There has been a great deal of emphasis on the zones where higher buildings will be allowed in the media coverage of the Unitary Plan. Especially giving voice to those who see this as unwelcome. Yet the plan isn’t by any means only about Auckland ‘growing up’, it also includes the quite substantial expansion of the current city limits. So I thought it might be useful to have a look at this side of the plan, particularly in order to try to get a sense of the likely character of the future city. Will Auckland still be a place where people with the attitudes of the man in the cartoon below will still be able to fit?
Malcolm Walker Metro April 2013
Below is a chart from a doc on the Council’s UP shapeauckland.co.nz site:
This chart says there are currently 20,000 sites ready to go outside the existing MUL [Metropolitan Urban Limits] and 50,000 properly rural sites plus 90,000 new ex-urban greenfields new suburban ’sprawl’ sites adding up to 160,000 sites for new low rise detached dwellings in [potentially] leafy environments proposed under the new plan.
This is to complement an identified additional capacity for some 280,000 dwellings within the existing MUL. These of course will not by any means all be apartments, it includes for example the current conversion of the Manukau golf course into new low rise suburb of detached houses by Fletcher Building.
Auckland has around 485,000 existing dwellings most of which are detached houses. What that proportion is to apartments is hard to find, the best I could do is the following from the 2006 census. This site says that in 2006 of a toatal of 437,988 there were:
approx. 311,000 = separate houses
approx. 98,500 = two or more flats/ houses, town houses/ apartments joined together
So back in 2006 there were just under a 1/4 of dwellings of a more intensive typology. But not all apartments by any means, as this grouping includes anything that isn’t a detached single dwelling, like suburban flats, townhouses, as well as partments. It will be interesting to see how this may have changed in this year’s census. This is what they say about this ratio:
The proportion of occupied dwellings that are separate houses appears to have declined slightly during that time, while the proportion of flats, townhouses and apartments appears to have increased from 21.7 per cent in 1996 to 23.9 per cent in 2006.
The bulk of these multi-unit developments have been in the CBD, with other significant higher density housing in areas in the periphery of the CBD e.g. Newmarket, Mount Eden and Grey Lynn. Other centres in the region are also seeing higher density development such as Henderson, Papakura, Takapuna, Botany, and Albany.
Looking ahead to 2041 will 1 million more people require say 300 000 more dwellings? And even if we assume the bulk of the new dwellings are of the attached typology, say 2/3, we are only looking at shifting the balance from about 24% to 38% of the total. Auckland in 2041 under the Unitary Plan as it is now will still predominantly be a place of detached houses. Especially because as observed above the attached dwellings will remain in a small number of places and, of course, because these places will be more densely occupied by definition, they will cover a much smaller area of the city than will the detached housing. Of course it is important to note that it is those that are happy to live a more urban existence that will enable Auckland to grow yet preserve whole areas of existing low density suburbia. Somewhat ironically. And only if there are some areas where greater density and higher buildings are allowed.
Of course a great deal will no doubt change over that period so whether the population does grow this fast and how people will choose to live is, of course, uncertain. But it is pretty clear that there is nothing particularly radical in the Plan in terms of restricting the future of Auckland in any one direction. If anything it just continues the recent gentle increase of ‘city-like’ habitation in Auckland. In other words Auckland is slowly morphing from having a big town nature towards having more city like characteristics, but slowly. This seems likely and natural and not unlike what has happened in Sydney and Melbourne.
My personal view is that it would be a poor outcome if all of the land identified for possible greenfields suburbs got developed in the way we have been, but it is certainly possible under this plan and it may be. Likewise I would prefer to see more intensification in selected areas, but it is clear that this is by no means certain under the plan. It will depend mostly on people’s desires, as expressed by the market.
It will be interesting to see, as this century unfolds, whether Auckland continues the international trends already observable here and best summed up in this book.
Whichever way Auckland grows, and my guess is it’ll probably be both up and out, I just hope that we do it better with more local walkable and compact centres and much better transport options than we bothered with until recently. And it does seem that on balance the Unitary Plan goes some way towards making these improvements more likely.
Now, if we could just get a much more rational approach to transport investment by central government then this plan will go a long way towards building more successful communities of all kinds in our biggest city.
Aside from the rather depressing patronage news, the most interesting report on the March agenda of the Auckland Transport Board is the Integrated Transport Programme (ITP). We saw some snippets of this document at last month’s Board meeting, but this is the first time we’ve seen a document that seems fairly critical in filling in the details of giving effect to the transport section of the Auckland Plan. The whole document is a fairly lengthy 100+ pages, excluding the Appendices (which aren’t on the AT website anyway for some odd reason), so it might take a few posts to get our heads around it completely.
A useful place to start is what’s called the “ITP approach” – which lays out the two major strategies which sit behind the ITP, as well as a kind of “where to from here” discussion:So it seems like the document is likely to pretty much always remain “live” and a work in progress. This is probably a very good thing, as the gaps in it become increasingly obvious as we read on.
