building. (Or any new building, for that matter.) If the building is expensive: Preserve it, it’s valuable to its owners! If the building is cheap: Preserve it, it’s valuable to its occupants!
But I don’t think that makes sense. As I wrote last week, we should be more interested in the social and economic processes going on within buildings, rather than the buildings themselves. There is an link between buildings and social processes, but it’s not very direct. That’s because an individual building can serve multiple functions over its life-span. An office building that starts life as an A-grade location for a commercial law firm may turn into a B- or C-grade tenancy for small professional service firms or tech start-ups. This can also happen in reverse: a run-down old building can be refurbished to attract A-grade tenants again.
Does this imply that there is no rationale for preserving historic buildings? No – there often is a good argument for historic preservation. Many (but not all) old buildings are attractive and aesthetically pleasing. Their presence in a neighbourhood or a downtown area can have positive “spillovers” to neighbours and passers-by.
If those spillovers are large, which may be true in the case of especially notable buildings or even specific areas with a number of attractive buildings all from a single era, it can be worth regulating to preserve the buildings. But that is a case for heritage preservation that can and should be expressed directly – it’s about the aesthetics of the building and the characteristics of the place! – rather than indirectly, as Rypkema does when talking about job creation and property values and yadda yadda.
What do you think about the economics of heritage preservation?
Auckland is currently growing more rapidly than the rest of New Zealand – as it has been doing for most of the last century. At the same time, other New Zealand regions are struggling with aging populations and drifting economies.
Source: Grimes and Tarrant (2013)
Understandably, some people look at these trends and conclude that Auckland’s a bit of a problem. If the city’s prospering while small towns decline, isn’t it because the government is spending too much money trying to pump growth into Auckland and too little elsewhere?
In short, is Auckland costing New Zealand too much?
The answer, in a word, is no. If anything, the government’s spending a little bit less in Auckland than it spends elsewhere. But don’t just take my word for that – let’s take a look at the data on where central government is spending money.
A few years back, NZIER did a useful analysis of where the government spent money and provided services. The following tables summarises their key findings. Overall, they find that Auckland gets only 31-32% of overall government expenditure – slightly less than its share of the population.
For all the visual thinkers out there, here’s a chart of government spending per person in New Zealand’s five most populous regions. Aucklanders get less spending per capita than the other large regions. This reflects the city’s young demographics – more workers, fewer pensioners – as well as the economies of scale enabled by larger, denser places.
But regardless of those advantages, the picture is clear: Aucklanders get a bit less government spending per person than residents of other regions – not more.
But, you say, what about all these costly transport investments we keep hearing about? Isn’t NZTA putting up megabucks to dig the Waterview tunnels and widen motorways and occasionally build the odd kilometre of busway? Isn’t Auckland Transport looking for money for CRL and light rail?
In other words, maybe we’re putting all our capital investment eggs in the Auckland basket?
NZIER’s report also seems to puncture that myth. They found that Auckland received around 35% of central government’s overall capital expenditures – only a wee bit more than the city’s share of the population. So it’s not like the government’s investing wildly in Auckland and leaving no money for other regions.
That being said, data on transport expenditures alone paints a slightly different picture. When I looked at NZTA’s regional expenditure analysis, I found that Auckland received almost half of the agency’s spending on new and improved roads over the last decade. (Unfortunately, consistent data isn’t available on PT infrastructure expenditure, as a lot of that is funded out of general tax funds or local government rates.)
However, this level of spending isn’t fundamentally out of line with Auckland’s growth. The following table looks at spending and population growth outcomes for New Zealand’s five most populous regions. It compares the share of NZTA’s spending on new and improved roads over the 2004-2013 period with each region’s share of national population growth between the 2006 and 2013 Censuses and their share of projected population growth to 2043.
||Share of NZTA spending on new and improved roads, 2005-2014
||Share of population growth 2006-2013
||Share of projected population growth 2013-2043
|Bay of Plenty
A couple of things jump out at me from this table:
- Although Auckland has received a large share of new road spending over the last decade, this may just be enough to keep up with current and projected population growth.
- NZTA spending on new roads in Canterbury over this period hasn’t been wildly disproportionate relative to its population growth over the same period – although spending figures will have been bumped up by the Canterbury earthquake rebuild. However, Canterbury’s growth projections imply that there may be a case to spend more in the region.
