Are Aucklanders paying too much in rates?

Aucklanders (and, I suspect, people in general) complain about high and rising property taxes. But are our rates actually too high? Compared to what?

An article last year reported on what ratepayers are paying in each of New Zealand’s territorial authorities:

Not surprisingly, rates in the most sought-after areas are also high. Those living in Auckland, where the average household income is around $76,000, face annual bills of $2636. The average house price in Auckland was $678,533 in February.

But residents in Christchurch face comparatively low bills. At $1706 a year, they make the top 10 for cheapest rate bills.

In other words:

  • In 2014, the average Auckland ratepayer paid rates equal to 0.39% of their property’s value ($2636/$678,553). This year, of course, that figure will be lower as property values have increased much, much, much faster than rates bills.
  • In Christchurch, the average ratepayer paid rates equal to 0.37% of their property’s value ($1706 divided by the average home price of $462,086).

The article didn’t bother comparing New Zealand’s rates bills with property taxes in other countries, so I went out and gathered some data on property taxes in the US and Canada, two countries that are frequently cited as examples for New Zealand to follow. (Albeit sometimes for very different reasons.)

Before getting into the figures, I should say that this isn’t a perfect comparison, because:

  • There are more layers of government in Canada and the US, due to their federal systems
  • Local governments in Canada and the US have more fiscal responsibilities – schools are funded by local governments in the US and provincial governments in Canada, for example
  • But they also have more options for levying taxes – in the US, local governments can impose income taxes, sales taxes, and business taxes. In Canada, provincial governments can do the same.

Overall, the Canadian data is likely to be much more comparable than the US data, as municipal governments’ responsibilities and tax powers are more similar. With that in mind, here’s how Auckland stacks up to the major Canadian cities. The data is from a 2014 Globe and Mail article:

Canada residential property taxes chart

Basically, Auckland (and Christchurch) has quite low property taxes relative to most Canadian cities. The only city that pays a lower property tax rate is Vancouver. (More on that below.)

And here’s how Auckland’s residential property tax rates stack up to the five most-taxed and least-taxed American states. The data is from tax-rates.org:

US states residential property taxes chart

In keeping with American states’ reputations as “laboratories of democracy”, different states seem to be testing out very different property tax policies. If Auckland and Christchurch were in the US, they would be among the most lightly-taxed places in the country. Certainly much less so than that bastion of high property taxes, Texas.

Wait a minute, Texas?

Here’s what tax-rates.org had to say about Harris County, which contains Houston:

Harris County has one of the highest median property taxes in the United States, and is ranked 152nd of the 3143 counties in order of median property taxes.

The average yearly property tax paid by Harris County residents amounts to about 4.26% of their yearly income.

Here’s a chart comparing property tax rates between a selection of major US cities. Houston is head and shoulders above the rest, in terms of property taxes. And, nonwithstanding the disclaimers, Auckland seems to be relatively lightly taxed:

US cities residential property taxes chart

Perhaps the lesson is that if we want to be more like Houston, which some people cite as an example for Auckland to follow, we should start by raising property taxes. The median Houston homeowner pays US$3,040 in property tax. That’s roughly equivalent to NZ$4,100, or 50% more than Aucklanders pay.

Houston needs the cash to pay for all those roads, of course. But its relatively high property taxes are also likely to be one of the hidden causes of Houston’s relatively affordable housing. This is because high property taxes tend to discourage people from bidding up house prices – the more they pay for houses, the more they pay in taxes!

On the other side of the coin, literally, Vancouver offers much lower property taxes. Another analysis of Canadian property tax data shows that the average Vancouver homeowner pays CA$2,322 in property taxes. That’s roughly equivalent to NZ$2,500 – or slightly less than Auckland rates. It seems like Vancouver’s compact, transit-oriented urban form is quite cheap for local taxpayers.

And finally, there’s no evidence that rates are especially high in Auckland or other New Zealand cities. If anything, it’s the opposite – property is taxed unusually lightly in New Zealand.

What do you make of this data?

Is public transport an “inferior good”?

I’ve recently been taking a look at Statistics NZ’s Census data on car ownership in Auckland. One interesting observation is that low-income households are considerably more likely to not own a car. One implication is that minimum parking requirements, which require everyone to have carparks (or pay for their provision every time they go to the shops), are a quite regressive policy. (More on this in a future post!) And, of course, providing frequent, reliable public transport services and safe walking and cycling options throughout the city will benefit low-income households the most. (In other words, separated bike lanes are not just about hipster urbanism!)

Another interpretation of the data on car ownership is that it shows that a car is what economists call a “normal good“. In plain English, this means that when people’s incomes increase, they tend to have more of them. This seems to be true in Auckland: high-income households are less likely to own no cars and more likely to own three or more cars.

However, people commonly assume (or assert) that public transport is an “inferior good“, or something that people consume less of as their incomes increase. This assumption is deeply embedded in transport policymaking and transport modelling. It’s part of the reason that policymakers have been so eager to disinvest and underfund our public transport networks over the past half-century: “In the future, we’ll all be richer and drive more.”

But is this actually true? Let’s take a look at the data.

First, I took a look at the Household Economic Survey data, which Statistics NZ has very helpfully broken down by decile of household income. Here’s a chart showing the percent of household spending that goes to transport (including cars, petrol, public transport, etc) and passenger transport alone:

HES transport spending by decile 2013 chart

In short, higher-income households do seem to spend more money on passenger transport, both in absolute term (i.e. dollars per week) and as a share of their incomes. This may suggest that public transport isn’t an inferior good. Unfortunately, though, it’s not possible to draw any definitive conclusions from this data for two reasons. First, the Stats NZ data doesn’t allow us to split out urban areas (where average incomes tend to be higher and PT is available) from rural areas (which tend to be poorer and lacking in PT). Second, Stats NZ has grouped air travel into the passenger transport category… which means we might just be picking up the fact that richer people fly more.