One of the key initiatives appears to be what’s referred to as the “four stage intervention process” – which really just highlights that we should do everything we can to use what we have better before we go and build new stuff. Given the Auckland Plan approach of “just build everything and do it as quickly as possible”, this is a welcome breath of sanity and – if applied properly – should lead to things like more bus lanes (to optimise the use of existing road space for people throughput) and hopefully fewer expensive and stupid motorways.
However, all this talk about optimising existing networks seems to get flung out the window when it comes to the ITP’s investment profile over the next 30 years, which lumps a huge amount of spend into the first decade:
By way of comparison, the ITP notes that since 2000 there has been around $7 billion of total spending on transport in Auckland – which means that this plan is based around the assumption that spending in the next 10 years on transport will be more than triple what we’ve spent in the last 10 (or so) years. Even given inflation that seems rather optimistic.
So what results do we get from this massive spend-up? Well, pretty rubbish to be honest if you use congestion as you key measurement of success. I can actually start to see why the government is sceptical of Auckland’s approach to transport if these really are the outcomes (although they’re solution of building more roads is just likely to make things even worse):Presumably the weird result of inter-peak congestion ending up worse than peak congestion, which theoretically means we need to come up with new names for them, is just a bizarre quirk of the transport modelling as to my knowledge there’s nowhere else in the whole entire world that finds its roads busier off-peak than during the peak. Which does call into question the validity of all the modelling results in my opinion, but let’s set that issue aside for a minute.
Another way in which Auckland’s future transport investment seems to completely fail in terms of delivering the outcomes we want is in relation to reducing greenhouse gas emissions. The table below is, quite frankly, pretty embarrassing reading:
The obvious question from all of this is “why are the results so bad when we’re spending such a massive amount of cash on transport?” This leads to further questions about whether the mix of projects is right, whether we’re measuring the right things, what hasn’t yet been looked at in terms of policy initiatives (road pricing, stronger travel demand management, less urban sprawl) and what impact on these results individual proposed projects might have. For example, the amount of increased congestion in the CBD or the growth in CO2 emissions resulting from building another harbour crossing.
Turning to the project mix, the map that was in the version of the ITP presented in February – which seemed to be riddled with errors – has now disappeared to be replaced by something much vaguer in terms of projected costs. Here’s the roading map:
While it’s possible that some of the numbers in the February version were incorrect, it’s worth refreshing our memory to highlight the vast bulk of future spending on new infrastructure over the 30 year span of the ITP is proposed to be on new roads:
The final image to highlight is where and when the ITP thinks that growth will occur over the next 30 years – which seems to be the base ‘input’ to the transport modelling and is fairly alarming to anyone other than Nick Smith:
So now that we’ve confirmed a land-use growth pattern based largely on sprawl and a transport investment plan based largely on building more roads will deliver really bad outcomes can we please get around to doing what’s supposed to be the Auckland Plan vision: a quality compact city with a vastly improved public transport system?
Because, to be frankly honest, this plan is rubbish.
Interesting news out this morning of a report, paid for by the government and Auckland into the economic competitiveness of the NZ economy. While the whole report hasn’t been released yet, information has emerged about a chapter in it relating to Auckland. The report has been put together by Hong Kong-based Professor Michael Enright and another expert, Michael Porter. It appears that the report has been fairly critical of the current state of Auckland however positively it does suggest that we are going in the right direction, just not fast enough. The report follows on from a similar one from him done in the 90′s on the same issue.
Auckland, Professor Enright said, lacked entertainment and cultural facilities, still depended on cars to get around and needed to move the container port off the most important piece of land in New Zealand for an iconic building.
“We should ask, ‘What is the value of the Sydney Opera House to Sydney, or the Eiffel Tower to Paris?’
“While foreign impressions of Auckland are positive, very few foreigners can name a single thing that is distinctive about the city,” the report said.
Some of his strongest criticism was directed at the CBD, calling the $45 million upgrade of the Aotea Centre a “concrete jungle” and bemoaning the lack of a world-class entertainment or nightlife district, like a Times Square.
“Queen St, which should be the Champs Elysees, the Fifth Ave of Auckland, is deteriorating … there is limited outdoor cafe culture near the city centre.”
Professor Enright said Auckland’s first priority should be a mass transit system, including the city rail loop, followed by revitalising the CBD – calling the $45 million upgraded Aotea Square a “concrete jungle” – and an end to urban sprawl in favour of an “overall denser Auckland”.
That would lead to a “complete change” in what Aucklanders consider the ideal lifestyle, including giving up the house in the suburbs and the car.
Many of these ideas are contained in the Auckland Plan – a 30-year blueprint for the city – but Professor Enright said the plan was not bold enough and Auckland might arrive in 2040 prepared for 2022.
Personally I’m not convinced for the need for an iconic building on the waterfront, but in general I agree with many of the sentiments. As with my post this morning, I think that many of the projects in the Auckland plan are good but do need some re prioritisation. You can also hear a report on this from Radio NZ below.
Or listen here.
But naturally a report like this, which generally supports the council in the key areas of housing and transport doesn’t sit well with the Government. Steven Joyce has already criticised the report and blamed officials for organising it.
Or listen here.
