My last two posts about Demographia’s analysis of house prices prompted quite a bit of discussion. I thought that it may be worth expanding on my points and clarifying why they mean that we should take Demographia’s conclusions with a large grain of salt.

Economists (and statisticians) have a term for what Demographia has done: “omitted variable bias”. This can occur when there are multiple variables that have a causal impact on an outcome. If we attempt to understand that outcome without considering all explanatory variables, we run the risk of biasing our conclusions.

Economists are trained to identify and address issues arising from omitted variable bias. Here, for example, is a comment on the topic from a widely used undergraduate econometrics textbook:

Now suppose that, rather than including an irrelevant variable, we omit a variable that actually belongs in the true (or population) model. This is often called the problem of excluding a relevant variable or underspecifying the model. We claimed in Chapter 2 and earlier in this chapter that this problem generally causes the OLS [ordinary least squares regression] estimators to be biased.

Now, I realise that’s a bit obscure, so let me be more specific. Here’s a list of (some) factors that can influence house prices, with a view on their expected impact:

VariableExpected impact
Expectations for future population and economic growthFuture expectations tend to be capitalised into house prices – i.e. prices will tend to be higher in areas with better growth prospects
Consumer and natural amenitiesPeople are willing to pay more to live in nicer places
Interest rates (and availability of finance)Lower interest rates enable people to afford a larger mortgage on a given level of income
Construction sector productivityLower productivity will increase the cost of supplying new dwellings
Tax policies, including capital gains taxes and mortgage interest deductionsTaxation of capital gains will reduce willingness to invest in housing for capital gains
Tax subsidies for mortgage-holders will tend to push prices up
Other housing market policies, such as rent subsidies or public housing provisionRent subsidies tend to be captured by landlords and thus will tend to push up prices
Ongoing construction of state housing will add supply to the low end of the market and thus constrain price increases
Urban planning policiesPolicies that constrain the development of new housing in desirable areas, or make it more costly or uncertain to develop, will reduce supply and push up prices

Demographia only addresses one of those seven variables. Because they fail to account for the other six potentially explanatory variables, their estimates of the welfare impact of urban planning policies are not likely to be reliable. Without controlling for other potential explanations for high housing prices, it’s impossible to say whether their conclusions about any individual city are correct or not.

Consequently, my recommendation to people seeking to understand the impact of urban planning policies on housing costs is simple: Ignore Demographia and go read the relevant economics literature instead. For those who are interested in doing so, here are a few papers that I have learned a lot from. They apply a range of modelling approaches, but what they have in common is that they undertake a detailed analysis of rules, rather than making sweeping and unsupported generalisations:

  • Glaeser, Gyourko and Saks (2005) studied the impact of building height limits in Manhattan by looking at the gap between observed sale prices and the marginal cost to add another floor to high-rise buildings. They find that constraining the supply of high-rise apartments imposed a significant “regulatory tax” on residents.
  • Grimes and Liang (2007) took at look at land prices around Auckland’s Metropolitan Urban Limit, finding evidence of a “boundary discontinuity”. They interpreted this as evidence that the the MUL is overly restrictive.
  • Kulish et al (2011) developed a hypothetical model of the impact of several factors on housing and transport costs. They modelled density restrictions as well as increased transport costs and lower building productivity, finding that building height limits raise housing costs and increase sprawl. I have previously discussed their findings.
  • MRCagney (2013) examined the impact of minimum parking requirements in Auckland, finding that they impose a loss on developers and businesses by forcing them to over-supply parking. They also cause worse congestion, meaning that not even drivers benefit. Luke C briefly discussed this study in a post on the Unitary Plan parking rules.

My favourite economics paper on planning regulations is Cheshire and Sheppard’s 2002 study on the impact of greenbelt rules in Reading, UK. The authors observed that greenbelts have both positive and negative effects. On one hand, they limit the supply of land for new housing, which drives up costs. On the other hand, they give residents access to public open spaces, which people like. Rather than ignoring this trade-off, they used house price data to model it.

Overall, Cheshire and Sheppard did find that allowing development in Reading’s greenbelt would make people better off. However, they also found that a failure to consider the amenities produced by planning rules would have resulted in too high an estimate of the gains in wellbeing. In other words: right direction, wrong magnitude.

In light of the evidence, my view is that failing to account for urban amenities and other explanatory variables in an analysis of the impact of supply restrictions can result in two errors:

  • First, it can make us over-optimistic about the degree to which loosening rules will affect housing prices. That’s not to say that less restrictive planning regulations couldn’t make us better off – just that we should not expect house prices to fall by 60-75% as Demographia implies when it says that Auckland should have a median multiple of 3.
  • Second, it can lead to perverse outcomes, by encouraging us to eliminate rules that are serving a useful purpose. Often (although not always) planning rules are managing the external social or environmental costs associated with some developments. A proper cost-benefit analysis – which Demographia has not done – will consider both the pluses and minuses of rules.

In short, housing markets are complex, and any analysis needs to consider that fact. To reiterate my point from last week: Demographia takes an inappropriate, overly simplistic view of house prices. This may be good for grabbing headlines, but it’s not good economics.

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88 comments

  1. A further important variable to consider is the capacity of the building sector to increase its construction rate. This is affected by, but not a sub-set of productivity.

    If the building sector is at or close to capacity then one would expect other measures to encourage housing to be inflationary in effect.

  2. I guess most of these factors affect demand. low interest rates mean increased demand across higher price points as large mortgages are affordable. tax free capital gains = higher demand for investment properties. rent subsidies = higher return on rentals = higher demand for investment properties. local amenities = more migration = more demand. etc etc

    Demographias argument is that only when you constrain supply do these demand factors lead to an excessive increase in land prices. If supply were better able to respond to demand, then one would see only modest price increases.

    1. Your conclusion might imply that it is not the rural-urban boundary that we need to look at but restrictions on intensification on the isthmus given that this is where the most demand is 😉 It is therefore a shame that the Unitary Plan will not enable this due to the opposition to anything more than what is currently built..

      1. yes at the moment we are severely limiting the build up, and severely limiting the build out. With immigration running at 50K/year, is anyone surprised landprices continue their double digit gain?

        1. We have planned a limited amount of build out, just enough to cope with the population increase assuming the expected densification happens. How is that not severely limiting the build-out? I guess we can argue if that is ‘severe’ or not; Much as i personally would prefer the city to build up and to have easy access to the surrounding green spaces, i’ll argue that anything that creates the environment for land speculators to pump up land prices to insane levels is ‘severe’.

