This is the second post in an ongoing series on the politics and economic of zoning reform. The first part looked at the costs, benefits, and distributional impacts of reforming urban planning rules to enable more development. This part takes a more specific look at the most recent reform to Auckland’s planning system: the Unitary Plan.
Now that the hearings are over, the submitters have been heard, and the politicians have voted, it’s worth asking: What have we gotten from the Unitary Plan? Does it take us in a useful direction, and to what degree?
In order to give a coherent answer to this question, I’m going to have to simplify matters. The UP does a lot to regulate development and local environmental issues – addressing everything from air quality to zoning for factors. But it has the strongest effects are on the city’s housing market. The UP shapes how much housing can be built, where it can be built, and how easy it is to get permission to build it.
Consequently, I’m going to focus on the impact of the Unitary Plan on people’s ability to build more homes in the city. Zoning capacity isn’t the only thing that matters, but it’s important. Cities that have “downzoned” severely, like Los Angeles in the 1970s and 80s, typically experience rising housing prices, while cities that “upzone” significantly, like Tokyo in the 1990s, tend to have an easier time keeping prices under control.
The great down-zoning of LA (Morrow, 2013)
In order to estimate the UP’s impact on Auckland’s capacity to build more homes, I’m going to draw upon “capacity for growth” modelling produced by Auckland Council and subsequently updated throughout the hearings process. As changes to the modelling methodology make a like-for-like comparison a bit difficult, I’m going to have to piece together the overall results.
The 2012 Capacity for Growth Study estimated the number of homes that could be built under the legacy zoning rules that were put in place prior to Auckland Council amalgamation. The modellers estimated a measure of “plan-enabled capacity” – i.e. the total quantity of housing that could be built within the city if everyone (re)developed their site to the maximum permitted under the zoning rules.
This is obviously an implausible scenario, as many people won’t choose to redevelop, at least for a while. So the results are best thought of as a theoretical upper bound rather than a realistic estimate of what would happen in practice. As we’ll see, this was addressed in subsequent modelling undertaken during the hearings.
With that caveat in mind, the modellers found that the legacy zoning rules allowed between 250,000 and 345,000 additional dwellings to be built in Auckland. The lower number reflects the maximum capacity for infill development, while the higher number reflects the maximum capacity for redeveloping residential sites.
The 2013 Capacity for Growth Study used the same methodology to assess the version of the UP that was notified by Auckland Council after consultation on the plan. This showed that the notified UP had only made incremental increases to infill and redevelopment capacity within the city.
The modellers found that the legacy zoning rules allowed between 258,000 and 417,000 additional dwellings to be built in Auckland. The lower number reflects infill capacity, while the higher figure reflects redevelopment capacity. However, it also noted future greenfield areas with capacity for around 90,000 additional dwellings.
Taking the greenfield areas into account, the notified UP would have delivered a 39-47% increase in capacity for housing, relative to the legacy zoning. That difference is shown in the following diagram. Essentially, the Unitary Plan as originally conceived would have been at most an incremental improvement.
Things get a bit more complex when comparing between the notified UP and the final version of the UP that was recommended by the Independent Hearings Panel and approved (with minor tweaks) by Auckland Council. The modelling methodology changed in the course of the hearings, with the focus shifting from “plan-enabled” capacity to “commercially feasible” capacity. In effect, a new model was built to filter out sites that wouldn’t be profitable to develop.
The result was the final numbers presented in the Independent Hearings Panel’s report (and covered, somewhat hyperbolically, by the Spinoff) are lower – but considerably more realistic – than the figures reported in the Capacity for Growth Studies.
You can see that in the following chart. The commercially feasible capacity enabled by the notified UP is 213,000 additional dwellings – only 42% of the full plan-enabled capacity.
The key thing in this chart is the change between the notified UP and the final UP. Feasible capacity has increased from 213,000 to 422,000 dwellings, or a 98% increase. Most of the increase in capacity comes from within existing residential zones, thanks to rezoning and changes to zoning rules to allow people to build more dwellings on the same amount of land.
So if we squint a bit, we can put these estimates together to get a rough picture of the overall outcome:
- The notified UP increased plan-enabled capacity by 39-47% relative to the legacy plans
- The final UP increased feasible capacity by 98% relative to the notified UP
- This implies that the final UP has increased the zoning envelope by around 175-190%, relative to the legacy plans (i.e. 1.98*1.39 to 1.98*1.47).
Equivalently, if we assume that only around 42% of the plan-enabled capacity under the legacy zoning plans would be commercially feasible (a similar ratio to the notified UP), we can put together the following chart:
Is this sufficient? Time will tell. Getting housing, transport, and place-making right for Auckland doesn’t end with a planning rulebook. But the final UP is undoubtedly a large step away from the broken status quo.
As this is a series on the economics and politics of zoning reform, I want to close with a few simple observations that arise from the quantitative analysis in this post.
- The incremental changes observed between the legacy plans and the notified UP reflect the outcome of a political process. Council put out a draft plan for consultation, and then pulled back a lot of the changes in response to criticism.
- The considerably larger changes between the notified UP and the final UP arose from a technical process – the independent hearings.
- Although the IHP recommended, councillors decided. The final UP was voted up by many of the same councillors who had pulled back to a more conservative position three years before.
This in turn raises two questions that I will revisit in future posts in this series. First, why did the political process deliver a more conservative outcome than the technical process? And second, what changed between 2013 and 2016 to obtain a different outcome from the council votes on the plan?
What do you make of these figures?
I’ve written several blog posts talking about challenges facing local democracy and consultation processes. This is an important issue. Harvard economists Daron Acemoglu and James Robinson make a convincing argument that inclusive political institutions, such as broad electoral franchises and transparent policy processes, are the essential element for countries’ long-term economic and social success. Governments that listen to their citizens are better at delivering higher levels of wellbeing. Governments that don’t are seldom awesome.
Consequently, it’s worth paying close attention to the details of democratic and consultative processes. When they are done well, they can provide valuable insight into people’s needs and preferences. But when done badly, they may instead provide avenues for narrow-minded minorities to hijack the policy process.
