The Auckland productivity premium

The Motu Institute recently published new research into the urban productivity premium in New Zealand, or the degree to which firms and workers in big cities tend to produce more and earn higher wages. This is an essential issue for urban and transport policy as it gets to the heart of why we have cities. As we’ve discussed in the past, cities offer opportunities for better connections between firms, workers, and customers, leading to better economic outcomes. (Economists usually describe this as agglomeration economies.)

In the paper – with the enthralling title of “Urban productivity estimation with heterogeneous prices and labour” – researcher Dave Maré sets out to update and extend some of his previous work on the topic. His new research investigates two issues that might bias estimates of the urban productivity premium:

  1. Imperfect competition in small markets: Firms in large cities face more competition and hence will tend to have less market power (ie ability to jack up prices) than firms in small cities. This tends to result in low estimates of the urban productivity premium.
  2. “Sorting” of skilled workers into cities: People with higher skill levels – which could mean more education, more experience, or better ideas – tend to gravitate towards cities. (Similarly, cities tend to have different mixes of firms and industries.) Not controlling for this can result in a high estimate of the urban productivity premium.

Even after controlling for these factors, Maré finds evidence of a non-negligible productivity premium in Auckland. That is,

We document an urban labour productivity premium, with Auckland firms having labour productivity that is 17.9% higher than that of firms in other urban areas, and 17.0% higher than firms in rural areas. Some of this premium is due to the mix of industries in different cities. Auckland has a disproportionately high share of employment in industries that have above average labour productivity. Adjusting for this composition reveals a smaller, but still sizeable, premium of 13.5% relative to other urban areas, and 11.3% relative to firms in rural areas.

Here’s a chart showing how other parts of New Zealand compare to Auckland in terms of productivity, after controlling for industry mix, workers’ skill levels, imperfect competition, and a range of other factors like firm size. (This chart is based on the first column in Table 3 of the paper.) As you can see, firms in Auckland are more productive than firms in other parts of NZ, with Wellington (4.2% less productive) and Tauranga (9.4% less productive) being closest to Auckland.

mare-2016-firm-productivity-in-urban-areas-chart

It’s worth noting that Maré’s new estimates of Auckland’s productivity premium are considerably smaller than his previous ones. In a 2008 paper, he estimated that firms in Auckland were around 51% more productive than firms elsewhere in New Zealand. These are obviously very different numbers! But, as explained in an appendix, the majority of the differences are due to different procedures regarding data selection and processing.

Notwithstanding the exact number, Maré’s new analysis raises a few important conceptual questions about the urban productivity premium. His analysis shows that a large share of the difference in productivity between big cities, small cities, and rural areas is down to the fact that skilled workers tend to sort themselves into cities. When we control for workers’ skill levels, we tend to get lower estimates of the urban productivity premium. Or, if you prefer that in economese:

The meta-analysis by Melo et al. (2009, Table 4) reports that studies that control for labour quality generally yield agglomeration elasticities that are 5 to 6 percentage points lower than studies that do not. In the current study, labour quality adjustment lowers the estimated agglomeration elasticity by 0.057 (from 0.079 to 0.022).

However, I’m not sure it is totally appropriate to adjust for skill levels, as it’s possible that cities’ ability to attract and retain talented, innovative, and motivated people (and productive firms) is in fact a type of agglomeration economy. In other words, we might be controlling away the effect of interest!

Open migration between Australia and New Zealand means that people who can’t find an appropriate place (urban and economic) in New Zealand can easily go to Australian cities. So the alternative for skilled people who are dissuaded from living in Auckland isn’t necessarily that they’ll go and start up a business in Hamilton. Instead, they might head across the Tasman, where their skills are totally lost to New Zealand.

What does this mean for urban policy in New Zealand? I’d tentatively identify two key ideas we might want to focus on in order to allow our cities to get better at attracting and retaining productive people and firms.

