This is a post from Peter Nunns

I stepped down from Greater Auckland at the start of the year as my schedule was about to get a lot busier. First, I was going to have a baby in August. This has now happened and he is very healthy, not to mention adorable. Second, prior to the baby’s arrival I had to finish a postgrad degree in economics, which included a bunch of coursework plus a significant research project. So I haven’t had much free time to write blog posts this year!

Now that I’ve gotten a (good) mark back on the research project, I thought I’d write about it. It was inspired by a 2015 paper by two US economists, Chang-Tai Hsieh and Enrico Moretti, that looked at the economic impacts of zoning policies that make it more difficult to build more housing in productive places like San Francisco and New York. CityLab reviewed the paper here:

The dearth of affordable housing options in superstar cities like New York, San Francisco and San Jose (home of Silicon Valley) costs the U.S. economy about $1.6 trillion a year in lost wages and productivity, according to a new analysis from economists Chang-Tai Hsieh of the University of Chicago and Enrico Moretti of the University of California at Berkeley. The study, which journalists like The Economist’s Ryan Avent and Vox’s Tim Lee have written about, was made publicly available as a National Bureau of Economic Research working paper earlier this month.

[…]

To get at this, Hsieh and Moretti develop a statistical model—a spatial equilibrium model to be more precise—of the contribution each U.S. city and metro make to national economic growth. Their model traces the economic contribution of 220 metros to overall U.S. economic growth over the more than five decade period spanning 1964 (the first year for which comprehensive data on wages for metros is available) to 2009, based on data from the U.S. Census Bureau’s County Business Patterns (CBP) and supplemented with data on the characteristics of workers (race, gender, age, union status and educational attainment) from the American Community Survey and the Current Population Survey. To look at the effects of housing on wages and productivity, the economists use data on housing supply developed by MIT economist Albert Saiz, and look specifically at the effects of policies that restrict the supply of housing via the Wharton Residential Land Use Regulatory Index.

Put more simply, the economists’ research examines the geographic allocation of workers across the United States, and tests the following proposition: What might happen if workers were free to move to the cities and metros with the most robust economies, where they could be most productive, thus fueling even greater productivity and growth for the U.S. economy as a whole? To get at this, Hsieh and Moretti develop a number of alternative scenarios based on the ability of workers to move to and settle in these highly productive metros.

When I read Hsieh and Moretti’s paper, I immediately wondered whether something similar was happening in New Zealand. After all, we have several large, comparatively productive cities that also have high and rapidly-rising house prices – Auckland and Wellington, and to a lesser extent Christchurch. So I investigated.

Here’s the abstract for the resulting research paper, which should (hopefully) soon be published as a working paper from the University of Auckland economics department:

Over the last generation, house prices and rents have risen more rapidly than incomes in New Zealand. Regional house prices have also diverged significantly, with Auckland and Queenstown in particular rising above the rest. This paper explores the causes and economic consequences of recent increases in regional house prices in New Zealand.

I demonstrate that recent house price increases in New Zealand are due in large part to rising house price distortions, which reflect ‘wedges’ between house prices and underlying costs of supply. These distortions are largest in Auckland, Queenstown, Tauranga, Hamilton, and Wellington. They arise due to housing supply constraints, such as zoning rules that limit new subdivision, limit redevelopment of existing sites, or require large lot sizes and costly features such as on-site carparking. Regions with larger house price distortions, indicating the presence of supply constraints, appear to have experienced larger increases in house prices and rents in response to migration shocks.

Rising house price distortions have large economic impacts due to misallocation of labour away from high-productivity regions in New Zealand, in particular Auckland and Wellington, and increased net migration of New Zealanders to Australia. To quantify these economic costs, I calibrate a spatial equilibrium model using regional economic data for the 2000-2016 period and use it to investigate the effect of counterfactual scenarios in which house price distortions had not increased in recent decades.

My ‘upper bound’ estimate is that comprehensively removing constraints to housing supply would have increased New Zealand’s total economic output by up to 7.7%, increased per-worker output by 0.9%, and eliminated recent net migration outflows to Australia. More plausible counterfactual scenarios would result in smaller, but still economically meaningful, gains on the order of one to five percent of gross domestic product.