One challenge in developing a better understanding of people’s values is there is relatively little opinion polling on a lot of major policy issues. This can leave politicians to make policy in a bit of an information void, relying upon anecdotes and comments from people who choose to call or write them. This anecdata might be representative of the general public sentiment… but then again, it might not be.
With that in mind, it was interesting to see the results of two new polls released in the last week.
The first was commissioned by The Spinoff as part of its coverage of the Unitary Plan decision and Auckland’s local government elections. They asked a representative sample of Aucklanders how they felt about the Unitary Plan:
The Unitary Plan, which The Spinoff and others have been banging on about recently, was signed off by Auckland Council with a surprising lack of rowdy opposition last week. It turns out our newly reformed pro-density politicians were channelling the views of Aucklanders at large, with more than a stonking 85% of those who expressed a view broadly supporting the plan – albeit most with some reservations – in an SSI poll for the Spinoff, commissioned with Jennings Murphy.
Asked, “Do you broadly agree with Auckland’s Unitary Plan and its plan to allow for 422,000 new homes in the city over the next 25 years?”, 19.1% of respondents chose the option “yes, great idea” and 55.8% “yes, but have some reservations”. Just 12.4% answered “no” and 12.8% said “don’t know”.
This is a big result. It follows four years of public and sometimes acrimonious debate about the ultimate shape of the plan. What we seem to have got out the end is a planning rulebook that will make a useful contribution to allowing Auckland to build more homes to meet the current shortfall and future growth… and a fair degree of public consensus that doing so is a good thing.
The second poll, which Bernard Hickey reported on Interest.co.nz, asked New Zealanders whether they’d like to see house prices rise, flatten, or fall. The result was resoundingly in favour of lower house prices:
In news that counters assumptions about home owners opposing falling house prices, an opinion poll conducted by UMR has found 60% of Aucklanders and 55% of home owners would prefer that house prices either fell a bit or fell dramatically over the next year.
The poll of 1,000 New Zealanders over the age of 18 was taken from July 29 to August 17 through UMR’s online omnibus survey and found a total of 63% who would either prefer house prices to ‘fall but not too much’ (37%) or to fall dramatically (26%).
UMR, which conducts polls for the Labour Party, found 55% of home owners would prefer house prices to fall a bit (40%) or dramatically (15%).
The poll found 14% of respondents preferred house prices either kept rising rapidly (4%) or at a slower pace (14%), while 17% of Aucklanders wanted house prices to keep rising rapidly (4%) or at a slower pace (13%). A total of 15% of home owners wanted house prices to rise rapidly (2%) or at a slower pace (13%). There were 633 home owners and 331 Aucklanders in the poll of 1,000 respondents.
The poll also asked if there was a housing crisis at the moment and found that 81% of all respondents and 85% of Aucklanders thought there was a crisis, while 79% of home owners thought there was housing crisis. Fourteen per cent of those polled thought there was no crisis and 5% were unsure.
This is a fascinating result. There’s a high degree of consensus that high house prices are currently a major problem (“crisis!”) and broad, although not universal, agreement that they should be lower.
In July, former Reserve Bank chair Arthur Grimes caused a stir by suggesting that we should build a lot more homes in Auckland to cut prices by around 40%. (Remember: real house prices fell by around 40% in the 1970s, after rising rapidly due to a confluence of supply and demand factors. So Grimes is not arguing for something that has never happened before.)
Prime Minister John Key’s response was a bit skeptical… but possibly not very much in touch with the public perception:
“I think it is crazy. Go and ask the average Aucklander who has got a mortgage with a bank if they want to see 40 per cent of their equity disappear.”
Now, it’s one thing to want house prices to be lower in the abstract, and another thing for the value of your own home to fall. So if prices actually started dropping, people might not be so enthused about the outcomes. (Especially if the flow-on effects on consumer confidence and construction activity led to a recession.) But I think we can conclude that:
- New Zealanders are worried about high housing costs, and their ill effects on young people and low-income households
- Policies that enable more housing to get built are popular
- People don’t think current high prices are a good thing and would like to see them change.
This is a good thing: there is public support for solving New Zealand’s housing affordability problems. In a democratic political system, this should translate into policies that better reflect our values. Reasons for optimism…
This is a repost of an article I wrote last December explaining why I’m optimistic about housing affordability in Auckland – and New Zealand’s ability to solve problems in general. I think my optimism has held up reasonably well. Since then, New Zealand’s conversation on housing affordability and urban planning has matured in some important ways – crystallising in the response to the Independent Hearings Panel’s recommendations on the Auckland Unitary Plan.
As Toby Manhire observed, “the most remarkable thing is the response… on the whole it’s been incredibly positive”. Reasonable people could have reservations about aspects of the IHP’s recommendations, but most of the views I’ve seen recognise that the finished plan is a good step forward to solving the housing challenges the city faces.
Meanwhile, the UK has voted to Brexit the EU and a large share of Americans – possibly even a majority if we’re unlucky – are planning on voting for Trump. So New Zealand seems to be ahead of the curve on pragmatic problem-solving. Yay!
What’s the problem?
Housing is expensive in New Zealand, especially in Auckland, where median house prices have increased fivefold since the early 1990s (in nominal terms). Roughly half of this increase has occurred in the last four years, which is causing quite a bit of concern:
Housing markets are complex – prices are influenced by both demand-side and supply-side variables. As a result, it can be difficult to tell a single, simple story about why prices have gone up or down in any given year. Take the recent rise in Auckland house prices. Some people argue that it’s a financial bubble (a demand-side explanation); others blame high migration (demand) or distortionary tax policies (demand); and others cite inflexible planning rules (a supply-side explanation) or low construction productivity (supply).
Although short-term dynamics can be mysterious, elasticity of housing supply is the main long-term driver of housing market outcomes in a growing city. The easier it is to build new dwellings in the right places in response to increased demand, the less upward pressure there will be on prices.
