Friday, August 3, 2018

The Bed Tax is a Bad Tax

Auckland Council has introduced a tax on properties providing online accommodation services by way of a targeted rate.  This a bad tax and a bad precedent.  If we think about it, the only rationale must be to raise more revenue to reduce the Council’s fiscal risk (more on that below), and to protect the accommodation sector. 
Distorting the tax system
New Zealand has a simple tax system based on general income and consumption taxes and property rates.  Government has long resisted targeted taxes. Yet that is precisely what this new rate is  - a bed tax.  It is aimed at households supplementing their income through renting spare capacity.  But the income raised in this way is already subject to income tax –Airbnb and other the peer-to-peer platforms ensure that the income earned is transparent.
Yet there is no justification for targeting rating at the occupancy of houses because this is covered under existing capital value-based residential rates. More valuable homes incur higher rates. The more bedrooms, larger the home, the higher the rate, all else being equal. Where a house is in a desirable area and the occupants can charge more for the bed and breakfast service; but they will already be paying higher rates. 

Incidentally, building consent costs reflect house size and value, providing an expectation that all the rooms so consented will be occupied.
No impact on public costs
The anomalous nature of this form of tax is obvious: what happens when the children start earning and are asked by Mum and Dad to pay board. Do we increase the rates then?  Or when people take in a permanent boarder to help make ends meet?

Should we lower rates on a property when the children leave home? We can always increase them again if they come home. But if they move elsewhere -- to Dunedin, Wellington, Tauranga, or Sydney perhaps -- their demand on Auckland services disappears.  And if they stay in Auckland they will pay rates in their new abode.  
Either way, there is no impact on demand for public services if their place is occupied by occasional visitors. In any case, much infrastructure is paid for directly through user charges. So if we accommodate visitors in an empty bedroom the services they consume are already accounted for.

Renting a room is rational economics
Look at it another way. We are constantly told that we are over-capitalising our residential assets, at the cost of more productive investments.  Well, here’s an example of people taking an initiative to increase the productivity of housing; and what does the Council do? Increase the rates on the asset, in effect taxing a productivity gain. And that positive outcome is supplemented by the additional demand that the visitors make on commercial goods and services, and the support they provide for recreational and cultural facilities.  All of this adds to the health of the economy (and the rate take).  So why would the Council discourage it with yet another impost?
 What about the accommodation sector?
Web-based services like Airbnb and are disrupting the accommodation sector. Low cost airlines and their web-based sales did much the same to air transport.  Since then we have experienced a travel and tourism boom and, incidentally, a long overdue restructuring of the aviation sector.

Why should formal accommodation be protected from such innovation? While web-based booking platforms have cut into the traditional travel agent sector and make a claim on the commissions of transport and accommodation operators, they are also a tool for increasing occupancy to the point that few accommodation providers operate without them.
The emergence of a substantial informal accommodation sector might provide just the smoothing mechanism needed to reduce investment risk in accommodation.  Traditionally capacity shortfalls constrain tourism growth in destinations until an investor is prepared to bet another 50, 100, 200 or more hotel rooms on demand.  When a whole lot of new rooms are introduced in one hit, the uptake is often slow, putting the investment at risk and eroding other operators’ occupancies. 

All too often the early investors are burnt, and it is only the second or third investors that begin to make any money out of formal accommodation.  In this environment, development stutters along, demand potential is unrealised, and the quality of investment  - in all respects - is questionable.

But when growth can build smoothly through an active informal sector in which entry and exit is easy and capacity dispersed, the environment for new investors is less risky.  The informal sector in effect provides a proving ground for growth and a buffer should growth falter.  If the bed and breakfast sector is a threat, why are there so many new hotel beds planned for Auckland?
So why bother?
Auckland Council is facing a fiscal squeeze.  It has opted for a growth model – a compact city - that places pressure on outmoded, under-capacity, and increasingly obsolete infrastructure, and consequently is facing major retrofitting challenges.  That model, defined in large part by the revamping of the Central Business District, creates a host of external costs, including congestion, loss of green space, heavy investment in mass public transit, and rebuilding underground infrastructure no longer fit for purpose.  Politically it is difficult to keep raising general rates to do this, and to levy sufficient area-of-benefit rates on CBD landowners could undermine the model. 
Perhaps the council should consider the adverse fiscal and equity consequences of such a model.
Instead, taxpayer subsidies and new forms of local taxation are being called on to support it.  The petrol tax is an obvious one, a tax that, among other things, penalises people who do not regularly access the CBD and inner suburbs. The targeted bed and breakfast rate is another one that will hit people who may well need the small amount of income it yields to meet their own commitments.