First, we need to think hard about whether our policies make it attractive for mobile people to come to (or stay in) our bigger cities. This is a key consideration for, say, urban planning reform, as high housing prices driven by constraints on housing development are an important barrier to people coming or staying. Evidence from the US suggests that, if left unaddressed, high house prices can systematically dissuade people from moving to productive places where they can put their skills to best use.

Second, we also need to think about how to preserve and enhance the amenities that are on offer in New Zealand cities. Our relatively clean air, reasonably well-preserved coastal environment (clean beaches, marine reserves, etc), and accessible forests and natural parks are important attractions, but other areas are letting us down. For instance, rural and small-town water quality is rapidly declining due to expanding dairy farming.

More relevant to transport, street design in New Zealand is pretty retrograde, leading to a lack of high-quality public spaces where people actually want to be. All too often, we insist upon shoving cars down corridors, heedless of the fact that some streets have higher value as places to be. But we know we can do better: places like O’Connell St and Wynyard Quarter give many people joy on a daily basis.

What do you think about the urban productivity premium? And how can we get more of it?

Optimal heritage zoning: an empirical perspective

Back in July, I went down to Wellington for this year’s New Zealand Association of Economists conference. I really enjoy NZAE – people attend because they’re genuinely excited about sharing their ideas and learning from other people. (Stu Donovan and John Polkinghorne were also there.)

I was presenting a paper on using hedonic analysis of property sales to assess and compare the costs and benefits of planning regulations. The empirical side of the paper was an analysis of the impact of dwelling size, lot size, location, and amenities such as the presence of old buildings on property sale prices.

I used these results to consider the rationale for heritage preservation policies. In doing so, I asked three key questions:

  • Is there evidence of positive spillovers (“externalities”, in economese) associated with old buildings?
  • How large are those spillovers relative to other things that people value, such as living close to the city centre or having more living space?
  • Is a blanket heritage control that limits the demolition of building likely to be optimal? In other words, are the positive spillovers from old buildings large enough to justify making it more difficult to develop in some areas?

The first question is very important. As I discussed the other week, people argue that old buildings should be preserved because they are valuable to their inhabitants. To my mind, that is not a good case for government to get involved. If heritage buildings are mainly valuable to their inhabitants, then those people can probably sort things out without the need for any rules.

But if there are positive spillovers from heritage, there may be a case to regulate. That’s because decisions made by a property owner about whether to demolish a heritage property may not take into account the impacts that their decisions may have on other people.

Many – although certainly not all! – old buildings have aesthetically pleasing exteriors. Simply put, they’re nice to look at. (This may simply reflect a selection process – i.e. people built ugly buildings 100 years ago, but they’ve been demolished.) The presence of these buildings can make an area more attractive for passers-by and other residents.

Central Post Office 1921

Central Post Office – now known as Britomart (Source)

There are a number of ways that we can measure the public value of aesthetically pleasing old buildings. For example, people may visit areas with more old buildings more often and spend more time walking the streets. (Although I caution that there’s a risk of omitted variable bias here, as areas with older buildings also tend to have older, more walkable street networks.) They may spend more money in shops in these area. Or, importantly, they may be willing to pay higher prices to live around old buildings and enjoy their aesthetic characteristics more frequently.

In my paper, I used residential property sale data to identify the existence of positive spillovers from old buildings. I’ll spare you the details of the number-crunching, but basically, I used four years of recent property sales data to determine whether people are willing to pay higher prices to live near old (pre-1940) buildings.

The results suggest that there are modest positive spillovers from old buildings. On average, every additional pre-1940 building in a neighbourhood was associated with a 0.3% increase in the price paid for neighbouring dwellings. Some individual buildings are likely to have stronger spillovers, of course – not all old buildings are created equal! And there are likely to be some spillovers that aren’t captured in residential property prices.

But as heritage policy is often a very local event – people tend to advocate for the preservation of buildings in their suburb or neighbourhood – it’s likely that this measure captures many of the spillovers that matter. Which leads us on to the third question: When is a blanket heritage control likely to be optimal?