The empirical evidence suggests that housing supply in Auckland is slightly inelastic – somewhere in the range of 0.7 to 0.9. This isn’t horrible, but nor is it sufficient to get housing supply in balance with demand.
Severe geographic constraints – Auckland’s harbours and steep hillsides – appear to be an underlying driver of the city’s inelastic housing supply. In this context, settling for average urban planning policies means getting a limited supply of housing and high prices. Consequently, we have to make it much easier to use scarce land efficiently. That means reforming our approach to planning regulations. In the past, we adopted land-hungry policies like minimum parking requirements or severe building height limits without thinking through their ill effects. That has costs, and we need to do better.
Auckland is not the only city coping with high housing prices and a lack of supply – you see similar problems in places like London, New York, San Francisco, and Sydney. However, I would bet that New Zealand will do a better job sorting out its housing affordability issues than other places. In fact, I am betting on it! I’m renting in Auckland, which means that I bear all of the downside and none of the upside of spiraling housing prices.
There are three reasons for my optimism:
1. Our proven track record of policy reform
Let’s start with a pat on the back. Having lived in New Zealand, the United States, and Nigeria, I’d say that Kiwis are, by and large, pretty reasonable when it comes to public policy. We’re not very corrupt, which removes one major source of inefficiency. We generally recognise that as a small, distant trade-exposed country we can’t afford to do things inefficiently. And, due to New Zealand’s small size, there’s usually no need to over-complicate things.
Policymaking anywhere will always be subject to cognitive and professional biases – people screw things up, and sometimes it takes a while to sort it out – but New Zealanders don’t seem want totally irrational or insane policies. Unlike the US, say:
Possibly as a consequence, New Zealand has a record of reforming policies that aren’t working, either incrementally or in one go. The classic example of this is in trade policy. From the 1930s to the 1980s, the New Zealand government oversaw an extensive set of import controls. Te Ara describes this policy:
Faced with declining export returns and a foreign exchange crisis, a Labour-led government introduced foreign exchange controls and import licensing regulations in 1938. The regulations prohibited the import of any goods except under licence or where exempted.
Importers had to apply to government for both an import licence and the foreign exchange needed for purchases. The quota – the amount that could be imported with a licence – was set on the basis of imports the previous year.
Just as restrictions on the efficient use of land produce windfall gains for landowners while foisting large costs on renters and new home-buyers, import licensing created fortunes for some manufacturers while making most consumers worse off. As a consequence, after experimenting with some liberalisation of trade policy in the 1970s and 1980s, the remaining import controls were swept away in the late 1980s.
Recent changes in transport policy also demonstrate our ability to reform bad policies. Over the last decade, there have been some important, although undoubtedly incremental, moves to reform our inefficient monomodal urban transport system.
For example, last year I reviewed a 2010 research research report on deficiencies in NZ’s public transport planning and operations – and was surprised to find that almost all of its recommendations are being implemented in Auckland, Christchurch, and other places. Since 2010, Auckland has:
- Established a public agency (AT) that can plan and deliver a PT network and supporting infrastructure
- Developed and begun implementing a frequent, connected network that satisfies best practice network design principles
- Reformed bus contract models
- Implemented integrated ticketing (and soon, integrated fares)
- Started to build bus interchanges and bus lanes.
This is a big deal, but it’s hardly the only story in town. How about the fact that central and local governments are now coming to the party on urban cycleways? For the first time ever, significant investments are going towards one of New Zealand’s “missing modes”.
We now have an opportunity to take the same approach to urban planning – reform what isn’t working and get better outcomes.
2. The structure of our governments
The current structure of New Zealand’s governments makes it easier to implement reforms and make them stick. We have two key advantages in this area that offer a smoother path to policy reform.
First, New Zealand’s government has a unitary structure rather than a federal one. This means that most powers are concentrated in central government rather than distributed among multiple layers of government. Political centralisation certainly isn’t all good – in the past it’s often led to a perverse situation in which urban transport policy is being designed by rural politicians.
But in this case, it makes policy changes much easier. If central government were to, say, issue a National Policy Statement on urban development or rewrite sections of the Resource Management Act (which governs the development and implementation of urban planning rules), it would lead to changes in the way that local governments regulate. That option isn’t usually available in federal systems.
Because any proposal to liberalise planning rules inevitably creates controversy at local body election time, central government involvement can potentially assist in getting important changes over the line.
Second, the creation of the unified Auckland Council ensures that all growth tradeoffs – and the negative consequences of preventing growth – are internalised within a single council. Gone are the days when councils could simply refuse to zone for growth and assume that it would become someone else’s problem instead. Now a single council is responsible for sorting the region’s problems out.
You can see the results in the Unitary Plan – a document that’s not perfect (no plan is!) but which takes some important steps forward. For example, it removes MPRs from the centre zones, which are intended to accommodate a mix of business and residential uses, cuts back minimum lot sizes throughout much of the city, and creates some midrise residential zones.
Amalgamation does come at a potential cost to Tiebout competition, in which adjacent councils compete for growth. But I suspect that the benefits outweigh the drawbacks. As the San Francisco Bay Area shows, local government fragmentation doesn’t necessarily result in more housing supply – the Bay Area has 93 local governments but building permits have still been falling since the 1970s.
New Zealand’s unitary government structure and the creation of a consolidated Auckland Council create the potential for “virtuous cycles” in which local and central government egg each other on to improve urban planning regulations and processes. To date, this has led to things like the Special Housing Areas, which aims to ease consenting in selected areas, and the Unitary Plan hearings process, which is intended to review the plan and allow it to be implemented faster.
The hearings process, in particular, has encouraged Auckland Council to think carefully about its proposed zoning rules. For example, following instructions from the hearings panel, the council is considering rezoning some areas to enable more housing. This is an important step towards recovering from the ill effects of past down-zoning.