In its scramble for fiscal respectability, Auckland Council appears not to be respecting the financial needs of its citizens, nor is it looking to the long-term prospects of the visitor sector within Auckland. 

Thursday, April 20, 2017

Auckland facing Hobson’s Choice: Expansion or Implosion?

Choosing Auckland
In 1840, the first New Zealand Governor, William Hobson, sailed into Waitemata Harbour and chose Auckland as the country’s new capital.  The harbour offered ease of embarkation and disembarkation.  Fertile coastal lands meant that settlers could grow food crops, and the local Maori tribe, Ngati Whatua, welcomed the promise of protection and trade that European settlement offered.

Auckland’s early fortunes fluctuated.  The city could only be reached easily from other early settlements in New Zealand by sea .  It was on an isthmus divided by two harbours, crossed by flood-prone creeks and peppered with swamps.  In addition, tribes to the south resisted the sale and alienation of their fertile Waikato lands, stalling expansion of European settlement until the late 1860s. 

The emergence of New Zealand’s first city
Auckland survived, though, even when New Zealand’s administrative capital was moved to Wellington, 600km south, in 1865.  Rivers were bridged, wetlands drained, waterfronts reclaimed, and a railway pushed into the fertile and now subdued Waikato region, and beyond. 

The city prospered in the 20th Century, dominating the import and distribution of manufactured goods and exporting regional produce.  Consequently, it developed a substantial import-substitution manufacturing sector, boosted by protectionist policies introduced in the 1930s. 

When the economy was deregulated, starting in the late 1970s,  manufacturing’s role contracted.  However, its presence and the city’s trading heritage set Auckland up as the primary service centre in New Zealand, providing business, professional, trade, and financial services to production (much of it taking place beyond its boundaries), and catering to the needs of a steadily growing population.

Primacy in the 21st century
The cumulative advantages of scale served Auckland well.  Although still a small city globally (347th on the UN Population Division’s 2015 city size listing), it accounts for 32% of New Zealand’s population and 34% of its employment. This primacy reflects the importance of consolidating human skills and resources in a small country (population 4.8 million, less than the Sydney metropolitan area’s 5 million 2,000km across the Tasman Sea) and the low density of settlement over the rest of New Zealand.

Auckland remains New Zealand’s centre of disembarkation.  Even as increasing numbers of residents decamp for hinterland towns and smaller cities, New Zealanders returning from overseas, new migrants, and international students tend to make Auckland their first stop (Figure 1).  As a result, the city accounted for 50% of national population growth over the five years to 2016, a period of exceptional migration gains.

Figure 1: Net Long-Term Migration, Auckland and the Rest of New Zealand, 1991-2016

Reaching choke point?

Today Hobson’s site seems unsuited for a city of even 1.5million, let alone the 2+ million projected for the not-too-distant future.  Physical constraints have put the squeeze on housing and transport.  Ageing underground infrastructure struggles to cope.  The city may be approaching – or have already exceeded –Tamaki Makarau’s carrying capacity.  That, though, is not something that Auckland Council seems ready to contemplate.

Unfortunately, an obtuse planning response to the challenge of growth is set to squander the human and physical capital already invested in the city, and to mar its natural qualities.  A plan preoccupied with boosting employment and housing in a confined CBD and to promote increasingly intensive development on the Isthmus looks set to throttle growth. 

Externalities abounding
The outcome for Auckland of a strategy of consolidation and centralisation in is already apparent:

·         Under-capacity public and private transport services and a lack of redundancy in the networks lead to frequent stoppages on road and rail throughout the city, compounding already excessive congestion;

·         Restrictive land use policies create a hopeless backlog of housing demand with severe economic and social impacts (see, for example, the presentation of economic commentator Shamubeel Eaqub in Joel Cayford’s Reflections on Auckland Planning);

·         Increasing costs to business – the costs of employment, congestion, business disruption, and even space for growth raise the spectre of slowing investment, diminishing productivity, and income growth;

·         Grossly inflated land prices feed into high housing costs, distorting the supply chain and generating a new middle-underclass, defined more by frustrated housing aspirations than by educational or family shortcomings;

·         Failures in water, sewage, and stormwater systems threaten the health of the harbours and estuaries which give Auckland its character;

·         A growing likelihood that significant natural events (such as intense low pressure storms) will increasingly bring a congested city, its critical services, and its centre to a halt.

