NZ considers new tools to combat housing bubbles

Earlier this month, I wrote about two policy actions being undertaken by the Reserve Bank of New Zealand (RBNZ) and the New Zealand Government aimed indirectly at reducing the economy’s exposure to the housing market. These measures included:

  1. the Open Bank Resolution (OBR) Policy, which seeks to protect taxpayers from funding future bank bailouts; and
  2. directing the Productivity Commission (modelled on the Australian body) to undertake an examination into housing affordability, with the stated aim of reducing the economy’s accumulation of debt and exposure to external shocks.

Late last month, the RBNZ also announced that it had identified several macro-prudential tools, such as loan-to-value ratio (LVR) restrictions and counter-cyclical capital buffers, that it would consider using in order to moderate future credit bubbles.

RBNZ Governor, Alan Bollard, said the following about the proposed measures in a recent speech to the Basel III Conference in Sydney:

“[New Zealand needs] to keep preparing for how we might deal with credit and asset price booms when they recur in the future,” Bollard says. “Our work so far on macro-prudential instruments suggests that we should keep our expectations modest, but we have identified several tools that we would contemplate using in the right circumstances.”

He notes past “periods of unsustainably strong credit growth and asset price cycles” which have had damaging effects on the economy and the financial system.

“We will certainly face similar developments in the future, so we want to develop our macro-prudential toolkit now to enhance our ability to deal with them when the time comes,’ says Bollard.

Rapid credit and asset price growth had amplified general economic cycles and made monetary policy’s task of controlling inflation more difficult.

“We have seen the difficulties that can arise when interest rates alone are used,” Bollard says.

“The collateral damage to the net export sector from the high New Zealand dollar exchange rate during the previous economic upswing prompted a search for potential tools to assist monetary policy. Now, in light of the broader and significant social and macroeconomic costs arising from financial system distress in the aftermath of the global financial crisis, there is greater will to consider additional tools.”

The RBNZ appears to have won bipartisan support for the proposed macro-prudential tools.

The Finance Minister of the National Party Government, Bill English, last week made the following comments about the proposed measures:

Finance Minister Bill English says he is satisfied with the Reserve Bank of New Zealand’s consideration of new tools to control property and asset price cycles so there is no repeat of the house price bubble seen during the last decade…

“We don’t want to see a repeat of the 2000s with excessive property speculation. I don’t think that either domestic or overseas banks are going to allow that to happen, because they’ve had a near death experience themselves, and they’d be reckless to go out and lend strongly against property speculation,” English said .

“I think you’ll find that the regulators like the Reserve Bank are keen to make sure that they reduce that prospect as well,” he said.

“The Reserve Bank is a bit ahead of the international pack, it’s been thinking through the issues of what they call macro-prudential regulation, which is, to deal precisely with property cycles that disrupt the macro economy, and they’ve disrupted it pretty severely in this last round.”

“I’m satisfied they are, by international standards, well ahead of most regulators in thinking through how to handle property cycles, and asset [price] cycles,” English said.

For their part, the Labour Opposition today also signalled their support for the proposed measures:

Government needs to look at new tools for the Reserve Bank to use for controlling inflationary pressures, such as regulating loan to value (LVR ) ratios, Labour Party leader Phil Goff said in a speech today…

“We cannot afford to damage our export and productive sectors by policies which promote inflationary housing booms which in turn push up interest and exchange rates,” Goff said.

“That requires leveling the playing field in terms of not creating tax advantages for property investment over the export economy. It means widening the objectives of the Reserve Bank,” he said.

“We need to look at other tools for the Reserve Bank such as regulating the capital to lending ratios to curb inflationary pressure and not just for prudential supervision.”

However, whilst the Government and Opposition are busy agreeing with each other on the need for new macro-prudential measures in order to prevent housing bubbles and spur New Zealand’s export and productive sectors, the RBNZ’s recent 50 basis point cut to official interest rates (to 2.5%) combined with a relaxation of credit standards by the banks, appears to be having the opposite effect of providing renewed fuel to the housing market:

Reserve Bank of New Zealand statistics released on Wednesday show there were NZ$896 million worth of mortgage approvals by banks in the week to April 1.

This was highest level of approvals by value since the week to November 20, 2009…

This is the first rise from a year ago since January 2010.