3. The political agenda
Lastly, housing affordability has hit the political radar at a national level. There is an increasing consensus that reforms to urban planning rules are a key part of the solution. The latest Productivity Commission report on using land for housing outlined some key policy changes, and politicians from several major parties have subsequently endorsed a number of these recommendations. For example:
In other words, there is likely to be cross-party support for sensible reforms to urban planning that build on the good work that’s already been done by central and local government.
Globally speaking, it’s somewhat unique – and fortuitous – to have so much attention placed on urban planning issues at both a local and central government level. For example, in the US, a few economists in the Obama administration are starting to talk about the drawbacks of overly restrictive planning regulations. But President Obama has very little ability to influence zoning in San Francisco or New York.
New Zealand is different. We are generally willing to reform policies that aren’t working for us, we’ve got government structures that can facilitate that reform, and our elected representatives are paying attention to the problems and potential solutions. Those seem like good reasons for optimism!
I think reasonable people could disagree about the Independent Hearings Panel’s recommendations on the Auckland Unitary Plan. In fact, a large number of generally reasonable people have spent a lot of the last two years disagreeing about the appropriate shape of the plan.
That’s all part of the democratic process. It doesn’t necessarily produce a perfect outcome on every issue, but on average it’s pretty reasonable. I expect that people will continue to critique, relitigate and change various pieces of the plan – that, too, is part of the process. We should welcome the ongoing debate.
What is not tenable at this point, however, is to criticise without being concrete, or to insist that we reject the entire plan and go back to – what? Those are not meaningful positions to espouse at the end of a multi-year planning and hearings process with many, many opportunities for community input. Nor do they offer anything positive for solving Auckland’s housing crisis, which is turning families out into the street for want of a home.
Brian Rudman’s column on the Unitary Plan recommendations in last week’s NZ Herald was, unfortunately, an example of a substance-free critique that doesn’t add much to the discussion. He writes:
There’s a cargo cult hysteria erupting over the magical cure-all abilities of Auckland Council’s proposed unitary plan, as revised by the Government-appointed hearings panel.
A broad church of true believers, including such odd bed-fellows as the Sallies and property developers, seems convinced the panel has discovered the holy grail which will conjure up affordable housing for all. They’re now ordering councillors to abdicate their responsibilities and tick the recommendations through unread.
Named the Coalition for More Homes, they’ve written to councillors thundering, “the time for deliberating is over, the process has been followed, it’s time to get on with it”.
At the risk of suffering elder abuse, dare I point out they are wrong. Like them, I’m shocked by the housing crisis. But I’ll be equally shocked if our elected representatives suddenly panic and get swept along with the mob’s obsession with housing at the expense of all the other ingredients that go into making a world-class city.
So what does Rudman want? It’s not at all clear. He certainly doesn’t think that councillors should adopt the Unitary Plan as is – hence his use of hyperbolic phrases like “cargo cult hysteria” and “the mob’s obsession with housing”. But what does he want them to do instead? Should they:
- Vote to accept some of the IHP’s recommendations, and reject others? (If so, which ones?)
- Vote to refuse all the recommendations, and default back to a completely different plan? (If so, which plan?)
In the absence of clear suggestions about what specific parts of the Unitary Plan he thinks are unacceptable, and how he thinks the city should proceed, Rudman’s column doesn’t add anything positive to the debate.
To be fair to Rudman, he does offer two or three specific examples of things he doesn’t like about the IHP’s recommendations. For instance, he really doesn’t like the approach they’ve taken to development on a volcanic cone in Papatoetoe:
Like despoilers from another age, the panel has also rezoned precious Crater Hill, on the edge of the Manukau Harbour at Papatoetoe, as suitable for up to 575 houses, either inside this privately owned volcano or on its outer slopes. This, at the request of the owners.
Geologist Bruce Hayward says Crater Hill is the second best preserved of the southern mountains after Mangere Mountain. It is ranked eighth most valued volcano in a report supporting Auckland’s attempt at World Heritage status for the volcanic field. Says Dr Hayward: “Welcome to the new world of more housing subdivisions, no matter what the cost.”
This is a perfectly reasonable view to hold. It’s fine to not want Auckland’s maunga to be built on. After all, they are an iconic part of the city’s landscape.
But piecemeal objections are not a good reason to call for rejecting the entire Unitary Plan. Binning the plan and starting again from scratch would be expensive and risky, due to:
- The cost of throwing housing development into limbo while we restart a very long planning and hearing process – in the middle of a housing affordability crisis
- The time and money that council and submitters will have to waste repeating the same exercise – probably with a similar result
- The risk that Auckland Council will be sacked and replaced by commissioners – I can’t see how that would enhance local democracy.
If that’s not what Rudman wants – and I hope it’s not – then he needs to clearly explain what he does actually want to see from the Unitary Plan and from the council’s decisions about it. The same goes for all critics of the Unitary Plan: Rather than carping about the plan in general, they need to play a constructive role and articulate what specific things they’d like to be changed, and how they think we should go about changing them.
What do you think is good about the Unitary Plan? What do you think could be better?
This is a cross-post of an article written by Transportblog reader and passionate Cantabrian Brendon Harre. Brendon takes a look at New Zealand’s attitudes around housing development:
Robert Borson sculpture -titled “Homeless Angel”
The inspiration for the title of this paper comes from an economist –Eric Crampton writing about Auckland’s housing crisis. Towards the end of his serious paper on the economics of how to fix Auckland’s housing woes, he wrote this;
Every time a NIMBY cries, an angel has to sleep in a car, or in a garage.
Eric obviously was reflecting the public’s concern about the rise of homelessness in Auckland. But he also alludes to another important issue. The losers of Nimby policies are invisible -like angels we cannot see their physical form. It is impossible to identify specific people who will be economically excluded from adequate shelter by Nimby policy. The specific Nimby rules or plans preventing suburbs becoming denser or new suburbs coming into existence cannot be directed attributed as the causative factor for an individual’s lack of adequate shelter. At the individual level there will always be a range of factors explaining homelessness or inadequate housing.