It’s the geography, Stupid
The response to the challenge of growth has been to promote increasing densities in the central city and, latterly, in the inner suburbs, a strategy that is deeply flawed for this city (something I have laboured in earlier postings: e.g., here and here). 

This strategy flies in the face of Auckland’s geography and the natural constraints it imposes.  It raises the prospect of fiscal failure for the council because it requires high cost works with limited if any productivity gains while compounding depreciation, maintenance, capital and servicing liabilities. 

The city will be hard placed to meet its financial commitments if the current crisis of growth accelerates, further lifting ratepayer costs and reducing the affordability of Auckland to business and households alike.  And any slowdown would only compound the city’s fiscal miseries.

Hobson’s choice
So now we are faced with our own Hobson’s choice (Thomas’ not William’s): the city has little option but to find ways to expand.  It is time to embrace new approaches to land and its use in the region, how and where it is developed, and how it is connected.

Given that Auckland Council seems hell-bent on promoting consolidation on a site ill-suited to it and in a culture in which it will work only for a few, this will only happen with a dramatic shift in thinking.  That might come if Government moves quickly to embrace the proposals for revamping urban planning through the rewrite of the Resource Management Act and shake up of the planning establishment proposed by the Productivity Commission The choices for Auckland are narrowing.

Tuesday, March 14, 2017

Not Another Downtown Sports Stadium? How Many White Elephants do we Need?  

More Monumentalism
I’ve said it before but it looks like it needs saying again: Auckland does not need a new downtown stadium. (Actually,the  last time I said it I was talking about convention centres.  But the principles, and the downsides, are much the same).
Somewhat surprisingly, then, new Auckland Mayor Phil Goff, who is clearly concerned about the risk to the city's fiscal position in the face of a ballooning transport and infrastructure spend, has revived the idea of a waterfront stadium.  This by one of the steadier, more rational, and experienced members of the last Labour Government: what was he thinking? 

Through Council Controlled Organisation, Regional Facilities Auckland (RFA), Mr Goff has commissioned a pre-feasibility study from Price Waterhouse Coopers of a stadium with capacity for 25,000 to 50,000 people. The consultants will consider potential CBD sites, the benefits (and presumably costs) to the city, demand, development of a stadium precinct, building and running costs, and planning issues.
The answer in four
I’m not sure much work is required to demonstrate:
(1) Stadiums do not pay their way and, it might be added, the economic impact studies that suggest that they justify the subsidies dished out to get them up and keep them running are usually spurious;

(2)  Through expensive stadiums ratepayers end up subsidising professional sports teams;

(3) Where downtown and waterside locations are growing new stadiums are an uneconomic use of valuable land;

(4) Auckland’s waterfront does not need a big area to be sterilised and effectively privatised – or confined to the use of the few people who can afford the eye-watering cost of tickets to get in.
In short, a quick review of the existing evidence would save ratepayers' money even on a pre-feasibility report.

How to pay?
The evidence suggests that we can't.

The 2016 RFA annual report does not separate out the performance of individual facilities (indoor and outdoor sports stadiums, Auckland Museum, Zoo, and Art Gallery). But we can guess that excess capacity (or limited demand) in the outdoor stadiums contributed to the relatively poor aggregate figures: total income (before revaluations) of $131.5m included a capital subsidy of close to $26m and an operating subsidy of almost $31m from the Council, and just $44m in revenue across all facilities. 

In fact, total entrance and admission fees amounted to under $11m, with venue hire just over $13m, this based on land, buildings and plant (excluding art works) assets of around $800m.
Given this record, it’s hard to see a new $1bn sports and concert facility making any financial headway, especially when all the evidence suggests stable if not declining attendance. A few hallmark events and concerts aren't going to boost revenue ahead of what is being dragged in at the three other signifcant stadiums in the city. 
It’s also hard to see sponsorships making any dent in the public funding that would be needed for a new stadium. Sponsorships of all RFA venues apparently generated under $620,000 in 2016.