So let’s take a look at a second set of data: 2013 Census data on household incomes and main commute mode. To avoid issues with comparing between rural and urban areas, I focused on data for Auckland alone. The following scatter-plot shows the correlation between PT mode share for commute journeys and median personal income for Auckland area units. (I’ve excluded area units with population densities less than 1 person per hectare, as they’re likely to be rural areas where PT isn’t available.)

Census 2013 personal incomes and PT mode share chart

There isn’t much of a pattern in this data. There are some higher-income areas with high PT mode share, and some with low PT mode share. But the trendline does seem to be moderately positive. In other words, the Census data doesn’t seem to indicate that PT is an inferior good – people in higher-income areas are slightly more likely to use PT.

Finally, it’s worth taking a look at changes over time. In other words: Are Aucklanders using PT more or less as average incomes increase? In order to examine this question, I looked at Statistics NZ’s data on household incomes by region as well as the public transport boardings data that Matt has diligently compiled. The Stats NZ data only reaches back to 1998, so we’re limited to looking at recent changes.

Matt’s data on patronage shows that total PT boardings in Auckland rose from 37.6 million in 1998 to 72.4 million in 2014 – significantly outpacing population growth. Incomes also rose over the same period. Here’s a chart comparing changes in (nominal) median household incomes with changes in PT boardings per capita for the Auckland region:

Auckland median household incomes and PT boardings chart

In recent years, Aucklanders haven’t reduced their use of public transport as incomes increased. In fact, we’ve seen the exact opposite – PT trips per capita have risen in line with median incomes. (Or even slightly faster, as I didn’t account for the effect of inflation on incomes.)

Is this conclusive evidence that PT is a “normal good” that people will demand more of when they get richer? Probably not – I don’t have the time, budget, or micro-data to analyse the behaviour of individual transport users. But it provides no empirical support whatsoever for the assumption that PT is an “inferior good” that people will want less of in the future.

In short, we should probably stop simply assuming that PT use will wither away with rising incomes. That might be true, but it’s not obviously apparent in the data. A better course of action would be to start planning to provide public transport that will be useful to people of all incomes.

In defense of population growth

Growth: what is it good for?

Accommodating a growing population can certainly be challenging. It means having to find more money to invest in transport and water infrastructure to enable new residents to live and travel in the city. As Auckland Council’s recent consultation on the Long Term Plan shows, asking people to pay more is never a very popular proposition – even if they like how the money’s being spent.

And, as Stu pointed out in his post on Auckland house prices this Monday, population growth can also put pressure on housing markets. Multiple research papers from the Reserve Bank have shown that increases in net migration tend to be followed by increases in house prices – shown in this chart. Obviously, homeowners do quite well out of this, but others face added costs:

RBNZ net migration and house prices chart

In short, it’s not surprising that some people feel trepidatious about population growth and migration. And it’s not surprising that those anxieties are especially present in Auckland, which is projected to continue growing rapidly over the next three decades.

While unease about population growth is understandable, I’d argue that it’s misplaced. In my view, the benefits of urban population growth in New Zealand far outweigh the costs. While large urban areas can become dysfunctional – think of Beijing’s astonishing smog problems or the high cost of infrastructure in sprawling American cities – New Zealand’s cities are nowhere near large enough for the diseconomies of scale to triumph over the economies of scale.

This is easy to see if we look at the periods when Auckland hasn’t been attracting migrants. Here’s a chart from a presentation on Auckland’s demographics by Auckland Council social researcher Alison Reid. It displays the composition of Auckland’s population growth since 1922. In recent decades, natural population increase – i.e. people having babies – has been the biggest source of growth. Net migration is important, but it can be quite volatile – surging up and then crashing back.

Auckland components of population growth 1922-2012

What stood out to me from this chart was that the years with little or no net migration to Auckland have not been good times for the city. Net migration slowed to a trickle during the Great Depression, and turned negative during the constrained years during and after World War Two. More recently, quite a few people fled Auckland during the economically calamitous Muldoon years. Net migration remained low during the painful adjustments imposed by the following two governments.

I wasn’t living in Auckland during the 1990s – my parents had joined the queues leaving via Auckland airport – but friends who were say that the city was turning into a ghost-town. History shows that shutting off the migration tap has never led to a better, more vibrant city or more opportunity for residents. It’s simply been a sign of failure.

My hypothesis is that New Zealand has a strong feedback loop between net migration and economic growth. When growth prospects get worse – as they did in the 1970 and 1980s – it dissuades people from coming here and encourages Kiwis to leave for greener pastures. This in turn worsens growth prospects by sucking consumer demand out of the economy and reducing perceived household wealth (i.e. lowering house prices).

By contrast, good growth prospects tend to attract migrants to New Zealand’s cities and encourage potential emigrants to stay. This in turn leads to a virtuous cycle between higher growth and increased migration.

We can’t fully control this process, as it depends in part on what’s happening in Australia and the rest of the world (not to mention macroeconomic variables that we don’t fully understand). But we can make sure that our cities are in a good position to take advantage of population growth.

The first, and most important thing we can do is to build better cities that are able to attract and efficiently accommodate more people. In Auckland, for example, we’ve got some challenges, including transport investment that’s been heavily skewed towards cars (and only cars) and rising house prices. But the flip-side of those is that we’ve got great opportunities to:

  • Improve transport choice by investing in Auckland’s “missing modes” – a frequent bus network throughout the city, rapid transit infrastructure, and safe walking and cycling infrastructure
  • Improve housing choice by providing opportunities for people to develop higher-density residential typologies in market-attractive areas
  • Invest in great public spaces, such as Auckland’s waterfront and increasing numbers of shared spaces.

Second, as we attract more people to our cities, we need to accommodate them in an efficient and environmentally responsible way. This means enabling people to live in areas that are accessible to jobs, shops, and other amenities. As I found when I looked at carbon emissions from commutes in New Zealand cities, people in inner-city areas are considerably more environmentally friendly than their co-workers from the urban fringe.