I’ll talk about the details in follow-up posts, but I wanted to briefly discuss the implications of that ‘upper bound’ estimate. In 2017, New Zealand’s GDP was around $270 billion, so increasing that by 7.7% would be worth around $21 billion per year, which is a lot of money.

Like all estimates from economic models, this should be taken with a grain of salt. But it suggests that the economic gains from comprehensively sorting our our challenges with urban growth are potentially very large.

Which begs the question: What would it take to achieve those gains?

Unfortunately, that’s a beyond the scope of this particular piece of research. But the answer is pretty simple: Build a lot more homes in the right places.

Doing that is hard, but we know the basic elements of the solution. Zoning reform is absolutely necessary: In order to get more homes built in the right places, it first has to be legal to build those homes. But as we’ve seen since the Auckland Unitary Plan was completed, that may not be enough by itself. It’s also essential to take a hard look at construction costs, scale in the development industry, and so on and so forth.

Transport is also a key piece of the puzzle. A city that grows without improving its transport system will begin to experience growth as dysfunction, and vote to stop it. So it’s necessary to provide more and better choices about how to get around, especially by public transport, walking, and cycling.

Lastly, dollars and cents are important, to be sure, but we shouldn’t lose sight of all the other things that make life worth living, from swimmable beaches to vibrant public squares. If we’re going to go for growth, we need to have a good plan to ensure that the benefits flow back to better places and a cleaner environment.

Next week: Why have house prices increased so much?

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49 comments

  1. “Now that I’ve gotten a (good) mark back”

    You received a good mark or you obtained a good mark or you earned a good mark

    You “gotten” nothing as “gotten” is not a word. Hopefully the written English you used in your paper was better!

    Congratulation in achieving your postgrad degree.

      1. Interesting – my first search did not show that. A bit more research showed its use is complex.

        British English stopped using gotten when Queen Victoria was still ruling England, and that was a long time ago. But people in the States never did stop using it, so it’s still proper American English if you’re on that side of the world.

        Some people argue that it can be used in speech but not in written form.

        Perhaps its a Trivial (of little value or importance for the Year13 History students) point.

        1. It is still in everyday use here in New Zealand and other uses of the British varient of the English language as in “ill gotten gains”

        1. No they don’t. Personally I don’t mind so long as we can understand it, but it does annoy me the way they rabbit on about “materiality,” which is a very useful and relevant word, rather than using plain “materials,” which is what they invariably mean.

          1. Hmmm, I never noticed how much the word “materiality” annoys me until just now. Unusually fancy way to say “is it large?”

    1. I’ve noticed it a lot recently in the Herald as it seems they are now publishing articles straight out of the states. I would say it shouldn’t be used in NZ (although I’m sure it does). I believe Peter is American though? In which case fair game.

      1. “I would say it shouldn’t be used in NZ”

        It is commonly used in NZ and i see no reason why not. Why should we slavishly adhere to British English? Or British anything, for that matter?

          1. Laughing at the joke was going to be my one piece of input to this painful thread but I held back just in case. When we’ve gotten a new definition for ‘of’ into the NZ dictionary, we’ll be gettin somewhere. Should of could of would of…

            Language is for communication and for fun. Why people use it as yet another way of dividing ‘us’ from ‘them’ and stratifying society I have no idea.

    2. “Congratulations” (not “congratulation”) in demonstrating your ability to sweat the small stuff.

      Hopefully the written English you use in future will not be for online comments!

  2. Thanks Peter. Looking forward to the further posts. I think it’s absolutely clear that the costs associated with not having affordable housing are high. I’m not sure how you measure the personal costs. The people having to work longer hours than they want. The kids in daycare younger and for longer days than the parents wanted. The teenagers whose parents aren’t around much, left to sort their stuff out in a vacuum. The lack of volunteer workers to fill all the roles that used to filled by people not in full time work. The not being able to follow one’s dream at setting up a business because the house mortgage is so huge. I’m sure whatever you’ve calculated will just be the tip of the iceberg.

    1. The children put off/not had, the time off work that can’t be taken due to pressing mortgages and having to cash in leave, a generation of older parents who are closer to 60 by the time their kids turn 21…all these things have massive consequences. I will be reading with interest 🙂

      1. In a sense, what I’ve done here just scratches the surface of the long-run social costs, as I didn’t look at those sorts of inter-generational effects.