The downside of a blanket control is that it will make it more difficult (or even impossible) for people to redevelop sites or make additions to existing homes. My analysis of recent property sales showed that the quantity of floorspace has a strong effect on property values. I estimated that a 10% increase in the size of a dwelling was associated with a 4.8% increase in its sale price, holding all other factors constant.

Based on this result, I asked: How much additional floorspace would be required to fully offset the loss of aesthetic spillovers from neighbouring pre-1940 buildings? In other words, what’s the point at which people might be indifferent between preserving heritage and getting opportunities to intensify their properties?

The results are mapped below. Darker greens and blues indicate areas with larger positive spillovers from old buildings. Yellow colours indicate areas where there are few if any spillovers. Of course, there are likely to be a number of subtleties that I wasn’t able to pick up in the data, such as the quality of heritage properties in different areas.

Heritage_CB_test_map

Change in floorspace required to offset loss of heritage spillovers (Source: Nunns, 2015)

One interesting thing about this map is that it suggests that the value of heritage preservation may be relatively low compared to the value of opportunities for intensification almost everywhere in the city. Even in the most heritage-y parts of Devonport and Ponsonby, it would only take a 30-40% increase in floorspace to fully compensate for the loss of localised spillovers from all the pre-1940 buildings in the neighbourhood. That isn’t an unreasonable possibility given that these areas have standalone houses sitting on crazily expensive land. (And the fact that many of these buildings would be preserved by their owners anyway.)

So what should we make of this?

First, an important caveat: these results are not definitive. They’re based on a piece of quantitative analysis that captures overall trends but omits qualitative aspects of the aesthetics of old buildings. In some areas, it may under-estimate the contribution of individual buildings that are especially attractive. In others, it will over-estimate the magnitude of spillovers, because the old buildings in the area are simply not that flash.

But even taking that caveat into mind, there may be room to optimise heritage preservation by focusing blanket heritage controls in areas where evidence of positive spillovers is strongest. So it’s encouraging to see that Auckland Council is refining its position on heritage controls in the Unitary Plan. (And dispiriting to see the NZ Herald’s alarmist one-sided take on the issue. Pro tip to the editors: articles like this are why I do not buy your newspaper. I spend money on other print media, so you’re missing out.)

It’s also worth remembering that blanket controls aren’t the only way to preserve heritage. Heritage schedules can be used to target protections to individual buildings with notable aesthetic or historic value. And councils can directly fund the preservation of notable buildings by buying up and renovating them. In some cases, these may be a more efficient way of ensuring that we maintain the good bits of the city at a reasonable cost.

What do you think an optimal heritage preservation policy would look like?

Isolated in the quarter-acre pavlova paradise?

The other week, the NZ Herald reported on some new research into Kiwis’ sense of social connectedness. The results, unfortunately, are fairly dismal:

New research has found that New Zealanders are losing touch with their neighbours – and it’s affecting our wellbeing.

In the recently released results of the Sovereign Wellness Index, New Zealand trailed behind other countries when it came social connections and community, with our neighbourly relations particularly lacking.

“We came last when compared to 29 European countries that deployed the same survey, which is not only a disappointing result but, when compared to the first Sovereign Wellbeing Index in 2013, it shows no improvement,” said Grant Schofield professor of public health at AUT University, who led the research.

Interestingly, the study’s authors identified urban form as a principal cause of our weak social bonds:

The survey found that only four per cent of New Zealanders agreed they felt close to people in their local area – which Mr Schofield said was a symptom of sprawling, car-centric cities such as Auckland.

“Community design has a role to play in fostering connections and I don’t believe we are seeing the benefit of this in New Zealand,” he said.

“Work, play and home are often on opposite sides of the city and the commute is killing our neighbourly interaction and our community integration,” Mr Schofield said.

The survey also found that almost 40 per cent of Kiwis only meet with others socially once a month or less.

