Geography and housing supply dynamics

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:

AKL from space

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:

NZIER Auckland's narrow geography

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.

Double EMU Orakei Basin

Auckland Geography works against roads

When I first started reading this op-ed in the heralds motoring section the other day I thought “here we go, this is sounding like someone wanting to push some form of petrolhead nirvana”

Paul Charman says stop your complaining and celebrate the people who get us through the Queen City’s roading maze

If quantum physics allowed it, somebody should journey back to 1840 and shoot Governor Hobson.

Ideally this would be after he organises the Treaty but before he names a town after the Earl of Auckland, and sites it between Waitemata and Manukau Harbours.

The location was great for the 200 or so “sailing-ships-are-us” brigade here 170 years ago but it’s a tough legacy for the 1.5 million people who live in Auckland today.

And while there is a bit of the petrolhead desire in the piece, it also makes one very important point.

Thanks to the Queen City’s hourglass shape and the inability of our forefathers to build roads to suit it, massive gaps exist in our modern roading network. There’s no motorway detour around the Central Motorway Junction south of the CBD, forcing all motorway traffic in the isthmus to pass through it. Big rigs travelling from port to port compete with old family Nissans headed across town.

True, the situation will be eased by State Highway 20 extensions through southern and western Auckland (the harbour bridge is a similar choke-point but nobody knows how we’ll fix that one).

Proper alternative routes were planned 50 years ago but stymied for decades by small-vision councils and screaming nimby landowners.

Well, boo hoo and get over it. It’s hard to drive in Auckland, tough.

But – thanks to those two beautiful harbours – Auckland is also a great place to live.

The reality is that Auckland’s geography simply isn’t that suited to an auto dependent transport system. The various waterways combined with our volcanic terrain have created a series of pinch points around the city. A lot of vehicles wanting to cross the urban area get funnelled into one of these points. It means that those roads need to have a lot of capacity to keep traffic flowing and that can very often be extremely expensive to provide. The worst example is probably the Additional Waitemata Harbour Crossing for which it is expected to cost $5 billion to provide additional road capacity.

However while those same geographic features affect also affect public transport infrastructure, one advantage PT has is that it can move people much more efficiently and so the same number of people can be moved within a much smaller space. For example a double tracked rail line – which could be accommodated in a corridor with a width of ~12m – could easily carry more than 9,000 people in each direction with just 5 minute frequencies. That’s more than an 8 lane motorway which would need at least 40m of width. The narrower corridor also means it is possible to put the corridor underground if we don’t want it impacting on the surface, or interacting with surface streets and we have seen this happen at New Lynn.

What’s more, our geography and existing land use has also created a number of natural corridors that can/could quite easily be served by PT.

Auckland development Corridors

This issue has also been one of our considerations when we designed the Congestion Free Network which allows for most of the city to be served with a really high quality PT network for the same price as what the government and AT are currently planning to spend on a few big roading upgrades.

CFN 2030A

I think it’s also worth noting the key point that Paul makes in the piece that there are a huge number of people behind the scenes that work to keep the whole transport system working. Without many of them it would be much much harder to get around.

Myth Busting: Aucklands Geography

Myth: Auckland isn’t geographically suited to public transport.

I’m not sure where this myth even came from but if I had to guess, it would have been from the 50’s or 60’s, the same time that many of our transport myths originated from those looking to justify building the motorways instead of public transport. The theory goes that cities like Wellington are more suited to public transport, and in particular rail, due to the the geography largely forcing development into a couple of long thin corridors. As such, Auckland which extends out in all sorts of directions is said to be more suited to car based transport.

At first that seems logical which is why I guess so many people have taken it to be true but then how do you explain why public transport is able to be provided easily in river cities. Some of the worlds greatest cities sit on river plains and they spread out in all directions yet they have been able to build fairly extensive PT systems. Some of that is related to density (and I will address density in a future myth busting post) but not, an example I have experienced myself is Munich where urban area itself is not that much smaller than Auckland’s and the population is a fairly similar size.

What is interesting about Auckland is that unlike many cities, the outer parts of the urban area are naturally shaped into a handful of fairly defined corridors that connect to the isthmus at just a dozen pinch points, something that is actually perfectly suited to PT. This is further helped by some of the infrastructure we have already put in place like the rail lines and funnily enough those motorways.

  • The North Shore, which thanks to the Hauraki Gulf and the Waitamata Harbour is a fairly defined corridor all the way up to Albany.
  • To the West we have the land curving around and bordered by the Whau river on the eastern side and hemmed in by the Waitakere ranges and foothills on the western side.
  • SH16 has opened up a further corridor to the North West which is again bordered on one side by the upper reaches of the Waitamata.
  • In the East we have a similar situation to the west, in this case with the Tamaki river on one side and more hilly terrain on the other.
  • Lastly to the South we have development that has largely followed the rail line and motorway stretching development out in a long ribbon.

When you also add in our current and planed rapid transit network (RTN) you can see how the the areas away from the isthmus are largely contained into a few defined areas. In fact all most of the cities development is within ~1.5km of these RTN lines, including those bits within the isthmus. Lets have a look:

On top of this many of our older suburbs on the isthmus were actually developed with the help of public transport in the form of trams. These suburbs are uniquely suited to the provision of PT both in the past and in the future. However we don’t have to wait for decades to be able to afford this. As we have seen recently with the proposed new bus network, we have been able to get significant improvement out of our existing resources and as such by 2022 we will see the percentage of households that are within 500m of a service that runs at least every 15 minutes from 7am to 7pm will jump from 14% to 40%. Here is the 2016 version of the proposed PT map showing just how much coverage the new network will have.

So really Auckland is really quite suited to the provision of public transport. In many ways is not suited to urban motorways as those pinch points act to funnel traffic into a handful of places, something which decent public transport infrastructure can easily bypass while moving huge amounts more people. Further that motorway infrastructure has required huge physical alterations to our environment which have led the wholesale removal of suburbs. What has stopped us up until now has been poor decisions and planning that have forced PT to become substandard. The good news is that with a little bit of work, like the bus network redesign, we will be able to get it working much, much better.