As the debate over intensification versus urban sprawl seemingly intensifies, there is one assumption that seems to underpin a lot of the discussion – from both sides of the debate actually. That assumption is that achieving most of Auckland’s future growth through intensification will be an enormous challenge, a ‘step change’ from what Auckland has done before, requiring a huge change in mindset away from living in a traditional (mythical) “quarter acre paradise” and towards living in different housing typologies like terraced housing and apartments.
The Auckland Plan’s development strategy – which generally (at least in words) supports a compact city approach – runs this “story” quite significantly:
Over time, the viability of attached and higher-density housing will improve, and provide choice for Aucklanders. Chapter 10: Urban Auckland shows examples of housing types across a wide range of densities and formats, and indicates the types of locations where we can expect them to be built. This is also explained in the following section on the Development Strategy maps. A healthy supply of high-density housing has the potential to address the challenge of housing affordability, through efficiencies in land use and infrastructure provision. The delivery of housing choices depends on many organisations, notably the private sector.
While it’s true that detached housing has typically constituted the majority of dwellings built, this doesn’t mean that Auckland’s recent growth has predominantly been through urban expansion – therefore making a “70/30 split” between intensification and expansion supposedly aspirational. Well some information we have managed to obtain from the councils research unit shows that when you look at the proportion of housing comprising either ‘intensification’ (additional dwellings within the existing urban footprint) or ‘expansion’ (additional dwellings outside the existing urban footprint) over the past 15 years a significant majority of new dwellings are ‘intensification’:
Source: Auckland Council research unit – covers April 1996-December 2011
Looking at the numbers in terms of proportions it’s clear that in every single year many more dwellings have been consented inside the current urban area than outside – with 2005 being the year with the lowest proportion of intensification at 61%:
While of course many of the ‘easier’ intensification opportunities, such as infill housing, have been used up over this time (and the decades before it – Auckland has been significantly intensifying since the 1970s), what this information clearly shows is that achieving most growth through intensification is not really a challenge. We’ve been doing it quite well for quite some time. Clearly Aucklanders seem to have preferred the choice of living somewhere within the existing urban area – even if it meant a smaller section or an apartment or some other form of housing – than the urban edge.
Given this background, the Auckland Plan aspiration of 70% of development being within the 2010 urban limits (which actually go significantly beyond the 2010 urbanised area) seems nothing but business as usual and anything below that is actually a shift away from what Auckland has been doing for the past 15 years towards a greater focus on urban expansion. A focus on most growth through intensification is not revolutionary or aspirational or ‘requiring a step-change’ at all – it’s what we’ve been doing for quite a long time.
My last two posts (here and here) considered Demographia’s recently released survey of housing affordability for 2013, which concluded that housing in NZ is increasingly unaffordable.
My first post suggested Demographia’s primary findings were not supported by independent evidence, such as alternative “rent-income” and “home affordability” indicators. My second post then outlined some issues with their “median-multiple” indicator (calculated as the median house price divided by the median household income).
This post will now refine some of these criticisms, before outlining some of my own ideas on the causes of housing affordability issues in New Zealand. First I wanted to tease out some of implicit assumptions that underpin Demographia’s “median-multiple” indicator, namely:
- Median-matching: This issue was best articulated by James H: “the median-multiple indicator carries an assumption: that the income-earners at and around the median are the same group who demand the houses priced at and around the median, and that result can be extrapolated for other price-income pairings. As mentioned in the post, that excludes measurement for a large group of earners at many income levels who are in fact happy to rent for a range of reasons. Also I doubt whether median houses are often bought by median earners for a variety of reasons including life stages, geographical differences etc.”
- Independent inputs: This issue relates to the fact that the two inputs into the median-multiple indicator (house prices are income) are actually not independent of each other. Consider a situation, for example, where most of the houses in New Zealand were being bought and sold by relatively wealthy households, and that these households subsequently experienced high income growth, while incomes for the general population remained broadly unchanged. In this situation the median house price (and median-multiple indicator) would rise simply because income growth was concentrated within the same people that were purchasing properties, rather than because housing was becoming less affordable.
The second issue is quite important, because it implies that changes in income may in fact impact on house prices. The figure below illustrates the input data used by Demographia for Australia. In this graph, we find a strong positive correlation between median household income (x-axis) and median house prices (y-axis).
This suggests that locations with high incomes have more expensive housing (surprise surprise!). More specifically, it suggests that for every $1 increase in median household income there is a corresponding $5.1 increase in median house price. While that sounds like a lot, note that income is measured p.a. whereas house prices are “total.”
My final comment is on the relevance of Demographia’s indicator. i.e. the “so what” question? It seems that the parts of New Zealand with the highest median-multiple ratios, such as Auckland, are actually attracting the fastest population growth, as illustrated below. Of course, this may reflect other factors that are at play, but it does suggest that our housing affordability (at least as measured by the median-multiple indicator) is not yet significant enough to drive people away.
Thus, population growth in these places seems to be going the other direction from what Demographia would expect – we are increasingly moving to areas that they consider to be unaffordable. Based on this evidence, I’d suggest that the median-multiple indicator used by Demographia is not a good measure of housing affordability. Instead, it seems to measure:
- The degree to which income growth is invested in housing; and
- Population growth (which will tend to push up property prices but suppress income growth).