        I don’t think we’ve fully reckoned with the long-run impacts of structurally increasing property prices.

  3. “Lastly, dollars and cents are important, to be sure, but we shouldn’t lose sight of all the other things that make life worth living, from swimmable beaches to vibrant public squares.”

    Oooh yes. All those decades when people owning houses had their personal wealth going up, and the ability to leverage with rentals so they could rake in that capital gain…. while insisting on rates so low that the sewage system wasn’t maintained and upgraded, our waterways were trashed, our biodiversity slashed. Gosh there’s a debt to pay. And if it shouldn’t be paid by those well-heeled by the capital gain, I’m not sure if we’ll ever manage equity again.

  4. This is only anecdotal but I think this trend is already costing the Auckland economy. In the firm I work for I have seen several recent cases of bright Auckland educated graduates who have taken positions in Christchurch in preference to Auckland, because it is possible for them with their partner to buy a house on two graduate incomes in Christchurch, but not in Auckland. Having bright, well-educated young people leave the city can’t be good for it in the long term.

    1. Overpriced property has surely just made everything harder. Every business has to charge more if it has premises, and even if it doesn’t, because the staff have to be paid well enough to be able to afford accommodation.

      Then there’s the loss of the young teachers to other regions, and what that means for our kids with a too-small pool of ageing teachers, often not covering the full spectrum of subjects.

      1. As someone once said (can’t remember who) – if we don’t provide housing / wages to pay for it in NZ, it’s not that all our young people will just go to somewhere else in NZ instead. Many will go overseas. Our loss. Especially as the most enterprising and skilled have it easiest to leave. That drain is dreadful for a society which wants to do more than herd cows (PS: my family herds cows, but they don’t believe it should be our one thing to be known for).

    2. And yet down here in Christchurch I know many experienced nurses who have gone to Australia because their disposable income after housing costs is much better in Aussie cities like Brisbane.

  5. Congratulations on your dadship, Peter, and on using the English language with clarity and the inventive freedom with which it was wielded until Victorian pedants started inventing grammar rules. You research sounds excellent and I believe you are absolutely right that planning rules are a major impediment to affordable housing. As well as minimum parking requirements, there are minimum unit sizes, and other restrictions that seem to have been introduced by pressure groups during the Unitary Plan hearings process (e.g. character overlays on many town centres) and through non-statutory documents (e.g. minimum room dimensions). At least the Unitary Plan has given us more sensible density controls in place of the minimum lot sizes that gave unintended financial incentive for builders to produce five-bedroom houses with en-suites – the exact opposite of what our demographic trends say we need.

  6. Glad to see you back writing 🙂

    I wonder what it would take to change the housing conversation from “no three storey high rise next to me” to “more homes is a social and economic good”

    1. Yes. I don’t think it would take much of an exercise. Most people haven’t linked land use, regulation, transport and housing in their minds. Yet once they realise that good research is available, it doesn’t usually take many articles / speeches / conversations for people to realise the discussion is different to what they thought it was.

      I have seen way too many logical opportunities for discussion and education not being taken up by the Council and by Auckland Transport. This is not responsible governance, given the research these bodies hold and the tasks they have in front of them.

    2. A change in society, perhaps.

      Go back a bit in time. https://thespinoff.co.nz/politics/25-02-2016/aww-poor-thing-a-victory-for-the-loudest-aucklanders-in-the-room/

      So, lots of shouting… but nothing I didn’t quite knew before.

      However, the very fact that there was shouting told me something. The conversation goes like this:
      – if we do this, many will end up in substandard housing or outright homeless.
      – WHATEVER!!!

      This meeting is public record. I assume that was known to people in that meeting.

      I learned that New Zealand is a society where it is OK to shout, loud and proud, in public, that you don’t give a rat’s arse whether the generation of your kids and grandkids will live in a house or in a car.

      1. I think there’s a bit of give and take needed here. The Council suddenly changed the zoning on a huge area of properties in an area lumped with high rates and pretty average services in terms of things like public transport, after they’d consulted on a document that was very different to what they ultimately tried to put through. Realistically, what did they expect to happen?

        It was a poor display from the Council and an absolute fumble on the basics of engagement. It smacked of trying to sneak things past people instead of having the courage to consult on what actually needed to be done in the first place.