There are probably some other factors at work here. As I discussed in a post last October, Auckland’s commute times really aren’t that bad – the average Aucklander doesn’t seem to spend enough time on the road to explain our lack of social engagement.

Avg commute times in large cities

On the other hand, New Zealanders do work quite long hours when compared with Europeans. The average employed Kiwi worked 1760 hours a year in 2013 – around 27% more than the productive Dutch and Germans. Long hours spent at low-income jobs is probably worse than commuting for most people.

Nonetheless, we do need to take social connectivity seriously when we think about what we’re trying to accomplish in urban and transport policy. If you think about it, social connection is why we have cities in the first place. Urban economist Edward Glaeser is fond of describing cities as “the absence of physical space between people and companies.” They allow us to be close to each other, which offers all sorts of fantastic opportunities for efficiency and innovation and enjoyment.

Cities, in Glaeser’s view, emerge from our deep evolutionary biology. We are social animals – we like being around others and become unwell when we’re isolated. Hence cities.

Growth in world incomes over the past two centuries has not coincided with a great dispersal of human population. We have not sought to retreat into our own isolated estates. Instead, we have invested our newfound wealth into making our cities healthier, more attractive, and larger: steel framed buildings, elevators, trams, subways, public health and education, reticulated water systems…

World Bank GDP per capita and urbanisation

In short, humans have a preference for proximity, and we come to cities to satisfy it. If our cities are in fact isolating us, we need to re-think how we’re building them. Plonking down new houses in a paddock and calling it a solution to housing affordability is dangerously short-sighted. We’ve got to be thinking a few steps beyond that, and asking:

  • Will complementary land uses be integrated? Are we going to build places that pass the “five minute pint test” of having a place to get a pint of beer or a pint of milk within walking distance? Or will people have to get in the car to run even the simplest errands?
  • Will people have good access to the places they want to go? Will the housing choices we offer people respect their time, energy, and money, or will they lock people into long commutes on congested roads?
  • Will we offer people good transport choices that give them freedom to opt out of congestion by taking rapid transit or cycling?

Do you think Auckland (and other NZ cities) are socially disconnected? If so, what do you think we should do about it?

The moral case for immigration

In a post several weeks back, I talked about the economic case for immigration and population growth. In it, I hypothesised 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.

In my view, building good cities that attract and efficiently accommodate population growth can make us better off by strengthening the agglomeration economies at work in New Zealand’s economy. It can also make us better off in non-economic ways: consider romantic relationships, for example. If you’re young and single (or old and single), you should absolutely prefer more people to be arriving than leaving. The more young, mobile people are staying or arriving in New Zealand cities, the better your odds are of ending up in a good relationship.

However, I don’t think the economic case for immigration is as strong as the “moral” case for immigration. That’s because immigration is one of the most powerful mechanisms for enabling people to lift their incomes and social status. Migration can offer individuals opportunities that they never would have had in their home countries.

I’m going to discuss some economic research on the topic, but first I want to explain why it’s important to me.

Basically, in the 200-400 years in which reasonable data on my ancestors is available, migration has been just about the only thing that has enabled us to have any significant social or income mobility. Ever.

Migration has worked out well for me. Moving back to New Zealand has given me opportunities that I might not have had in the United States. Thus far, I’ve had a more interesting and fulfilling career and I’ve been surrounded by interesting and friendly people while doing it.

Migration also worked out well for my parents and several of their siblings, who left New Zealand in the 1970s and 1980s during the wave of economic destruction caused by collapsing commodity prices and Muldoonist Think Big initiatives. Like many other New Zealanders, they’ve done well overseas.

And, back in the 1840s-1890s, migration to New Zealand opened up opportunities for social mobility and independence to my great-grandparents and great-great-grandparents. In fact, those were just about the first opportunities anyone in my family had to get ahead. If it weren’t for migration, we’d still be lower-middle class in some grim former mill town in northern England.

