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 20^th 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. 

Credibility on the line: time to get real about Auckland transport and land use options

Councillors are getting nervous about the planned central rail link (CRL).  So they should be.  And while planning is well down the track, it’s not too late to apply the brakes.

This post strings together some of the arguments I have raised against the CRL over the past several years[1], and adds another one –the likelihood that technology gains will further undermine it.

But first some basics. 

Moving more and moving further

Transport is a derived demand: you only get it in response to the demand to move people or goods.  And as information flows more and more freely around the world, so growing demand for travel and trade -- locally, nationally, and internationally -- drives investment in transport. 

As nations, towns, and cities prosper, we travel more and further.  We exercise greater choice in where and how we live.  We consume a greater variety of products and services at lower prices.  And the transport sector responds with ever increasing products, services, and capacity.

Of course, it’s not just a one-way street. Transport innovations facilitate new trading relationships and expand travel demands.  Innovation-driven gains in mobility have enabled the masses and not simply the rich to enjoy the benefits of access to more space, more places, and more lifestyle opportunities. 

For example, the arrival of the wide-bodied jet in the 1960s and the more recent emergence of the single aisle, light weight, twin engine long-distance jet have increased the affordability of long distance travel and supported the emergence of many more international travel destinations for many more travellers. 

Similarly, the globalisation of production has been facilitated by transformation of the freight industry into an integrated transport, storage, and fulfilment logistics sector operating seamlessly to deliver lower priced goods from producer to consumer regardless of the distance and borders between them.

Urban transport – a history of increasing personal mobility

This is not the place to detail the history of urban transport, but it’s worth noting a legacy of occasional step changes resulting from disruptive new technologies interspersed with long periods of refining existing technologies.  These two have offered people the opportunity to enjoy more space, better health, and better lifestyles through progressively improved access to housing, services, work, and recreation. 

 

Hence the displacement of horse and carriage with steam-driven and tracked vehicles in the second half of the 19^th century, the replacement of steam engines with internal combustion engines late in the 19^th century; the introduction of the omnibus at the beginning of the 20^th; the development of mass-production techniques for automobiles in the 1930s; and their proliferation in the 1950s and beyond.

Innovations in engines, propulsion, and materials have led to continuous automobile performance improvements. Even so, concerns about congestion, threats to oil supplies, pollution, and the costs of providing more road capacity raise questions over just how much more car use we can sustain. 

Despite its own gains in distribution, comfort, and speed, mass transit remains an alternative limited by fixed routes especially in today's complex and often fragmented cities.  The problem is less acute for buses than trains, although the economics of providing routes and schedules to suit diverse needs in large cities are entrenched in both modes.

So, where does the next step change lie in urban mobility?

Driving innovation

Perhaps the rate of advance to existing technologies has reached the point that disruptive technologies are less likely.  Ongoing innovation in car operations (built most recently on revolutions in information technology) and advances in engines are likely to deliver major capacity gains from infrastructure and lower the cost and impacts of private motoring[2], lifting personal mobility and reducing the likelihood of step change.  At the same time the propensity to use cars is stabilising, if not diminishing. [3] The threat is that the fixed route options for public transport will become even less attractive.

Of course demand will be  continue to be driven up by population growth, even if individuals drive less.  Herein lies the challenge: we are not talking about the mobility of current Aucklanders, but that of perhaps a million more seeking their share of transport infrastructure. 

How do we cater for this: promote a return to the old technology of fixed route rail capacity?  More roads? Or by managing transport demand through effective land use planning?  I prefer a combination of all three, but it’s a preference based on (1) understanding the particular limits to and costs of continued obsession with rail and particularly (in Auckland) the CRL, and (2) returning to an emphasis on sensible land use as the engine of this particular train, not transport.

The limits to rail

At the risk of being repetitive [4] here are some of the reasons to reject major expenditure on the CRL (or a rail-based airport link or harbour crossing for that matter):

(1)  Demand will be limited.  A doubling or tripling of rail patronage will not go far in terms of total commuter demand given the very small base it operates off; 9,000 Aucklanders commuted by train according to the 2013 Census.  That's 2% of commuters.  Currently 10% of Aucklanders commute by public transport, 80% of those bus.
 