So it is difficult to put a face on those who will be disenfranchised. Such as, the essential worker excluded from a city due to the price of housing, a business man or woman who went elsewhere because housing was too great a cost for them or their potential employees, the community volunteer who ran out of time due to an over stretched work/life balance related to housing costs…… Because attributing an individual’s particular housing state to the specifics of housing supply is difficult, even though the evidence for groups is clear.
In local political processes in New Zealand, both formal, such as local government submission processes for planning hearings or informal -media discussions of different housing supply options, those who make social cost complaints are readily identifiable and heard, while those who would benefit are frequently unidentified and very rarely heard.
This can be seen recently in Christchurch, where a very modest up-zoning proposal was discussed in The Press, in an article titled Residents reject housing intensification plans in Christchurch. Three residents of the proposed up-zoned neighbourhoods were photographed and interviewed to discuss their objections to the up-zoning proposals. There were no counterbalancing arguments or photos showing the benefits to future residents if up-zoning is allowed.
Perhaps Christchurch and New Zealand should look overseas for a different perspective? For instance, recently pro-development groups and community organisations met in Boulder, Colorado to discuss a Yimby narrative. Urbanists such as Sara Maxana @Yimbymom from Seattle made the case for abundant housing and sustainable infilling. She presents the progressive left argument for Yimbyism (Yes in my backyard), being pro development activism to counter the anti-development concept of Nimbyism. Sara states a simple truth -that when housing choice is limited, the wealthy always win. Sara places the Yimby housing supply argument in a humanism framework.
Seattle is a city with rising house prices and rents, more people arriving than leaving and an under supply of housing construction. The city in response to its housing crisis has created the Housing Affordability and Liveability Agenda, HALA for short, a policy making package Sara actively campaigned for, along with other Seattle Yimby activists. In recent elections Yimby candidates bested the Nimbys to take governance control over the city.
In my previous article –What does Nimbyism say about Cantabrians I discussed how Nimbyism in the CBD is setting a bad precedent for Christchurch. That Nimbyism is inherently selfish and that Canterbury should return to more constructive and ‘can do’ attitudes.
A recent article in the New York Times titled –How Anti-Growth Sentiment, Reflected in Zoning Laws, Thwarts Equality -discusses the social and economic costs of Nimbyism (H/T Kent Lundberg at Transportblog).
…. when zoning laws get out of hand, economists say, the damage to the American economy and society can be profound. Studies have shown that laws aimed at things like “maintaining neighbourhood character” or limiting how many unrelated people can live together in the same house contribute to racial segregation and deeper class disparities. They also exacerbate inequality by restricting the housing supply in places where demand is greatest.
The lost opportunities for development may theoretically reduce the output of the United States economy by as much as $1.5 trillion a year, according to estimates in a recent paper by the economists Chang-Tai Hsieh and Enrico Moretti.
Canterbury’s housing crisis has abated somewhat since the earthquakes. Only a few years ago in Christchurch many people struggled to find good housing -even now some people are poorly housed due to unresolved insurance claims. Eventually, though in Canterbury housing supply did ramp up, in particular in the satellite towns of Waimakariri and Selwyn Councils. Nationally though the housing crisis is worsening and it would be wrong for Christchurch to be complacent about its housing supply policies.
In my opinion for Canterbury and New Zealand to build strong, healthy communities they should learn lessons from Yimbys not Nimbys.
If any readers have an opinion, experience or expertise on homelessness there is a Cross-Party Homelessness Inquiry where you can make verbal or written submission. Submissions close 12th August 2016.
Who benefits from enabling housing development? And who bears the costs of restricting it?
One common refrain is that reducing regulations to enable housing will deliver higher profits to developers, while disadvantaging existing homeowners, who must contend with more people living in the neighbourhood. Another view is that restricting housing supply primarily benefits existing homeowners, who earn (untaxed) capital gains, while disadvantaging people who don’t own homes.
Along with Fran O’Sullivan, Arthur Grimes, Bernard Hickey, and many other commentators, I tend to agree with the second viewpoint: The primary distributional impact of restrictions on housing supply is to benefit existing homeowners at the expense of future homeowners. In this post I will argue that 1) we face a choice between existing and future home owners and 2) profits from development pale in comparison to untaxed capital gains on property.
So if you’re concerned about rampant profiteering, then you should be in favour of enabling more housing development.
Profit, homeowners, and false dichotomies
Developers undoubtedly set out to make a profit. They are after all putting their own time and money into building something, which in the process exposes them to risks. In this context it seems reasonable that they get something in return, otherwise, why would they develop housing at all? Whether developers earn a reasonable profit then effectively comes down to competition, and the best way to encourage competition is to enable lots of people to be developers.
In general, the more we restrict and regulate the supply of housing, then we will get less supply and less competition.
Those who rally against developers making profits seem to ignore that most of Auckland’s existing housing stock resulted from profit-seeking developers. This includes many houses that are now protected for heritage reasons. So it’s not clear to me that simply because developers are look to make a profit today, that the resulting developments will not be valued.
It is certainly fair to say that developers will only able to make a profit from development if they build something that people are prepared to pay for today. This is another way of saying that developers must consider their customers , i.e. people who want somewhere to live. So it strikes me as a false dichotomy for people to argue that developers “put profit before people”: If developers didn’t meet the needs of at least ***some*** people, then they wouldn’t make a profit.
Instead, the main trade-off seems to be between existing and future homeowners. I think Arthur Grimes described the trade-off best when he said (source):
My call for policies to drive a house price collapse is driven by my personal value judgement that it’s great for young families and families on lower incomes, to be able to afford to buy a house if they wish to do so. My concern is not for older, richer families, couples or individuals who already own their own (highly appreciated) house.
In this quote Arthur observes that we primarily have a choice between existing homeowners and future homeowners. He doesn’t mention developers at all. So when councillors vote for regulations that restrict housing supply, they are effectively voting in favour of existing homeowners. This is fine, provided they are comfortable with adopting what I consider to be a typically conservative position. These councillors are, in effect, behaving like Tories; they are protecting those who already have wealth.