And, despite any enthusiasm they might show for the project, Auckland’s major sports franchises, the Rugby Super 18 Blues and the NRL Warriors, are in no position to provide financial support.  The experience in the US, the apex of professional sports, is quite compelling; the major leagues free ride on local government funded stadiums. 
Little surprise, then, that the New Zealand Government is not interested in contributing to the guesstimated $1bn price tag.

So what are the benefits???
We do not need reports telling us about wonderful spin off effects, or me-too claims about how a global city needs a landmark stadium, or to have appointed advisors spraying ratepayers’ money about building monuments to civic stupidity when we can’t even begin to get a return on our existing facilities investments.

The bulk of research in the United States finds the economic contribution from major sports leagues or the construction of stadiums for them (or of convention centres) is negligible if not negative. This is  despite the benefits touted by the beneficiaries: the sports codes, the development sector, the city boosters and, dare I say it, the consultants (see, for example,  Sanders H, 2002, “Convention Myths and Realities: a Critical Review of Convention Center Feasibility Studies”, Economic Development Quarterly).

Transforming downtown?
The urban transformation effects are more often than not illusory.  Even if there were to be benefits from developing major civic projects in rundown precincts they would be irrelevant in central Auckland, with the CBD already straining under the weight of tourism, mushrooming apartment building, office development, and the construction of another mayoral monument, the Central Rail Link. 
It is a mistake to think that there will be benefits from opening waterfront spaces up to the public by building what is effectively a large enclosure that is empty most of the time. Instead, we will end up with a temple to elitism, excluding the general public, and surrounded by draughty voids where there might otherwise be more street activity, more people, and more income earning opportunities.

(And quite apart from any operating disadvantages, the rectangular stadium structure favoured by Mr Goff will exacerbate the creation of dead spaces around it).

Seeking a better city? Do better with what we’ve got
Certainly, there is a need to rationalise our existing stadiums, to focus on getting costs down and revenue up. RFA has been looking at the options for some time now.

The ideal strategy at this time in the city's development might be to rationalise existing investment, intensify returns from sunk capital, and realise any land value uplift that might come, for example, from shrinking Eden Park, consolidating and diversifying other facilities, creating local specialisations, and maintaining a presence close to the wider communities of Auckland.   

Throwing a downtown stadium into the mix is simply going to hinder progress.
Why the distraction?
It’s not just the capital outlay that would contribute to the City’s indebtedness and put more pressure on the city’s credit rating. Long-term operating, maintenance and depreciation costs will be substantial.  The risks this raises are enough to say don't even think about going there.

There are also the foregone opportunities, both for more intensive and continuous use of downtown land, and for investment in physical or social infrastructure that might contribute  more meaningfully to community wellbeing. 

If we are going to throw money at things that make a difference, let's start by cleaning up the city’s sewage overflows, sorting out stormwater network problems, or by lifting our commitment to resolving ever-increasing transport and housing issues.

Tuesday, March 7, 2017

Breaking Through and Moving on: Beginnings of a New Plan for Auckland

The Break Through
After years of pushing the compact city fallacy and ignoring the obvious approach to solving Auckland’s particular growth problems, the city and its planners have at last begun to water down their dearly held but doomed compact city plan.  The New Zealand Herald revealed that today “the council's planning committee will consider a report to allow for 120,000 new homes at six main locations in the north, north-west and south of the city.” A range of smaller rural settlements has also been identified for further development, spread over 130km from north to south. 

While only 30% of the assumed requirement for 400,000 dwellings is targeted for the “mini-cities”, the appetite for new greenfield, peri-urban settlement won’t stop there.  After all, there is only so much that can be crammed into the current urban area, especially in central Auckland. without destroying its appeal.  Apartments in the suburbs, the latest battlefield for entrenched urban planning, is least popular of all options.

We’re not there yet, but momentum is gathering for moving Auckland into a sustainable future. 

Breaking with the past makes sense
The ground has been giving for a while now.  The conceit of planning by projection is clear as migration figures deviate wildly from the analysts’ assumptions.  The estimates of housing supply underlying the Unitary Plan are demonstrably spurious.  The impacts of intensification on air and water quality and nature in the city are now coming to be realised.  And the impact on council finances as it aims to retrofit under-capacity infrastructure and pours money into transit threaten the City’s credit rating and the pockets of its citizens.