Boosting public transport demand though park and ride facilities or integrated ticketing is limited by the relatively small number of destinations served.  Public transport travel time costs are already high and multi-mode travel inevitably lifts them no matter high efficient. 

Boosting public transport demand by providing inner city dwelling capacity is largely irrelevant as inner city commuters already have a high propensity to walk, cycle or take public transport to work (only 55% use a private vehicle).  That market is tiny anyway, and likely to remain so.[5]  

Promoting high density dwelling around stations at key suburban centres to boost train patronage will meet market resistance.  And, if successful, it will lead to conflicts between local activity and park and ride facilities, adding to local congestion. 

Focusing employment on the CBD to boost the use of public transport ignores the needs of the majority of businesses (only 12% of Auckland employment is currently in the CBD).  It also ignores questions over the resilience of the CBD. its ageing, often capacity-constrained infrastructure. and the vulnerability to extreme climatic events of low lying and reclaimed land on which much of it is built[6].

Promoting higher employment densities around stations to lift the viability of rail will generate additional road congestion as much of the interaction around businesses still requires point-to-point vehicle access, the majority of commuters are likely to remain car-bound, and the more people that live in and around the CBD the more of them will need to commute outwards to employment as well as for recreational reasons -- by car.

And there is a real question mark over what those many more white collar workers in the new towers might be doing,[7] especially as high tech employment increasingly favours low rise, green working environments.

(2)  The impact on congestion will be minimal. Creating additional road capacity by diverting some commuter trips to public transport reduces the costs of private transport, encouraging greater car use until such time as unacceptable levels of delay once more set in.  Such evidence as there is for developed cities in North America, Australasia and Europe does not support the proposition that public transport reduces congestion.[8]

(3)  The Capital costs will be high – almost inevitably higher by hundreds of millions of dollars than current estimates;[9].  Even without the usual "large project blowout" the marginal costs will be very high: if the impact was to triple daily commuting patronage to, say, 30,000 people a day a capital cost of $2.4bn (both optimistic assumptions) represents $120,000 for each additional commuter.
 

(4)  Overheads will be high – fixed costs are a large component of rail overheads.  These include operating costs, maintenance, and renewals (for rolling stock in particular), interest on capital, and depreciation.  Any demands on ratepayers or road users to subsidise this are still costs, costs that are likely to reduce the attractiveness of Auckland as a place to live or invest. 

In addition, pricing public transport to recover even a constant share of higher costs from users is likely to lower demand. This, in turn, is likely to reduce income more than costs, potentially leading to a subsidy (public cost) blow out.

(5)  The business case relies on heroic assumptions about the future of work and housing.  Building a case on assumptions about a shift to high density housing on suburban stations and new towers of white collar employees around inner city stations is highly risky, with no evidence that the risks have been factored into decision making. [10]  And there seems to be little consideration given to the risks to rail resulting from technical advances taking place in the automobile industry that should increase the efficiency of roads, lower the costs and boost further the convenience of cars, and improve the performance of buses  [2],

(6)  The economics do not stack up and consequently fiscal risk is high.[11][12]  The legacy of the CRL is likely to be enduring debt and costs that potentially reduce the appeal of Auckland as a place to live without reducing the problem of congestion. And they will be so much higher if the optimistic projections on which the business case is based fail to materialise.  When costs substantially exceed benefits productivity suffer and the Auckland economy is the loser. 

There’s got to be a Better Way

The aim of this post was to contribute to the current debate over the future of the CRL.  Whether or not it goes ahead it is not going to solve Auckland’s transport problems.  Nor will an integrated transport system based on common ticketing and interchange stations with their substantial land demands and impact on local and arterial road congestion help much.

The long-term solution may best be based on a return to basics: identifying the land use pattern that is in accord with both the city’s geography and the ambitions of the council to house another million residents (an ambition that seems to have gone un-debated in the lead up to current plans).  The transport system needs to be organised to serve that. 