I’m grateful for the opportunities that migration has offered me and the opportunities that it’s offered to my family. Furthermore, I feel strongly that more people should have similar opportunities. I don’t believe in pulling up the ladder. If some hard-working folks from Nigeria, Guatemala, Bangladesh, Samoa, or wherever want to try their luck moving to an unknown country, I’m all for it. Give them a fair go.

Several recent papers by University of Otago economist Steven Stillman (another immigrant!) and several co-authors help quantify how valuable giving people the opportunity to immigrate can be. Stillman uses evidence from two “migration lotteries” operated by the New Zealand government. Under a programme started in 2002, a small number of Tongans and Samoans randomly selected from a pool of applicants are offered residency in New Zealand.

Evidence from the Tongan migration lottery shows significant improvements in well-being for migrants. Stillman and his co-authors found evidence of:

  • “Very large gains in objective well-being result from migrating to New Zealand (Table 2). The weekly wage of principal applicants rose by NZ$321 (US$200) within a year of first moving which is almost three times the weekly wages of the control group in Tonga (NZ$117).”
  • “More subtle and complex effects on subjective well-being…” After four years, they observed a “very substantial rise in the other components of mental health, of about three points, which is equivalent to one quarter of the wave 2 scores for the control group in Tonga.”

Evidence from the Samoan migration lottery shows that migration can also improve wellbeing for migrants’ families in the old country, at least in the short term. Stillman and his co-authors found that migration increased household consumption and reduced poverty in households that sent migrants to New Zealand, although these effects faded away over time.

In short, even after controlling for self-selection bias (i.e. the fact that migrants tend to have both motivation and resources to migrate), migration seems to make people better off. It doesn’t necessarily work for everyone, but it certainly works for most people.

In my view, the evidence suggests there are good economic and moral arguments for enabling migration, rather than cutting it off in the good times. If we want to manage house price inflation, it would be fairer and more sensible to pursue other policies instead. This could include (but certainly isn’t limited to):

  • Changes to tax policy to harmonise our property taxes with major trading and investment partners – as Stu highlighted, our unusually low property taxes distort people’s investment decisions and push cash into housing
  • Supply-side policies like a revitalised programme of state house construction or urban planning policies that enable people to build more housing in areas that are accessible to jobs and amenities.

What’s your experience with immigration? Remember, you or your ancestors came here relatively recently by boat or by airplane!

Can public transport save households money?

People sometimes argue that we should provide more public transport because it will reduce households’ transport costs. But is that actually true?

I took a look at this issue in a recent working paper on Location Affordability in New Zealand Cities that I presented at the 2014 New Zealand Association of Economists conference. In that paper, I found that:

…housing costs tend to fall with increasing distance from city centres, while commute distances, which drive variable transport costs, tend to increase. All other things being equal, higher rates of public transport use did not appear to improve transport affordability due to the fact that New Zealand’s public transport fares are comparable to or higher than car operating costs. However, car commuting is likely to be more costly in areas where parking is priced – a factor that we were not able to robustly estimate.

Car ownership rates, which drive a large share of transport costs, tend to be fairly consistent outside of city centres. One of the benefits of providing public transport and walking and cycling infrastructure is that it enables households to reduce car ownership costs. Conversely, policies such as minimum parking regulations tend to encourage higher rates of car ownership by ensuring abundant and low-priced parking.

In short, public transport can save households money, but whether it does in practice depends upon what how much they would pay for parking and whether they own a car or not. (A classic case of an economist saying “on the one hand… on the other hand…“!)

Here, I’d like to take a closer look at transport costs using a concrete example: my regular commute from Mount Eden to Takapuna. Here’s the Google Map view of the route between Mount Eden village and central Takapuna that I use on the days when I have to drive. (Note: The addresses on the map do not show where I live or where I work.) At 12.9 km, it’s a little bit longer than the average Aucklander’s 11.5 km commute:

Screen Shot 2014-11-07 at 1.48.16 PM

Time for some maths. According to data from AA’s 2013 Petrol Car Operating Cost Report, a compact car costs approximately $0.25 per kilometre to run. This figure includes the cost of petrol, oil, tyres, and regular repairs and maintenance, but excludes the cost to own the car.

