How Las Vegas gambled and lost

In yesterday’s article on the release of the latest US house price indices by Case-Shiller and the FHFA, one market stood out more than any other for the dramatic way in which home prices have collapsed: Las Vegas, Nevada.

According to the Case-Shiller index, house prices in ‘Sin City’ have fallen by a whopping 59% peak-to-trough, whereas at the state level, price are down 53% according to the FHFA. In inflation-adjusted (real) terms, the falls are even greater, as shown by the below charts:

In the lead-up to the crash, the Las Vegas economy was riding high. The unemployment rate was below 5% and per capita incomes were growing strongly:

With confidence sky-high on the back of seemingly solid fundamentals and rising asset prices, along with easy access to credit, Nevada households borrowed heavily. Per capita debt accumulation exploded in the mid-2000s to levels far in excess of the national average:

The overwhelming majority of this debt was held in mortgages as households chased house prices higher:

However, like all housing bubbles it was only a matter of time before the debt-fuelled party turned into one giant hangover. And with the national economy taking a turn for the worse in the wake of the sub-prime crisis and the collapse of Lehman Brothers, Las Vegas was destined to follow in its wake. After all, it is a tourist-based economy whereby around one-third of the city is employed in leisure and hospitality:

The rest is history. Home prices crashed, unemployment skyrocketed, and nominal per capita incomes fell for the first time in 80 years. Las Vegas is now home to one of the largest housing crashes in history.

And the pain is widespread, with around one in five mortgages 90 days in arrears – nearly three times the national average:

When conducting a housing post mortem, the question that always needs to be asked is: could anything have been done differently to prevent the housing bubble/bust?

Certainly, if credit was less readily available, households would have been constrained in their ability to bid-up prices. But easy credit was only part of the problem. Another key driver of the rampant price escalation and then collapse was the way in which land was supplied for housing.

Throughout the 2000s, Las Vegas was the fastest growing metropolitan area in the United States with more than 1,000,000 population (see below chart).

However, despite there being ample developable land within 40 miles of the Las Vegas city centre to accomodate this population growth, the actual quantity of land available for development was heaviliy restricted by the federal government Bureau of Land Management (BLM), which owns around 90% of the land in Clark County, which contains the entire Las Vegas urban area. The BLM heavily restricted sales of land to the market in an effort to maximise revenues, causing builders and developers to bid-up land price in period auctions to ensure their supply of land for construction (called ‘land banking’).

Whereas the price of land for housing generally sold for $40,000 per acre in the late 1990s, toward the peak of the bubble, average land prices fetched ten times that amount. Obviously, this land price inflation was a principal cause of the house price escalation as well as the sluggish supply response to the rapidly growing population and rising house prices (see below chart).

An article published in late 2006 in USA Today explains the supply situation in Las Vegas nicely:

LAS VEGAS — Flying into this desert metropolis is as deceiving as a mirage. From 10,000 feet you see empty land in all directions and swear the pace of suburban sprawl could go on unchecked.

You’d swear no end’s in sight to subdivisions stretching for miles beyond the Strip, enclaves of single-family houses that draw thousands of Californians and other migrants a year.

Look again. The valley that Las Vegas and 1.8 million residents call home is nearly built out. Mountains, national parks, military bases, an Indian community and a critter called the desert tortoise have Sin City hemmed in. At the current building pace in the USA’s fastest-growing major metro area, available acreage will be gone in less than a decade, developers and real estate analysts say.

Yet growth pressure and housing demand won’t abate. Greater Las Vegas will add 1 million residents in the next 10 years, state estimates say, and hit 3 million by 2020.

“You hear anywhere from a seven to 10 years supply at our growth rates and the valley’s full,” says developer Kenneth Smith of Glen, Smith and Glen…

A scarcity of land — or just as important, says Hal Rothman, a University of Nevada-Las Vegas history professor, the perception that it’s scarce — is driving prices skyward. “The result was a rush,” he says. “The situation is making a new valley around us, one that will be more crowded and expensive.”