Planning land use to serve an outmoded transit model based on an increasingly dated transport mode justified by the view that Auckland can continue to grow as mono-centric city is a recipe for disappointment  - and not just in transport.

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[1] Starting on this blog with Buses or Bust? April 2011 and Rethink the Link: Does Auckland Really Need to Pour Money into a Hole in the Ground, December 2011  To get an alternative point of view, visit transportblog.co.nz/

[2] Cars, Engines, Travel – Fewer, Smaller, Less February 2013,  Driving Blind – Driverless Cars Ramp up the Risk for Rail October 2014

[3] Cities, Cars, People – is Changing Car Use of Function of New Urbanism? March 2012

[4] Here’s an earlier list At least Five More Reasons not to Build the Central City Rail Link December 2012

[5] Living in the CBD or Just Passing Through, October 2014

[6] See Planning for Disaster and The Auckland Plan – A High Risk Recipe, November 2012

[7] See, for example, Whither White Collar Services? December 2011

[8] Do Density and Public Transport Relieve Congestion? December 2013

[9] Tunnel Vision: Thin Edge of the Rail Wedge July 2012

[10] For example Out Might Just be Better than up – the great Housing Debate is not Over April 2013 and on employment More Land, More Jobs, More Income, Addressing the Other Side of the Affordability Question April 2013

[11] This is the sort of contingency that a Business case should address as a matter of course.

[12] A Flawed Case,  Auckland’s City Rail Link and Derailing Auckland – Unravelling the assumptions December 2012

The Great Housing Debate Plods Along

Another day, another working party

The government and Auckland Council are working on the terms of reference for a working party to look further into Auckland’s housing crisis and how to resolve it.  Enough already.

A passage of reports, going nowhere
There has been a host of reports on Auckland’s housing needs, not many of them useful (otherwise the problem should have been solved).  Past attempts to reconcile statistical projections of demand with rose-tinted views of supply failed to stir the councils into doing something about a problem we have known about for 15 years.   

When we diagnosed it then, we argued (and the Auckland’s Regional Growth Forum agreed) that the Growth Strategy (the genesis of the Auckland Plan and its bloated progeny, the 7,000 page Unitary Plan) was too mechanistic in its approach to housing. 

The solution lay in more, not less, flexibility.

Matching residential capacity estimates with projections of household numbers is done at too coarse a level ...  Given diverse demand and ... differences in components of supply, capacity for some types of land is likely to be exhausted earlier than projected… The likelihood is that property prices will escalate if greater flexibility is not introduced… This raises the prospect of adverse equity impacts associated with housing affordability from a strategy that over-emphasises containment …”

Auckland Regional Growth Strategy Review, McDermott Fairgray for Auckland Regional Growth Forum, ARC 1998

Unfortunately, the interim has seen falling supply, rising prices, and perversely intransigent planning.

Deliberating and debating
The Productivity Commission’s was the latest, most wide-ranging and the most thoroughly grounded report into the issue.  It set out the parameters of the problem in a full and systematic manner. 

But that was a year ago now, and its urgency has been diluted in the war of words between central and local government.   And the prospect of a debate over a draft regulatory document the Unitary Plan - and when it might come into force as Auckland’s latest (and most constrictive) statutory planning document promises further procrastination.

I would set aside the Draft Housing Strategic Action Plan Stage 1, Working Draft Version 14 (yes, that’s right, 14!) put out by the Auckland Plan Committee, as yet another report from inside the bunker.  This one contains seven objectives, 12 Priority Areas, and 32 Actions.  Like all the others before it, this plan acknowledges the complexity of the problem.  Unfortunately, it seems to compound this with the complexity of “the solution”.  

The choices we face
As I think the Minister of Housing, Dr Nick Smith, was trying to get across in his recent exchange with the Auckland Mayor, we are running out of time.

We have three choices for dealing with the housing crisis (or not, as the case may be).

First,   can continue to convene working parties, write reports, and debate the detail.

Second, we can save paper, and do nothing, ignoring the problem on the grounds that it may go away. 