    2. I have met a lot of people who genuinely believe house prices are caused by interest rates. I just can’t get my head around that view point. Sure in the short term a high rate delays purchases so the market stagnates and a drop in rates can get things started again sort of like a catalyst- but actually drive prices? Surely that can only be demand from people who want to live there or rent it out, and supply. What is a low interest rate and what is a high interest rate from their viewpoint? Surely interest rates have only a short run impact as in the long run they reflect the actual cost of money? Even the current reserve bank governor seems to have fallen in to this way of thinking. He introduced LVRs to protect the banking system from a problem that didnt seem to exist, I mean we were coming out of a financial crisis and high loans hadn’t caused our banks any problems. He then keeps trying to jawbone the Auckland property market which is a fools errand if ever I saw one. I cant see what possible role monetary policy has in the housing market, it cant fix a supply problem or a demand boom it can only screw things up. This “its due to interest rates” stuff has the potential to take on a life of its own. If the bank tries to hose down the property market and gives us deflation as a result then we are truly stuffed. Stick to your knitting Mr Wheeler!

      1. There is what people want, and there is what they can afford. Affordability being the ability to service the mortgage.

        When rates drop and people re-do their calculations, they start thinking, forget about Mt Roskill, we can service an extra 500K now, so lets go for Kingsland. That buyer then looses out at auction to someone on a higher income who could raise an extra 800K at the new rates. In a supply constrained environment prices will rise to the limit imposed by affordability which is directly impacted by interest rates.

        1. “In a supply constrained environment…” yes exactly. In the short run supply is quite rigid but in the long run it isn’t. People can in-fill, intensify or sprawl so long as some twit (I am looking at you former Auckland Regional Council) didnt stop them. The interest rate can’t drop for ever but it did drop in the period of John’s graphs as that was the disinflationary period of the Brash governorship. I reiterate, in the long run house prices are affected by real effects not monetary. But we face a massive downside risk when some twit tries to use monetary policy to influence one asset class. If prices are high then that is the correct signal to build not to mess with interest rates or banking rules.

        2. Yes I hadn’t thought of that situation. You land bank when the land is appreciating at a higher rate than the prevailing interest rate. So a low interest rate with land constraints will encourage people to sit on the asset and sell it later at a higher price. A higher interest rate will encourage you to dispose of the land.

  3. There is a bigger problem with these guys and that is that they don’t define what a “house” is, they leave it up to each market to define that (informally).

    So there is no way you can compare the “median mulitple” or whatever their number is called between cities let alone countries.

    In NZ if you mention “house” a lot of people think you mean stand alone 4-5 bedroom McMansion on a full section in the ‘burbs.
    When clearly thats not necessarily the case in say Auckland but might be in Nelson.
    In Canada, a house probably means a 2 or 3 bedroom apartment in a large apartment (condo) building.

    Of course a 5 bedroom McMansion will pretty much cost a lot more money in any country and location than a 2-3 bedroom apartment in a massive high rise apartment.
    So that median multiple for a “house” is simply utter meaninglessness.

    And like Alice in Wonderland a house as measured by Demographia “means what they want it to mean”.

    1. Actually, Demographia’s approach significantly understates the extent of the problem in unaffordable markets by NOT controlling for house size.

      For example, Hong Kong’s median multiple is 17, even thought its median housing unit is around 1/5 the size of cities with a median multiple of 3.

      I would very much like to see a study done simply stating median rent per square foot, adjusted by income. I would bet that the cities with a high median multiple would mostly look exponentially WORSE.

      I don’t know why anyone is using this as an argument against Demographia and in favour of growth boundaries and intensification. This argument has been re-run repeatedly – not just on this forum. See “Debunking the Debunkers” by Phil Hayward on WhaleOil blog.

  4. You don’t need to have a PHD in economics to know that restricting the land supply and/or restricting what people can build on their land will increase the cost of a house in a growing city. The real question is do we allow more greenfield or brownfield development?
    I would personally prefer to see it left to the market to decide what people want – it won’t be perfect but the market will know better then even the most well meaning planner. The trick is somehow pricing in a reasonable cost for providing services to new developments – without this the market gets distorted to developments where the council picks up those costs.

    1. The market is always right. Really? Is that what you’re stating? GFC anyone?
      “Markets” are people. And people are not rational. Ergo markets are not rational.

      1. Didn’t say it is always right, just it is more right than Auckland’s planners (e.g. minimum 600m2 sections in our closest suburbs to the city).

      2. Sure, and the big lesson of political economy is, what frameworks and hence incentives work best? There is such a thing as “unintended consequences”. A good one in this context, is that urban planning in the UK has produced cities 5 times more compact than comparable cities in the USA, yet average commute to work times are 50% higher in the UK.

        Yet the people who are responsible for this would swear that their intervention in the market was aimed at least in part, at increasing commuting efficiency. Ironically in the former USSR where planners had total powers and there was not even a land market at all to transmit perverse outcomes, the “excess commuting” burden was blowing out worse and worse the longer time went on. See Alain Bertaud’s paper, “Cities Without Land Markets”

        1. Those average commute to work times, are those the average over all commuters, or only the average over all people who are commuting by car?

    2. I’m not particularly concerned about the development contribution for new developments but the ongoing maintenance costs associated with low density housing.

      1. Maybe the rates and/or water charges should be changed to reflect the costs of the type of property and/or area you live in?

        1. That is why rates should be on land value only. That would discourage land banking in an urban area because the land banker would pay the same rates as someone who builds/uses the land more productively.

          It would also encourage intensification by decreasing the marginal cost of building up i.e an apartment building with many ‘houses’ would pay the same rates as the neighbouring single stand a lone house on the same size plot of land.

          This would be much simpler than complicated planning rules etc.

          Land value taxes have made economic sense since Henry George proposed them. It is the politics of them that is difficult.

          This combined with the appropriate level of fuel taxes or road user charges should encourage an efficient agglomerated urban area that balances up with out.

        2. Also a growing urban area needs to accommodate higher densities that follows the building up option. Because of the space consuming nature of automobiles, growing cities should offer a choice of lower space using transport options like walking, biking and fast dedicated right of ways for passenger rail, trams and buses.

          Not to provide these transport choices means growth will unnaturally favour the ‘out’ option.