Mortgage approvals picked up substantially in the wake of the Reserve Bank’s decision to cut the Official Cash Rate by 50 basis points to 2.5% on March 10…

Meanwhile, mortgage brokers report banks have significantly loosened their lending criteria in recent months, increasing maximum loan to value ratios to 95% or higher and allowing larger multiples of lending to income.

Legal fees and other fees are also being dropped as banks strive to revive their lending growth in the wake of a long period of flat to no growth.

Average loan sizes are also larger.

The recent surge of housing loan approvals is evident by the below chart, although approvals are still well below their decade average.

Similarly, although New Zealand’s home prices have rebounded 3% over the past two months, they are still 5% below their November 2007 peak (or around 15% lower in inflation-adjusted terms):

What is most disconcerting about the recent drop in lending standards is that it is New Zealand’s state-owned bank – Kiwibank – that appears to be leading the charge:

Kiwibank has announced a new 6 month mortgage special of 5.40% until the end of April…

This is a record low mortgage rate offered by Kiwibank since it launched nine years ago…

Kiwibank’s 5.40% rate is the lowest in the market except for HSBC, which offers a 4.99% deal to ‘Premier’ customers who borrow more than NZ$500,000 and buy insurance through HSBC.

[Kiwbank CEO, Paul] Brock told Interest.co.nz in a double shot interview with Gareth Vaughan last month it was borrowing hundreds of millions of dollars offshore from the European Commercial Paper or ‘hot money’ markets at 90 day terms.

So on the one hand, you have the New Zealand Government saying that it wants to lower foreign debt and re-balance the economy away from housing speculation towards the export and productive sectors. Whilst at the same time, the Government-owned Kiwibank is worsening New Zealand’s vulnerability to ‘hot’ foreign debt by borrowing hundreds of millions in order to reflate the housing market.

Another flaw in the Government’s policy making is that it is not examining ways to address the other key cause of its housing bubble – i.e. the highly restrictive land-use policies that prevents low-cost housing from being quickly and efficiently supplied to the market, thus ensuring that:

  1. extra credit demand automatically feeds into higher prices instead of new construction;
  2. the house price rises and perceived scarcity encourages speculative demand and ‘panic buying’ from first-time buyers, which helps to drive prices up even further; the combination of which
  3. acts to make New Zealand’s housing market not only less affordable, but also more volatile and prone to boom/bust cycles as demand rises and falls.

To their credit, at least the New Zealand authorities are seriously examining ways to reduce their country’s macroeconomic vulnerabilities. This is in stark contrast to Australia, whose authorities are yet to publicly acknowledge that such vulnerabilities even exist.

In this regard, New Zealand is way ahead of the curve in thinking through how to handle the financial stability aspects of housing/credit cycles.

Cheers Leith

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www.twitter.com/Leithvo

Unconventional Economist

Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.

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Comments

  1. Looks like they are halfway there, but they still need to rein in the banks – I would hope they mandate a maximum LVR (say 75%) and outlaw the use of teaser rates to entice borrowers.

    Not sure if having a government owned bank – Auspost Bank anyone? – is a good thing if Kiwibank is anything to go by.

    Unfortunately its usually one of the populist measures raised by political parties to get votes.

    Good post Leith – late night, but good reading!

    • I think Auspost bank was pushed hardest by those in the Chris Joye camp who know the only outcome from a new lender will be more credit leading to higher house prices. No fix to affordibility..

  2. LVR’s are a load of crap. The “V” in the LVR is based on “price” (what the market is paying) not “value” (what the asset is yielding). If the asset class does not have an income stream, you cannot value it and hence it is purely speculative. Alternatively, if it has an income stream, you can easily value it and that value should represent the “V” in the LVR.

    Recent market prices reflect debt bubbles. So if you lower the LVR to 75%, the banks will still be fuelling a debt time bomb by lending more than the asset is worth in an overvalued market. Bank lending should be severely restricted on non-productive, non-income producing assets. Again it gets back to the pigs at the trough, there is no desire whatsoever for the politicians to turn their backs on the taxing machine which is housing.

    • Fair point Cogitator. I’d prefer that banks only lend based on rental yield as well, but that sort of reform is almost impossible to put through.