The advantages
I have been documenting the short comings of a compact city plan somewhat tediously since my report on the proposal to the Auckland Regional Council in 1999.  So, to change my tack, here are some advantages of the new direction towards satellite cities and settlements.  It provides:
·       The opportunity to develop attractive, affordable 21st century settlements, with emphasis on diversity, mobility, mixed activity, and balance – all so much easier to achieve in green fields compared with retrofitting existing services, congesting the suburbs, and squeezing housing into compromised brownfield or mixed use sites;

·        Better access to nature, greenspace, clean air, cycleways and trails, and recreational amenities;

·        Consequently, better health – an antidote for the urban epidemic of obesity;

·        Greater opportunities for self-reliance (detached, terrace, and duplex houses provide safe play space for toddlers and food growing opportunities) and more time to enjoy it;

·        Pressure off traffic congestion in the urban area;

·        Protection and restoration of community life –an alternative to the transience and anomie of apartment living;

·        A chance to focus on quality development in existing suburbs and on sustaining what makes Auckland an attractive place to live in and visit; quiet streets, healthy treescapes, generous parks and play spaces, bungalows and gardens, ease of movement, local shops and services, and a sense of place.

·        Urban form better suited to limiting the impact of extremeevents (mainly associated with climate change, but there is an increase in fretting over Auckland’s volcanic field), reducing over-concentration of resources, people and infrastructure, and an improved capacity to recover from disasters with dispersed development.

The provisos
Will all these good things come to pass?  Here are four provisos we need to consider as we allow our “pearls on a string” to expand:
(1)  Ensure that the mini cities have adequate commercial and employment land and in doing so avoid applying 20th century views of what should be where on that land, and how densely it should be occupied.  Just set some standards to manage conflicting uses, protect the environment, mandate minimum levels of amenity, and let the investment happen;

(2)  Ensure that mini-cities are well-connected, to each other, to the main urban area, and to key economic nodes (including port and airport).  Corridors need to be generous to allow for diverse traffic, transport modes, and growth;

(3)  Planners need to back off saying what should happen where and when, and instead say what is required before development can proceed.  This will allow demand to influence the timing of investment.  It will lower the speculative gains and land banking that coercive planning and orchestrating development sequences foster. 

(4)  Treat these as greenfield opportunities in the widest sense: encourage innovation in design, infrastructure, and investment to achieve more cost effective delivery, allow for new funding instruments, and reduce demands on public finances.

So what can the Council offer?
Many years of resistance to peri-urban growth suggest that planners are not necessarily the people to determine when this the proposed development might take place, or even to design it.  Instead, the Council needs the skills to negotiate delivery packages with investors and developers, and to provide oversight, and authority. 

And Wither Auckland Council?
Finally, while I find this development a justification for the many critical pieces I have written about Auckland’s planning in the past, I will indulge in one more observation.  Marry the mini-cities approach with the push for Urban DevelopmentAuthorities and we can begin to peel back the institutional onion that is Auckland Council.

So here’s a thought.  The mini-cities could be subject to development under an Urban Development Authority.  This should involve some community representation.  And when the development task is over, perhaps they could assume the managerial and regulatory role of a local authority.  

Sure, I was wrong when I gave the new, consolidated (or overweight) Auckland City just five years.  It’s still with us.  But maybe it’s time we acknowledged the short-comings and costs of a super city.  And if the region’s future does lie in Council Controlled Organisations and special purpose authorities to fulfil its functions, perhaps it’s time to at least shrink it down to fulfil basic funding, purchasing, high order spatial planning, and regulatory functions.

Sunday, July 31, 2016

Back to Basics: Planning, Housing Markets, and the Cost of Ignoring Economics

Acknowledging the impact of planning on housing

At last, economists, commentators and the media in New Zealand are recognising what has been evident in many countries since late in the 20th century; that plans to contain city growth in urban boundaries betray the hopes of large and growing numbers of urban dwellers and job seekers.
In Auckland, an independent panel has modified the proposed Unitary Plan to allow more dwellings.  But it is too little, too late; so Auckland remains consigned to increasing social division fashioned around a new poverty, a poverty rooted in the failure of the housing market.

This post doesn’t deal with numbers, or with evidence of why the Auckland Unitary Plan remains a pig’s ear.  Plenty of others have picked up on that.  Instead, it aims to set out the basics of housing supply – the complexity of the market itself and the economic principles that regulators need to understand if the ground lost is going to be recovered.