          On the other side of the coin to prevent any outward expansion by planning restriction or inadequate infrastructure provision just hands market power to landholders within the urban limits. This will almost certainly cause inflated land costs when an urban area is exposed to demand growth.

        3. +1 on both your comments above Brendon.

          We need up, out and better public transport and cycling. It must be all of those together to get the real effects.

        4. Both in outer AKl and around CHCH we are Building ODs, that is TOD, Transit Oriented Development, without the Transit. Result: old fashioned sprawl, or in some case even dense sprawl. Largely because central government policy is for OD or rather; ADD: Auto-Dependent Development [any other meaning to this acronym purely coincidental, honest].

        5. Patrick it seems that you, me and Goosoid agree there is a lack of balance to how our cities are developing.

          I firmly believe for our cities to successfully develop we need to take control of transport spending. Leave Wellington with a couple of genuinely nationally significant transport policies like developing a few hub ports that can service the whole country.

          Central government have been buggering up urban development for 65 years, by dictating urban development for areas they are not familiar with. Local control would have led to better outcomes.

        6. I further believe the government as our national collective democratic representatives can only allow regional democratic control of transport and urban development if they can trust that nationally significant issues like housing bubbles, housing inflation, unaffordable housing as measured by median house values… whatever you want to call it will be kept under control.

          So we need sensible trustworthy answers to questions like David Lupton asks at the bottom of this thread.

    3. In my career as an economic development planner I have seen so many abuses by the private sector – the “marketplace” – that I had to either laugh or cry. That’s why we are here. That’s why we have zoning. That’s why we have building codes. That’s why we have conservation land. That’s why we have environmental standards. That’s why we have public processes. Because the “marketplace” is just a rebranded Wild West.

      However, in addition to abuses, developers are not the all-seeing omnipotent beings that you may think they are. A developer is someone who makes money building something with other people’s money, and cashes out when a project hits his desired rate of return. That is a very different approach to investment and it wouldn’t change if everything is “left to the marketplace.” Anyway, planners have a very different perspective than that, a public service, creative, problem-solving approach to city development. Whereas a developer builds the same thing over and over because that’s what he’s comfortable with, the more of it he builds the lower his marginal costs, and a general aversion to innovation. Good planners understand the market and work within it, but they also think in terms of the possible.

      I have seen many instances – and contributed to more than a few – of planners identifying an opportunity that “the marketplace” overlooked, with resulting development that wouldn’t have happened, or happened in such a high quality form, leading to further high quality development. I can give lots of examples of market failure in urban development. Of course, there are good developers who don’t fit this mold, but they are the exception.

      1. Are you telling me the planners are perfect? I can spot so many holes in the unitary plan I don’t know whether to laugh or cry!
        The market would in the most part build houses that people want where they want to live – it might take a while to work out what people want and where they want it, but it would happen. Auckland’s planners seem to think everyone wants a gold plated million dollar property with massive sections, lots of carparks and a 2 hour commute – do you really think the market is that stupid? Even if the market was as bad as the planners, at least houses would cost a lot less!

        As for the building code, we have one of the most restrictive, annoying and expensive building codes in the world, and we are the ones with leaky houses. Try watching overseas property shows and see how much they are allowed to do without submitting thousands of dollars of plans to the council. I wanted to build a carport and by the time I got the plans drawn up and paid for consent it was going to cost $5k+ – my friend built one in Aus, didn’t need a draftsman and the council charged $300! Why not get rid of all the plans, paperwork and red tape and instead employ inspectors that know their stuff, it would save everyone a lot of time, money and would lead to better quality buildings.

        1. No. Why do you think I did?

          Please give a few examples – 10 or so – examples of “holes” in the Unitary Plan.

          Leaky houses are a reflection of what the entire “marketplace” would provide, given that the main purpose of the marketplace is to reduce costs and risks to the investor. The fact that a law wasn’t enforced does not negate the value of the law. Take this one up with the politicians.

          That comment about planners think everyone wants a million dollar house – obviously you know nothing about the profession, but it’s such a silly comment I won’t dignify it any further.

          Oh, overseas is the model? Pick one. India? Pakistan? Indonesia? Not saying the resources consents process can’t use an overhaul, but getting rid of all the “paperwork etc etc etc” will open up the “marketplace” to the abuse those things are designed to address. Why all of a sudden does a NZer want to be like Oz?

          So one bad idea after another Jumbo.

        2. Not sure I can give 10 examples, but this whole idea of intensifying the outskirts while in most cases making the isthmus either the same or less dense than it is currently seems like a really bad idea to me. I’ve never seen a city where the density gets higher the further you travel from the city centre! The current plan is basically to put density in the places where the least people complained about it – is that really a good way to do planning? Is that better then a free market approach?

          You’re right I don’t know much about planning, and I’m not even sure whether the issue is a planning or political issue, but it definitely seems to me (and most of the country for that matter) that the council goes out of their way to make developing houses as difficult and expensive as possible. Whether that be through minimum section size, carparking requirements, green space requirements, aesthetic requirements, etc. For example I can’t make my driveway more than 40% of the width of my property because it might look bad, but I am allowed to put an ugly 2.5 metre fence along the front – crazy! Most of these silly little rules don’t really achieve much but they do cause a huge amount of expense, annoyance and restriction.

          The leaky houses occurred because the law focuses on plans and paperwork instead of good knowledgeable inspectors using common sense (I hate the term common sense but in this case I think it applies). We used to have much less paperwork and much better inspectors and in general our old buildings are built to a much better standard than the current ones. I just don’t see the value in the council requiring detailed plans of every aspect of your house, its very expensive.

        3. “this whole idea of intensifying the outskirts while in most cases making the isthmus either the same or less dense than it is currently seems like a really bad idea to me” – And to planners. The only reason it has ended up like that is because of all the NIMBYs on the Isthmus and in my hood of the North Shore.

          I am sure if Council planners had their way (or at least the new generation – not the ones who still think it is 1981), huge swathes of the city would have rules allowing higher densities. It is the common sense way to allow the market to meet demand for inner city housing and support denser public transport. In other words, make a city work properly – the opposite of sprawl and auto dependence.

        4. “Please give a few examples – 10 or so – examples of “holes” in the Unitary Plan.”

          I’ll get started:

          1. The unitary plan has a policy of providing up to 70% of growth through intensification but then does not follow through with zoning that would allow anywhere near that amount of development.