Annual CO2 emissions per commuter DRAFT v1

Moreover, the data shows that increasing density can be a positive-sum game for existing communities as well as for the environment. At the city level, we can’t observe any relationship between rising population densities and congestion – fears of traffic-choked streets just don’t seem to have materialised in practice. (So much for diseconomies of scale!)

On the other side of the ledger, suburbs with higher population densities have better consumption choices. Many of the services that people rely upon – from vege shops to Japanese restaurants to public transport to roads – exhibit strong economies of scale, which means that they get better when there are more people around.

Which suggests that there is also a third important thing that we need to do, which is to tell good stories about the opportunities that urban growth will offer us. New Zealand’s used to thinking of itself as a rural economy with some cities sprinkled around as afterthoughts. That’s a dated and inaccurate self-image when over half the economy is located in our three largest cities.

So, what’s your perspective on urban growth?

Demographia and omitted variable bias

My last two posts about Demographia’s analysis of house prices prompted quite a bit of discussion. I thought that it may be worth expanding on my points and clarifying why they mean that we should take Demographia’s conclusions with a large grain of salt.

Economists (and statisticians) have a term for what Demographia has done: “omitted variable bias”. This can occur when there are multiple variables that have a causal impact on an outcome. If we attempt to understand that outcome without considering all explanatory variables, we run the risk of biasing our conclusions.

Economists are trained to identify and address issues arising from omitted variable bias. Here, for example, is a comment on the topic from a widely used undergraduate econometrics textbook:

Now suppose that, rather than including an irrelevant variable, we omit a variable that actually belongs in the true (or population) model. This is often called the problem of excluding a relevant variable or underspecifying the model. We claimed in Chapter 2 and earlier in this chapter that this problem generally causes the OLS [ordinary least squares regression] estimators to be biased.

Now, I realise that’s a bit obscure, so let me be more specific. Here’s a list of (some) factors that can influence house prices, with a view on their expected impact:

Variable Expected impact
Expectations for future population and economic growth Future expectations tend to be capitalised into house prices – i.e. prices will tend to be higher in areas with better growth prospects
Consumer and natural amenities People are willing to pay more to live in nicer places
Interest rates (and availability of finance) Lower interest rates enable people to afford a larger mortgage on a given level of income
Construction sector productivity Lower productivity will increase the cost of supplying new dwellings
Tax policies, including capital gains taxes and mortgage interest deductions Taxation of capital gains will reduce willingness to invest in housing for capital gains
Tax subsidies for mortgage-holders will tend to push prices up
Other housing market policies, such as rent subsidies or public housing provision Rent subsidies tend to be captured by landlords and thus will tend to push up prices
Ongoing construction of state housing will add supply to the low end of the market and thus constrain price increases
Urban planning policies Policies that constrain the development of new housing in desirable areas, or make it more costly or uncertain to develop, will reduce supply and push up prices

Demographia only addresses one of those seven variables. Because they fail to account for the other six potentially explanatory variables, their estimates of the welfare impact of urban planning policies are not likely to be reliable. Without controlling for other potential explanations for high housing prices, it’s impossible to say whether their conclusions about any individual city are correct or not.

Consequently, my recommendation to people seeking to understand the impact of urban planning policies on housing costs is simple: Ignore Demographia and go read the relevant economics literature instead. For those who are interested in doing so, here are a few papers that I have learned a lot from. They apply a range of modelling approaches, but what they have in common is that they undertake a detailed analysis of rules, rather than making sweeping and unsupported generalisations:

  • Glaeser, Gyourko and Saks (2005) studied the impact of building height limits in Manhattan by looking at the gap between observed sale prices and the marginal cost to add another floor to high-rise buildings. They find that constraining the supply of high-rise apartments imposed a significant “regulatory tax” on residents.
  • Grimes and Liang (2007) took at look at land prices around Auckland’s Metropolitan Urban Limit, finding evidence of a “boundary discontinuity”. They interpreted this as evidence that the the MUL is overly restrictive.
  • Kulish et al (2011) developed a hypothetical model of the impact of several factors on housing and transport costs. They modelled density restrictions as well as increased transport costs and lower building productivity, finding that building height limits raise housing costs and increase sprawl. I have previously discussed their findings.
  • MRCagney (2013) examined the impact of minimum parking requirements in Auckland, finding that they impose a loss on developers and businesses by forcing them to over-supply parking. They also cause worse congestion, meaning that not even drivers benefit. Luke C briefly discussed this study in a post on the Unitary Plan parking rules.

My favourite economics paper on planning regulations is Cheshire and Sheppard’s 2002 study on the impact of greenbelt rules in Reading, UK. The authors observed that greenbelts have both positive and negative effects. On one hand, they limit the supply of land for new housing, which drives up costs. On the other hand, they give residents access to public open spaces, which people like. Rather than ignoring this trade-off, they used house price data to model it.

Overall, Cheshire and Sheppard did find that allowing development in Reading’s greenbelt would make people better off. However, they also found that a failure to consider the amenities produced by planning rules would have resulted in too high an estimate of the gains in wellbeing. In other words: right direction, wrong magnitude.

In light of the evidence, my view is that failing to account for urban amenities and other explanatory variables in an analysis of the impact of supply restrictions can result in two errors:

  • First, it can make us over-optimistic about the degree to which loosening rules will affect housing prices. That’s not to say that less restrictive planning regulations couldn’t make us better off – just that we should not expect house prices to fall by 60-75% as Demographia implies when it says that Auckland should have a median multiple of 3.
  • Second, it can lead to perverse outcomes, by encouraging us to eliminate rules that are serving a useful purpose. Often (although not always) planning rules are managing the external social or environmental costs associated with some developments. A proper cost-benefit analysis – which Demographia has not done – will consider both the pluses and minuses of rules.

In short, housing markets are complex, and any analysis needs to consider that fact. To reiterate my point from last week: Demographia takes an inappropriate, overly simplistic view of house prices. This may be good for grabbing headlines, but it’s not good economics.