      For mind, the imputed rental yield on a property should exceed the “risk-free” rate of the 10 year bond. i.e rents should be more than 5.5%.

      Sound ridiculous? Consider the rental yield available on most US properties at the moment – and the stable yields on German properties.

  3. Thanks for an excellent post Leith.

    Bear in mind though that the RBNZ is belatedly dealing with the “fuel” aspect of this issue and that the Government itself has had three years to deal with the more important structural isssues, but insead has simply “kicked the can down the road”.

    We had the hopeless “Competitive Cities” papers released by the Environment Minister Nick Smith 12 October last and just recently the Housing Affordability Inquiry announcement of the newly formed NZ Productivity Commission announced by the Finance Minister Bill English, with Hide, Heatley and Williamson in tow.

    The PCNZ initiative is simply a “kick the can down the road” exercise. If English and associated Ministers dont have a clear picture of what needs to be done, they should seriously consider other employment where they can contribute to society, such as picking vegetables.

    The major problem within the NZ Government, as I understand it, is PM John Key himself. He lacks the ability to articulate issues effectively and therefore lacks the self confidence to do what needs to be done.

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

  4. Don’t worry about the recent uptick in mortgage lending here ( NZ) or the sales going through. Most commentators will tell you they are sales above the median, by a factor of 3 times in the over $2 million bracket. If you knew what was coming in the Budget etc., and both you and the other guy ( Government and, now, Oppoition) agreed on it, wouldn’t you be selling you expensive property now? After all, there’s been enough in even the MSM to be able to say “Well, we told you the changes were coming…”

  5. This line (plus a cup of coffee) almost cost me a laptop:

    “… preparing for how we might deal with credit and asset price booms when they recur in the future …”

    How about dealing with the last one?

  6. Good to see the Kiwi’s at least thinking about dealing with the problem. Unlike our ALP/LNP duopoly who bleat about affordibility but are quite happy with the stamp duty and warm fuzzy feeling a high house value gives their constituents.

    I’m still not sold that less restrictive land use policies are the answer leith. Yes it would lower the price of a new home, but if the new stock is all on the outskirts an hour+ from CBD what happens to those people if petrol keeps rising?

    Freeing up land on the urban boudaries without improving transport access and decentralising cities takes the cost off the house price and puts it on the petrol bill, with additional costs of commute time, distance to services, entertainment, sporting events, etc.

    • But if you are able to build almost what you want on that freed up land – i.e instead of row after depressing McMansions on 500sqm lots, mixed density, small shops (right next to housing), small business (i.e very light industry and officespace), then the infrastructure burden is reduced.

      The bottom line is this: we should be building different, mixed density suburbs where you don’t need to drive to get to your job.

      Doing so doesn’t require top-down planning, but bottom up innovation and competition between developers, by removing unresponsive regulations and planning rules.

      • I agree, but I think mixed use medium density infill development is already happening. And I have no problems with mcmansions if that’s what people want (although I definitely do not).

        In Brisbane just look at the transformation of many inner suburbs in the past decade.

        The problem is that people still like their own block of land, and governments continually support sprawl by widening expressways and extending commuter railway (as planned at Springfield south-west of Brisbane).

        They neglect however, to improve transport within the existing suburbs to improve the attractiveness of living at higher densities. We have a bike hire scheme and no space to actually use the bikes to commute. We have some buses, but they compete for roadspace with those car drivers from the new outer suburbs.

        The rate of new development, both infill and sprawl, is determined by the market. But when government support services, mostly transport infrastructure, are skewed in favour of sprawl, the market responds.

        Also, petrols prices rising will actually reduce sprawl as people begin to add up the costs of commuting.

      • You are on the right track, Prince.

        In fact, there is now volumes of academic research that reveals that urban containment policies drive up the “base price” of land, which results in other signals re household and business location being swamped by land prices. The result is similar or worse AVERAGE dispersion, to what would have happened under continued “sprawl”, with greater congestion, slower trip times, unaffordable housing, and reduced international competitiveness.

        The best policy course by a long shot, is to “price” road mileage and congestion, and let the market take care of the rest. This has immediate effects on efficiency, and has superior outcomes for urban form compared to growth limits that introduce market distortions. Growth limits have IMMEDIATE negative effects in inflated land prices, while the desired changes in urban form will occur only over decades, and even then it is questionable whether much at all of the ultimately desired efficiencies are gained in the process.