          2. Much of the land that has been zoned for intensification is in areas where there is not sufficient demand (or high enough land values – the same thing really) to justify intensification. At the same time the areas with the highest demand / land values, central suburbs and coastal areas, have mostly had further development prohibited.

          3. The Unitary Plan has minimum parking requirements despite the evidence of how irrational, distorting, and costly these are. http://greaterakl.wpengine.com/2014/02/25/unitary-plan-and-minimum-parking-requirements/
          In one instance there is a parking minimum and maximum which is the same number – one. As if this is a perfect amount of parking and any more or less must be banned.

          4. The residential zones allow large structures to be built but these may only be used as a single dwelling. For example the Mixed Housing suburban zone allows 2 storey buildings with 40% building coverage. So on a 700 m2 site you could build a 560 m2 building, but the density control of 1 dwelling / 400 m2 means this building could only be used as a single dwelling. Combined with high land prices this provides an incentive to build nothing but oversized McMansions. Again this cuts across other stated objectives of the plan of providing great housing choice and affordability.

        5. goosoid: I’m not sure if its the planners, councillors or politicians that are the problem – but I still think that if it was left to the market to decide what people want we would end up with a better city, significantly cheaper houses, and lower rates bills.

        6. Jimbo – Agreed. But as long as the NIMBYs have the power to stop the market working properly, we will never know.

          And likely the rules around development will keep the market skewed toward favouring sprawling, auto dependent housing in places far from job centres and where few actually want to live.

        7. Jimbo Jones raises an important point.

          “…I’ve never seen a city where the density gets higher the further you travel from the city centre…”

          Actually what is happening in Auckland, happens in every city that gets a growth boundary imposed without low density mandates for the fringe development. Alain Bertaud’s “Spatial Distribution of Density” profiles for several dozen world cities reveals that this is the case in a number of them, including Portland.

          I say you can visibly see it on Google Earth, in Melbourne and most Aussie cities, and in Wellington you see crazy high density stuff at Stokes Valley, Titahi Bay and Pauatahanui Inlet. Really the fringe should be left free to do what it wants, and all the efforts re efficient intensification need to be focused on making it happen at the right places. That means things like targeted land taxes and even threat of compulsory acquisition if redevelopment has not occurred within a given time frame.

          Balancing Demographics and upzoning has failed miserably in the UK for decades, the redevelopment that was meant to provide new housing for population growth NEVER happens, and each cycle, even LESS happens than what happened last cycle. If planners do not learn, they are leading their nation into socio-economic suicide, if the people are stupid enough to let them.

        8. Phil, what do you mean by “and in Wellington you see crazy high density stuff at Stokes Valley, Titahi Bay and Pauatahanui Inlet.” ? I’ve not been to Stokes Valley, but Titahi Bay and Pauatahanui both would seem to just have ordinary suburbia, nothing remotely high density, and certainly nothing crazily so. What they DO have, is stunning views of sea and harbours, which people like, hence their popularity. The intervening land between Porirua and Wellington is land-locked and dull and boring. I’m not surprised that it is empty.

        9. “we have one of the most restrictive, annoying and expensive building codes in the world” – Really? Do you have any evidence for that?

          I am not necessarily disagreeing but I am always suspicious when I see sweeping statements like that.

          It seems that many European countries have had much stricter building codes than us for some time. For example, insulation and double glazing are relatively recent requirements here while they are common in Europe. Even triple glazing is required in some parts of Northern Europe.

        10. No you’re right its just a sweeping statement.

          I’m not worried about the building code forcing a high standard of materials (double glazing, etc) and workmanship, its more the paperwork and process that goes with it that’s the problem.

          It seems to me from watching UK and US property shows that you can make some pretty major changes to your house, call the council (not sure if before or after), they send around an inspector, job done. Here to do even a simple change you have to employ a draftsman to draw up plans, submit them, wait 20 days (if you’re lucky), employ a certified builder to make the changes, have half a dozen inspections at your cost, and then they are bound to fail you for something really stupid. Because they make it so difficult, everyone tries their best to avoid it (either by doing the work illegally or making stupid compromises so they don’t need council approval). Is this process really needed?

        11. I don’t know about that. I have heard plenty of British people complain about how hard it is to get through the bureaucracy over there.

          In general and having lived in Europe for long periods, I would be very surprised if bureaucracy there would be less than here.

          Don’t know about the US. Seems to be plenty of controls in some cities. Plus all the private covenants in places like Houston, Texas that will actually be enforced by the State (crazy stuff in my opinion).

        12. I think planning in the UK is a real nightmare, but building seems pretty straight forward if you don’t need planning. For example you can add a 3 metre extension to the back of your house without planning consent.

        13. I feel it is necessary to counter the assertion that we have one of the most expensive and baddest Building Codes in the world. Quite simply: not so. New Zealand actually has a performance based code which is one of the loosest in the world, which is the problem area which gave rise to the leaky building crisis. Leaky buildings were caused by, it is now agreed, a mix of relaxing building codes, permitting untreated timber, allowing private building inspectors, changing design styles to Mediterranean monolithic look (but without their climate or building materials), as well as poor design detailing at complex junctions, and poor workmanship from untrained and unqualified inspectors. So, quite a complex mix.
          To try and counter that, we now have a quite prescriptive overlay on our performance code, and councils are trying to employ qualified inspectors and get people to use licensed building practitioners. But at least we shouldn’t have leaky buildings any more.

        14. ‘all the private covenants in places like Houston, Texas that will actually be enforced by the State (crazy stuff in my opinion).’

          Why do you find it crazy that covenants are legally enforceable? After all zoning is enforced by council in NZ, and our bundle of rights is enforceable by Central Govt.

          Zoning originally was only council (public) taking over the administration of covenants (private).

        15. “Why do you find it crazy that covenants are legally enforceable? After all zoning is enforced by council in NZ, and our bundle of rights is enforceable by Central Govt.” – Because they are private covenants. Unlike zoning they haven’t debated or notified to the community. They have been imposed top down by the developers for who knows what reason. Probably to make them more attractive.

          What other private contractual arrangement will be enforced at public expense?

          Covenants in NZ are often not enforced because it costs residents money to do it. And that is good. If surrounding properties are not worried then obviously the covenant has run its course or was a waste of time in the first place as no one place any commercial value on it.