It’s not clear to me that the median-multiple indicator measures housing affordability, and nor is it clear to me that the urban containment policies pursued by local governments are binding to the degree that they have major impacts on property prices. They may be – but Demographia’s indicator does not, and cannot, tell you that.
My personal view is that the primary impact of local government regulations is not through the constraints they place on land supply (i.e. urban containment), but actually through the barriers they create to the development of more compact and affordable housing. Here’s some examples of regulations pursued by local governments in New Zealand that seem likely to restrict the supply of affordable housing:
- Minimum lot sizes – i.e. “all ye who have less money shall be forced to purchase land you don’t want.”
- Minimum apartment sizes – i.e. “all ye who have less money shall be forced to purchase living space you don’t want.”
- Minimum parking requirements – i.e. “all ye who have less money shall be forced to pay for vehicles you don’t own”.
- Maximum height limits – i.e. “all ye who chose to live like rats are consigned to perish like rats – on the street.”
- Heritage protections – i.e. “all ye who don’t have the money to renovate a villa shall live elsewhere.”
In my experience these policies are often more binding constraints than the availability of land. So my suggestion is that housing affordability has less to do with policies that favour urban containment (as Demographia and the National Party would have you believe) than they are to do with the plethora of policies that suppress more intensive and affordable housing. I’d go as far as to say that most of our policy settings have a systematic bias against the development of compact and affordable housing.
In this light, it seems that recent political announcements have missed the mark. National are deluding themselves into thinking that the release of land on the urban periphery will deliver meaningful and sustained reductions in the cost of land, and by extension housing. Labour and the Greens, meanwhile, seem intent on using government capital to build our way out of the problem – which is not only expensive but also runs the risk (at least on the surface) of building the wrong kinds of houses in the wrong places. None of these three parties seems to yet acknowledge that some of our issues with housing affordability may be the result of policies that prevent urban intensification.
So instead of writing the foreword to next year’s (deeply flawed) Demographia report, I’d suggest that Bill English – and other National cabinet Ministers – should be writing letters in support of proposals to develop apartments, town houses, and units in places like Milford and Orakei. And more importantly, they should be making submissions on aspects of the draft Unitary Plan that support and/or prevent more compact and affordable accommodation options. Onya Bill.
Yesterday’s post considered the recently released Demographia survey on housing affordability. Thanks to everyone who commented; the discussion was useful for honing my thoughts on follow-up posts. Such as this.
But first let’s re-cap: Demographia’s key findings were 1) New Zealand has increasingly unaffordable housing and 2) this is the direct result of urban containment policies.
The main issue I took with the Demographia report in yesterday’s post was 1) the lack of strong economic justification/references supporting their housing affordability indicator of choice (namely the median-multiple ratio) and 2) the lack of discussion/investigation of potential alternative indicators.
Indeed, my quick web search threw up at least two alternative indicators of housing affordability, namely the rent-multiple ratio and the home affordability index, neither of which appeared to lend much support to Demographia’s findings. Of course, this does not prove their conclusions are incorrect, but it does suggest they are premature.
In this post I wanted to look beneath the hood of Demographia’s housing affordability indicator a little more. The reason being that when you do you start to see what they are measuring and, perhaps more importantly, what they are not measuring. In Demographia’s case, they calculated their housing affordability indicator as follows:
Median-multiple = median house price / gross median household income per annum
This then measures, in a simple sense, the cost of the median home relative to the median household income. While that may sound reasonable enough on the surface, the devil is in the detail. Two of the more obvious issues with Demographia’s indicator that spring to my mind are discussed in the following paragraphs.
Demographia’s definition of “income” excludes taxes and transfers. This is pertinent for at least two reasons:
- First, some taxes have direct impacts on property prices, e.g. local rates. These will simultaneously tend to affect property prices (higher rates = lower property prices) and post-tax income (lower), but not gross income. Somewhat perversely, this would mean that jurisdictions with higher property taxes would tend to exhibit more affordable housing, at least according to Demographia’s indicator.
- Second, most taxes directly impact on a household’s disposable income and in turn affects their ability to afford housing. In New Zealand tax rates have changed considerably over time, especially for different segments of the population. Consider for example the impact of Working for Families on demand for certain types of housing.
Such issues mean that the median-multiple housing affordability indicator, as it appears that Demographia have applied it will not pick up on relevant differences in taxes and transfers, both spatially and temporally.
The spatial differences are likely to be fairly minimal within a country like NZ – where local taxes don’t vary that much from place to place – but this is certainly not the case when making international comparisons. Many countries have much higher rates of property taxes (and even local income taxes) that will tend to impact on house prices and thereby affect their housing affordability relative compared to New Zealand.
On the other hand, the temporal differences introduced by changes in domestic tax and transfer policies are likely to be fairly large, even within a country. The potential impacts on housing affordability of recent tax changes to the top personal tax rate, ability to claim capital depreciation on properties, and commercial tax rates are hard to predict in advance. Tax impacts may well spill over national boundaries as well; NZ’s lack of capital gains tax, for example, is frequently quoted by my Australian colleagues as a primary driver of their decision to invest in New Zealand’s property market.
