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?