          “Zoning originally was only council (public) taking over the administration of covenants (private).” – Do you have a reference for that? That may be true in the US (though maybe not) but I never heard that before, including in land law at university.

  5. The school zoning is one of the biggest driver of cost. Parents wants their children to play with other wealthy children who has successful parents. They believe people espacially children are affected by each other. Whos like their kid to play with children who only think about how to get government benefit when they grow up.

    1. Yep, the dirty little secret of success to the Auckland Grammars of this world is cherry-picking 1st XV prospects from the poorer suburbs, and telling the rest “there’s not even a place for you in the drongo class”. Ironically, John Banks was told exactly that in the early 1960s, so AG snobbery isn’t a new thing. Maybe get rid of deciles and zoning, and replace it with an ethnic quota system… oh wait, the Americans have already tried that. Still, it’d be fun to watch Auckland Grammar have its Little Rock Nine moment.

      And funnily enough, Lee Kuan Yew dictated that Singaporean citizens of different ethnicities and social backgrounds were required to live close by, in order to prevent the emergence of ghettoes. Somehow those among us who look to Singapore as a fiscal role model for NZ would shut that down as social(ist) engineering.

    2. School zoning is actually the main reason for the USA’s absurdly low densities in some suburbs. Glaeser discusses this in his book “Triumph of the City”. Large lot mandates are not illegal but other exclusionary measures are, therefore large lot mandates get used by default. This is another classic example of “unintended consequences” of well-meaning government interference. School zoning, and disallowing efficient exclusionary tactics, results in planet-destroying urban sprawl. Nice.

  6. Yes the situation is complex, and yes Demographia is simplistic. But who cares. The point is that there is a problem. Shooting Demographia wont make the problem go away.

    The problem in Auckland is that the price of houses is high relative to average incomes, making it hard for people to finance house purchases out of income. That is what people seem to mean by ‘unaffordable’. The prices are not unaffordable in the normal sense, since people are actually paying the going price. So it is the multiple average price to average income that people worry about. That’s what demographia measures.

    If you think that the high multiple is not caused by the restricted supply of land, we can debate that. Previously you seemed to agree that it was, but in this post you list it along with a lot of other factors. If you look at the other factors though, those that increase demand will only push up prices significantly if the supply is constrained. (Even with unconstrained supply some places will of course be valued higher than others). Speculation in land and land banking are also symptoms of a constrained supply. Speculation often leads to bubbles and that is another concern people have about the Auckland market.

    Do you agree that the restricted supply of land is a contributing factor in the high cost of housing in Auckland?

    If you do, we come to the next issue which is “what do we do about it”. One answer could be “nothing”. If we don’t want Auckland to grow, we can price people out of the place, let them go live in Hamilton, or wherever.

  7. From what I understand, you do favour doing something about it and your solution is to ease planning restrictions on building up and building denser. Fine. If that is your position, then we agree (and you agree with the authors of Demographia) that easing planning restrictions is part of the solution. The only point I would like make is that if the relaxation of building restrictions is limited to specific areas, the likely impact is a windfall gain for property owners in those locations and an increase in land banking. Only if the relaxation engenders competitive supply of land for development will prices come down. That’s why I think removing the urban growth limit is going to have the biggest impact. I think we need both.
    So why not relax the urban growth limit? It seems to me that this is the crux of your objection to Demographia. You favour keeping the urban growth limit. Why? You have in the past presented data to show that infrastructure costs are lower with compact cities. I would agree if we are building from scratch, it must be true – I have doubts if density is in-fill and requires existing facilities to be upgraded. But assume what you say is true. What then? As long as people are charged for what they use, why not let people decide. If people can chose between inner city apartments and leafy suburbs (or grey suburbia) why not let them, as long as they are paying the full cost of the infrastructure.
    All Demographia says is that there is a problem. Don’t shoot the messenger unless you really think that there is no problem. If you agree that there is a problem – or even just that we could do things better – lets work together to make things better.

    1. ‘So why not relax the urban growth limit?’

      Because:

      1. It won’t change prices much. 2. It’s already loose. 3. It’s the most expense place to service [social cost] 4. Demand is closer in…. etc

      So why not relax density controls?

      1. 1. You don’t know that. 2. Nope, the differential in land value across the urban boundary is an order of magnitude or more. 3. Not really, as long as transport is priced. 4. Demand for different areas is interlinked. People will weigh up their options. Yes most people will prefer to live closer in all else being equal, but they weigh it up against other factors.

        Yes let’s relax density controls too!

      2. (Thanks Matthew)
        Also: 1. Lets do it and see, 2. So you shouldn’t be concerned if it is loosened. Actually the way the limit is administered would appear designed to drip feed new land and ensure maximum profits for the landowners 3. Lets look at ways of recovering the costs rather than banning things 4 , If that is the case what’s the problem? 5) Of course, do that too.

        I remember when planners didn’t allow residential development in city centres “because no one would want to live there” Well if no one would want to live there, why did they want to prohibit it? Now you tell me that you want to have an urban boundary because demand is further in – well if you are right, then we don’t need to have a boundary – lets get rid of it. The only argument you put up for having a limit is 3, and I have said all along that we need to ensure that people pay the costs they impose. Now I know that’s not as easy as it sounds, but if that is the real problem lets concentrate on solving it because by using planning rules we are creating more problems than we avoid.

        1. Thanks David. I hope Peter Nunns the author of this article answers these pertinent questions.

        2. I am really pleased to see that David Lupton has commented, he is highly credible and a very busy man. Great points there, Matthew W and Brendon Harre too, it frustrates me that Peter Nunns does not engage, including with emailed questions and arguments.

          The problem with asserting that a growth boundary is “already loose” as Patrick does, is this. Any growth boundary with even as much as an alleged “20 years supply” of land within it, will still trigger price inflation of an order of magnitude or more. The reason is that “total volume of land” is NOT “land for sale”. Same as with upzoning – assuming that upzoning to allow for 20,000 new homes will actually result in 20,000 new homes being built to meet demographic pressures, is nonsense. This approach has been failing miserably in the UK for decades.

          Owners of sites will either behave like rational owners of a resource, or like holders of speculative commodities (eg gold). Imposing a growth boundary always alters site owner behavior to the latter – not just for greenfields but for all existing sites. We have already seen newspaper headlines “Landbanking concerns hit Auckland CBD” which did not surprise me at all, it was merely confirmation of my beliefs.

