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.