Developers who 15 years ago paid less than $40,000 an acre are paying more than $300,000 today. In an auction of public land that went on the market last year, a developer paid $639 million for 2,655 acres…

Developers are leapfrogging over BLM land with plans for big projects, such as 42,000-acre Coyote Springs 50 miles north of here. That’s “drive until you qualify” territory for home buyers seeking affordable mortgages. But costs of building roads, sewers and utilities “are incredible,” says Steve Bottfeld, senior analyst of Marketing Solutions, a local research firm. “Don’t look for it to happen in 10 years”…

Developers don’t expect land prices to fall. They’re packing houses in traditional subdivisions so close together neighbors can practically shake hands out their windows. Economics are moving developers toward a slow embrace of trends familiar elsewhere…

It’s hard to deny that if land had been freely available for development, developers would not have paid such high prices for the land sold by the federal government and Las Vegas home prices would never have risen to such dizzying heights or crashed as violently.

Las Vegas is yet another case study whereby excessive government interference in the supply of land (and/or the provision of housing) has mixed with easy credit to create a speculative bubble followed by a disorderly bust.

unconventionaleconomist@hotmail.com

www.twitter.com/Leithvo

56 Responses to “ “How Las Vegas gambled and lost”

  1. Housing Troll says:

    “Drive until you qualify”…..lol

    I’m expecting to see that line rolling one out at the first spruik opportunity in the MSM.

    • PhilBest says:

      The term “drive to qualify” (for a mortgage) has entered popular terminology in the USA in the wake of their housing bubble crisis.

      The phenomenon has been gravely misinterpreted. “Smart Growth” advocates have used the collapse of mortgages in “drive to qualify” suburbs as “evidence” that they need to have “regional planning” powers to stop remote development.

      But the famous “Costs of Sprawl 2000″ Report specifically identified, that the higher median house prices in a city go over a certain figure (in 2000 it was US $170,000) the MORE WORTHWHILE it was to “drive to qualify”.

      “Drive to qualify” is a SYMPTOM of inflated urban land prices, not a problem in its own right. You can be sure that the phenomenon simply did not exist in the many affordable cities of the USA.

      Ironically, these ultra long commutes result in a “Smart Growth” city’s commuting statistics being far from the “success” that the advocates of “Smart Growth” alleged as the objective of their regulations. In fact, even within the borders of a “Smart Growth” city, the trade off between location and price of homes, force people to live further away from jobs and amenities. Alain Bertaud’s papers on “The Spatial Distribution of Density” reveal this about cities like Portland, Curitiba, Seoul, and London.

      • We are seeing this “drive to qualify” phenomenom playing out in Australia. For example, exurban areas outside of Melbourne’s growth boundary – Drouin, Bacchus Marsh, Warragul, Gisborne and Wallan – have exploded in popularity in recent times. Similarly, Mt Barker outside Adelaide’s growth boundary has also experienced fast growth.

      • gef05 says:

        I agree with you, Unconventional, that it’s a symptom. Here in NC the situation played out in the mid-noughties just as it did in NV and many many other places around the country, and now we have entire streets in “new” subdivisions that are empty.

        Side note: What’s fascinating is that the arguments we all heard five years ago are being used currently in Oz to defend high house prices:

        -immigration
        -wage growth
        -scarcity of land and houses
        -traditionally undervalued housing assets
        -it’s real estate
        -other bubbles were different

        Sheesh.

      • realist says:

        You are flat-out full of it. Florida has some of the most sprawl-friendly policies anywhere. And yet prices blew up and crashed as well. It was lax lending, pure and simple.

      • You are showing your ignorance there realist. Florida implemented state-wide growth management laws in 1985 including: the imposition of urban growth boundaries which, in the case of Miami, precluded development outside of Miami-Dade county’s western and southern edges as well as its southeastern coastal fringe; high impact fees, which forced developers to pay for new roads, schools and parks associated with growth; and comprehensive plans to determine where and how much development would be permitted.