          Developments tend to take several years. And developers tend to want to secure their next site before they have finished with their next one. This alone means that “10 years supply of land” tends to be “taken” at any one time. Plans like what they have in the UK, and I have even seen this for Dorkland, that thing “5 years supply” is generous, merely illustrate the most pig-ignorance imaginable regarding how the real world works. But even with “20 years supply”, as in Portland, the amount of land that owners decide to sell anyway is short of what developers need, hence developers start door-knocking instead of just watching the rural land sales adverts. What does this do for price expectations of the land owners?

          This is why splatter development is a norm, and it is not even inherently inefficient. The uses of leftover spaces, including provision of public space and infrastructure, can be done a LOT more efficiently than a dense sprawl pushing out incrementally with land uses set in concrete as you go. Agglomerations like Silicon Valley can form too, when you have spare, low cost land; it is common knowledge among urban economists in the UK that their planning system foregoes any such effects.

        3. Matthew W: “Not really, as long as transport is priced.”

          David Lupton: “Lets look at ways of recovering the costs rather than banning things”

          I would agree with removing restrictions on outward growth if infrastructure and transport were priced properly. But at the moment they are not priced properly and one of the key reasons Council’s employ urban limits is because they are responsible for providing infrastructure and are unable to do so in every place at once. Council has to choose where to direct the limited infrastructure it can provide. This is why it makes no sense to remove urban limits without figuring out how to internalise infrastructure costs. Otherwise you could zone all the land you want for development, but the areas where infrastructure is to be provided would still have the same premium on them as if there was an urban limit.

          So people calling for the removal of urban limits really need to be calling for a way to properly internalise the infrastructure costs of new development. This is a lot harder than deleting a line on a map.

        4. A good reality based answer from a planner. Thanks Frank.

          Would you agree Frank that because NZ has historically been frugal in paying for the public spaces and infrastructures for where new urban development can occur this has lead to over restrictive land supply which has translated to inflated land prices? That zoning just reflects the areas that LG can provide infrastructure for?

          The effect being saving cents on public spending by local government (the 3 waters, local roads etc) and central government transport spending has resulted in the private sector paying out dollars in extra charges for higher property prices?

        5. All I think it has actually done is moved the governments (local and central) “lots of a few cents per year” spend for 30+ years to “lots of dollars up front, for the private sector, in year 1”.

          There are very real lots of $ costs for providing the 3 waters, roads and ALL the “other stuff” provided by local and central governments, historically its only “a few cents per property” (per year, for many years) –
          because its amortised over everyone who is a ratepayer/taxpayer and over many years (or in some cases, never stops being paid).

          Private sector doesn’t do that, it pays for and then lumps the entire cost up front on to the purchaser. Which is then passed on to subsequent purchasers (plus a “handling charge”/holding cost at each stage too no doubt).

          Watercare in Auckland says it costs $30K for each new “3 waters” connection to each new property inside the RUB/.MUL now – who pays and how its paid is a reason why there are MULs/RUBs and developer levies.
          Without the MUL or RUB as Frank says there would be a defacto MUL or RUB anyway – land which is “buildable” – because it can have a connection for the roads and 3 waters will be worth more.
          Land not in that “zone” is worth a lot less. And getting your land in the “defacto-MUL” zone will be a ongoing battle with land developers and councils. Better to have a limit with well defined ways for it to be changed over time than some system whereby back room deals between developers and council employees or Ministers is the norm I think and less prone to corruption.

          A more recent example of lines on a map distorting the “market” is school zones (e.g. Auckland Grammar Zones) – if you live in a school zone you can get access to that school when you want – at some stage, guaranteed, outside a school zone, you’ll not get it easily without a lot of (really expensive) fees you’ll have to pay yourself – and usually only if spare places are available. In zone, you will be accepted no matter what.
          Houses in a popular school zones therefore do command a good deal more money than those that aren’t.

          On the surface it seems unfair that two houses on opposite sides of the same street can be worth so much different when they are alike in every other aspect – all because of a line on map for a school zone.

          So should we do away with school zones on the basis that it distorts the “market” for education? I’m sure you’d hear a huge outcry from all those property owners currently in-zone that will have hundreds of thousands slashed off their property values if that happened for starters.

          Government tried having no home zones for schools decades back and that was a disaster – examples abounded with parents with kids living next door to some schools and not being able to get their kids to their adjacent/closest school.

          And clearly the marginal cost of widening the school zone to take a larger (and hard to predict exactly how much more) number of pupils is huge for the popular schools.
          So at some point you have to say, enough is enough, this school (and its “zone”) can’t get bigger.
          Any MUL or RUB is the same – puts a line in the sand for now. there will be winners and losers as a result.
          Over time maybe that line can move. If we don’t do that whats the practical alternative?

        6. Problem is the MUL isn’t growing fast enough to prevent land being monopolised by landbankers. I’m sure Hugh will have somethign to say about how do we supply the 3 waters fast enought to ensure that connection doesn’t become an effective MUL.

        7. Hi Frank, you summed up the problem, and inadvertently provided the solution.

          ‘Council’s employ urban limits is because they are responsible for providing infrastructure’

          The solution is to allow others to provide the infrastructure. It makes no sense to allow a bureaucracy and monopoly to provide this, let alone the inefficiency of continuing to employ a mass gravity feed waste-water system when there are far more cost efficient and greener solutions possible. The only reason council do not want this to happen is that they would lose control of their empire, and the control of how they think a city should develop.

          This is not a ‘light bulb’ moment, developers already provide and pay for most of the infrastructure in a new NZ development, and the success of the Texas MUD system is that they also pay, develop and manage the infrastructure, including waste-water. Local Texas councils deliberately do not want to get involved in the most risky part of a development which is its start-up and bedding in process.

        8. “Hi Frank, you summed up the problem, and inadvertently provided the solution.”

          Well it wasn’t inadvertent, I know that developers could provide infrastructure through an MUD type set up but our current system does not allow this. The question of how this would be implemented and what law changes would be required needs to be answered. I know councils are reluctant for developers to provide local wastewater systems because the liability of those systems can be later passed on to council. My whole point was that doing all of this is more complex than removing a line on a map and I haven’t seen any detailed proposals of how this could work in practice.

          Also it is politically very difficult to implement road pricing and until we have road pricing the costs of exurban development will not be truly internalised.

    2. “From what I understand, you do favour doing something about it and your solution is to ease planning restrictions on building up and building denser.”

