The release of the Studio D4/Jasmax report on the Auckland Plan the other day really did throw the ‘cat amongst the pigeons’, as the saying goes – particularly in terms of highlighting the question of what level of change to existing urban areas would need to be made to reach target levels of intensification. That’s going to be a key issue when it comes to big decisions on the Auckland Plan over the next month or two. I’ve commented on the flip-side of this debate a number of times before: the level of urban expansion that the Plan also proposes.
Another key ‘benefit’ of allowing more urban sprawl, so say its proponents, is an improvement to housing affordability. There’s some logic in this at a basic level: if you constrain the supply of land then its price goes up is basic economics. But when it comes to reality, things can be a bit more complicated than that.
Yesterday’s NZ Herald ran a story about housing affordability, reporting on the annual Demographia study into this issue:
The eighth annual Demographia International Housing Affordability Survey, co-authored by Wendell Cox in the US and Hugh Pavletich here, showed New Zealand had no affordable markets, and Auckland was the worst.
It noted that it has been only 20 years since most markets in New Zealand were within reach according to the study’s criteria, with average prices equivalent to less than three times the average annual income.
Housing should not cost more than three times annual income to be ranked affordable, Demographia says. Housing costing more than five times the annual average income was considered severely unaffordable.
The average Auckland house is valued at 6.4 times the city’s annual average household income, only marginally less affordable than the greater London area.
As someone with vague hopes of owning a house one day, I’m well aware of how unaffordable it is. Also, I’m well aware of how housing affordability has dramatically reduced over the past decade as prices have skyrocketed.
The report’s authors, typically, blame land-use policies that restrict land supply (like Auckland’s urban limit):
In the report, Mr Pavletich blamed restrictive land policies in Auckland for pushing up values compared with incomes, rather than other factors such as low wages.
“The economic evidence indicates that this trend is strongly related to the implementation of more restrictive land use regulations, especially measures that create scarcity in land for housing thus driving up prices,” the study said…
…Dr Bob Bruegmann, professor emeritus of art history, architecture and urban planning at the University of Illinois at Chicago, introduced the study saying the rise of smart growth policies to tighten land supply had a big effect particularly in Australia “where the recent rise in prices has been particularly sharp and, given the vast extent of the country, the urban containment policies are particularly contentious”.
Bob Dey’s Property Report had an excellent analysis of the study – also published yesterday:
The argument might seem simple: Provide more land on the fringe, and enough of it to generate competition, and prices will come down. Against that, a counter-argument is that extending suburbia further from the centre increases transport costs, which ought to be taken into account in the overall housing cost picture.
The more complicated question is: How, without a calamity, do you put land prices into reverse without upsetting the existing market? Would buyers accept the absence of capital gain? Lenders have been hit by defaults during the global financial crisis, but would they accept long-term housing deflation? What happens to the construction industry if builders see reduced capital gain at the end of their project?
This is a very interesting question to consider, and one that has been in my mind as I have a think about what might happen to property prices around Auckland if – for argument’s sake – we were to just remove the urban limit and allow pretty much unfettered sprawl. I suppose there are two scenarios:
First, it could make the big difference that Demographia think it would and significantly lower housing prices throughout the whole urban area. While this could be great for me, if housing in inner parts of the city become significantly cheaper, I tend to think that the broader economic consequences of plummeting housing prices (particularly in a country like New Zealand where people have so much of their wealth tied up in housing) could be quite severe. In the long-run I guess it would be good for housing to become more affordable, although it’s interesting to note that other cities with unaffordable housing (Sydney and Vancouver) tend to be the cities vying with Auckland at the very top of various league-tables of the world’s most liveable and desirable cities. In the short run, a huge drop in housing prices seems likely to have a pretty major, and potentially disastrous, economic impact.
The second scenario is that allowing more urban sprawl wouldn’t make much difference to housing prices, except on the extreme urban periphery. There’s some logic to this scenario too: prices in a particular area are determined by the level of demand and supply in that particular area. Adding more houses near Drury doesn’t change the supply of housing in Ponsonby and seems unlikely to change the demand for housing in Ponsonby – so why would it have a huge impact on Ponsonby house prices? Arguably, all we would be doing by allowing more urban sprawl is shifting the poor out to the urban periphery – where they replace housing costs with transport costs, and we all need to subsidise them by building new roads, pipes, schools and so forth.
This second scenario is looked at in another recent article on Bob Dey’s excellent website, where he quotes from Patrick Fontein’s (yes, the primary author of the Studio D4/Jasmax report) submission on the Auckland Plan:
Mr Fontein said the urban limit had been so stringently applied that buying & trading land within it was an investment class in itself, which had led to inflated section prices: “Auckland Council needs to ensure there is sufficient land zoned for urban intensification, as well as greenfield development.
“Releasing more land will somewhat improve the affordability of new house prices, but as new houses on the external Auckland suburbs are still priced in excess of $550-600,000, releasing more land will have almost no impact on housing affordability in the $200-$450,000 price range. Careful consideration needs to be made of the total infrastructure costs of new greenfield locations, as the cost of infrastructure in certain locations will add substantially to developed land cost.
“The main effect on existing Auckland property prices of releasing substantial new greenfield development sites will be to reduce demand for low-amenity-value existing suburbs, such that these suburbs over time will become less attractive, will not be able to attract re-investment capital and these low-amenity suburbs will gradually decay. This will have the effect of making these low-amenity suburbs even less desirable, which then makes these suburbs more affordable!! (eg, some people upgrade from an older low-amenity suburb to a new house in a new subdivision, and there are relatively not enough buyers attracted into the older low-amenity suburb).”
Obviously this is just the opinion of one person – albeit someone who has been pretty close to the industry and has looked at the matter in quite a bit of detail. His key link between housing affordability and urban sprawl relates to the reduced focus there will be on reinvesting in poorer suburbs, leading to their further decay – with the corollary being that through such a process they will become more affordable. I may have somewhat misinterpreted what he means, but it sounds something like what I call the ‘Detroit doughnut effect’ where urban sprawl leads to decay and near abandonment of many parts of the existing city. Not exactly what I think we want already troublesome parts of Auckland to descend to.
I still think there’s an argument that the incremental, well planned, release of additional land for development has some effect on housing prices – more to ensure they don’t go higher rather than bringing them significantly lower. But that needs to be matched with providing more housing units in the parts of Auckland where people actually really want to live – through clever and well designed (and located) intensification. Obviously there are parts of Auckland where intensification isn’t appropriate, or where only a certain level of intensification is appropriate. Working that out is complicated, ensuring good design is complicated, aligning our transport infrastructure investment with where we are focusing intensification is complicated. Devising schemes to create a supply of affordable housing where people want to live is complicated. But that’s OK: if it was easy it would be boring.