- On the flip side, Wellington, Waikato, and the Bay of Plenty all received a higher share of spending on new roads than their growth projections imply. Wellington, for example, has received 10% of national spending on new roads over the past decade, even though it’s only projected to accommodate 5% of national population growth over the next three decades. (Transmission Gully will boost the spending figure higher.)
Finally, spending on new roads only accounts for around 1/2 of NZTA’s overall budget. The remainder, which is spent on stuff like road maintenance and PT operations, tends to be distributed on a more or less proportionate basis.
So that’s it in a nutshell. Auckland’s hardly the rapacious parasite that some people make it out to be – it’s not sucking small towns dry of their tax dollars. If anything, it’s the opposite: taxes paid in Auckland fund pensions for small town residents. And while Auckland has been getting a higher share of spending on new roads, that’s not unreasonable given the current and projected rate of population growth in the city.
What do you think about regional government spending?
Transport evaluation, and urban policy in general, invariably requires us to make trade-offs between the present and the future. When we invest in the built environment – roads, rails, buildings, etc – we are expending today’s resources on projects that will primarily benefit people in the future. Conversely, decisions we make about resource use today – e.g. how much greenhouse gas to emit – will impose increasing costs on future generations.
Individuals also make decisions that involve trade-offs between the present and the future. For example, most home-buyers take out a mortgage, which allows them to spread the payments over a long period of time in exchange for paying a bit more in interest charges. For the borrower and for the bank, the interest rate paid on the debt reflects the trade-off between repaying the debt today or repaying next year.
Of course, there are also other ways that individuals make trade-offs between the present and the future. They may, for example, spend money on their children’s education, even though the “returns” from doing so are long-term and indirect. Or they may vote for policies that cost them money now but return long-term benefits, such as environmental protection or pre-funding of superannuation.
The trade-offs that governments make between present and future are codified as discount rates, which describe how much of a “discount” we place on future outcomes relative to present outcomes. For example, a discount rate of 10% means that the government would value a benefit of $100 in a year’s time as being equal to a benefit of $90 today.
Transportblog’s previously taken a look at the discount rate issue here, here, and here. But others are also engaged with the issue. Back in August, University of Michigan economics professor Miles Kimball, who had been visiting the Treasury, strongly criticised its approach to discount rates. The key point in his critique is that the Treasury’s discount rates don’t accurately reflect the financial market returns currently available to the government:
There is an extremely strong argument against using an 8% real discount rate in evaluating government projects. I think the argument below can be sharpened to become institutionally relevant.
Basically, an 8% real discount rate makes no sense to use unless the New Zealand government is actually getting an 8% real return on funds that it saves. It is not enough for someone to claim that the New Zealand government theoretically could get an 8% real return on funds it saves when that is not true or is only theoretical because the New Zealand government would never actually do that with funds saved by not doing a project.
Just to be clear, my view is that (a) all projects that are better than putting the money in the Superfund should be done, and (b) if someone claims that a project is worse than putting money in the Superfund, then money should be put in the Superfund instead, and (c) if a project looks better than paying off some of the debt by buying bonds–or, almost equivalently, good enough that borrowing at the bond rate to do it looks like a positive present value–it should also be undertaken UNLESS the government is willing to issue additional bonds to put more money in the Superfund invested in risky assets.
I’ve skimmed over a lot of the substance of Kimball’s argument, which I encourage you to read. (Warning: it’s wonky.) After Kimball’s blog post, former RBNZ economist Michael Reddell wrote a blog post defending the Treasury’s policy. Reddell’s counter-argument is that financial returns to government is the wrong measure of the time value of money:
I was struck reading Kimball’s material that the cost of the government’s equity did not get a mention. There was a strong tendency to treat the government as an autonomous agent (like a household) managing its own wealth, whose low borrowing costs depends only on the innate qualities of the government and its decision-makers. But that is simply wrong. A government’s financial strength – and ability to borrow at or near a conceptual “risk-free” interest rate – rests on the ability and willingness of the government to raise taxes (or cut spending) as required to meet the debt commitments. That ability to tax is implicit equity, and it has a cost (an opportunity cost) that is considerably higher, in most cases, than 2.5 per cent real. So long as the government will raise taxes as required, the bondholder bears none of the downside if a project goes wrong. But shareholders – citizens – do. Bearing that risk has a cost, and that cost needs to be taken into account by government decision-makers.