The Conclusion
This is quite a longish post that concentrates on the basics of housing markets and economics.  If you don’t want to read it all, here is my conclusion.

There are no options if we want to make housing affordable again.  Without adequate supply, initiatives to dampen demand will be futile at best, destructive at worst.
Arbitrary restrictions on urban land development that cannot be justified on environmental or infrastructure grounds must be removed from the city’s plan.  Attempting to force people into small, high density dwellings by rationing land for inside or outside the metropolitan boundary penalises all new housing and large sections of the community.
Prescribing when, where, and how much  greenfield development can take place means that the price of brownfield land, infill, and remaining unbuilt lots within the urban boundary is inevitably pushed up to the point that virtually any dwellings in any location – whether apartments, terrace houses, or detached homes on tiny sites – will be unaffordable (and unfundable) for a very large share of the community.  Trying to make high density housing affordable will require small dwellings, cheaply fitted out, built to minimum specifications, little suited to most market segments.  They will be unattractive to developers and to the banks, and, if they can be delivered, are  likely to concentrate rather than alleviate the health and welfare consequences of inadequate housing. 
This is basic economics: generation rent, the millennials, the homeless, and families across the board will benefit only if land speculation is taken out of the housing equation by removing arbitrary restrictions on where, when, and how much urban development can occur in and around Auckland.

If you struggle with this conclusion perhaps you could read on.

What Happens When You Limit Land for Housing?
It’s simple, really: if supply is artificially restricted in a market with growing demand, that market will be distorted.  As a result, monetary and non-monetary costs will be higher than they need to be. 
If the market is at all complex, regulations aimed at managing demand to offset a supply failure (like investment or lending thresholds for house mortgages) will lead to further distortion. Distortion will show up in unexpected and inequitable outcomes, advantaging some groups and disadvantaging others.

A complex market
In a growing city the market for housing is continuously changing, which makes it difficult to predict.  It’s also complex, which makes it difficult to regulate. 

Complexity comes from the many ways housing demand is divided up; for example:

·  Across suburbs and sectors (e.g., inner, outer, north, south, east, and west);

·  According to where individuals or households stand on the housing “ladder”, which in simple terms distinguishes among people seeking a first home, households after a subsequent family home (or homes), empty nesters aiming to downsize, and those wanting a retirement home;

·  By demography which, while associated with progress on the housing ladder, will further influence the dwellings people need according to household size and type (non-family household, solo occupant, couple without children, couple with children, solo parent with children, extended family, and so forth);

·  By different lifestyle preferences among, for example: large and small dwellings, modest and indulgent scale or design; different types of locality (in or near the city centre, coastal, suburban, urban village, rural township, countryside); and, increasingly, whether or not in a planned or managed community;

·  By ability to pay, through which a household might exercise its preferences.

Together these divisions can be used to describe many market segments, each with distinctive housing needs and expectations.  Consequently, a trade-off between medium/high density and lower density development is meaningless: a differentiated housing market needs both, and options within each.
When housing supply is suppressed by regulations that reduce the availability of land, the impact is spread unevenly over dwelling types and therefore impacts unevenly on demand segments.  This is most obvious in the way in which new entrants are excluded from home ownership, along with low income earners, single income households, and young families with a preference for space; in fact, young people generally.  Social divisions that were once defined predominantly by income and socio-economic status are now also marked by a generational divide.

Housing and employment
The adverse impacts of limiting the land available to meet housing demand – by location, type, and price – are compounded by the link between housing markets and the labour market. Like the housing market, the labour market is organised geographically.  People want employment close to where they live; and businesses want to invest close to where the sorts of workers they need are likely to reside.  

Ideally, the catchments for certain types of labour will overlap with the areas in which those people live. This makes jobs readily accessible to households.  Accessibility can be maintained as cities grow with the development of transport connections that let people move easily between residence and work.  This is straightforward when a city is small enough and the city centre and inner suburbs account for a large share of employment.  But as cities grow and employment becomes more specialised, the role of the central city changes, and jobs and houses become dispersed, increasing the time and resources committed to commuting. 
Restricting land for housing and employment increases the costs of investment in both.  It makes houses less affordable and business expansion costlier.  The increased commuting times, costs, and congestion penalise both residents and businesses.  By lowering discretionary spending, increasing staff turnover, and inflating wages, the effect is to reduce productivity and competitiveness.