      • realist says:

        You are showing YOUR ignorance. I have lived in Florida for 41 years. Miami is but one city in Florida, and the western boundary is Everglades National Park. Duh. Please explain to me Palm Coast and Wakulla county, two of the fastest growing areas in the US during the 2000s. I had property in both areas. Virtually no restrictions on growth, other than lip service. It was total wild west, or make that wild south. The thing that drove prices was novice “investors,” using money that came at virtually no cost. People would buy sight unseen. It was a ridiculous bubble of hype. Where is all that demand now? Gone. Dust.

      • So you admit that you are WRONG and that growth WAS restricted around the Miami metro area – the largest metro area in Florida? The fact that you lived in Florida means absolutely nothing. The fact remains that the state implemented state-wide growth management laws in 1985, which totally contradicts your statement.

        In 2006 the Brookings Institution undertook a review of land use regulations in the 50 largest metro areas of the US. It ranked Florida near the top on regulatory restrictiveness for its heavy use of urban containment measures.

  2. Sean G says:

    Thanks for this very interesting read Leith. I know that price-gouging fringe development has been a recurring theme in your blog but Las Vegas certainly seems to be at the pointy end of the stick.

    Here in Victoria, recent big sales of development land around Cragieburn, Wallan and Cranbourne tend to confirm your thesis. The owners hang on to their property till the urban fringe touches their land and then sell at huge windfall prices… Brumby (to his credit) tried to tax this windfall with the Growth Area Infrastructre Contribution but given the stupidly high prices of land in places like Caroline Springs ($250,000 – $300,000 even before you put a house on it) all its actually doing is keeping people out of the property market.

    Personally I’m confident that a market-based solution is around the corner. I think we’ve past the Peak Debt point and people simply can’t afford to shell out any more money – therefore prices for new housing market will stablise or slump. All that means is the conga line of greedy people gouging first homebuyers including big developers and government will have to expect a much smaller (and more realistic) return.

    • “The owners hang on to their property till the urban fringe touches their land and then sell at huge windfall prices…”

      The solution to this problem is to abandon the urban growth boundary and dramatically increase the amount of land zoned for urban uses. This would enhance competition in the land market and hinder the land holders’ and developers’ ability to land bank and drive prices up.

      However, the Vic Government would also need to significantly speed-up its Structure Planning processes to ensure that housing can be supplied quickly and competition between rival homebuilders and developers is increased. There’s not much point increasing land supply in isolation if developers are then unable to build homes on that land due to restrictive planning processes.

      A broad-based land tax would also help to prevent land banking as holding costs would be increased.

      • “The solution to this problem is to abandon the urban growth boundary”

        Obviously we strongly disagree here.

        “A broad-based land tax would also help to prevent land banking as holding costs would be increased.”

        Now we’re talking! Also remember that we need to reduce taxes on productive endeavours along with such reform. No point keeping the bad taxes and adding one more for government to waste on election promises.

      • PhilBest says:

        Cameron, why would you BOTHER with an urban growth boundary at all, if you had land taxes? Obviously, land taxes would alter the equation that economists and speculators are all familiar with, regarding “how many years of supply” is worth the risk of trying to “corner”. But it would still be possible to have an urban growth boundary tight enough to cause a speculative bubble.

        The catch 22 situation is, and would remain, that an urban growth boundary that actually DOES “constrain growth” over the LONG term, in contrast to what a free market would have done, HAS to affect land prices. An UGB relaxed enough NOT to affect land prices, would have to NOT result in outcomes any different to what the free market would have.

        Economists consistently advocate land taxes and/or road use pricing INSTEAD of urban growth boundaries. There are several studies with titles that include terminology like “Are Urban Growth Boundaries a Second Best Option…..”? and the answer is consistently, NO. (Alex Anas and Jan Breuckner are 2 authors of such studies, off the top of my head, and there are plenty more that consider this question).

        Then there is the amazing land tax advocate Mason Gaffney’s 1964 paper, “Containment Policies for Urban Sprawl”.