The effects of restricting supply: Dislocation and rampant profits
However, building new homes isn’t the only – or even the main – way to make a profit in Auckland’s current housing market. Due to restricted housing supply, we aren’t building enough homes to meet demand. As a result, prices have risen.
Rising prices has two primary effects. First, it squeezes low-income people out of the market. This is a well-documented phenomenon. As the California Legislative Analyst’s Office found in an analysis of the San Francisco Bay Area, suburbs that developed less housing experienced more displacement. Without new housing development, every new resident must displace an existing resident – a vicious dynamic that hits low-income households hardest:
A lack of housing supply is compounded by distortionary tax policies – principally our unwillingness to tax unearned capital gains on housing – with the result that house prices are going up at a fast clip. This provides an unearned, untaxed capital gains windfall for people who are lucky enough to own property.
Unearned capital gains, unlike developer profits, are a win-lose scenario. People who own houses win, as the value of their assets rise. But people who are renting or trying to buy a home lose to an equal extent, as they face higher and higher prices.
So how large are capital gains compared to developer profits, anyway?
In recent years, untaxed capital gains on residential property have been very large relative to developer profits. According to data from the Reserve Bank, untaxed capital gains on residential property exceeded $100 billion last year:
- In the first quarter of 2016, the total value of residential property in New Zealand was $905 billion
- One year earlier, the value of residential property was only $791 billion.
By comparison, according to Statistics NZ’s most recent (2014) Annual Enterprise Survey, which tracks industry performance, residential housing construction firms (ANZSIC E301) made gross, before-tax profits of a mere $570 million. Even if we add in “other construction services” (ANZSIC E321, E322, E323, E324, and E329), which includes land development firms as well as a whole bunch of other stuff, total residential development profits add up to no more than $2 billion a year, before tax. And developers pay taxes on those profits! For the visual learners out there, here’s the data in a chart:
In other words, the profits that developers earn are relatively insignificant compared to the unearned, untaxed capital gains that have accrued to property owners. I would argue that the latter are largely the result of regulations that restrict housing supply, and hence represent a transfer from future homeowners, and to a lesser degree developers, to existing homeowners.
So what’s the takeaway message from all this? Well, if Councillors like Mike Lee and Cathy Casey are concerned about profiteering in New Zealand society (and they say they are), then they should start pushing to enable more housing development in Auckland. Yes, developers may make slightly more money in the process, but this increase pales in comparison to the reduction in untaxed capital gains that would accrue to existing home-owners. If you’re concerned about people making unearned profits, then regulations that restrict housing supply and which drive up the prices of existing dwellings should be your primary target.
More commentary on this later on, but for now I’m just going to drop in some data.
Former Reserve Bank chair Arthur Grimes commented last week in The Spinoff:
In March 2016, the REINZ Auckland median house price reached $820,000. Four years previously, it was $495,000 – that’s a 66% increase in 4 years. What’s more alarming is that in 2012, many people considered that house prices were already getting out of reach for most people. That was particularly the case for young people and low income earners.
That extraordinary increase – coupled with the already high level in 2012 – was behind my call to a recent Auckland Conversations event that policy-makers should strive to cause a 40% collapse in house prices to bring the median back to around $500,000.
This sounds like a bit of a crazy idea. But the even crazier thing is that it’s happened before.
In the early 1970s, New Zealand experienced a rapid increase in house prices caused by, among other things, a swift run-up in immigration and a shortage of builders and building materials. Between 1971 and 1974 real house prices increased by 60%. This caused alarm, and the government responded by loosening planning controls to allow more flats to be built in cities. Then the 1973 oil shock hit, net migration turned negative, and the economy entered into a prolonged slide. (Thanks Muldoon!)
From 1974 to 1980, house prices fell by around 40% in real terms. By the end of the decade houses were no more valuable than they had been at the start. That’s shown in the following graph, which I’ve compiled from Reserve Bank data on long-run house prices and consumer price inflation.
In principle, the same thing could happen today, given the right confluence of supply and demand shocks. But there’s an important difference between the 1970s and the 2010s: consumer price inflation.
Back then, overall price levels were inflating at double-digit rates. As a result, all that it took to get house prices back in line with wages (and prices for everything else) was for them to stand still for a few years. In dollar terms, house prices actually held constant from 1974 to 1980, while prices for everything else increased around them.
Today, consumer price inflation has dropped to almost zero. This means that getting real house prices back in line with incomes, at least in the short term, will require prices to fall in dollar terms. That is, understandably, a scary prospect for politicians, bankers, and homeowners. But it could happen.
Welcome back to mid-week reading, which is (happily) becoming a more intermittent feature. One of the most interesting things I’ve recently read was Jonathan McCalmont’s exploration of anarchist scholar James C Scott’s arguments about the way that governments interact with their people: “Seeing like a state: why strategy games make us think and behave like brutal psychopaths“:
Cloaked as they were in the trappings of religion and medieval warfare, it was all too easy to overlook the morally dubious nature of the games’ relationship between players and in-game characters. Indeed, it was not until the release of Bullfrog’s Syndicate (1993) that the political savagery of the strategy genre became fully apparent. Stripped of the moral fig leaf of historical context, Syndicate asked us to assume to role of a corporate CEO who used cybernetically enhanced slaves to battle rival CEOs for control over a virtual environment that enslaved the entire human race. For the first time, players were asked to embody not mythical beings or historical princes but ruthlessly exploitative capitalist tyrants. The fact that playing a corporation was no different to playing a god or a warlord merely served to drive home the moral message: You are a complete bastard…
What all of these games have in common is a tendency to make even the most liberal of gamers behave like brutal tyrants. For the player of strategy games, little computer people serve only as a means to an end. We do not care about whether or not our little computer people are happy, we only care about whether or not they are productive. If they are not productive then they are in our way and little computer people who get in the way of their players tend to wind up brutalised, enslaved and dead.