      I haven’t made any policy recommendations in this post, but this is not a bad one. If we care about the negative impact of planning regulations, it seems that me must pay _most_ attention to the ones that are keeping people from living in the most desirable, accessible places.

      “So why not relax the urban growth limit? It seems to me that this is the crux of your objection to Demographia. You favour keeping the urban growth limit.”

      In this post, I linked to, and commented favourably on, two papers that critiqued urban growth boundaries. I’m not sure why you formed this conclusion.

      “If people can chose between inner city apartments and leafy suburbs (or grey suburbia) why not let them, as long as they are paying the full cost of the infrastructure.”

      I fully agree and would welcome any of your thoughts about how we’d go about adopting a marginal cost approach to charging for infrastructure.

      “All Demographia says is that there is a problem. Don’t shoot the messenger unless you really think that there is no problem.”

      Let me speak in analogies. Demographia is an amateur paleontologist that’s running around telling everyone that tyrannosaurus rex was half a kilometre tall and could breathe fire. I am pointing out that T-rex was certainly a very large dinosaur, but that we shouldn’t exaggerate for the sake of sensationalism. And you’re telling me that I shouldn’t be so mean to Demographia – after all, they agree that T-rex was big, so who cares about the magnitude of their estimate?

      1. Thanks Peter. Apart from the implied height of T Rex, we all seem to actually agree more than disagree. Time to stop arguing and start talking. There are good ideas around on how to charge for infrastructure, how to allow development outside the urban growth boundary without imposing costs on those inside, etc. Lets focus on those. Cities are the future – the trend for most of a country’s population to live in cities is going to continue, and cities are going to have to grow. Cities need to cater for a range of needs and aspirations. Lets start with that as a premise, and see what the constraints are, and whether we can fix them. We have a huge resource just in the contributors to this blog. Can we use it productively? That’s the challenge.

  8. Peter there is one area I agree with you. I too find it hard to believe that by simply remove the MUL that is say 28km out from Auckland’s CBD this would lead to an immediate price correction so that median prices fall from 8 to 3 for all the market from the CBD to the MUL.

    I believe that is unrealistic and it will take years for the market to adjust to more competition.

    I think we will need to do lots of interventions -more and better transport provision, a LVT type rates system, more liberal planning policies…. That in the first incidence this will lead to a slow deflation in new build prices (both up and out) and the existing property and land markets will stabilise in price from its ever upward trajectory.

    But existing house prices which make up the bulk of the median value figure will only fall when a significant number of new and better houses, apartments etc come onto the market at significantly cheaper prices, with the best will in the world (which doesn’t exist at both central and local government) this will take years for the market to adjust to providing.

    1. The way that price falls transmit across cities will vary according to the circumstances of each city. I would agree that the price of inappropriately high density property near the fringe is likely to fall more than the prices of NIMBY-protected suburbs closer in. The latter are far closer to what people want, and combine both the tradition of space AND more convenient location. Undistorted markets usually provide a trade-off of space and location; a growth boundary and high-density-at-the-fringe is totally wrong.

      But in Melbourne, there is obviously a CBD apartment building boom and speculator-driven bubble that many astute observers are picking will crash massively in value one day. Many apartments are being bought off the plan by speculators and not even being occupied.

      But I can’t see resilience in the prices of Auckland’s $1,000,000 + hovels in Grey Lynn etc even though they are nowhere near the fringe. In general, it is the land values that crash, so dilapidated and near-valueless properties on land that has temporarily been turned into gold, can be expected to crash with a volatility commensurate to their inflation.

    2. One big point I want to take up re “amenity value of constraints like Green Belts” – and I know Paul Cheshire agrees with me on this.

      You can have the same or greater amenity value by preserving “green spaces” at regular intervals as a city grows, while avoiding the perverse effect on land rents that occurs with a “belt” or a “boundary”. In fact Alan W. Evans says something like this: a child playing in a street and surrounded by concrete for ten miles in every direction won’t get any utility from knowing that one-percenters are having a wine and cigar on their balconies overlooking the green belt. There is absolutely no doubt that regularly spaced green public space is far more egalitarian than belts. This is all part of the calculus of “dispersion versus concentration” – of jobs and amenities. US low density cities do not lack parks and green space at all, and the ability to afford property near it is far more democratised.

      This is one part of “the correct role of planning” – securing the rights of way and preservations of public space well ahead of actual growth, like the New York Commissioner’s plan of 1813 did – allocating 1/3 of Manhattan’s surface area to road network! It was decades before the last of the rural uses were supplanted by urban and the road network was even built. Sickeningly, Auckland Council’s calculations of costs for greenfields versus intensification, stacks up inflated costs of acquiring park space for greenfields developments – when proper planning would have got it nearly for free – while omitting any equivalent costs for intensification because the reality is that the park space is not being provided in those cases in spite of the greater population pressures. Ironically, the need to provide more public space, including for schools, is one of the reasons that Ian Gordon (1996) suggests only a 7% reduction in travel distances by doubling the density of housing in which people live.

      Again, I wait Peter Nunns’ engagement.

    3. The other big point I want to take up with Peter Nunns’ analysis, is that the growth boundary is not merely one factor among several that add LINEARLY to the problem. It is actually like a catalyst or a multiplier to which all the other factors are endogenous in their impacts.

      It is perfectly possible to have high amenity and a median multiple below 4. The cost of farmland is so low everywhere, that fringe housing prices need not differ significantly any more than the price of cars and TV’s needs to differ in cities with higher amenity. I do not believe that there is any evidence to support assertions that amenity or even agglomerations can be responsible for median multiples being double or more relative to another city. Agglomerations affect incomes which in turn affects property values, therefore the median multiple effect should be static.

      New York urban area managed to have median multiples below 4 up till when the fringes hit de facto Green belts – adjoining municipalities rural zoning. Los Angeles was affordable up till the 1970’s before it started to hit similar constraints, and of course these constraints are now “total”.

      Availability of credit, and speculation, and the role of tax policies and other incentives, all have effects that are endogenous to the elasticity of supply. You either have systemically affordable housing that none of the other factors can affect – or every demand side factor will be turbocharged in its impact. There are papers that attempt to model US cities in property cycles and this is the only way they can formularise the fact that elastic-supply cities have no inflation while in the other cities, the demand side factors do correlate nicely with the volatility. Heeboll and Anundsen’s one is probably the most up to date and the best as a result.