      • Mladen says:

        Seems like there are a lot of nascent Georgians out there :)

        See http://en.wikipedia.org/wiki/Georgism

      • PhilBest says:

        I for one, like “land taxes” more and more, the more I discover problems with our modern economies, that land taxes would have prevented.

      • realist says:

        Yes, and in 1985, the bubble immediately struck in Florida … oh wait, it took a few years, and in 1990, the bubble struck Florida … oh wait, and in 1995 … oh wait, in 2000, no, wait again … yes, in 2003, when LENDING STANDARDS WENT TO NOTHING, the bubble struck Florida.

  3. tom says:

    Yes but given Las Vegas’s water problems they can’t afford to have loose land regulation. Las Vegas is arguably already too big for it’s water supply.

    • But regulating land-use is a very poor and indirect way of dealing with water supply issues. Why not price water properly? Or implement efficiency saving measures?

      Besides, how does forcing people to live in cramped, crowded and expensive homes save more water than households living in cheaper more spacious accomodation?

    • k says:

      Las Vegas is in the middle of the desert. Realistically they should have simply charged the cost price for water- it would have restricted growth because no one would be willing to pay the price- ditto LA- same issue.
      When I used to watch CSI I was always blown away by the houses with vast green lawns-that is simply not sustainable. In place not far from Las Vegas people settle for dirt and rck gardens, or grass that spends more time brown than green.

  4. Scribe says:

    I lived in Vegas from 2005-2007. My work colleagues in Vegas kept trying to get me to join them and buy real estate. I was told it was a “sure thing” and I should “get in while [I] still can”. Needless to say, many of those people, who had all the cocksure confidence I see in Aussies, subsequently lost their shirts.

  5. NOT A ''TRUE BELIEVER'' says:

    Same bloody thing is already upon us on the Gold, Sunshine and Central coasts, Melbourne, Perth, Brisbane and many parts of Sydney and other regions. When will fools ever learn; there is no such thing as a one way bet!

  6. The Claw says:

    Leith, You deserve a medal for your work.
    Years ago I explained how government had choked supply of residential land and poked demand hence driving up prices to buy or rent in my home city of Sydney.
    To my surprise I found that many people denied this obvious truth, claimed that there was no shortage of housing, housing was oversupplied and prices would soon crash like in USA, Ireland, Spain, Germany, France or Dutch Tulips.
    I was called a fool, a spruiker, a wilderbeest and worse. I was told that Sydney housing was just a simple bubble driven up by credit during a mania. They promised prices would soon crash. I am still waiting. Median prices seem to have reached a high plateau and stayed there since 2003.
    Whenever I asked the shortage-deniers for more information about USA, Ireland, Spain, Germany, France, etc, I discovered that they knew nothing about those places other than that house prices had risen and then fallen, and at some point other people had claimed there were shortage there. Apparently if someone claimed there was a shortage in Vegas, then prices fell, this meant I could not legitimately claim there was a shortage in Sydney now. I can’t follow their logic!
    Thanks for explaining how choked supply triggered the housing bubble in Vegas.
    My guess in that the places in Australia with the greatest similarity would be Darwin, Canberra and mining towns like Karratha. They are surrounded by oodles of land without permission from government to build.

    • Thanks Claw. It took me a while to understand this stuff, but I got there eventually.

      I lived in Canberra for three years from 2003 to 2006. It’s supply situation is very similar to Vegas in that the developable land is owned by the Government which rations its release and auctions it off to the highest bidder. There is oodles of potential land available – even in the inner suburbs – but very little of it is available for development. Not surprisingly, prices and rents are much higher than they should be.

      • Velociraptor says:

        Only a component of the problem. Credit and high LVRs was a major player

        Go to Houston. Plenty of 7 figure properties in the easy commute of downtown.

        The median is low due to the endless supply of junk being built and turned over on the fringes (due to easy supply). Premium RE In Atlanta and Houston is still premium though.

        I like the German model.

        Folks want a cheap house within 5-10km of Sydney and scream shortage because they can’t find one.