Alternative explanations for Auckland house prices

Last week I took a look at the economics underlying Demographia’s “International Housing Affordability Survey” and found them severely lacking. As it turns out, Demographia’s data isn’t much good as a measure of the costs of poor planning rules – but it does seem to provide some information about people’s “revealed preference” for urban amenity.

To recap: urban economics suggests that differences in the level of the median house price to median household income ratio between cities can be interpreted as differences in livability. All else equal, people should be willing to pay more to live in cities that offer better quality of life.

But how should we interpret changes to the median multiple from year to year? If a city’s median multiple rises from 5 to 5.5, does that mean that the city suddenly got 10% more livable? Or did something else happen?

Demographia is very certain that higher median multiples are the product of one thing, and one thing only: limits on sprawl into greenfield areas. Here’s Don Brash, former Governor of the Reserve Bank of New Zealand and former head of several right-wing political parties, laying out that view in Demographia’s 2008 report:

Once again, the Demographia survey leads inevitably to one clear conclusion: the affordability of housing is overwhelmingly a function of just one thing, the extent to which governments place artificial restrictions on the supply of residential land.

With that in mind, Demographia’s data seems to indicate that housing in Los Angeles and Las Vegas (as well as many other US cities) suddenly became a lot more affordable in the late 2000s. It’s obvious that they must have removed their Metropolitan Urban Limits – how else to explain such a big drop? Oh, wait…

Demographia Los Angeles Las Vegas median multiple

(It’s slightly disturbing that our Reserve Bank used to be run by a man who doesn’t believe that interest rates and credit conditions can affect house prices. But I digress.)

Here’s a graph of changes in Demographia’s median multiple estimate for Auckland since 2004. We haven’t seen the same drastic swings as in the US, where the housing bubble and bust was pronounced, but house prices have risen relative to incomes. (Although, as Stu found in his analysis of different measures of housing costs, this hasn’t flowed through to rents or mortgage payments, due in part to changes in interest rates.)

Demographia Auckland median multiple

This change has been especially pronounced in the last few years. Since 2012, Auckland’s median multiple has risen roughly 22%. Does this mean that we’ve become 22% more “livable” during that time?

With all due respect to the good work done by Auckland Council and Auckland Transport since their inception, probably not. So we need to look for alternative explanations, of which there are several. I’ll focus on three in particular.

The first potential explanation is that there has been a market failure. Residential construction slumped massively during the Global Financial Crisis, with the most significant reductions occurring in the supply of apartments and attached dwellings. Here’s a graph that John Polkinghorne put together illustrating that trend:

NZ building consents

Incomes and employment have mostly come back from the recession, but construction has been a bit slow to respond. I suspect this reflects technical constraints within the development sector, as it takes a while to organise finance, find sites, and hire the cranes, bulldozers, and blokes/blokesses in hardhats. Until they get into gear, there may be a bit of an undersupply – but one that will tend to sort itself out.

The second potential explanation is that the introduction of Auckland’s Unitary Plan has caused people to expect housing supply to be more constrained in the future. While the Unitary Plan envisages the gradual expansion of the city’s Metropolitan Urban Limit to meet new demand for greenfield suburbs, it maintains extensive controls on the supply of new dwellings in accessible, high amenity areas. Moreover, the plan actually got significantly more restrictive following the consultation process.

Transportblog has highlighted this issue a number of times before. To recap, here’s a map (from Koordinates) that shows where the Unitary Plan got more restrictive as a result of consultation. The areas in red have been down-zoned to restrict development, while areas in green have been up-zoned. The large orange areas show future greenfield land. As you can see, there are not a lot of opportunities to develop new dwellings in the isthmus and lower North Shore, while West Auckland has been happy to facilitate growth:


Unitary Plan changes from draft to proposed version on Koordinates

Timing is important here. Demographia’s figures suggest that there was a jump in house prices relative to incomes between the end of 2012 and the end of 2013. This coincides with the notification of the Unitary Plan in September 2013, which, as described above, will ease greenfield land supply while limiting development opportunities in the inner suburbs.

However, there is also a third potential explanation: that our rising house prices reflect increasing awareness of Auckland’s great quality of life. For most of the last decade, our city has been near the top in Mercer’s Quality of Living Survey. It’s been ranked third for five years running.

So maybe the story is that potential migrants and investors have observed that, by international standards, Auckland offers high quality of life at an affordable price. And they are in the process of arbitraging that away.

I’ve illustrated that process in the following graph, which shows the relationship between Demographia’s median multiple (X axis) and Mercer’s Quality of Living Survey (Y axis). The trend-line is estimated based on 2012 data. I’ve also plotted Auckland’s median multiple and Mercer index in 2015.

The red dot that represents Auckland is moving towards the trend-line, suggest that its prices are catching up with its livability.

Demographia Auckland median multiple change 2012-2015

Previous studies have found that growth in New Zealand house prices is strongly correlated with net migration – i.e. migrants tend to bid up house prices. Net migration to New Zealand did, in fact, start picking up in 2013 – around the time that Demographia’s estimate of the price to income ratio began to rise. Perhaps this is evidence for the “amenity arbitrage” hypothesis?

NZ net migration Feb 2005-2015

So, which explanation is true? Honestly, it’s impossible to say without a lot more detailed analysis. My point in writing this is not to argue that there is a single explanation for changes in Auckland’s house prices, but to point out that there are many possible explanations. Housing markets are affected by a number of factors, and it’s inappropriate to focus on one without controlling for the rest.

This is, essentially, why Demographia’s analysis fails. Rather than articulating a model that encompasses all of the potential explanatory factors, they have settled on a single number and insisted that it must be interpreted in a single way. It’s hard to see the value in that approach. And it’s definitely not good economics.

Should we relocate the Ports of Auckland?

Disclaimer: in professional life I have done some work on ports, including co-authoring the 2012 PwC report on future scenarios for Upper North Island ports. This post doesn’t reflect the views of my present or past employers or clients. It’s just a quick thought experiment, based on some data and a few assumptions.