There is a related argument sometimes heard that governments should do infrastructure projects rather than private firms simply because the government’s borrowing costs are typically lower than those of a private firm. But, again, that rests on the power to tax, and the ability to force citizens/residents to pay additional taxes has a cost from their perspective (even if the government never chooses to exercise the option). As citizens, the possibility that the government will raise taxes (or cut other spending programmes – eg NZS) impinges on our own ability and willingness to take risks, and hence to consume or invest in other areas. That often won’t be a small cost. The opportunity cost of the government not undertaking a project is not what, say. the NZSF might be able to earn on the funds, but what citizens themselves might prefer to do if that risk-bearing capacity was freed up.
Again, I’ve skimmed over Reddell’s argument, so I’d encourage you to read it in full if you’re interested. He throws in a brief jab at road projects with low BCRs:
We have too little disciplined analysis of the costs and benefits of most government projects, and too little willingness to allow decisions to be guided by the results of the analysis when it is undertaken (did I hear the words “Transmission Gully”?).
I can see some truth in both sides of the debate. Kimball’s got a good point, which is that current government borrowing costs (and financial market returns in general) are at historic lows, which should lead to lower government discount rates. But Reddell’s also correct that it’s appropriate to set discount rates based on wider social decisions about consumption and investment.
One issue that neither of the two grappled with in detail was the question of how risky government investments actually are. Kimball touched on that briefly, arguing – essentially – that the benefits of projects will inevitably rise in the future due to people’s greater willingness to pay for public goods in the future:
A good method of risk adjustment for projects is to think seriously of the real dollar value they will have dependent on the level of real consumption in the economy. One virtue of thinking about the adjustment this way is also that it provides a reminder that the dollar value of the flow of benefits from many projects will tend to increase in the future simply because trend increases in per capita income will raise the willingness to pay for those benefits.
Frankly, I don’t think this is correct. Changes in technology, changes in prices, and changes in preferences mean that infrastructure that’s useful today can easily become a stranded asset tomorrow. Look at Los Angeles: in the 1950s it was rushing to rip up its rail lines, and now it’s rushing to build a new rapid transit network. Or look at San Francisco: several of the elevated expressways it built in the 1960s have been torn down.
In short, things change. Sometimes they change quite radically. When the Ministry of Transport looked at future transport demand last year, they found that they couldn’t settle on a single forecast for future transport demand. Instead, they arrived at four scenarios, three of which entailed a decline in vehicle travel:
In other words, there can be considerable uncertainty in returns from transport investments. While it might not necessarily be appropriate to try to account for this in discount rates, it’s surely an important consideration for project evaluation more generally.
What do you think about discount rates?
Over the last couple weeks, I’ve been taking a look at the economics of publicly owned golf courses. Unfortunately, I still haven’t managed to work in a reference to one of my favourite Big Lebowski quotes, so I’ll just have to drop it in here without preamble. In the words of the Dude: “Obviously, you’re not a golfer.”
Last week, I took a quick look at the costs and benefits of publicly owned golf courses, arguing that we would be considerably better off if we freed up the land for public parks and new neighbourhoods. After looking at the potential value of the land for housing or business use, which far exceeds the value for golfers, I asked: “Why isn’t the opportunity cost of using lots of land for golf being recognised the prices charged by golf courses?”
To start answering this question, we have to look at how golf course land is valued for rates and other purposes. As I argued when looking at the economics of applying rates to all government-owned land, rates can serve as a “market signal” that encourages productive use of land. Owners of valuable land can expect to pay higher rates, and hence know that they need to get enough revenue from the land to cover them. Conversely, distortions in the rating system can encourage wasteful and unproductive uses of a scarce resource.