        It will never happen. California has crashed but check out the Premium RE around Frisco and LA downtown, still premium.

      • Properties with premium locations will always be more expensive. That’s why we use median prices in housing analysis, because it excludes the outliers.

        I bet you that premium properties around Houston are FAR CHEAPER than equivalent premium properties in Melbourne or Sydney.

        The cost of land on the fringe is critical in not only keeping entry housing affordable, but also reducing the cost of inner city housing as well. The fringe is the ‘inflation vent’ of the housing market. Force prices up there, and you will also force inner-city prices up as well.

        Also, new fringe housing in Houston sells for around $150k versus $350k plus in Australia’s capital cities. Their blocks are typically much larger as well.

      • Velociraptor says:

        True but as Mav points out supply constraints are only a leg of the stool.

        I argue that if LVRs were capped at 80% and loans capped to <15% of HOUSHOLD income you'd have no bubble.

        When I bought a home in the early 90s the same supply constraints existed but loans were not cash buffet with a trough (I think I borrowed 100K on an 80K household income).

        There was no bubble.

      • Velociraptor says:

        Think Fire.

        It needs three components:

        Heat, Fuel (Combustible material), and Oxygen.

        Take away one component and it doesn’t exist.

      • Supply constraints have gotten progressively worse over the past decade or so as all of Australia’s state governments have implemented urban containment policies, including urban growth boundaries, up front infrastructure charges, etc.

        But I take your point about the role of easy credit. However, by the same token, easy credit has not caused any significant bubble/busts in the US cities/states where supply was not constrained (Texas just one example).

      • gef05 says:

        You can get a 5/3 in Memorial, Houston, for USD455K. Spankin’.

      • Velociraptor says:

        Good point Leith. 10/10 on your post on prevention is better than cure.

        After the carnage, say 2016 I hope state govts and councils are better informed.

  7. Mav says:

    Great post – I think what you have demonstrated is that regulation-induced supply shortage + credit boom can take house prices up there into the stratosphere.
    .
    But if one leg of the bubble, credit, is cut off, then the other leg – supply shortage – won’t necessarily keep you up there.

    • Mav says:

      err.. replace “shortage” with “constraint”.

    • Velociraptor says:

      +1

      Some are like a blind dog with a bone tho ;)

      • PhilBest says:

        You like the “German model”.

        That happens to include a “constitutional right” for the owner of any rural property, to develop it for housing or industrial.

        Refer to “Bigger Better Faster More: Why Some Countries Plan Better Than Others” by Oliver Hartwich and Alan Evans.

        Have you not noticed the random bunches of houses and industrial buildings all over the German “countryside”? The Germans actually do not seem to object to this. There is still plenty of countryside. Perhaps the Germans are the only people in the world intelligent enough to have worked out what is the factual ratio between the quantity of countryside and the requirement for urban land. There is probably nothing more damaging to rational political outcomes on this issue, than pig-ignorant, idiot assumptions about this on the part of “most people” – probably thanks to media giving lying scum Greens a free ride absent of any fact checks.

      • Velociraptor says:

        And, having an employer in your village/community is beneficial.

  8. PhilBest says:

    But is there ANY housing market in the WORLD, that has urban land supply constraints and NO BUBBLE because of clever “credit restriction” policies? Where IS this mythical shangri-la?

    I have posted more than once about South Korea and THEIR policies of mortgage credit restrictions. The response I get from the “land supply doesn’t matter” brigade, is that “oh, we’ve looked into what happened in South Korea more closely, and it turns out that there were too many loopholes that enabled SOME people to get credit easier than others”.

    But the fact remains, about South Korea, that young people saving for a “rising target” house price, delaying marriage and childbearing, because they could not get credit; caused national savings to INCREASE. How much MORE evidence does anyone NEED, that land supply restrictions are far more important than “credit” issues?

    Furthermore, as we know from experience in the USA, when the lending sector DOES act responsibly and refuses to lend to riskier borrowers, politicians start leaning on them. Especially when “minorities” etc are over-represented among those denied credit.

