I’ve been thinking about an interesting and provocative article by engineer and Strong Towns advocate Charles Marohn. “Interesting” because it provides a novel way of thinking about the financial trade-offs inherent in urban development, including the allocation of costs between private property owners and the public in general, and between current residents and future ones. “Provocative” because it kills a few sacred cows along the way.
Marohn is best known as a critic of conventional suburban development patterns that involve large taxpayer-funded subsidies for infrastructure and expose communities to long-run fiscal liabilities that they are not prepared to address. But, as he discusses in the article, he’s also not a fan of attempts to simplify the issue down to a question of population density:
The most common question I receive by email is some variation of: what is the right density for a Strong Town? What is the magic number that makes all the math work and that we should plug into our zoning codes to get the optimum place?
[…] Let me restate the question: Something that I think would be valuable for planners and everyone else who finds it painful to think independently but instead to take comfort in misapplying “data” provided by others deemed experts (see parking codes as one of many examples) is to have a table of densities that will allow us to zone a Strong Town.
I hate density as a metric and whenever I hear someone talk about it my mind reflexively moves on to something more worthy of my time. Yours should too. Density is not our problem or our solution. Insolvency is our problem. Productive places are the solution.
This is a good critique. While you need data to make rational decisions, looking at the wrong evidence can be useless or worse. Density is not necessarily a good proxy for cities’ financial sustainability, any more than traffic volumes are a good indicator of the value that cities get out of urban streets. For instance, while low-density Stockton, California went bust after the 2008 financial crisis, high-density New York City teetered on the brink of bankruptcy in the economic turmoil of the 1970s.
Instead of density, Marohn recommends looking at the relationship between property values and the replacement cost of urban infrastructure:
Consider the following: You own a $200,000 house. I come to you on behalf of the city with a proposal. We are going to fix all of the infrastructure directly in front of your home. We’re going to fix the street and the curb and the sidewalk. We’re going to replace all the pipes and service connections. And when we’re done with this project – a once a generation undertaking – we’re going to give you the bill.
And when we give you the bill for the stuff that directly serves you – the stuff that you but nobody else needs – we’re going to also give you a bill for your share of the communal infrastructure. In other words, you are going to also pay a once-a-generation charge for the maintenance and upkeep of all the arterial streets, interchanges, traffic signals, lift station pumps, water towers, treatment facilities, etc… It will only be your share – everyone else will pay theirs – and you won’t be billed again for a generation.
Remember that you own a $200,000 house. What if I said your total bill was $200,000? Would you pay it? I’ve been asking people this exact question for the past two weeks and have yet to have anyone who didn’t immediately say “no, there is no way.” And, of course, nobody would pay this. If the house is worth $200,000 and my additional cost of maintaining the infrastructure to allow me to live in that house is an additional $200,000, than that’s a really bad investment…
It is only when I got to $10,000 where people in large numbers would agree they would pay and, at $5,000, I started to get universal acceptance. For a $200,000 house, it is definitely worth an additional investment of $5,000 to keep everything around it functioning.
I think this is a reasonable thought process and it points to a powerful conclusion. At a property value to infrastructure investment ratio of 1:1, everybody walks. Nobody sensible is going to invest $200,000 in infrastructure in a property and have it end up being valued at only $200,000. What’s the point?
At a ratio of 10:1, resistance starts to soften and we see people with different circumstances start to respond differently. Somewhere between 20:1 and 40:1 we cross over into no-brainer territory. Nobody is going to walk away from a $200,000 investment if all they have to put in is another $5,000 once a generation to keep it all maintained.
So instead of density, what we’re really talking about here is a target ratio of private investment to public investment of somewhere between 20:1 on the risky end and 40:1 on the secure end. If your city has $40 billion of total value when you add up all private investments, sustaining public investments of $1 billion (40:1) is a doable proposition. Public investments totaling $2 billion (20:1) starts to be risky with outside forces of inflation, interest rates and other factors beyond your control starting to impact your potential solvency.
Following Marohn’s approach, how financially sustainable are New Zealand towns and cities?
We can get some valuable insights from a quick back-of-the-envelope analysis. According to Reserve Bank statistics, the total value of residential property in New Zealand, as of March 2016, was $905 billion.
We can compare this to data on the replacement value of roads and pipes compiled by the Treasury’s National Infrastructure Unit. According to their 2015 review:
- The total value of local roads (excluding land costs) is around $50 billion. State highways are valued at around $29 billion.
- The total replacement value of urban water infrastructure – ie drinking water, wastewater, and stormwater – is $45.2 billion. However, much of this infrastructure is in unknown condition, or not meeting performance standards.
State highways are intended to be fully funded out of the National Land Transport Fund (NLTF) – ie out of fuel taxes, road user charges, and other revenues from users. Likewise, the NLTF provides around 50% of funding for local roads – leaving a substantial chunk to be paid by ratepayers, including people who seldom drive. However, water infrastructure is usually funded by ratepayers, sometimes with a contribution from developers for up-front capital costs.
If we assume that these funding splits continue, property owners will have to fund the replacement of around $70 billion worth of roads and pipes. In other words, New Zealand’s average ratio of residential property value to public infrastructure costs is around 13 to 1 (ie $905bn/$70bn).
This is above Marohn’s recommended range of 40:1 to 20:1 – not necessarily unmanageable, but nonetheless a signal that we need to take a cautious approach to developing our towns and cities. (By comparison, Marohn has found some cities in the US where long-term costs to renew/maintain public infrastructure are twice as large as the value of residential properties.)
However, averages conceal a lot of variation. In particular, when thinking about what will strengthen or weaken cities’ financial sustainability, we need to think about the marginal cost of infrastructure to serve new growth areas, not simply the average cost across the entire city. There, we have stronger cause for concern.
For instance, Auckland Council’s Future Urban Land Supply Strategy, released last year, estimates that the costs to provide ‘bulk infrastructure’, or arterial roads, water and wastewater mains, etc to service greenfield areas are in the range of $17 billion. These greenfield areas are expected to provide capacity for somewhere between 88,000 and 110,000 new dwellings.
Based on these high-level estimates, bulk infrastructure costs to serve greenfield growth areas will be in the range of $150-190,000 per dwelling. By comparison, as of August 2016 the median house price in Auckland was around $842,000. This implies that new developments will have a Marohn ratio in the range of 6:1 to 4:1 – even before accounting for local roads and pipes.
Now, the true picture might not be quite that bad. Some costs will be put back on users or developers, at least in the short run, while others might be avoidable (at least initially). And if the Unitary Plan is successful in providing more redevelopment and infill options in the city, we may not need to develop all of this infrastructure.
Nonetheless, a casual analysis suggests that caution is needed. Our current housing affordability woes mean that there is an imperative to develop more housing – but if we’re doing that in a financially unsustainable way, we might not be doing ourselves many favours.
What do you think of the financial sustainability of New Zealand cities?