And it will, in due course, with a large (younger) chunk of demand heading offshore and another (older) chunk heading for provincial and small town New Zealand. Demand will wither.  And that will bring forward the day that the bubble bursts.  Given so many eggs in the Auckland basket that will be a disaster for the country as a whole.

Incidentally, waiting for the bubble to burst should also bring plenty of newly bank-owned properties onto the market at fire sale prices – a somewhat perverse correction to a problem created by a shortage.  The problem then will be that not too many people will be able to afford them, certainly not the people who need them.

Unfortunately, inaction points the way to economic decline in the long-term (and, it seems, xenophobia in the short term).

(Thinking about it, Option 1 is just a variant on option 2, but it might let our politicians and report writers feel a bit better about it).

Third, We take action now.

The action option and political palatability
How?  Well the Productivity Commission demonstrated that this is a multi-faceted problem.  And if it was easily and painlessly fixed, it would have been.  It needs a multi-faceted solution that not everyone will like.  There will be short-term losers, including people affronted by a loss in property value. Some of us may have to accept that selling our houses will not necessarily fund retirement in the style we had hoped for.

Sometimes, though, political popularity has to give way to strong leadership.

The obvious starting point – land supply
The Commission emphasised the role of land scarcity.  So let’s start there. There is an urgent need to line up capacity for perhaps 60,000 houses in and around Auckland.  

If we are to have a land shock, though, let’s moderate its impact on infrastructure, environment, and transport by spreading it across multiple sites (brownfield, infill, the greenfield edge, and satellite towns).  This should also ensure the diversity of new stock and limit downward pressure on existing prices and equity within sub-regional markets.

Supported by sensible regulation
We also need to avoid clumsy heritage rules in the city’s proposed plan that will stymie quality urban renewal and prevent modest gains in density in existing suburbs by restricting demolition of any old houses (pre 1940s).  Better by far to preserve with some sensitivity those structures (and perhaps streets) of true character and enduring merit and let the others go if this serves housing demand better.  This approach will make increasing densities in long-established suburbs easier, and the results more attractive.

In fact, let’s streamline all regulation of land use change that does not relate directly to protecting environmental quality and capacity, so that our decisions reflect better how critical good housing is to Auckland’s social and economic wellbeing, and its liveability

And balance
We will also need to provide adequate land for the growth of local employment opportunities at the same time.  Failing to prioritise this is another black mark against the Auckland Growth Strategy and successive planning documents that underlie today’s congestion.

The notion of balanced decision making needs to be carried over into infrastructure.  Let’s get over the myths that bigger is better and that more spending now saves costs later.  It doesn’t, because excessive infrastructure imposes costs today that limit our capacity to implement better solutions tomorrow.  A little more fine tuning of infrastructure design, funding, and delivery is critical to efficient land use in the long run.

For this issue, it’s worth changing the law
It might be hard to countenance, but freeing up land supply for housing around Auckland requires legislative action so that it doesn’t get bogged down in the procedures and strictures around Auckland’s Draft Unitary Plan. And we cannot afford to wait and do it indirectly through the clumsy process of ongoing reforms to the Resource Management Act. 

A development corporation
If Minister Smith and Mayor Brown want to collaborate, perhaps they could create between them a corporation capable of assembling the necessary parcels of land.  Once this is done substantial parcels already approved for development can be released to the market for development through a variety of transparent and competitive methods. 

There are plenty of successful precedents and we have the examples of Council Controlled Organisations (including Auckland Property) that should be capable of breaking through bureaucratic logjams.  Surely the government and council can get this jam-breaker sorted quickly.

Beyond fixing land supply
Of course, adequate land supply is only one condition –albeit the most critical - necessary to re-establish an effective housing market. We also need changes in the institutional, industrial, and commercial environments.  We need to lower infrastructure costs.  We might also expect changes in the social environment as households and communities adapt to a new housing reality, because whatever we achieve, it is unlikely to be the same as what we had in the past.

I will address possible changes in these matters another posting. 

The time is now
For the moment, the message is that a new approach to land supply is urgent. We know enough to stop debating and pondering and to begin the job.  Without action on land, any other initiatives will come to nought and we may as well just carry on wringing our hands and writing reports.