      Another challenge we constantly pose to Peter Nunns and his theories, is how to explain Liverpool’s median multiple of over 7 when it is Britain’s Detroit? This is clear evidence that even with 50% population loss over 6 decades, the remaining population still is forced to consume less space than they would naturally choose, and have to bid against each other and speculators, for that space. I believe that the post-WW2 decades of suburban densities in NZ, Germany and France are “about right” – sufficiently low density to avoid the UK “bidding war for space” effect, while not being the absurdly low density that marks many US suburbs as a perverse outcome of education policy, zoning, and what are legal exclusionary measures.

    4. Peter Nunns also says:

      “Rent subsidies tend to be captured by landlords and thus will tend to push up prices
      Ongoing construction of state housing will add supply to the low end of the market and thus constrain price increases”

      The first comment is only true as long as there is a supply elasticity and an affordability problem. If you subsidised landlords in Houston, it would push rents down as the subsidies were passed on as landlords competed for tenants.

      The latter comment is only true if you already have systemically affordable housing created by elastic supply. If you have an affordability problem, then the impact “by income group” will land on those who do not quite qualify for the state housing. It has been noted for decades in the UK, that there is a powerful disincentive to “losing state housing” entitlement eg by getting a job – because paying your own way in the housing market will cost you a LOT more than you will manage to gain in income from the job.

      By 1974, fully 1/3 of British were in State housing and there was still perverse impacts on the next quintile or so of people who did not qualify. Of course providing State housing as “the solution” is bound to “run out of other people’s money”. Where do you stop? When 50% of the population are in it and the next 15% or so are unconscionably burdened by housing costs? Thatcher had all the right reasons for selling off the State houses but she failed to understand that the perverse effects of the distorted housing markets from planning, would ultimately undermine the effectiveness of her sell-off – which sell-off incidentally took the pressure OFF house prices for a cycle or two.

      I actually sent the following letter to the NZ Herald the day before yesterday:

      From: Phil Hayward
      Sent: Tuesday, 7 April 2015 8:20 a.m.
      To: ‘[email protected]
      Subject: Outcomes of State housing sell-off depends heavily on other important factors

      Dear Editor

      I respect all Sir Bob Jones’ arguments about the merits of selling State houses to their tenants, and also about the potential for the market to provide well for those at the bottom of the socio-economic scale.

      But a serious distinction needs to be made between the long-term effects in housing markets with elastic supply and systemic affordability, versus those with sticky, slow supply processes, systemically unaffordable prices and inflated land costs.

      Because the UK is a glaring example of the latter, what has happened years down the track from the Thatcher era sell-off of State housing to the tenants, is that this housing merely became part of the stock of existing, grossly overpriced old houses, and the benefit to the families who became owners on generous terms in the 1970’s has been strictly one-off.

      The UK now has a screaming crisis of social injustice in housing, with everyone below a certain age and income level condemned to a lifetime of renting of space that will only ever become more and more expensive per square foot.

      The reality is that only production-scale suburban development – like building Mangere – renders all housing choices affordable. This should have remained “the Kiwi way”.

      Yours faithfully

      Philip G. Hayward
      Etc etc

      1. Hey Phil here is a tip. If you are going to demand people reply to you then maybe start by not spamming nine comments in a row of rant and copy-paste letters you sent to other people.

        Ain’t nobody got time for that.

        1. It was only a matter of time. Phil must have had a long weekend away and woken up this morning to find he missed the debate on his favourite monologue subject…

    1. Well, Hugh, if we do get a bubble bursting in housing here, it certainly won’t be for the same reasons that Ireland did.

      1. It would be quite interesting to have an economist like Peter Nunns to write an blog post explaining why NZ is not (or is) just like Ireland.

  9. Generally I don’t bother to engage with religious fanatics, especially when they are serving vested interests but for all our usual more rational readers it’s worth pointing to this Economist article on the complex issue of land and dwelling cost. It’s just isn’t possible to reduce the forces at work here one one single point, as the sprawl industry wants to, here’s a good overview:

    http://www.economist.com/news/briefing/21647622-land-centre-pre-industrial-economy-has-returned-constraint-growth?fsrc=scn/tw/te/pe/theparadoxofsoil

    1. By my reading that article does reduce it to a single point “The good news is that the world’s urban-land scarcity is largely an artificial problem. The bad news is that that does not make it a soluble one. Redressing strict land regulation”

      Let us build up and out and supply will be able to keep up with demand whether from homeowners, investors, or the dreaded foreign national laundering freshly minted money from ill gotten gains.

    2. Patrick R … Your romantic comments are certainly amusing. I am by no means popular with the vested interests / protectionists within the property sector. It has been a 25 year War with those guys.

      There are two major issues we are pressing for. First …stopping LGs from artificially inflating land values … second … requiring them to finance infrastructure properly.

      These matters are outlined within Section 4 of CHRISTCHURCH; THE WAY FORWARD …

      http://www.scoop.co.nz/stories/AK1206/S00251/christchurch-the-way-forward.htm

  10. Guy .. California burst as well, with a seriously under-supplied market.

    On a population basis California has about a million less residential units than Texas. There was no bubble to burst in Texas.

    May I suggest you keep a close watch on China … and ponder the impacts on “bubble vulnerable” Australia and New Zealand …

    China scrambles to defuse property bubble – MarketWatch

    http://www.marketwatch.com/story/china-scrambles-to-defuse-property-bubble-2015-04-08?page=1

    My view is that we are going to deeply regret not dealing with these issues out of the 2008 election as promised. Mr Key is going to have a lot of explaining to do in due course.

    1. National have been in power for seven years as house prices have skyrocketed and have done little about it but sure lets blame Labour

      1. . Frank … then why isn’t Labour pressing the current Government hard now to open up land supply and finance infrastructure properly.

        Is it because Labour is not willing to upset its vested interests and paymasters, the public sector unions and local government bureaucrats ?

  11. Property: Auckland market ‘ponzi scheme’ – economist – Business – NZ Herald News

    http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11429522

    Auckland’s housing market has become a giant Ponzi scheme, one economist says, as residents pay each other to get in and drive prices up and up.

    Shamubeel Eaqub, NZIER principal economist, said this decade’s housing market was like last decade’s finance companies, being run as a high-risk money-go-round which could eventually end in misery. … read more via hyperlink above …

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