The Ports of Auckland (POA) are back in the news due to their new reclamation plans. As usual, this has attracted both critics and proponents. POA’s plans have been criticised for their negative environmental impacts on the Waitemata Harbour, the loss of views of the Hauraki Gulf, and the fact that they will limit our ability to re-use port land for other purposes. On the other hand, they’ve been defended due to the economic role that POA plays in Auckland – it’s New Zealand’s largest port of import and also a significant port of export.

Ports of Auckland

As this suggests, there are both pros and cons to having a port located right on Auckland’s front door. How should we weigh them up?

Here’s one way of thinking about the question of whether we should prefer having POA in Auckland, or whether we would rather close it down and move our freight elsewhere:

  • The costs of moving the port would primarily relate to the added freight cost for Auckland’s imports and exports
  • The main benefit would be that we could repurpose POA’s land for alternative uses, such as housing, offices and retail, or public spaces.

How large are these costs and benefits?

The costs of relocating the port

One realistic way to look at the cost of port relocation is to ask: How much more would we have to spend to get the same outcomes?

If we closed down POA and shipped Auckland’s imports and exports through the Port of Tauranga (POT) instead, we would have to pay more to move those goods by land between the two cities. This would represent a net cost to New Zealand’s economy.

We can get a rough sense of these added costs by looking at current land transport costs and port volumes. According to an NZIER report published last month, in the year ended June 2014 POA handled:

  • around 968,000 twenty-foot-equivalent containers per year, 203,000 of which were trans-shipped to other ports in NZ;
  • around 207,000 cars; and
  • some other random stuff, like bulk cement.

Now, based on figures published in the 2012 PwC report (see Table 4 on page 76), the cheapest way to move goods between Tauranga and Auckland is by rail. It costs approximately $600 to move a single container by rail between the two cities. (Or around $750 to move a container by road.) While KiwiRail doesn’t currently ship cars by rail, rail operators in other countries do. Let’s assume, therefore, that it costs around the same amount ($600) to ship a single car.

Based on these land transport costs, we’re looking at an added annual cost of around $580 million. Yikes. A quite large sum. In reality, this is probably a bit on the high side, given that some of these goods will not originate from or be destined for Auckland.

In addition, we would forego the $66 million in annual dividends that POA pays to Auckland Council. So the total annual cost of relocating the port would be around $650 million.

The benefits of port relocation

Although the costs of moving POA entirely out of Auckland are high, we might be willing to bear them if the profits from land development were sufficiently high. So: How much would the land have to be worth to justify relocating POA?

Well, we know that, in order for it to be worth doing, repurposing the port land for residential and commercial uses, or public space, would have to yield at least $650 million per annum. That figure represents the minimum annual return that we would require from POA’s land.

Let’s assume, for a moment, that Auckland Council could get an average rate of return of 8% on its port land if it were put to other uses. This suggests that in order to obtain an annual return of $650 million, POA’s land would have to be worth a total of around $8.1 billion. (Calculated as follows: $650 million in annual profits / 8% rate of return = $8.1 billion.)

According to Wikipedia, POA has a total of 55 hectares of wharves and storage areas. If that were worth $8.1 billion in total, it would mean that the land would be worth around $15,000 per square metre. That’s roughly what it would take for moving the port to be a net benefit for the economy – city centre land values above $15,000 per square metre.

Now, this is in the range of current land values in the city centre – albeit on the high side. So redeveloping the port could, in principle, provide net benefits for Auckland. The case might get stronger if land values continue increasing and if the downtown revival continues at pace.

However, I don’t think this quick, back-of-the-envelope analysis proves much. For one thing, the benefits of port relocation are probably overstated due to the fact that it would be quite difficult to redevelop 55 hectares of downtown land quickly. It might take decades to realise the value of port land for alternative uses.

For another, it would be quite difficult to compensate the “losers” from the process – the firms and workers who would be worse off as a result of higher transport costs to their location in Auckland.

So, what should we do with the port?

As this analysis has (hopefully) shown, there are both costs and benefits to moving POA. And, for that matter, to leaving it in place or expanding it.

Moreover, the costs of moving POA are not infinite, which means that the benefits of doing so may at some point be large enough to justify the move. But they are very large, which means that we would have to be confident that we could actually redevelop port land in a reasonable timeframe.

It’s also important to recognise that there are other risks in moving the port, as well as uncertainty about some of the costs that I’ve cited. In my view, there are three main limitations to this analysis:

  • First, I’ve assumed that there are no technical constraints to doubling freight volumes at POT. This is probably not realistic – expanding that port would be costly both financially and environmentally.
  • Second, I’ve assumed that shipping lots more goods by rail between Tauranga and Auckland won’t drive up the price of rail freight. In reality, KiwiRail (or the government) would have to pay for quite a few track upgrades and purchases of rolling stock, which may drive up the costs of rail freight.
  • Third, I’ve assumed that it would actually be feasible to redevelop POA’s land, and that redevelopment of port land would create added value rather than simply diverting growth from elsewhere in Auckland. This is not unreasonable, but it won’t be a rapid process. As the Wynyard Quarter shows, it can take over a decade to active and develop a substantial chunk of new land.

Lastly, there are likely to be problems with the timing of funds. In principle, land development profits could be used to pay for infrastructure upgrades. In practice, it won’t work so neatly, as infrastructure requirements will be front-loaded while development profits trickle in over a period of years or decades.

In other words, actually moving the port is likely to be a costly and risky enterprise. It will be difficult to overcome the risks and up-front costs associated with doing so – meaning that we should expect the port to stay in downtown Auckland.

Port location: What do you think?

Demographia fails Urban Economics 101

Every year since 2005, pro-sprawl think-tank Demographia has published a new edition of its “International Housing Affordability Survey“. They report a “median multiple” measure of housing affordability that compares median house prices to median household incomes within a number of cities, mostly in the English-speaking world.