These issues would make me extremely cautious about drawing broad, sweeping conclusions on trends on housing affordability both within and between countries simply based on the median-multiple indicator.
“C is for cookie and that’s good enough for me” – The following (deliberately facetious) statement helps I think to highlight a dimension of the housing affordability debate that is all too frequently glossed over, namely:
You don’t measure the affordability of cookies based on the cost of buying the cookie factory.
The point is that housing is a actually a type of good, or more specifically a service, which is “produced” by a house. You can gain access to housing without necessarily buying the factory that produces it, i.e. rent a house. Obviously, some people do this already and they’re called “renters.” Like me.
Even in New Zealand many people rent by choice. And in many countries in central and northern Europe renting is even more prevalent. But the key takeaway message is that the affordability of housing, which is what Demographia sets out to investigate, is probably better measured (from an economic perspective) using rents rather than house prices. This is especially true for low income households that are more likely to rent.
And that’s why I’d place more emphasis on the graph produced by the Productivity Commission, which calculated the ratio of rents to household disposable income over time than the median-multiple indicator presented by the Demographia study. This showed the rent to income ratio in New Zealand declining since the 1990s, contrary to Demographia’s findings and casting some not inconsiderable doubt on their conclusions.
My preference for using rents is also related to the first point on the impacts of taxes on house prices: Unlike houses, which are an asset, rents measure the cost of housing services. I suspect it’s far easier to “net out” the impact of services taxes in various jurisdictions, i.e. GST, on rents than it is to adjust for changes in the myriad of other income and asset taxes that might affect house pricing.
That’s all for tonight, but tomorrow’s another day and I’m already fomenting ideas on the next Demographia post; in the meantime I’d welcome your comments/suggestions/criticisms.
The annual Demographia Housing Affordability report is out – this time with its forward written by Bill English – and just like every other Demographia study it suggests that more land needs to be opened up for urban sprawl in order to bring down housing prices. There are a number of different flaws in Demographia’s analysis (for example it’s based on pre-tax income, it ignores the infrastructure costs of servicing sprawl and it ignores the additional transport costs of living on the urban edge) but I’ll ignore those for now, instead focusing on a pretty simple question – does Auckland really have a land supply shortage?
I think it’s fairly widely agreed that an important factor in Auckland’s rising house prices is a lack of housing supply: simply not enough dwellings are being built. The Auckland Plan talks about the need to build around 13,000 houses a year, every year, over the next 30 years and the fact that we’ve only been building around 3,000 dwellings a year in recent times:What you can also see in the graph above is that Auckland was able to build its required amount of housing during the middle of last decade (the very years when housing prices increased the fastest from memory) and that the number of detached dwellings as well as the number of apartments built per year has fallen dramatically since about 2004. As large greenfield areas such as Silverdale North, Flat Bush, Hingaia, Hobsonville and parts of Takanini have become available for development over the past six or seven years, it’s interesting that we have actually seen a decline in detached structures built rather than a further increase.
Furthermore, Auckland has a lot of areas for future greenfield development working their way through the planning process at the moment or already operative. This is shown in the Auckland Plan’s development strategy map – with yellow indicating “pipeline” (which I assume means that it’s in the process of becoming operative) and “operative” (ready to go I assume) greenfield land. Operative is shown in red and pipeline land in yellow: In fact, the Auckland Plan states that the biggest chunk of growth in the first 10 years of the Plan will take place in these areas:
Personally I think it’s likely that Auckland won’t see anywhere near that amount of greenfield development over the next 10 years – not because there won’t be enough land available (as I said the process for opening up that land is underway already) but rather because there’s unlikely to be the market demand for houses in these peripheral locations.
But in any case, I don’t think that supply new houses in these areas is likely to do much about housing affordability because there’s actually not a housing affordability problem in peripheral parts of Auckland. For example searching Papakura area properties under $400,000 returns not far off half the houses for sale (224 out of 569) in that area:
Auckland’s average house prices are dragged up by the extraordinary prices paid for places in the inner suburbs because that’s seemingly where people really want to live. If there’s heaps of available greenfield land on the urban edge, a significant number of relatively affordable houses already available on the urban edge and the planning in place for a huge amount more greenfield land on the urban edge, I just can’t buy into the hypothesis of Auckland having a land supply shortage.
What we have is a housing supply shortage, particularly in the inner suburbs where people want to live. And the way to fix that is by making intensification easier through getting rid of minimum parking requirements and getting rid of density controls. It’ll be interesting to see whether the Unitary Plan tackles this real issue rather than the non-existent land supply shortage spun by property developers who want to make a pile of money by bringing their land inside the urban limits.
*** Spoiler alert: The title of this post is somewhat hyperbolic ***
Demographia’s “9th Annual International Housing Affordability Survey” has just been released and is receiving a lot of attention in various media outlets, such as the NZHerald. Indeed, NZ ‘s connection to the report is relatively strong – it was co-authored by a kiwi and the foreword is written by our very own Minister of Finance.