As a result, I’d expect to spend around $6.45 per day commuting by car (12.9km x $0.25/km x 2).

What would the same journey cost on public transport? According to Auckland Transport’s journey planner, the best way to do this is to take the 274/277 bus from Mount Eden village to Symonds St, walk down the hill, and hop on the 839/858/875/879 service, which runs to central Takapuna. Because both buses run frequently all day, this is a really easy connection. (AT’s New Network will be adding frequent, connecting services to many more parts of Auckland – which is really great news for south and west Auckland and the North Shore!)

As I use a HOP card, which offers discounts on the cash fares and also a $0.50 discount if you transfer between services, the entire trip costs me $4.05 – or $8.10 per day to commute in both directions.

So far, driving is coming out ahead – the costs to operate a car are a bit cheaper than the cost of bus fares. But wait: we’ve forgotten to account for parking costs!

Albany P and R

How could we forget about parking when there’s so much of it in Auckland? (Photo: Albany park-and-ride)

Wilsons operates the closest parking garage on The Strand in Takapuna. They charge $11 for all-day parking. If I pay them for parking – and I don’t have many other options in the area – that means that a car commute now costs $17.45 ($6.45 + $11). That’s over twice as expensive as taking the bus!

In short, when people must pay for parking, public transport is a much cheaper option. However, a lot of people don’t pay directly for parking, due to the fact that minimum parking rules have resulted in an uneconomic oversupply of parking in many areas. (They still pay for parking indirectly – through lower wages, more expensive groceries, or higher housing costs. But these costs, while significant, aren’t as obvious to people on a day-to-day basis.)

And we haven’t yet accounted for one of the big costs of driving to work – the fixed costs of car ownership. Based on data from the AA’s Petrol Car Operating Cost Report and the Ministry of Transport’s data on the NZ vehicle fleet, I estimated that it costs around $2,900 per annum to own an average car (i.e. not a new car). This includes the cost of registration ($288), insurance ($790), and warrant of fitness ($49, twice a year), as well as the interest payments and depreciation on the car itself (assuming that the average car is worth around $8,000).

$2,900 per car per year is obviously quite a big cost for most households, and I’m sure a lot of people would rather save the money and spend it on other things. Abundant public transport and walking and cycling options can give households the option to downsize on car ownership and save thousands annually.

Here’s a summary of my calculations. As you can see, by taking public transport rather than driving I save $9.35 every day I commute to work. Over the entire working year, this adds up to a lot of money – over $2,300!

And by choosing to take the bus and not to own a car, I save even more money – over $5,200 every year in total. If I choose to save that money instead, it will add up to a large sum of money over time. According to Sorted.org.nz’s savings calculator, if I put an additional $5,200 in my Kiwisaver account every year and get a modest 6% return, I’ll have more than $200,000 in retirement savings after thirty years – which is enough to let me retire three or four years early.

In other words, our driving habit is literally squandering our lives. Sell your car and retire early!

Commute costs Mt Eden to Takapuna

Finally, it’s worth reflecting on the policy implications of this analysis. The maths on transport costs suggest that:

  • Distortions in one market (parking) can affect outcomes in an adjacent market (public transport). When parking is available for free, it makes taking the bus or train much less attractive from a financial perspective. This in turn makes PT seem less viable than it would be if parking wasn’t heavily subsidised. And it’s simply unrealistic to expect parking to be free – space is expensive in cities!
  • Councils have in the past regulated for an oversupply of parking by setting highly prescriptive minimum parking rules. In addition to forcing property owners to pay for supplying too much parking, this makes it impossible for people and businesses to price parking to reflect the true cost of providing it. This is insane, and we need to stop doing it.
  • While public transport can save households money on a day-to-day basis, the big gains arise when people cut back on car ownership. Transport and urban planning can enable households to make this choice – or prevent them from doing so.
  • When councils choose to put in new PT services or infrastructure, they should always ask: what do we need to do to turn a neighbourhood with a frequent bus route into a neighbourhood where you don’t need to drive for daily necessities? Neighbourhoods need to pass the “five minute pint test“: can you get a pint of beer or a pint of milk within a five minute walk?