Demographia’s aim, in publishing this data, is to argue that “if housing exceeds 3.0 times annual household incomes, that there is institutional failure at the local level. The political and regulatory impediments with respect to land supply and infrastructure provision must be dealt with.” By this, they mean building car-dependent suburbs on the urban fringe – and nothing else.

Another Demographia-approved urban paradise.

A number of people, including Todd Litman and Stu Donovan (on Transportblog), have taken aim at Demographia’s empirical analysis and choice of metrics. Unfortunately, Demographia is unwilling to open up its analysis and methodology for an independent peer reviewed, so it’s difficult to referee those claims.

Here, I want to take a look at the issue from a different perspective. Basically, the urban economics literature suggests that Demographia’s chosen measures do not mean what they think they mean. And they almost certainly do not prove the case they’re trying to make.Before I explain why, let’s start out with a quick look at the data. According to Demographia’s 2015 report:

  • The most “affordable” cities included the likes of Detroit (median multiple of 2.1), Cleveland (2.6), and Houston (3.5)
  • The “unaffordable” cities included most large Australian cities, including Sydney (9.8) and Melbourne (8.7), many “coastal” North American cities, such as Los Angeles (8.0), San Francisco (9.2), Vancouver (10.6), New York (6.1), and Boston (5.4)
  • All New Zealand cities were on the “unaffordable” end of the spectrum, ranging from Palmerston North (4.1) and Dunedin (4.6) to Christchurch (6.1), Tauranga (6.8) and Auckland (8.2).

In other words, there’s a quite large range of median multiples. This raises a quite obvious question: Why are people willing to pay so much more to live in some places? Why live in “unaffordable” San Francisco when “affordable” Houston is just down the road? Why live in Auckland when housing is relatively cheaper in Dunedin?

IMG_3218

Why would anyone want to live in a large, multicultural city located between two beautiful harbours in a subtropical climate? Sheer madness.

Urban economists have studied this phenomenon in detail, and observed that there is an omitted variable in Demographia’s equation: the differing amenities offered by different cities. If a city offers good natural amenities or consumer amenities, people will be willing to pay more to live there. Conversely, if a place isn’t particularly nice, people won’t be willing to pay much for houses there. (Common sense, really.)

In his fantastic survey of the urban economics literature, Harvard economist Ed Glaeser goes so far as to say that ratio measures, such the median multiple popularised by Demographia, are useless for analysis:

It is quite common in discussions of housing affordability to focus on the share of income being spent on housing, as if this is a natural measure of the degree to which housing affordability is a problem within an area. The spatial equilibrium assumption suggests that this measure is not particularly meaningful or helpful.

In short, urban economics suggests that we should interpret a high median multiple as an indication that a city offers great amenity for its residents, rather than an indication of bad policies. I tested this hypothesis by looking at the correlation between the (2012) Demographia median multiple figures and two international quality of living rankings. I found that there was a positive correlation between median multiples and livability.

Here’s the correlation between the median multiple (X axis) and the Economist Intelligence Unit’s 2012 Best Cities Ranking (Y axis). I was only able to match up 12 cities, but there’s a fairly strong positive trend:

Demographia median multiple vs EIU livability index

Here’s the correlation between the median multiple (X axis) and Mercer’s 2012 Quality of Living Survey (Y axis; lower numbers indicate higher rankings). Once again, a positive correlation, with 31 data points:

Demographia median multiple vs Mercer livability ranking

In other words, high house prices relative to incomes are a good indicator that a city is a nice place to live. Rather than proving that Metropolitan Urban Limits inevitably push up house prices, Demographia’s median multiple seems to simply measure cities’ relative levels of amenity. When they argue that all cities should have a median multiple of under three, they are arguing for an absurdity: that all cities should offer the exact same level of amenity to their residents.

If we wanted to accomplish that, we’d have to destroy most of the things that make great cities great. This might make housing cheaper, but it wouldn’t make us any better off in a broader sense. That’s because it would require us to:

  • Bulldoze the Waitakere Ranges and use the spoil to fill in the Hauraki Gulf – to ensure that Auckland didn’t have any natural advantages over a flat, inland city like Hamilton
  • Dynamite the historic boulevards of Paris and replace them with American-style subdivisions and malls – to ensure that Paris didn’t offer anything that Houston doesn’t
  • Ban any venture capital or startup activity in San Francisco, to ensure that it doesn’t offer any agglomeration economies that don’t exist in Detroit
  • Build large screens over sunny cities like Tauranga and Brisbane – to ensure that they don’t have nicer weather than Moscow or Toronto.

But Demographia’s not aware of this. Their analysis is overly simplistic. The only thing it reveals is the authors’ grievous failure to understand the basics of urban economics. It’s no wonder that Demographia has never tried to have its studies peer reviewed or published in academic journals. Their claims aren’t supported by any valid conceptual model. But I guess that’s what happens when you get an urban planner and a former property developer to do an economist’s job…

If you want more consumption choices, live near lots of other people

One of the many reasons that people choose to live in cities is that cities offer variety. As Stu Donovan has argued before, being around more people sometimes seems inconvenient, but it also exposes you to new ideas, new people, and new consumption choices.

I’ve previously written about the value that people place on choices in housing and transport markets, and how having more choices is particularly valuable for people on low incomes. This week, I want to look at how cities provide us with choice in the retail and restaurant markets.

My hypothesis is that there are economies of scale in the provision of both public and private goods. In more straightforward terms, that means that if you live closer to more people, you can have more public transport, more parks, more good restaurants, more shops, and so on and so forth. If this intuition is true, the best way to obtain variety at an affordable price is to live in a dense area of the city.

In order to test this hypothesis, I took a look at Statistics New Zealand’s Business Demography statistics, which provide information on the number of businesses (“geographic units”) and employment within particular industries. Very helpfully, Stats NZ publishes this data at a suburb level (“area units”, in Stats-speak).