For those not in the know, the primary objective of the Demographia report is to evaluate housing affordability across a selection of “anglo” countries, namely Australia, New Zealand, Canada, the U.S., the U.K. and Ireland. This is a very admirable objective; after all if policy makers can better understand the complex range of factors affecting housing affordability, then this can in turn support more informed debate and policy settings.
Demographia measure housing affordability using the so-called “median-multiple” indicator, which they define as follows:
Housing affordability = Median house price / Median household income.
This is a pretty simple indicator: Take the median house price and divide by the median household income and, voila, you have a multiple describing the price of housing relative to incomes. Demographia then collect a swathe of data on house prices and incomes for all cities with populations of 1.0 million or more in Australia, New Zealand, Ireland, U.K., Canada, and the United States. Their results over time are shown below.
Since 2004 the trend in the median-multiple measure has diverged between countries; it increased in Australia, New Zealand, and Canada; stayed broadly constant in the U.S.; but declined in the U.K. and Ireland. While these are fairly innocuous results, the Demographia report then concludes (p. 3):
Overwhelming economic evidence indicates that urban containment policies, especially urban growth boundaries raise the price of housing relative to income. This inevitably leads to a reduced standard of living and increases poverty rates, because the unnecessarily higher costs of housing leave households with less discretionary income to spend on other goods and services. The higher costs ripple into rental markets, tightening the budgets of lower income households, who already suffer from lower discretionary incomes. The principal problem is the failure to maintain a “competitive land supply.” Brookings Institution economist Anthony Downs describes the process, noting that more urban growth boundaries can convey monopolistic pricing power on sellers of land if sufficient supply is not available, which, all things being equal, is likely to raise the price of land and housing that is built on it.
I read that and thought “hmm, that’s fairly strong stuff.” So at this point I thought it was worth stepping back a little.
First let’s examine the two key arguments the Demographia report advances in support of the median-multiple measure of housing affordability (p. 6):
- It is used by other reputable organisations, such as the World Bank, the UN, and Harvard; and
- It is simpler than other measures, which are “often not well-understood outside of the financial sector.”
The second reason given is rather vacuous and, frankly, a little condescending to anyone who does not work in the financial sector. And believe me, many economists do not work in the financial sector; at least not anymore.
On the other hand the first reason offered as justification for using the indicator is more understandable: If the median-multiple indicator is used by a range of reputable international organisations then it likely has more merit as measure of global differences in housing affordability.
At that point I tried to follow the sources provided in the Demographia report. Doing raised some fairly important issues: The World Bank link, for example, takes you to a relatively obscure web-page that appears to date from 1992, while the Harvard link appears to be an on-line catalogue of the indicators used in the U.N. report, rather than an independent publication attesting to the merits of the median-multiple indicator.
That leaves us with one “independent” reference, namely the U.N., lending credibility to the use of the median-multiple indicator of housing affordability. Following that link, however, reveals that the median-multiple indicator is but one of a myriad of indicators and checklists identified by the U.N. And perhaps more importantly, the U.N. do not present the median-multiple indicator in isolation, but instead consider it as one of two possible “housing affordability” ratios, as illustrated below.
Righto, so the median-multiple measure can be calculated using either median house prices or house rents. At this stage I was perplexed: Why does the Demographia study not (from what I can tell) mention the ratio of house rents to income as as a possible alternative indicator?
So I did some more digging, and found this graph in the Productivity Commission’s final report on housing affordability in NZ, which considered median rent to household (disposable) income, as illustrated below. In many ways this indicator is more comprehensive than that originally identified in the U.N. report, because it considers after-tax income.
Based on this graph the Productivity Commission concludes (p. 4):
During the house price boom, rents increased at around the same rate as generalised inflation. Across territorial authorities, rents grew in a relatively tight range of 2.3% per year (in Dunedin City) to 8.2% per year (in Buller District). In all cases, rent increases were significantly less than real house price inflation and the ratio of house prices to rents increased markedly, a departure from the long-term broadly stable relationship.
This apparently benign aggregate situation disguises a more difficult position for renters on lower incomes. In particular, people in the lowest two income quintiles spend a much higher proportion of their income on rent than people on higher incomes (Figure 0.5). Even though the situation appears to have improved since the late 1990s, those in the two lower income quintiles still spend, on average, more than 30% of their disposable income on rent, after allowing for government assistance.
Oh dear Daisy: It seems that the Productivity Commission has – using the other housing affordability indicator recommended by the U.N. study referenced by the Demographia report – come to a different conclusion: That housing affordability in NZ has been improving since the late 1990s.
Now at this point I want to caution that these other indicators do not prove that Demographia is necessarily wrong, only that their use of indicators may be too limited. Usefully, the Productivity Commission includes another indicator of housing affordability, namely the “home affordability index” (compiled by Massey University). This index considers the relationship between the costs of servicing a mortgage on the median house and median household income:
This indicator suggests that home affordability has been declining for about the last 4 years. Perhaps more importantly, the 2008 peak in the home affordability index (indicating relatively unaffordable homes) does not seem to be significantly higher than earlier peaks in, for example, 1989 and 1996.