Fiscal pressures also increase, through the need to fund more roads, transit, and associated facilities. 

The social costs
There are costly social consequences. The impacts of substandard housing and overcrowded living conditions are well known.  They include poor health, difficulties securing and holding down jobs, erratic school attendance, limited educational achievement, and diminished employment prospects. 
Even for those who are housed, the high costs can create financial stress, contributing to domestic violence, and welfare and charity dependence.  The absence of starter homes, high rental commitments, and excessive mortgage repayments act to delay family formation and child-bearing, reducing fertility.  Ultimately, high housing costs will also suppress any offsetting demographic or economic gains that might come from immigration by making a city unaffordable to new arrivals.  It may well fuel outward migration, particularly among those with the skills and motivation to improve their situation elsewhere, robbing a city of some of its most socially mobile citizens.

The consequences of declining ownership
That fact that lower affordability reduces the opportunity to own a house is now well documented.  A prolonged period of renting becomes the only viable option for many if not most new households.  

This brings its own problems, especially in New Zealand where the institutional arrangements that might bring stability to renting are absent.  Lack of secure tenure is reflected in negative measures of school attendance, job retention, income growth, and social networking.  In contrast, home ownership has been a traditional path for saving and building equity, with the benefits of home improvement and appreciation accruing to the owner-occupiers.  Ownership provides households the stability required to underpin educational and career progression, savings, health, and social stability.

The opportunities to profit
The upsides of a housing shortage are confined to particular groups.  Home owners with significant equity may purchase one or more investment properties for rental purposes, boosting their incomes while bidding upprices. This favours older groups at the end of their careers and heading towards retirement, further highlighting the contrast in fortunes between retiring baby-boomers and the millennial generation

Then there are the speculators.  They may be small investors on-selling their rental properties for the capital gain.  Or, they may simply be owner-occupants who buy and sell regularly, sometimes improving their houses, but always seeking to exploit rapid price escalation by on-selling.
Large scale institutional investors, development companies and investment trusts, may accumulate green or brownfield land for development, and simply hold it in undeveloped form to farm the long-term gains from appreciation, writing holding costs off against investments elsewhere.  This slows the market – with less properties on sale than might otherwise be the case – and entrenches the shortage, compounding the distortion initiated by planning restrictions. 

Fixing it
Increasing housing supply alone will not solve the problem once the distortions initiated by inappropriate plans have become embedded in the behaviour of market participants, as is the case in Auckland with 15 years of compact city plans.  While boosting the supply of land for development is an essential first step on the path to normalcy in the housing market, reform to taxation laws will also be necessarily to remove the market manipulation evident in land banking and speculative investment. Imposing a modest capital gains tax across the board is the most obvious such measure, which would bring New Zealand into line with the rest of the world.

On the land use front, there are no options if we really do want to make housing affordable again.  Any attempt to force people into small, high density dwellings by limiting how much land will be made available for new housing penalises all categories. By prescribing when and where greenfield development can take place, the price of brownfield land, infill, and remaining unbuilt lots within the urban boundary is pushed up to the point that any dwellings built on it – whether apartments, terrace houses, or detached homes on tiny sites – will be highly priced and remain unaffordable to a very large share of the community.  Making high density housing affordable means small dwellings, cheaply fitted out, and built to a minimum specification, little suited to most market segments and difficult to finance. 

This is basic economics: generation rent, the millennials, the homeless, and families across the board will benefit from access to housing in whatever form they might seek only if land speculation is taken out of the equation.  This means removing arbitrary restrictions on where, when, and how much urban development can occur.  Until then, the Auckland Plan, even in its revised form, will remain the major impediment to creating a livable city which works for the majority of its residents. 

Monday, July 25, 2016

Silk Purse Planning: Can Auckland’s Unitary Plan Be Remade?

The Next Step on the Auckland Planning Path
The Independent Hearings Panel has presented its recommendations for the Proposed Auckland Unitary Plan (PAUP) to Auckland Council.  We now await their public release and the response of the Council to the recommended changes.

The Panel faced a huge challenge[1] in trying to ground the PAUP.  An obvious problem it has had to deal with is the erroneous estimate of Auckland’s capacity to absorb around 70% of predicted growth within the proposed urban boundary, a fundamental starting point for the Plan.  