So with this in mind, I used Auckland Council’s GIS Viewer to compare the rates being charged on Chamberlain Park and surrounding properties. As the following screencapture shows, there are two overlapping rating units on Chamberlain Park, one for the course and one for the clubrooms:
The following table summarises data on the two rates assessments. In total, the golf course pays about $97,000 in rates. At first glance, this seems like a lot, but it’s actually pretty paltry considering the spatial expanse (expense?) of the golf course.
|2014 Land Value
|2014 Improvement Value
|2014 Capital Value (LV+IV)
|2015/16 total rates
|Average land value ($/m2)
The land under the golf course is valued at $21.1 million – or around $65 per square metre. This is a comically low valuation. It’s probably been decades since land in Mount Albert was actually that cheap. (I wish it was possible to find buy land that cheaply on the isthmus. I’d buy acres!)
For a comparison, I’ve also looked at the land valuations for five randomly selected residential properties in the immediate vicinity of the golf course. That data, summarised in the table below, indicates that residential land in the area is valued at around $1,100 per square metre – or 16 times higher than Chamberlain Park’s valuation. (As property prices have risen since valuations were conducted, this is likely to understate current prices.)
|Land area (m2)
|2014 Land Value
|Average land value ($/m2)
Here’s a chart showing the comparison:
The practical consequence of this is that Chamberlain Park only pays a fraction of the rates that it should pay. If the land were valued fairly, the golf course would have to pay around 16 times as much in rates – around $1.6 million. As the golf course only pays $97,000 in rates at present, this amounts to a massive public subsidy.
In fact, the rates subsidy granted to Chamberlain Park is roughly equivalent to the annual value of greens fees, which I estimated at around $1.65 million. (Most greens fees go towards the cost of running the golf course.) People golfing at Chamberlain Park are only paying a fraction of the cost of providing the course, leaving other rate-payers to cover the foregone rates income from the land.
As the average residential rates bill was around $2636 in 2014, and around $214 higher in 2015, this means that roughly 530 Auckland households must pay rates to cover the subsidy for Chamberlain Park (i.e. $1.5m foregone rates from Chamberlain Park / $2850 rates per household = ~530 households).
In short, quite a lot of people are being taxed to pay for this golf course-shaped hole in our ratings system. And because the ratings system under-values the land under Chamberlain Park, the golf course is operating without any clear market signals that it needs to use that land differently.
Now, as I discussed in part 1 of this series, there are legitimate reasons for Council to provide public parks, even if it means foregoing some dwellings or some rates income, as they are open to all visitors and thus provide broader social benefits. So I don’t think that this argument applies to (say) Albert Park or Maungakiekie.
But golf courses are very different, as they can only be used by a small number of people at a time. Golf courses are businesses serving paying customers, just like supermarkets and hairdressers and hotels, and they should be expected to pay their own way. We wouldn’t arbitrarily slash rates sixteenfold for the Mount Albert Pak-N-Save, so why do we do that for the golf course just up the road?
Last week, I took a look at some new research from the Netherlands that estimated the benefits of public transport for car travel times based on data from 13 “natural experiments” – public transport strikes. The Dutch researchers found that PT provided significant congestion reduction benefits – around €95 million per annum, equal to 47% of PT fare subsidies.
While the data was specific to Rotterdam, I’d expect to find similar results in most other cities with half-decent public transport networks. The whole thing got me wondering: Is there any similar evidence from New Zealand?
Fortunately for PT users and drivers, but unfortunately for researchers, potential PT strikes have mostly been averted over the last few years. However, Wellington did experience a “natural experiment” of sorts back in June 2013, when a major storm washed out the Hutt Valley railway line:
The Hutt Valley rail line was out for six days, including four working days. During that period, things got pretty ugly on the roads, as the motorway into downtown Wellington didn’t have enough capacity to accommodate people who ordinarily commuted in by train.
The Ministry of Transport (among others) very cleverly observed that this was a great opportunity to learn something about the impact of PT networks on road congestion. During the rail outage, they surveyed around 1,000 Wellington commuters about their travel experiences. According to their report, they found that:
- The closure of the Hutt Valley rail line put significant pressure on the road network. Delays for commuters were most severe on the Monday following the storm. Traffic on State Highway 2 was severely congested, with morning peak hour conditions lasting two hours longer than usual
- 80 percent of Wellington commuters from the Hutt Valley and Wairarapa experienced a longer than usual trip
- 32 percent of them experienced delays of over an hour
- the severity of commuter delays lessened over the week, with the number of commuters from the Hutt Valley and Wairarapa experiencing delays of over an hour halving by Wednesday 26 June
Essentially, what happened was that a bunch of people who ordinarily caught the train from the Hutt Valley couldn’t do that due to the storm damage. A quick eyeballing of MoT’s graph of daily rail patronage suggests that around 4,000 people had to make other travel arrangements:
Almost half of the rail commuters from the Hutt Valley opted to drive instead, while the remainder chose to take replacement buses or to stay at home instead. This had a serious impact on motorway traffic, as shown on this graph of hourly southbound traffic volumes. On a normal day (the green or blue lines), traffic volumes peak at around 7-8am, and fall off sharply after that.