I’ve focused on two particular types of businesses that serve households’ daily needs:

  • ANZSIC industry H45, which includes restaurants, bars, and clubs
  • ANZSIC industry G41, food retail, which includes supermarkets and other small-scale food retailers.

I mapped the density of these businesses throughout different Auckland suburbs. Blue colours show higher densities of restaurants/bars or food retailers; yellow colours show lower densities. A few clear patterns emerge. First, densities tend to be highest in inner city suburbs, and even more so in the city centre. Second, there are also pockets of higher density around satellite centres like Takapuna and New Lynn. Third, the density of retail and restaurants tends to be much lower on the fringe of the city.

Auckland restaurant and food retail density maps v1

How can we explain these patterns? Why are some areas so much better supplied with retail and dining options than others?

We can get some insights by looking at the built form retail and restaurants areas in different areas of the city.

Here’s what a retail street looks like in the city centre, where high residential and employment density sustain a lot of activity both day and night. This is O’Connell St before and after its shared space transformation. Notice how people are just walking up:

O'Connell Before and After 4

Here’s what retail looks like in an inner-city shopping and dining district, Ponsonby Road, which is surrounded by old suburbs of medium population density. It has lots of shops right on the street, plus a bit of parking tucked around the back:

Ponsonby Rd St Johns

And here’s what retail looks like in a newer suburb at the edge of town – Albany centre. It’s physically separated from nearby residential areas, highly car-dependent, and as a result, it requires large swathes of parking to support each shop or restaurant:

Albany Mall - Aucklands most modern Metropolitan Centre...

Albany Mall – Aucklands most modern Metropolitan Centre…

In other words, less parking is required to get shoppers to the door in densely populated areas – which should make it easier to sustain more shopping and dining options per square kilometre.

A simple econometric analysis seems to support this view. I attempted to explain the density of restaurants and food retailers in suburbs in terms of the population density and employment density of those areas. (Using Census and Business Demography data from Stats NZ.) As I hypothesised, there is a statistically significant, positive relationship between higher population and employment densities and the density of restaurants and food retailers. These two factors predict roughly 85% of the variation in restaurant and retail density in Auckland suburbs.

Regression results are reported in the table below, for anyone who’s interested. These aren’t perfect models – I suspect that it would be worth testing some spatial regression models, as retailers often attract customers from a wider catchment than a single suburb. Furthermore, we’d have to analyse changes over time in order to establish that increasing population density in an area will in turn increase retail diversity. But these results do provide a reasonable indication of the underlying relationships.

OLS regression models for restaurant and retail density
Dependent variable:
log(restaurant_bar_density) log(food_retail_density)
(1) (2)
log(pop_density) 0.464*** 0.597***
(0.031) (0.033)
log(emp_density) 0.620*** 0.486***
(0.026) (0.027)
Constant -5.531*** -6.290***
(0.182) (0.191)
Observations 342 342
R2 0.856 0.835
Adjusted R2 0.856 0.834
Residual Std. Error (df = 339) 0.632 0.664
F Statistic (df = 2; 339) 1,011.219*** 860.694***
Note: *p<0.1; **p<0.05; ***p<0.01

What do these figures mean? The coefficients from the model – highlighted in bold – display the relationship (or “elasticity”) between population or employment density and density of restaurants or food retailers. They show that:

  • Areas with 10% higher population density have, on average, 4.6% more restaurants/bars and 6.0% more food retailers (including supermarkets)
  • Areas with 10% higher employment density have, on average, 6.2% more restaurants/bars and 4.9% more food retailers.

In short: Higher density can benefit people by giving them more choice in restaurant and retail markets. Having a mix of residential and commercial uses around is even better, as it can sustain activity throughout the entire day rather than just in the evenings or at lunchtime.

Stats NZ’s data isn’t granular enough to say, but I suspect that denser areas also have a greater diversity of dining and retail options. (This is intuitively obvious – if there are already two fish-and-chip shops in the neighbourhood, why would anyone choose to open up a third?)

What do you make of this data on density and retail choices?

We need to stop lying to ourselves about congestion

Without getting back on the topic of pohutukawas or St Luke’s Road again, I did notice something funny in the statement that Greg Edmonds, Auckland Transport’s Chief Operating Officer, made in Metro Magazine in response to the issue:

The founding premise of the Auckland super city was that the city’s congestion was costing $1 billion a year in lost productivity and this had to change.

[…]

Auckland Transport (AT) was created to solve the congestion problem…

Some people might think that this is a slightly too narrow view of Auckland Transport’s mandate. Whatever. Fair enough.

However, there is actually a much more serious problem with Mr Edmonds’ comments. Simply put: the notion that we can “solve the congestion problem” is not at all realistic. (Unless we are willing to try out road pricing, which is unlikely given the tepid response to the last few studies of the issue.)

I don’t want to pick on Mr Edmonds in particular. It’s common to hear politicians, bureaucrats, and advocates from all over say similar things. We constantly hear that Project X or Project Y will “fix congestion” or “solve gridlock” or “save us [some unthinkably large amount of money] in congestion costs”.

As an economist, I’m baffled by these statements. The empirical evidence on congestion overwhelmingly shows that it is not possible to reduce it by building more roads. This is because people change their behaviour in response to bigger roads. They shift from walking to the store to driving there; they buy a house further out of town; they travel at different times.

Here’s what two North American economists, Duranton and Turner, had to say on the topic after undertaking a comprehensive, multi-decade study on induced traffic in US cities:

Our data suggests a ‘fundamental law of road congestion’ where the extension of most major roads is met with a proportional increase in traffic. Not only do we provide direct evidence for this law, but also show find evidence that three implications of this law; near flat demand curve for VKT, convergence of traffic levels, and no effect of public transit on traffic levels.

All earlier studies, such as this comprehensive 1998 study of 70 US metro areas over a 15 year period cited by walkable city advocate Jeff Speck, have come up with identical findings:

Metro areas that invested heavily in road capacity expansion fared no better in easing congestion than metro areas that did not. Trends in congestion show that areas that exhibited greater growth in lane capacity spent roughly $22 billion more on road construction than those that didn’t, yet ended up with slightly higher congestion costs per person, wasted fuel, and travel delay.