So, what would you do with an extra $5,200 in your pocket every year?

The importance of housing choices in cities

Good cities should provide choices to their inhabitants. Any big (or small!) city is composed of a variety of people with various preferences, needs, and budgets. Look around you: Aucklanders are a bloody diverse bunch, and we’re getting more so as I type these words.

The Aucklanders of the future will want to get around in different ways, live in different places, and entertain themselves in different ways. In fact, this is already happening. It’s the reason for the success of the innovative mixed-use developments on the waterfront, the runaway success of Britomart and other rail upgrades, and, on the flip side, declines in vehicle kilometres travelled per capita.

At Transportblog, we recognise the importance of choice in cities, which is why we’re so enthusiastic about opportunities to invest in a better public transport network and better walking and cycling options. We believe that offering Aucklanders more travel choices at an affordable price will improve our living standards. Full stop.

What’s true in the transport market is also true in the housing market. Offering a greater range of housing choices will raise the living standards of Aucklanders, because we want to live in different types of homes. Enabling higher-density development in more areas will make some people much better off, because they want to live in dense environments, without making anyone else worse off.

Critics of intensification often fail to understand this argument. They say: “Oh, you just want to make everyone live in a tiny shoebox apartment!” In fact, the exact opposite is true. Enabling some people to choose to live in apartments or terraced houses will ensure that there is more land available for others who would prefer a lifestyle block in Dairy Flat or a quarter acre in Flat Bush.

Essentially, urban planning that enables housing choice allows for both high-density and medium-density living options and more low-density suburban living. This isn’t idle conjecture – it’s a well-established finding in urban economic theory and the empirical literature.

A few years ago a team of economists from the Reserve Bank of Australia put this idea to the test using economic modelling techniques. Their paper, entitled “Urban Structure and Housing Prices: Some Evidence from Australian Cities” (pdf), tested the impact of different urban policies. (NZIER economist Kirdan Lees has also done some similar work for New Zealand, but his initial paper (pdf) did not look at building height limits. In any case, the results are similar.)

The RBA economists model a relatively simple, monocentric city with employment and amenities concentrated in the centre and the residential population radiating out in a circle – the basic workhorse model in urban economics. While this is a simplification, it can easily be generalised to a polycentric city – just imagine multiple centres rather than a single centre. Their “unconstrained equilibrium” looks like this:

Kulish et al (2011) unconstrained

In short, densities – and building heights – are highest in the areas that are most accessible to employment and amenities. Land prices are also highest in these areas. This doesn’t occur as a result of a planner’s fiat – it happens because lots of people want to live close to the action. Others, of course, would prefer to be a bit further away with more space – and that is what they get in the unconstrained urban equilibrium.

Next, the RBA economists simulated the effects of imposing a building height limit. In effect, limiting building heights would prevent people from choosing to live at high densities near employment and amenities. Here are the results – the magenta lines show the effects of the constraint:

Kulish et al (2011) building height limit

Pay close attention to the middle two panels. They show that a building height limit does not just restrict high-density development in the centre – it also raises densities in the outskirts of the city. In short, a city that constrains medium to high density development doesn’t just fail to provide options for people who want to live in apartments. It also fails to provide options for people who want quarter acre sections or lifestyle blocks.

Has this happened in Auckland? It’s difficult to say for certain, but my research on population densities in NZ and Australian cities found that Auckland was missing out on both medium-density suburbs and low-density exurbs.

Finally, as the first panel shows, these restrictions are expected to raise the cost of housing for everybody, regardless of location or housing preference. As I said at the start, good cities provide choices for their inhabitants. Failing to provide for choice in the housing market just means that we all pay too much for homes that don’t suit our preferences.