  7. It always intrigues me how ‘economists’ come up with these large dollars amounts for lost wages and productivity, $1.6 trillion as quoted.
    Same as the traffic congestion in Auckland costing so many billions per year.
    And further in the post there is the answer:
    ‘H and M develop a statistical model, a spatial equilibrium model to be more precise’
    Just as I suspected, it’s all based on BS. A fraud no less and beggars belief that the word precise could be in the same sentence as statistical modelling.
    Is there any credible example in Auckland where statistical modelling has proven to predict the actual state of affairs? Think transport and housing and their costs, total fails?
    Then AT have demonstrated their precise use of modelling by using future guessed numbers to model current traffic/cycle stats.
    Do economists actually contribute any useful to society?

    1. That’s some cracking gaslighting Bogle, well done.

      Perhaps the next time you want to criticize a post, criticize something that it actually says.

    2. I’m sorry to hear about your previous employment. For what it’s worth, I think restructures are generally a dodgy idea, as people always underestimate how disruptive they will be.

      On your other points, when you see the word “model” you should interpret it as “a systematic way of thinking about how parts of the world work”. Some models are better than others as they do a better job representing the reality. For instance, the Copernican model of the solar system explained planetary movements better than the geocentric model. However, it is inaccurate in some important respects, such as the fact that the sun is not fixed in place but moving through the galaxy.

      I think having a systematic way of thinking about cause and effect is better than *not* having one, or relying on guesswork, gut feel, or simple extrapolation of recent trends. It’s wise to treat models with suspicion – if they make predictions that diverge wildly from observed trends, that’s a cause for concern – but unwise to disregard them entirely.

      In this particular case, I’d argue that the predictions from the model – people are leaving Auckland due to high house prices – lines up pretty well with observed data on regional inflows/outflows survey data on whether people are considering moving, and anecdotes about various people who have moved.

  8. The causes and economic consequences of rising regional housing prices is simple, it is years of short term quick fix urban, economic, population and transport planning, under investment of local and national public transport systems, no long term population growth and the belief that the car will solve transport woes, coupled with years of neo-liberalism economic ‘leaving it to market forces’ policies, resulting in a low wage economy, over burden under funded health, education, social, policing services,lack of social and affordable housing and nimby-ism, especially in the NIMBY Republic of Auckland.

    Its going to take a very brave governemnt to say enough and develop a long urban, economic, population, environmental and transport planning that factors in global warming, climate change, global economical and political uncertainty.

    At least the current government has plans but do they have the staying power to carry them out, as 47% of the voters wants National’s short term quick fix short term neo-liberal economic policies, that business and market forces will solve NZ urban, economic, population and transport needs, which will make NZ more of basket case that currently is.

    1. Awesome, a competition where whoever can shout NEOLIBERAL as loudly and as often as possible is the winner? Count me in.

    2. Neoliberalism isn’t the problem here – unintended consequences are. I think you’ve described that quite nicely in the first paragraph. Faced with the need to think about the long-term future, we’ve generally preferred short-term fixes that have caused other problems by the time the medium term rolls around.

      The antidote to this isn’t necessarily more planning, or less planning for that matter – it’s planning done differently. That is, start by thinking up some scenarios for where we might end up in the long term, and then work backwards to identify all the things that would need to be done right to get the best out of those possible futures. And then, of course, we need to actually do them!

    3. Yes, nothing less than a, …ahem…. paradigm shift is required. Much more than the fiddling by the current government. To be specific, mass building of affordable (not social) rental and ‘to buy’ housing.
      Incredibly short sighted policy making over successive governments has resulted in this mess. Big intervention is now required. And more tax is needed to pay for it. But no one is brave or honest enough to say that.

  9. Invective because I once lost a job I enjoyed because an economist recommended a company reorganise and adjust focus in another direction. They did that but went bust anyway. The original owner told me the reorganise was a disaster and if he had kept in the area they had expertise they would still be in business.
    So any time I see economists’ modelled future I’m extremely sceptical.

  10. Peter – You are correct, it’s about planning done differently by thinking outside the square but at the same time to factor in global warming, climate change, technology advancement and global economic and political uncertainty, so NZ can survive.