Second, on a different note, Tim Watkins (Pundit) reflects on the government’s reaction to the Auckland housing crisis. While the article’s a few weeks old at this point, Watkins’ points are still worth considering:
What’s become clear is that Auckland’s problem is no longer a land supply problem, it’s a house supply problem. The Special Housing Areas have opened up over 50,000 sections according to the government, but only 1000 houses have been built. Even Auckland Council estimates six and a half years worth of land is ready to build on. What’s missing is a will (or requirement) to build, tradie capacity and, arguably, a government commitment to a mass building programme.
Instead, what we’ve got from National seems to be an admission any fix on Auckland house prices is years away and what matters to them now is spreading the blame.
Watkins also highlights infrastructure as a key problem:
Auckland Council is in a bind on infrastructure. Not that you’d know it from most of the debate, but it’s willing to sprawl somewhat. It’s problem is the lack of roads, rail, sewers, footpaths and the like on the outskirts of the city and an inability to pay for it.
Auckland Council is maxed out on debt; if it borrows more it suffer a credit downgrade and the local government authority that borrows on behalf of councils simply won’t let it do that, as I understand it. It can’t raise rates, because they’re already high and they’d suffer a revolt. Thy want to introduce congestion charges, but the government won’t change the law to let them.
Third, the Economist offers a good analysis of the opportunity that current low fossil fuel prices offer for policy reform:
The most straightforward piece of reform, pretty much everywhere, is simply to remove all the subsidies for producing or consuming fossil fuels. Last year governments around the world threw $550 billion down that rathole—on everything from holding down the price of petrol in poor countries to encouraging companies to search for oil. By one count, such handouts led to extra consumption that was responsible for 36% of global carbon emissions in 1980-2010.
Falling prices provide an opportunity to rethink this nonsense. Cash-strapped developing countries such as India and Indonesia have bravely begun to cut fuel subsidies, freeing up money to spend on hospitals and schools (see article). But the big oil exporters in the poor world, which tend to be the most egregious subsidisers of domestic fuel prices, have not followed their lead. Venezuela is close to default, yet petrol still costs a few cents a litre in Caracas. And rich countries still underwrite the production of oil and gas. Why should American taxpayers pay for Exxon to find hydrocarbons? All these subsidies should be binned.
What a better policy would look like
That should be just the beginning. Politicians, for the most part, have refused to raise taxes on fossil fuels in recent years, on the grounds that making driving or heating homes more expensive would not only annoy voters but also hurt the economy. With petrol and natural gas getting cheaper by the day, that excuse has gone. Higher taxes would encourage conservation, dampen future price swings and provide a more sensible way for governments to raise money.
An obvious starting point is to target petrol. America’s federal government levies a tax of just 18 cents a gallon (five cents a litre)—a figure that it has not dared change since 1993. Even better would be a tax on carbon. Burning fossil fuels harms the health of both the planet and its inhabitants. Taxing carbon would nudge energy firms and consumers towards using cleaner fuels. As fuel prices fall, a carbon tax is becoming less politically daunting.
Lastly, new evidence from New York shows that protected cycle lanes, in addition to being safer and more enjoyable for people on bikes, can also improve life for people in cars:
When New York City first started adding new protected bike lanes in 2007, some drivers made the usual argument against them: Taking street space away from cars would slow down traffic. After years of collecting data, a new report from the city shows that the opposite is true. On some streets redesigned with protected bike lanes, travel times are actually faster. And it turns out the new lanes have a range of other benefits as well.
For pedestrians, the bike lanes make walking safer by shortening crosswalks and making crossings more obvious to drivers. Pedestrian injuries have dropped an average of 22% on streets with bike lanes. Not surprisingly, cyclist injuries have also decreased; on 9th Avenue, for example, even though far more bikes are on the street, cyclist injuries have gone down by 65%.
For cars, a better traffic flow comes partly as a side benefit from a safety feature added with the bike lanes. Cars turning left now have pockets to wait in—so they’re less likely to hit a cyclist riding straight, but they also stop blocking traffic as they wait.
“Having that left turning area, where you’re able to get out of the flow, you can see the cyclist, the cyclist can see the turning vehicle, you can pause and not feel the pressure from behind to make a quick movement,” says Josh Benson, director of bicycle and pedestrian programs for the New York City Department of Transportation. “That’s a major major safety feature of these type of bike lanes. But it also helps the flow.”
Housing issues in Auckland have become a fairly constant news piece in recent years and the affordability issue has become louder and louder. And it’s not just people wanting to buy a house either but also for renters as rental prices rise too, something that is particularly tough for those on low incomes.
We know that one of the key tools to helping unlock development in Auckland is of course the Unitary Plan – depending on what final form it takes. It reached a new milestone last Friday as the Independent Hearings Panel held its final hearing on it. The amount of work the panel has undertaken has been significant. There were 9443 submissions and 3951 further submissions. The hearings began in September 2014 and there have been 242 days of hearings and there were more than 10,000 pieces of evidence.
Between now and July they’ll be working on their final recommendations to the plan which will be voted on by the council. With elections coming up it’s anyone’s guess as to which way councillors will vote. One thing that does seem clear though is that pressure is increasing on them from the government, in particular Housing Minister Nick Smith.
On the weekend he told by both TVNZ’s Q&A and Newshub’s The Nation that he will be imminently releasing a National Policy Statement (NPS) under the RMA which will put pressure on the growing councils like Auckland to open up land.
“Next month I will be producing a national policy directive under the [Resource Management Act] that will put far tougher requirements on growing councils to ensure they are freeing up long-term the land that is required so that we don’t get into the sort of juggernaut that has been at the core of the unaffordable housing problems in Auckland.”
At first blush that sounds similar to the “throw open the gates” type statements he made when he was made housing minister however since that time he seems to have moderated some of his comments and gained a better understanding of some of the finer issues such as density restrictions that prevent intensification. As such I am hopeful that the NPS he’s developing will also address these constraints too.