By contrast, on Monday 24 June, when the rail line was out, people were still travelling in (slowly) until almost 11am. That’s some serious congestion:
Based on survey data, MoT estimated that the storm damage increased average travel times during the morning peak by 0.329 hours (20 minutes) on Friday 21 June, 0.309 hours (18.5 minutes) on Monday 24 June, and 0.230 hours (14 minutes) on Wednesday 26 June. It then used those estimates of average delay for people travelling at peak time to estimate the added cost of congestion that arose as a result of the Hutt Valley rail line outage:
In short, a four-day breakdown in part of Wellington’s public transport network cost morning peak travellers around $2.66 million in lost time. If we assume that there was a similar level of delay during the afternoon peak, when people are commuting out of downtown Wellington, the total cost would be roughly double that – $5.32 million.
This can give us a rough estimate of the value of public transport for congestion relief in Wellington. Extrapolated out over a full year (i.e. 250 working days), these results suggest that the Hutt Valley rail line saves drivers the equivalent of around $330 million in travel time (i.e. $5.32m / 4 days * 250 working days).
That is a very large number. According to an Auckland Transport report comparing Auckland and Wellington rail performance, Wellington’s overall rail network only cost $81.2 million to operate in 2013. 56% of operating costs were covered by fares, meaning that the total public subsidy for the network is around $36 million per annum.
On the back of these figures, it looks like Wellington’s drivers are getting a fantastic return from using some fuel taxes to pay for PT rather than more roads. The travel time savings associated with the Hutt Valley line alone are nine times as large as the operating subsidy for the entire Wellington rail network.
There are two caveats worth applying to these figures, one practical and one methodological.
First, it’s likely that the value of rail for congestion relief is unusually high in Wellington due to the shape of the city. Here’s a map of Wellington’s population density and infrastructure in 2001 and 2013 (from my analysis of urban population density). Dormitory suburbs extend linearly up the Hutt Valley and towards Porirua and the Kapiti Coast. Everyone travelling from those places to downtown Wellington are funnelled through a single transport corridor running along the shoreline of the harbour:
In Wellington, losing the rail line means pushing everyone onto a single road. (Unlike Rotterdam, cycling isn’t especially viable due to the lack of safe infrastructure on this route.) In other cities, there tend to be a greater range of alternative routes, which spreads around the traffic impacts.
Second, these results aren’t as robust as the Rotterdam study, due to their use of survey data rather than quantitative measures of traffic flow and speed. They’re not likely to be totally wrong, but it’s likely that people over- or under-estimated commute times, or that the survey wasn’t representative of all travellers (which could invalidate MoT’s extrapolation to all morning peak travellers).
However, the increasing availability of real-time data on traffic speeds from GPS devices means that the next time this happens, it will be possible to measure the impacts in much greater detail and with greater precision. The Rotterdam study offers some good methodological insight into how best to do that – it looks at transport outcomes at specific locations over a long period of time, and controls for seasonal and weekday effects that may influence transport outcomes.
Lastly, it would be really interesting to see some similar analysis done for Auckland. I’m sure that there have been a number of full or partial rail network outages, either due to bad weather or scheduled track upgrades. Perhaps it would be worth taking a look at congestion on those days.
Last week I started taking a look at publicly-owned golf courses. I argued that they are different from public parks in several important respects. While public parks are freely available to all Aucklanders, golf courses are only open to paying golfers. As a result, we need to treat golf courses differently – not as a tax-funded public good, but as a business that must pay its way.