    Mortgage lending is actually a competitive business. What is a “careful” bank supposed to do when there are supply-related issues with housing affordability – quit the industry altogether until the crash has happened and wiped out their competitors?

  9. PhilBest says:

    Excellent research from the Unconventional Economist, again. Las Vegas has, appallingly, been stated in some “studies”, to be a counter example of a city with “easy land supply” that still had a bubble. There are several internationally reputed academics who absolutely should know better than to have fallen for this.

    There is also a lot of confusion surrounding “elasticity of supply”. The common error, is for analysts to compare supply and demand over several years – when the problem was a lack of EARLY response to increased demand. Larger amounts of “supply” that only come on stream AFTER large “planning gains” have been factored in to the market’s functioning; does NOT prove “elastic” supply – to the contrary, in fact.

  10. Leith – this article is one of your finest efforts. Congratulations!

    First – that raw fringe land at $US40,000 per acre through the 1990′s seems very rich as well. Desert land should be near worthless – at best a few hundred dollars an acre. It seems to me the Government has been milking it for decades in Nevada.

    Second – the household debt loads per capita graph is a cracker. It sure illustrates the dramatic difference between Texas and California. And others too of course.

    I do hope this hugely important article (or hyperlinks to it) appears on other websites around the world.

    Again – congratulations!

    Hugh Pavletich
    Co author – Annual Demographia International Housing Affordability Survey
    http://www.PerformanceUrbanPlanning.org
    Christchurch
    New Zealand

  11. I see this article is No 2 on New Zealand’s http://www.interest co nz Friday Top 10 at 10.

  12. ConMeConU says:

    “It’s hard to deny that if land had been freely available for development, developers would not have paid such high prices for the land sold by the federal government and Las Vegas home prices would never have risen to such dizzying heights or crashed as violently.

    Las Vegas is yet another case study whereby excessive government interference in the supply of land (and/or the provision of housing) has mixed with easy credit to create a speculative bubble followed by a disorderly bust.”

    There was never a lack of land to build homes for Vegas “residents”… those who actually live and work there. An important factor in the Vegas bubble is the large number of “investors”. I don’t have the exact number but it’s somewhere in the 40-45% range. Since the city didn’t put a limit on non-resident investors, they raced to Vegas like 19-yr old sailors to brothels. They range from the average Joe Schmoe to Hollywood celebrities who were brought in to put glam up the city and intensify the feeding frenzy. Vegas is entertainment, resort, a life style. It’s sex and family-oriented… you can have it all. They bought land, 2nd or 3rd homes, condos, etc. They don’t live and work in Vegas. They just buy the property as a vacation home, rent it out or flip it for a quick profit. It was normal for one to own 2-3 homes and put very little to zero down. Many of these folks are from California. Some are rich while others extracted equity from their primary Cal residences or used their pension funds. Once the market began to turn, the “smart” investors sold and ran out of Vegas like it’s a nuclear test site.

    During the run-up it was a sight to behold. By 2003, to buy a house you must put your name into a lottery because there was too many buyers. The salesmanship, the spin, the hype and pressure the developers put on buyers were very slick. One might even say that it was the perfect con job.

  13. SoCal says:

    Something is wrong with land use regulation, but it isn’t even a issue here, as clear to anyone with a calculator who can multiply the number of expensive luxury homes per acre and see the unmitigated greed of the developers.

  14. Steve Dean says:

    Lake Mead is only a few miles from Vegas. It was created by damming the Colorado river with the Hoover Dam.

    It is the largest reservoir in the US. It runs for over 190 kilometers and contains plenty of water for Vegas.

  15. Not convinced says:

    Good article, but does this mean that the usual comments from your uninformed readers about negative gearing (which doesn’t exist in the US) being the root cause of Australia’s housing bubble will have to find a new factor to blame?

  16. To be clear – artificial scarcity is the “trigger” for housing bubbles – finance (in all its forms) is simply the “fuel”.