Consequently, all we can realistically do about congestion is to give people good alternatives to participating in it. Other modes, such as grade-separated rapid transit and walking and cycling, do not get congested in the same way as roads do. While the research shows that providing alternatives to driving does not necessarily reduce road congestion, it does give people a way to reduce their exposure to it.

In light of these fundamental economic realities, it is essential that transport agencies stop talking about “fixing congestion”. This is nothing more than a dangerous fantasy.

Suggesting that we can solve congestion creates unrealistic hopes among the public. Every time a politician or transport agency opens a new road and promises that it will reduce congestion or speed up people’s journeys, they are feeding expectations that can never fully be met.

The result of this is that transport agencies are constantly dealing with demands for more roads that will not actually deliver long-term solutions to the problem of congestion. This sets the transport profession up to constantly fail to satisfy people’s desires and demands. This has to be a tremendously disheartening situation to be in.

My personal view is that instead of talking about “fixing congestion”, transport agencies should instead promise to deliver outcomes that are actually achievable.

This could include, for example, committing to deliver transport choice to underserved areas of the city by investing in rapid transit infrastructure, frequent bus services, and safe walking and cycling infrastructure. While transport agencies would have to work hard to deliver on all this, they could expect that the end result would be more transport choice for residents.

Transport agencies could even commit to some traditionally roads-centric goals, like, say, building new roads to enable the development of a new subdivision at the edge of the city. At least, as long as they weren’t making unrealistic promises of fast, frictionless commutes to the future residents…

MoT’s review of capital spending on roads, part 3

This is the second post in a series on the Ministry of Transport’s working paper on New Zealand’s capital spending on roads, which was prepared as an input to the 2015/16 Government Policy Statement (GPS) on Land Transport Funding. It was released to Matt under the Official Information Act just before Christmas. Previous posts:

In the previous post, I took a look at the MoT paper’s findings on the economic efficiency of state highway spending. MoT showed that since 2008 spending on the Roads of National Significance (RoNS) has gone up, while benefit-cost ratios have gone down. As a result, we have almost doubled our spending on state highways without achieving any more economic or social benefits from that spending.

This week, I’ll take a look at a different question: Is it possible to spend our road budget more efficiently? If we chose to build other roads instead, would we get more benefits from them?

The MoT paper examines this issue quite comprehensively, and comes up with an unambiguous “yes”. But before I get into it, it’s worth reviewing the system that the Government is currently using to assess transport investments. Projects are ranked on three criteria:

  • Strategic fit [i.e. is this project trying to do something that the Government cares about?]
  • Effectiveness [i.e. will this project actually do what it’s intended to do?]
  • Benefit and cost appraisal [i.e. will this project deliver more benefits than costs?]

In short, the BCR is only part of the picture. In practice, it’s less important than strategic fit. However, it’s still an important criteria for determining whether we are getting good value out of our transport investments, especially as many of the strategic outcomes that the Government wants are accounted for in a transport cost-benefit analysis.

With that in mind, Section 5.4 of the MoT paper compares BCRs for local road and state highway projects which have committed funding versus those that will probably receive funding or which will remain unfunded.

This analysis, summarised in the chart below, shows that BCRs for state highway projects tend to be lower than BCRs for local road projects whether or not they have committed funding or not. This might be an indication that too much money has been allocated to new state highways – effectively, there are worthy local roads that are going unfunded.

Another worrisome finding is that BCRs for “committed and approved” state highway projects are considerably lower than projects that are merely “probable” or which have not been given funding. This suggests that even within the state highway budget, funding isn’t going to the projects that offer the best returns.

MoT BCR by funding priority chart 1

However, the MoT paper notes that these figures include “significant spending on large strategic projects” – the Auckland Manukau Eastern Transport Initiative (AMETI) in  local roads and the RoNS in state highways. Is it simply the case that a few big funding calls are skewing the results?

Here’s what the chart looks like with those projects removed. As you can see, “committed and approved” state highway projects other than the RoNS also offer a lower return than the “probable and reserve” projects that may or may not get funding. What the hell is going on here?

MoT BCR by funding priority chart 2

Elsewhere in the paper, MoT sums up the situation as follows, with a nod to the idea that traffic forecasts are over-predicting growth:

MoT state highway benefits

It also compares these figures with BCRs for other transport spending, including NZTA-funded PT infrastructure and services and walking and cycling projects, and concludes that:

MoT BCR by activity class summary

In other words, the focus on big state highway projects means that the Government is passing up higher-value spending that serves other modes. Unfortunately, the paper doesn’t offer a lot of additional analysis. But it would be interesting to know how much analysis NZTA or MoT has done on the bus infrastructure projects that are needed to get good transport outcomes in Auckland, such as the Northern Busway extension, the Northwest Busway, extensions of the AMETI busway, and bus interchanges to support Auckland’s New Network.

With all that in mind, how would we be spending money if cost-benefit analysis was the key criteria?

Section 6.2 of the MoT report contains a number of colourful charts to illustrate how we could be doing things differently. Here’s the bit that stuck out for me. It classifies new state highway projects, excluding RoNS, according to their BCR (vertical axis), funding priority (horizontal axis), and total cost (size of bubble).

If BCRs were the key criteria for project funding, the black-coloured bubbles would be de-funded and the red-coloured bubbles funded in their place:

MoT de-prioritised projects 1

MoT de-prioritised projects 2

As you can see, if the Government were focused on getting the highest benefits out of its transport budget, it would have to de-fund most large state highway projects that are currently underway. Yikes.

It’s not clear what conclusions MoT’s drawing from this analysis, as the final paragraphs are entirely blacked out. However, I’d be surprised if they weren’t a bit skeptical of the way that public money is being spent…

Next week: MoT’s analysis of roads spending by region. Preview: Canterbury’s getting a raw deal.