This week, I will take a look at some of the “opportunity costs” associated with using land for golf courses rather than alternative uses, such as public parks or housing. My central question is this: Do the benefits of using land for golf outweigh the benefits of developing the land for housing? Or is it the other way around?
Let’s start with a look at some broad trends. First, here’s what’s happened to the price of housing over the last two decades: it’s gone up significantly. This is a strong indication that demand for housing (and more intensive urban land uses) is increasing. While predicting the future is difficult, most people expect housing demand (and prices) to continue rising in the future.
Second, here’s a short-term forecast of revenues for Auckland’s 39 golf clubs from a 2013 report on future prospects for golf facilities. According to the report, golf club membership has been declining by around 1.6% a year. Unless something major changes, this trend will continue and put many golf courses under financial pressure:
Effectively, rising demand for housing and falling demand for golf mean that using large amounts of publicly-owned land for golf courses will become increasingly inefficient. Here’s one way of thinking about the benefits of the status quo (to golfers) versus the benefits of redevelopment (to people who otherwise wouldn’t be able to buy or rent homes in the area).
I’m going use Chamberlain Park as a case study, but the same approach could be generalised to other publicly-owned golf courses. Here’s a picture of the course, which occupies 32 hectares in Mount Albert:
According to the local board, Chamberlain Park currently hosts over 50,000 rounds of golf a year. Let’s be generous and call it 55,000 rounds. According to the club’s website, green fees are $30 on weekends. This means that the total annual value of golf rounds played at Chamberlain Park is $1.65 million. In present value terms (i.e. extending this forward 40 years into the future and applying a 6% discount rate), this equates to $26.2 million.
Now, let’s consider alternative uses for the land. Let’s assume that we would develop it for housing and commercial uses, with a substantial amount of land reserved for public parks. We don’t have to look too far to find a good example of this kind of development. It’s exactly what’s happening at Wynyard Quarter, which will have a mix of medium-density residential and commercial buildings, a substantial waterfront park, and a linear park running the length of Daldy St:
The important thing is that if development is master-planned appropriately, it can lead to more housing and better public spaces. That’s certainly happening at Wynyard, but it could also happen in Chamberlain Park if redevelopment enabled better connections between new public parks, the Northwestern cycleway, Western Springs, and Mount Albert in general.
So let’s start by assuming that we would reserve one third of Chamberlain Park – 10 hectares – for new parks and playing fields. That’s the same size as Grey Lynn Park, which attracts 100,000 people to the Grey Lynn Festival on a single Sunday – i.e. twice as many people as Chamberlain Park sees in a year.
The remainder – around 22 hectares – could be developed as new neighbourhoods, possibly along the mid-rise, mixed-use lines of Wynyard Quarter. I’m going to assume, further, that around 25% of that space would be devoted to streets, which is pretty typical of new developments. That means that after providing some sizeable public parks and laying out all the streets, we’d have around 16 hectares that could be built on.
Now, current land values in the Mount Albert area are in the range of $1500 per square metre, or possibly higher. That’s a reasonable estimate of the value that people place on the opportunity to live in the area. That means that the total benefit of redeveloping Chamberlain Park for housing is around $240 million (i.e. $1500/m2*16 ha*10,000m2/ha). These benefits would accrue primarily to the people who end up living in the area, but it could also keep housing prices from rising as rapidly and thus have wider benefits.
In short, the benefits of redeveloping Chamberlain Park – even after leaving aside a substantial area for public parks – are nine times larger than the benefits of the status quo for golfers (i.e. $240m/$26.2m = 9.2). Because demand for housing is rising at the same time that demand for golfing is falling, this figure is likely to increase, not fall.
This doesn’t necessarily mean that we have to redevelop Auckland’s publicly-owned golf courses, but it does raise some questions. First, given the fact that redevelopment is likely to be vastly more beneficial than the status quo, why isn’t it being put forward as an option in the Chamberlain Park consultation?
Second, why isn’t the opportunity cost of using lots of land for golf being recognised the prices charged by golf courses? As we’ve seen, people would place a quite high value on being able to live or work on the land occupied by some golf courses. In principle, that should be factored in to green fees, but in practice it isn’t. In the next instalment, I’ll explore this question further – it turns out that publicly-owned golf courses enjoy a large subsidy from ratepayers.
What do you think about the benefits of alternative options for using golf course land?