So, what’s your dream Auckland home? Subject to budget constraints, of course…

Location affordability in New Zealand cities – is greenfield growth really affordable?

Several weeks ago I attended the annual New Zealand Association of Economists conference in Auckland. Geoff Cooper, Auckland Council’s Chief Economist, had organised several sessions on urban issues, and as a result there was a lot of excellent discussion of urban issues and Auckland’s housing market. You can see the full conference programme and some papers here.

At the conference, I presented some new research on housing and transport costs in New Zealand’s main urban areas. My working paper, enticingly entitled Location Affordability in New Zealand Cities: An Intra-Urban and Comparative Perspective, can be read in full here (pdf). Before I discuss the results, I’d like to thank my employer, MRCagney, for giving me the time and the data to write the paper, along with several of my colleagues for help with the analysis, and Geoff Cooper for suggesting the topic and providing helpful feedback along the way.

The aim of the paper was to provide broader and more meaningful estimates of location affordability that take into account all costs faced by households. In my view, widely-reported sources such as Massey University’s Home Affordability Report have too narrow a focus, looking only at house prices. However, a range of research has found that transport costs vary between different locations depending upon a range of factors such as urban form, availability of transport, and accessibility to jobs and services. And transport costs are pretty large for many households!

I used two methods to provide a more comprehensive estimate of location affordability in Auckland, Wellington, and Canterbury. First, I used Census 2013 data to estimate household housing, car ownership, and commute spending at a detailed area level within each of the three regions. This allowed me to estimate variations in affordability between areas within individual regions. Second, I used household budget survey data to get a sense of how New Zealand cities stack up against other New World cities.

My main findings were as follows:

  • First, rents (a proxy measure for housing costs) tended to fall with distance from the city centre. However, commute costs tended to rise with distance – meaning that outlying areas were less affordable for residents once all costs are included. This was consistent with previous work on location affordability in New Zealand and the United States.
  • Second, international comparisons suggest that Auckland and Wellington have relatively high housing costs and that this may be driving some of the affordability findings. While this finding lines up with previous research that’s focused on house prices alone, it’s important to note that the location affordability estimates suggest that a focus on greenfields growth alone may not save households money.
  • Third, while I didn’t identify any specific policy recommendations, I’d recommend that (a) policymakers should consider all location-related costs when attempting to address affordability for households and that (b) further research should focus on removing barriers to increasing the supply of dwellings in relatively accessible areas.

And now for some pictures.

These maps show two measures of location affordability within Auckland. The left-hand map shows estimated housing costs (i.e. rents) as a share of median household incomes at a detailed area level. Broadly speaking, this map shows that expected housing costs fall between 20% and 30% of household income in most of the city, although some areas are relatively less affordable.

The right-hand map, on the other hand, incorporates expected car ownership and commute costs. Overall location affordability is lower throughout the city. Expected housing and transport costs rise to 40-50% in areas of west and south Auckland, as well as the entire Whangaparoa Peninsula. The most affordable areas for their residents tend to be in Auckland’s inner isthmus suburbs.

Auckland map 1 Rent share Auckland map 2 HT share

(Click to enlarge)

I’ve also combined this data into a graph that presents location affordability by distance from Auckland’s city centre. The bottom (blue) line shows housing costs as a share of median household income, weighted across all area units within each 2-kilometre concentric circle radiating outwards from the city centre. It shows that, on average, households spend a similar share of their overall income on housing costs in both close-in and outlying suburbs.

The top (red) line shows that combined housing, car ownership, and commute costs increase as a share of household incomes with increasing distance from the city centre. On average, households that live further out of Auckland spend more on location-related costs, as lower lower rents are offset by added commute costs.

Auckland H_T distance chart

The results for Wellington and Christchurch were broadly similar – although with a few interesting differences related to their urban form and transport choices. However, as this is the Auckland Transport Blog, I’m going to suggest that you read the paper to see those results. It’s long, but it also presents a lot of new data on housing and transport costs in New Zealand.