I also hope the government consider the impacts on infrastructure as part of any policy. Just throwing open the land might sound like the immediate solution but that land also needs infrastructure to support it and that isn’t cheap. The Council, Auckland Transport and NZTA have been working on the Transport for Future Urban Growth which is planning for about 110,000 dwellings on greenfield land and just the major infrastructure is likely to cost around $8 billion.
Yesterday Smith also became a bit more personal calling Councillor Mike Lee a NIMBY, a hypocrite and part of the problem for opposing intensification in Herne Bay.
“Mike Lee is guilty of Nimbyism,” said Dr Smith.
The Government has designated the site of the old Gables pub a “special housing area”. That allows for fast-tracked development, with between four to seven of the apartments “affordable housing”. It’s about getting more housing into inner-Auckland’s “urban intensification”.
But neighbours don’t like it, and, local councillor Mr Lee is on their side. Mr Lee wrote earlier this year, saying the development was “overriding the civil rights of neighbouring property owners”.
Dr Smith responded, saying he found Mr Lee’s position “ironic”, “odd” and “part of the problem”.
“We cannot have that sort of Nimbyism. That’s at the core of where Auckland has gone wrong. That’s why I’ve politely written back to Mr Lee and said ‘actually, you are being a hypocrite’.”
Unfortunately, in many ways Nick Smith is right, over the last few years Mike Lee has fairly consistently voted against rules that would enable more housing, especially in the in inner suburbs.
John Key is also threatening the council and at his weekly press conference yesterday said:
The Prime Minister also warned that the Government would not be able to “sit back” if Auckland councillors did not deliver enough houses in the city.
Asked to elaborate, Mr Key said ministers would make announcements in this area soon.
Could the government ultimately force the Unitary Plan through if the councillors don’t approve it or worse could they install commissioners?
While I don’t agree with everything they’ve said, one positive is that the government have made some better noises around some housing issues. In saying that they also remain very quick to blame the council for the current issues when they need to take a share of the blame too. The reality is the Unitary Plan process is one the government created and more so, some of the ideas like an NPS could have been pushed years ago. Other tools that they’ve implemented such as the Special Housing Areas have resulted in at least some developers using it as a tool for to increase the value of their land-banking.
The bad news is that even if the government and council’s all do their bits well, our housing issues are something that could take decades to resolve. We’ll now have to await with interest to see what comes out of the budget and out of the NPS the government are preparing.
The NZ Herald’s been running a series on Auckland’s housing affordability crisis. The articles thus far have ranged from thoughtful and thought-provoking to downright imbecilic – such as a mortgage broker’s suggestion that young people could afford homes if they gave up their Sky subscription. I think there’s a Tui ad for that.
One of the best bits, however, is the interactive map of housing affordability that data journalist Caleb Tutty put together. Here it is in animated gif form:
The map shows the share of properties sold within each suburb over the last year that you’d be able to afford, depending upon how much of a deposit you’d saved up.
For example, here’s what the affordability map looks like if you have $100,000 in the bank. Under current bank lending policies you can borrow 80% of the house value, meaning that your deposit will buy you a half-million dollar house. Observe how the vast majority of the city is coloured red, indicating that the majority of properties would be beyond your reach.
Incidentally, a $100,000 deposit is a prohibitively large sum for most young Aucklanders. According to Stats NZ data on incomes, in 2015 the median pre-tax weekly income for Aucklanders in their late 20s (25-29) was $729, or around $38,000 a year. Income taxes take about $5,700 of that sum, leaving $32,300 to provide for the necessities and save for a deposit. (On average, people in their early 30s earn a bit more – $901 per week – but that doesn’t close the gap.)
Consequently, the average young Aucklander would have to save something like one-third of their after-tax income for ten years in order to afford a deposit on a half-million dollar home. So in other words, if you’re young, you’re probably screwed no matter how thrifty or prudent you are… unless your parents are wealthy and generous.
However, there are some tentative bright spots in this rather disheartening picture. To illustrate, I’ve reduced the deposit to $70,000, which is still pretty onerous but not impossible for young people. That would allow you to buy a home worth $350,000. Here’s the map. Now the entire city is shaded a deeply unaffordable red. You can hardly buy anything anywhere. The isthmus is red. The North Shore is red. The Waitakeres are red. Manukau is red. You can’t even afford to live in Otara or Manurewa.
But if you zoom in closer, you’ll notice that there is still a solitary green patch of affordability in the middle. The majority of apartment sales in the city centre are still in your price range! You can afford 55% of the properties sold in the city centre or in neighbouring Grafton. (Manukau central is the next most affordable place – just under half of the dwellings sold there are cheaper than $350,000. But there are fewer homes there.)
Prices in the city centre aren’t necessarily cheap in an absolute sense – but it nonetheless offers many more options for a young buyer seeking to buy a starter home than anywhere else in Auckland.
Why is this?
It’s not because demand to live in the city centre is low. Its residential population has quadrupled since 2001 – a rate of increase that far outstrips the rest of the city. Today, there are more people living in the Auckland city centre than there are in Whanganui.
What sets the city centre apart isn’t low demand but high supply responsiveness: the city centre has stayed affordable because lot of apartments have been built there. This includes a mix of expensive apartments and small, affordable apartments to meet a range of different demands for space. Former All Blacks coach Graham Henry is moving into a luxury apartment in the Viaduct Harbour, while there are many students on low incomes living a bit further up the hill.
These maps show one simple thing: Building lots of apartments works. The one place in the city where we’ve allowed it to happen – the city centre – is now the most affordable place in the city.
There’s nothing that special about the city centre. It’s hardly the only place in the city where it’s physically possible or commercially feasible to build apartments. We could allow the same thing to happen in a lot of places, and reap the benefits.
This doesn’t mean a high-rise building on every street. It’s possible to build lots of apartments while keeping building heights to a quite human scale – three to seven storeys, say. This is the model that’s worked well in a lot of European cities. Like this new neighbourhood in Freiburg, Germany:
It’s also a model that allowed fast-growing New World cities to develop and prosper a century ago – as this excellent article from Bike Portland points out. This is the type of building that we used to build:
So what’s the holdup?