The question is, has the Panel managed to turn this sow’s ear into a silk purse?  And, if so, will the Council accept its recommendations?

Room to move?
One of the challenges the Panel faced was whether to focus simply on the rules, their application, and their effects; or to address the more fundamental issue of the appropriateness of the principles on which the Plan is based. From my reading of the Panel’s early communications, it could not avoid the latter.
Certainly, much of the debate about the Unitary Plan has focused on the key principles and objectives around city containment and intensification. Just like the Auckland Regional Growth Strategy (1999) from which it evolved via the Auckland Spatial Plan (2011), the PAUP is wedded to locating the majority of regional growth in the existing built-up area. 

Unlike the Regional Growth Strategy, though, the Unitary Plan had to make the near impossible leap from principle to practice.  That’s where the high rise vision fell to the ground. 
 In order to work, rule-based policies need predictability in the scale, nature, and timing of population and employment growth.  They assume conformity, compliance, and consistency of response by those they impact on.  And they assume that multiple decisions on business expansion and housing investment can be nudged to fit the web that a large number of complicated and often ambiguous rules seek to weave.  Good luck with all that.
However well the Panel has done its job, the implementation of the Plan's web of rules is bound to be source of frustration, costs, and conflict for some time to come.

Mission impossible?
The very idea of a single long term plan for a large (16,100sq km), largely rural (over 70% of the landmass) region containing a rapidly growing and diversifying urban mass is flawed. 

The challenge is compounded by the fact that it is unitary plan.  It tries to cover environmental, economic, cultural, and social policies in a single document intended to set the long term land use directions - or constraints – on Auckland’s development when we have little idea of what the future holds.  

This suggests that regardless of the quality of the Panel and its deliberations, the mission was impossible to start with.  A minimalist or at least more measured and flexible approach to Auckland’s future would have served the region better.

The real issues
Auckland faces two underlying problems that mean a comprehensive plan cannot deliver what its protagonists want by way of streamlining, clarity, and consistency of decision-making.   

First, Auckland comprises many diverse communities, each with its own needs, prospects, and possibilities.  Given an increasingly articulate, disparate, media savvy, and engaged population and galloping technical change, crafting a plan that will satisfy the many communities, cultures, and interests that comprise Auckland is well-nigh impossible. 
Becoming more authoritarian – more rule dependent – to deliver a vision based on containing the city will increase the challenge of implementing the plan, increase resistance, and lead to more unexpected outcomes.

Second, a single unitary council is simply wrong for Auckland.  Rather than streamlining processes it disempowers constituents. Promised efficiencies are not delivered.  Costs blow out.  Systems become more complicated.  Regular restructuring and internal reforms distract staff.  Various subordinate organisations – branches, divisions, council controlled organisations, even subcommittees -- take on a life of their own, pulling in different directions.  The weight of management increases, compromising the governance relationship with the board (or council), and the organisation loses its way. 

The elephant in the council chamber
Large-scale mergers don’t often work.  This one doesn’t look any different.   The Committee for Auckland in its push for a single city, the Royal Commission on Auckland Governance with its 800-page prescription, and the Minister for Local Government of the day with his can-do/will-do approach, all got it wrong. 

They apparently didn’t reflect on the recent history of the New Zealand corporate sector.  This would have shown them that as you push seemingly complementary organisations together with their different roles, markets, management practices, and cultures, they tend to become unwieldy, bureaucratic, slow moving, and ultimately unmanageable.  Our leading businesses in forestry, primary processing, food production, and development went on a merger spree in the 1970s, only to find themselves undone and asset stripped in the 1980s and 1990s. 
No matter how good a job the Independent Panel has done, a land use plan cannot remedy the flaws inherent in a large unitary council trying to be all things to all peoples.  

[1]           Bernard Hickey documents it:
"On Friday, Auckland's 'Eagle' landed in the offices of the Council and it's a moment that will prove pivotal in the future of both Auckland and the rest of the economy.  The Independent Hearings Panel on the Auckland Unitary Plan handed 1,000 of documents, plans and recommendations over to officials after five years of work, including 249 public meetings and 21,210 pieces of written feedback.
"There were 13,394 submissions from members of the public and all sorts of interested parties covering 1.494 million separate submission points over 249 days of hearings on 70 separate topics.  Submitters made 4,000 appearances and submitted over 10,000 pieces of evidence".