So where does this leave the Demographia report? Well on I’m afraid to say that a first investigation throws up very little corroborating evidence to support their key conclusions, namely that the current price of housing in New Zealand is “unaffordable” relative to historical norms. That’s not to say that they’re wrong, only that their conclusions are not fully supported by the available evidence.
Nor is this to suggest that more affordable housing is not a valid objective: I certainly think it is. And just because the current price of housing is comparable to historical trends, we should still be interested in making housing more affordable, because as Deomgraphia note it is perhaps the most basic of human needs. So while I question Demographia’s analysis and conclusions, the subject is nonetheless very important and worth considering in more detail.
I only wish that 1) they had the time/energy to analyse these issues in more detail within their existing research and 2) news organisations did a little more research before reporting the results of studies like this. While I have more to say on this issue (and hope to do so in future posts), it’s now time for me to up stumps and head for tea (i.e. bed). Until next time …
The 2012 Mercer Quality of Living Ranking survey has Auckland as the world’s third most liveable city – retaining the same ranking as 2011. The survey is designed to assist employers in the placement of expatriate staff and how much they should receive in living allowances, so the results tend to indicate quality of living if you’re really well off, however they give a useful guide. Here are the top 20:The explanation for how the results are collated is helpful in making sense out of them:
Mercer evaluates local living conditions in more than 460 cities it surveys worldwide. We analyze living conditions according to 39 factors, grouped in 10 categories:
Political and social environment (political stability, crime, law enforcement)
Economic environment (currency exchange regulations, banking services)
Socio-cultural environment (censorship, limitations on personal freedom)
Medical and health considerations (medical supplies and services, infectious diseases, sewage, waste disposal, air pollution, etc.)
Schools and education (standard and availability of international schools)
Public services and transportation (electricity, water, public transportation, traffic congestion, etc.)
Recreation (restaurants, theatres, movie theatres, sports and leisure, etc.)
Consumer goods (availability of food/daily consumption items, cars, etc.)
Housing (rental housing, household appliances, furniture, maintenance services)
Natural environment (climate, record of natural disasters)
The scores attributed to each factor allow for city-to-city comparisons. The result is a quality-of-living index that compares relative differences between any two locations that we evaluate. For the indices to be used effectively, Mercer has created a grid that allows users to link the resulting index to a quality-of-living allowance amount by recommending a percentage value in relation to the index.
For 2012, Mercer also prepared an Infrastructure Index, based on Electricity, Water Availability, Telephone, Mail, Public Transportation, Traffic Congestion & Airport Effectiveness. The results for this index are in many places quite different, with Auckland dropping from 3rd for liveability to 43rd for infrastructure provision. This most likely highlights that transport, particularly public transport I suspect, is the main barrier to becoming number one. The table below runs a comparison between the lists for those cities which appeared in both lists – those which scored better in the infrastructure are shown in green and those that scored better in the liveability are shown in red:It’s interesting that Auckland and Wellington are the two cities which outperform their infrastructure score in the final liveability ranking so much. What’s also interesting is that the cities with the top two infrastructure scores which haven’t corresponded to ending up in the top 50 liveable cities are Dallas and Atlanta: notoriously car dependent cities.
What is very interesting is that Auckland’s poor infrastructure score, relative to liveability, is perhaps reflected in Auckland generally scoring quite lowly in terms of economic performance compared to a number of these other cities. This is outlined in the Economy chapter of the Auckland Plan quite starkly:
Measured internationally, Auckland’s performance is relatively poor: it is ranked 69th out of 85 metro regions in the Organisation for Economic Co-operation and Development (OECD) in terms of GDP per capita. New Zealand’s economic performance has declined relative to other OECD countries in terms of GDP per capita to its position at 21st, but has stabilised at around 80% of the OECD median.
Pulling a few strands together, I think there’s likely to be an argument that Auckland’s historic under-investment in infrastructure – particularly the kind of transport infrastructure that encourages productivity through boosting employment densities - has held back our economic growth. This is reflected not only in our relatively poor economic performance, but also in our relatively low infrastructure scores in the Mercer survey. Because our transport investment in the past has been so focused on encouraging employment dispersal we have missed out on the agglomeration benefits that would have otherwise been enjoyed and therefore missed the economic growth that we should have had.
Fortunately there seems to be a growing recognition of this faulty thinking and a growing realisation that smart transport investment is about encouraging and facilitating land-use patterns which support economic growth – particularly through agglomeration. Let’s hope the government finally starts to understand this point and sees how critical a project such as the City Rail Link is in boosting Auckland’s economic productivity by allowing much greater employment densities in the city centre and in major centres on the rail network across Auckland. I can’t say I have too much hope though, sadly.
As a country we spend a lot of money on transport, at three levels: central government, local government and personally. In the 2012 budget, around $3.8 billion of expenditure on transport by central government was proposed. Further to that, transport is generally the biggest item of expenditure for local government – the Auckland Council spends over half its money (more than half your rates bill) on transport each year. Plus we obviously spend a lot of money ourselves: paying for petrol, buying cars, fixing cars, registering and warranting cars, paying for parking, paying for insurance, bus fares and so forth.