    Texas did not bubble, because of its (a) open land policies (b) sensible infrastructure financing and (c) Morthage Consumer Protection Legislation.

    Georgia had (a) and (b) but not (c) and instead of “bubbling”, it over produced.

    Note how the Median Multiples for Atlanta Georgia “bellied out” at 2.1 a couple of years back, last year 2.3 as the over production was being cleared (refer Demographia Surveys http://www.demographia.com ).

    In contast Texas metros generally sat around 2.5 to 3.0 Median Multiple. Texas overall flatlined pretty much at 2.5 MM.

    Over production of affordable market stock is far far less of a problem than the creation of bubble stock, where the Development Ratios are all to hell.

    Bubble markets in the main generate rubbish stock – far below the quality standards of affordable markets such as Georgia and Texas.

    The policy focus must bne on the structural political / regulatory impediments to the provision of affordable stock when demand (whether buyer and / or more liberal lending)kicks in.

  17. hamish says:

    Leith, what are your thoughts on the effects on restrictive planning controls in established suburbs. If they had been far less restrictive, do you think they could have helped moderate prices with additional supply, that is, do you think urban consolidation can work?

    I’ve skimmed through a few of the various Sydney local government ones, and aside from the cost impacts of all of them being different, some of them are incredibly anti-development, ie. I think it’s Ku-ring-gai restricts plot size to a minimum of 7-900sqm after subdivision in most of the council area, which is close to an outright ban in practice.

    As far as abandoning the urban growth boundary, I think people object to that due to a worry that it will lead to an uncontrolled explosion of more building on the fringes, but I doubt it would make much if any difference at all, as it is only the real demand due to population growth that will determine how much gets built. Looking at the experience of past decades, any previous growth boundary has ended up built over anyway in order to accommodate that added population.

    • PhilBest says:

      You raise an important point. The whole point of “Smart Growth” planning, is to increase urban efficiency. This means, apart from “restricting the fringe”, that we need INCREASES in density at “efficient” locations – which just happen to have people already living there. I have been infuriated with “planners” inability to see the point, that if they CAN’T make the increased density happen at the “efficient” locations, then urban growth boundaries are a total waste of time. In fact, the increased density at the efficient locations is really the ONLY thing they NEED to focus on – they should forget the UGB altogether.

      However, in many cities in Australia and NZ, the process of “redevelopment at higher densities” has been proceeding with mixed success, for 20 years. Redevelopment permission processes are not particularly predictable, and outcomes in the “industry” show that it is now clearly “high-risk”.

      The consequences of urban growth boundaries and our partly successful experiment in “urban densification”, is as follows.

      1) Steady reduction in lot sizes, accompanied by massive inflation in the price of lots, so that one eighth of an acre is now many times more expensive than one quarter of an acre would have been 20 years ago.

      2) “Densification” occurring at inefficient locations as well as efficient ones. This is what the great urban economist Alain Bertaud has long been predicting. This is because the price of urban land is so high, that efficient locations are priced out of reach of a lot more people, even with “lot size” being traded off, than what would have been the case without the inflation in prices. One constantly observes high density re-developments occurring immediately inside urban growth boundaries, where the land prices are “least unaffordable”. Meanwhile, efficiently located suburbs are more and more turning into enclaves of wealthy elites, rather than being redeveloped at maximum densities. This is not entirely because of the NIMBYism, given that the price of land at those locations is exorbitant – estimates of “more than $1 million” is accurate, under the conditions that I describe.

      3) The increase in public transport use is nowhere near as high as necessary to ameliorate traffic congestion, which has worsened, and spread to the suburbs. Road capacity has largely not been increased to keep pace with population increase, let alone the fact that densities are higher and many more vehicles are attempting to use the same road space. Our cities are most similar to Los Angeles in this regard – most US cities have far larger “minimum lot sizes” than LA or us. It is remarkable how even small cities in NZ, can have traffic congestion, delays, and commute length times at least as bad as cities ten times their size elsewhere in the world.