    With the latest IPCC reports and increasing concerns by scientists, that human society needs to make changes on the way we live and eat as global warming affects human food production.

    NZ as an island nation, we can start to plan long term economic and population planning to cope with global warming, climate change, technology advancement and global economic and political uncertainty.

    To do this, NZ needs to go back to the early twentieth century and develop a modern take on it, using our version of social liberal economic policies. We almost there with the coalition government which does have good long term policies but I don’t think the coalition is strong enough to cope with the pressure of the 47% of voters who want National short term ‘head buried in the sand’ neo-liberal economic policies and planning.

    NZ needs to start planning to double its population to 10 million that is environmentally sustainable with the emphasis on regional growth not just not the 6 main centres, especially Auckland, which in essence is already full. Any population growth in Auckland needs to go upwards and not outwards, as Auckland’s environment is already stressed with Queenstown and Wanaka not far behind. New immigrants need to have the skills to help NZ to grow, carry out research and development so our agri-business industries can ‘farm to suit the land and climate’ on a environmentally and sustainability basis, able to recycle more efficiently and so on.

    To house population growth, NZ needs to move to manufacture prefab construction, as the current ‘hammer n nail’ is to slow, costly and wasteful, have good long term urban, planning and have efficient town. city and in region public transport transport systems.

    Our existing road, rail and coastal shipping infrastructure needs upgrading, with emphasis on rail and coastal container shipping as the main carrier of freight, rail for regional, inter-regional and long distance passenger train services using electrification and hydrogen as motive power, our national state highway and regional road networks upgrade for better safety and EV/Hydrogen capable and the national electricity grid, back up with localized or suburban solar and wind generated networks that supply local communities/suburbs and feeds any surplus back to the national grid.

    Since the the list is long, the above are some of my thoughts.

      1. Heidi – The government needs to sell a clear concise vision of 2050 NZ to the voters and not the current hiccup to hiccup that is happening at the moment which is playing into the hands of National supporters.

        If Gen Zero can sell Auckland PT concept to Auckland ratepayers and politicians why isn’t there a Gen Zero type of vision for NZ being a environmentally sustainable living, agricultural, business and technology economy that is coping with erratic weather, the all voters can understand, instead of the un-cordinated shambolic campaigns and political parties that are plague with infighting and activism, we have at present.

        If NiWA is correct with their computer modelling that NZ will have long drier spring, summer and autumn and short intense wet winters, which has already started, we need to plan now to protect our agri businesses, way of life, economy, etc.

    1. In general, agreed!

      Another point I’d add is that, in the long run, to live within environmental limits we’re going to have to get to a state of zero global population growth. I think this can be done in a benign way that doesn’t involve any human rights violations. Most wealthy countries have fertility rates below 2, meaning that their populations will shrink over time, barring immigration, and most developing countries are trending in that direction.

      But getting to zero population growth will mean a quite significant adjustment in urban and regional growth. Most places will be standing still, or even declining, so they may not be able to count on an influx of new residents to fund infrastructure improvements. Some places will discover that they have over-extended themselves, infrastructurally. Others will find new ways of maintaining and improving what’s there.

      I always think of the opening scene to Kim Stanley Robinson’s utopian novel The Pacific Edge: A group of young people digging up one of those over-built American intersections, salvaging the buried metal, and reusing the space for a softball pitch…

      1. Hi Peter – I am looking at it from NZ’s point of view. What I wrote, is very achievable for NZ to do, if there was the political will to make if happen. At the moment there is but it is not sold to the voters as a clear concise vision, whilst the government is going through a series of not so good looking hiccups, that is playing into the hands of the 45-46% voters that are anti government policies.

        We all now, that the NZ voter will give a new government at least 2 terms and I think with the mixture of a centre left party, a right wing party and a centrist party government, where the 3 parties are reasonably on the same page and when some of the major policies like Kiwibuild, etc settle down, I think the voters mostly will allow the government 3 terms, especially if they start seeing more impact of climate change affecting NZ’s weather and their lives.

        As an island nation that has a small population and a land mass similar to Japan and Italy, NZ can become a world leader in adapting all aspects of individual, business, transport and agricultural functions adapting to global warming and associate climate change and joining up with other like minded countries like Sweden, Denmark, Norway, etc, other countries will take notice before the planet passes the point of no return.

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