Obviously at an individual level we pay because we need to get around. Plus we need stuff to get around as well, so that we can get that stuff ourselves. I’m not going to go into the amount we pay for transport individually much in this post – except perhaps to point out that transport costs that are worn by individuals clearly varies and the impact of different transport decisions we make, especially different funding priorities, has an impact on the amount we may need to pay at an individual level. For example, if the public transport system is good enough for one member of a family to rely on for every day commuting, then maybe that family only needs to own one car instead of two (or three) – and therefore they avoid the need for a massive expense in owning, fueling and maintaining that car.
So why do we spend a heap of money (by my reckoning, only social development, health and education would be funded more by central government) on transport? At a high level, it’s so that we can achieve benefits to society that cannot be achieve if there was no public agency managing the revenue collection, planning and implementation of transport improvements (though crazy libertarians will always disagree with this). Each government of the day tends to outline what its broad goals are at a general level, with policies designed to help achieve those goals. The current government wants to focus mostly on boosting the country’s economic performance and productivity. The Auckland Council wants to make Auckland the world’s most liveable city.
Where it becomes really interesting is the next step down – how does transport policy and spending help to actually achieve these broad levels goals? This obviously requires specifying a number of transport goals that contribute to achieving the over-arching vision – whether it be the government’s vision or the Council’s vision. The government thinks that spending big money on reducing traffic congestion on the roading network – particularly parts of the network that are busy freight routes (or, by the look of it, busy during holiday weekends) will make a huge difference to economic performance. The Council’s vision also focuses on reducing congestion, but suggests that this is likely to be best achieved through the creation of an outstanding public transport system and better integration of the transport system.
Occasionally, the two visions conflict – something which doesn’t please the government at all:
Given the cost and the forecast increase in congestion, despite this substantial investment there are fundamental questions over value for money and whether the right mix and timing of projects has been chosen to address forecast travel patterns. A priority for the Auckland Council, potential funders and infrastructure users is to reconsider the proposed projects and undertake the strategic review to determine whether individually, and as a package, they are the right projects to address the long-term transport challenges facing Auckland.
This view is consistent with the official Government response to the Auckland Council, released in July, which noted “… the Government also remains to be convinced that the programme as a whole represents the right mix of projects and will provide value for money. To improve the prospects for alignment on transport policy, the Government encourages the Council to review the proposed projects to ensure the transport strategy is optimised to address forecast congestion under the likely land use pattern”.
I actually strongly agree the Council needs to undertake such a piece of work, but the outcomes of the review might end up being the complete opposite of what the government thinks – the removal of a large number of pointless and eye-wateringly expensive roading projects.
But all of these plans are based on an assumption that reducing traffic congestion will actually lead to better economic growth and/or better liveability. Those are actually assumptions worth testing – as did an article in Atlantic Cities a few months back, which looked at the link between congestion and economic performance. The results will surprise some:The article explains the relationship, which actually shows that per capita GDP is higher where there’s more congestion:
…regional GDP and traffic congestion are tied to a common moderating variable – the presence of a vibrant, economically-productive city. And as city economies grow, so too does the demand for travel. People travel for work and meetings, for shopping and recreation. They produce and demand goods and services, which further increases travel demand. And when the streets become congested and driving inconvenient, people move to more accessible areas, rebuild at higher densities, travel shorter distances, and shift travel modes.
Stated another way, people adapt to congested environments. Because cities provide greater access to job opportunities than do rural areas, as well as wages that are more than 30 percent higher than their non-metropolitan counterparts they have a powerful economic incentive to do so.
Economic development is also intricately related to the density of employment – agglomeration benefits as they are commonly known. Putting more people in close proximity will inevitably lead to more congestion, but the negatives of that congestion (if there actually are any) are seemingly more than outweighed by the benefits of density.
Well what about Council’s assertion that reducing congestion will lead to improved liveability? Well just yesterday Mercer released their 2012 list of the world’s most liveable cities - with Auckland doing really well at number three (for the fourth year running). Let’s take a look at the top 10:
- Berne & Sydney
The bulk of these cites are dense European cities, which generally have quite a lot of congestion due to their limited road network in the inner areas (although obviously they tend to have pretty good transport choices). Other cities that do well include Vancouver, which decided to not build any motorways in its inner areas, and Copenhagen which is famous for being the world’s best city for cycling.
Perhaps what I’m really getting at with this post is highlighting that perhaps we’re focusing on the wrong thing in trying to achieve the ultimate goals of investing in transport? In both achieving stronger economic growth and better liveability, what if relieving congestion actually doesn’t help much? What if it actually undermines our efforts? What if it uses up a whole heap of money that could be better used on transport interventions which actually would assist in achieving the high level visions of both Central Government and Auckland Council (like encouraging greater employment densities or encouraging greater transport choices or reducing the amount of money we need to personally spend on transport so we can spend it more usefully elsewhere)?
For some reason an assumption has been made that reducing congestion will magically result in these strategic outcomes and therefore we need to focus on transport spending almost exclusively on the reduction of congestion. Well I’m calling bullshit on that assumption. And as there’s billions of dollars at stake here, we need to do better, quickly.