      4) Relative economic productivity has declined, and the “tradables sector” of the economy has shrunk. While our urban planning and inflated urban land prices are not often blamed for a role in this, there clearly is one. The McKinsey Institute identified this effect in Britain’s economy 20 years ago; numerous papers from Reading University and the London School of Economics (both of which have “Spatial Economics” Departments) confirm this; and the OECD has started highlighting this effect in its reports on Britain, Australia, and NZ (and possible other nations as well).

      5) Extremely long commutes from “rural” areas have become a much more common phenomenon. The response from the pro-smart growth politicians, has been to give the planners “regional” powers to prevent increases in “rural” residential development. Lifestyle blocks are also a lot more popular than they would normally be – apparently NZ’s land coverage in lifestyle blocks is now a higher % than its coverage in actual urban/city use.

      It is my opinion that Urban Growth Boundaries might as well be an economic espionage “weapon of mass destruction” devised by agents of an enemy power who have infiltrated our urban planning theory formulation and teaching disciplines.

      The only thing that will achieve anything of benefit to “urban efficiency” of the kind that the “smart growth” advocates actually allege they want; would be “nationalisation” or forced acquisition of property at efficient locations, mass redevelopment at higher densities with maximum “efficiency of scale”, and the sale of the redeveloped properties “at cost”. This would achieve the necessary changes in urban land markets, to gain the desired outcomes. The objectives of “smart growth” are simply unattainable with free urban land markets and “property rights” still existing. In fact, all it does is deliver fat capital gains to fortunately-placed people; and maybe this is the true secret reason for it. Guess why someone like George Soros heavily funds environmentalist organisations? It actually is NOT because he has an environmental conscience; he just knows who are his “useful idiots”, that’s all.

      • hamish says:

        Phil, when you say lifestyle blocks, I assume you are talking about those semi rural (zoned rural) areas around a city you can see on google maps, areas like Leppington in Sydney, a lot of which do seem to be agriculture like market gardens, but many also look to be a house with a massive backyard not being used for anything much at all? I figure they are like that because the zoning says you cannot build on anything less than something like 4000sqm.

        Given that one of the objectives of urban consolidation is to protect farmland from urban encroachment, I’d be curious to know how much potentially productive land around Sydney for example, is being used like supersized back yards, much of it being held speculatively on the expectation of re-zoning.

        Someone mentioned Germany earlier. I was on holiday last year and noted that they didn’t seem to have these semi rural zones. As soon as you left the town or city it was immediately rural. After reading about their right to build laws, I wonder if this is one of main reasons for this. There is no point in holding speculatively, as the right to develop already exists, and when you do develop you only use as much land as you need.

      • PhilBest says:

        Yes, EXACTLY.

        “…..There is no point in holding speculatively, as the right to develop already exists, and when you do develop you only use as much land as you need….”

        That is the ONLY REASON why ANY city anywhere in the world, does NOT have a house price bubble. Whether in Germany or Texas or Tennessee. Because, no matter HOW much land a speculator (or an oligopoly) “buys up” on the urban fringe, SOMEONE ELSE who owns land “somewhere in the region”, can develop it at prices that under-cut you.

        Buying up the “whole lot” is simply never going to pay. The speculator will encounter “holdouts”; the speculator’s own activities will force up the prices that land owners expect him to pay; and the cost of financing the operation will exceed, at some point, the potential returns even under extreme bubble conditions.

        The only way these urban development “planning gains” occur, is when “planners” get involved and dictate what land can be developed, and when. It might even involve the need to have the local government’s co-operation on new infrastructure, rather than a blatant “growth boundary”. If the process is “controlled”, then the speculators will love it.

        Read THIS:

        Dismay at ruling on spare land | Stuff.co.nz

        Even in Christchurch, which needs to get back on its feet after its earthquakes, and people need to get re-housed, a pack of “planning” a—holes are insisting that development patterns in nearby parts of the region conform strictly to their “master plan”. There is a “holdout” property owner involved, and because of that, nothing at all can happen in the town of Mosgiel, near Christchurch.