        Anas and Rhee estimate the economic “cost” of an urban growth boundary to be 70 times that of road pricing. Breuckner says the main reason urban growth boundaries are a failure, is that they FAIL to raise densities in EFFICIENT locations (due to land prices being prohibitive). I could quote a lot more from Cheshire, Morrill, Downs, Bertaud, Gordon, etc etc.

        One of the crowning ironies of all this, is that road pricing is a political danger zone, but voters blithely accept far more costly and damaging policy alternatives in the form of urban growth restrain. Another irony, is that if a $100,000 levy on first home buyers “to pay for infrastructure” had been mooted back in the year 2000, there would have been a revolt. Yet these people have PAID this money anyway, without a murmur of protest, and it has gone to sellers of property and the banking sector – little of it has been captured for infrastructure.

        Infrastructure levies on newbuilt homes has only collected a fraction of the revenue compared to all the older houses that first home buyers have paid $100,000 (and the rest) too much for.

        The recently floated “first home buyers strike” is common sense, but tragic that it was ever necessary.

  7. I have been predicting for a while, on blog sites in NZ, that Kiwibank will be yet another example of a State Owned Enterprise that will cost the NZ taxpayer billions one day.

    Kiwibank’s push into the mortgage market right where a property bubble is near its peak, is just what I expected. Is it motivated by political “prop the bubble up” thinking, or just the sheer stupidity that always ends up infesting State backed enterprises? (Think Fannie Mae and Freddie Mac).

    (The State owned Housing Corporation has been a recent big buyer of homes for all sorts of needy people including refugees – I bet that is politically motivated, “keep the bubble inflated” stuff. Just like getting SOE’s to hire staff for Clayton’s jobs, to bring unemployment figures down. This bubble is “costing” the NZ taxpayer via underhand political routes as well as the more obvious ones present and future).

    The big trading banks in NZ would do well to just let Kiwibank be the greater sucker; and let their mortgage portfolios shrink. The same goes in Aussie; any bank top exec who is prepared to let the mortgage portfolio shrink now, while other banks play “greater sucker”, is doing his enterprise a massive favour.

    If you read books about the Wall Street crash, you will know that certain big banks managed to unload most of their toxic holdings, while other idiot banks were still in “buy” mode.

    Derivatives and other complex financial instruments have obscured the fact that at base, this too was all about mortgages.

    One of the most absurd claims one sees parroted in NZ and Australia, is “we don’t have sub-prime”. We just don’t CALL it that; in fact we don’t even bother to itemise the part of banks mortgage portfolios that involve the borrower outlaying more than a certain percentage of their income.

    Someone pointed out about Ireland, when someone said there that a couple of years ago, “we don’t have subprime”; that “the entire market in Ireland IS sub-prime”. I think the same applies to us.

  8. “Petrol prices” – so what?

    Petrol prices have been going up for 30 years, and car use has also gone up. This is going to continue.

    This is because the efficiency and reliability of cars improves faster than petrol goes up in price; and petrol was never the main running cost anyway. The reliability of cars extends further and further into their life in years; lower and lower income people benefit from affordable automobility.

    In fact, this is one of the best ever illustrations of the “democratizing” effects of the free market. The wealthy buy new cars and cop far higher costs per mile because of depreciation. The lowest cost motoring anyone gets these days, is from the already-mostly-depreciated-but-still-reliable Japanese hatchback.

    There are now industry experts talking about a “rebound effect” as research and investment into “green” automobility (the biggest sums of venture capital in history are involved here) will bring us automobility at a far lower cost than we even needed it to go to “substitute for oil”. Remember when mobile phones reached a critical mass – what happened to the manufacturers who believed in low volume, expensive mobile phones for a wealthy minority?

    We are going to need more road space, not less; and we are going to need to fund roads from something other than petrol taxes, and that is a VERY GOOD THING: see my point above about how efficient road mileage and congestion charges are compared to Procrustean urban growth constraint policies.

    • Average fuel efficiency of passenger vehicles from ABS Survey of Motor Vehicle Usage

      1963 – 11.4L/100km
      2007 – 11.5L/100km

      http://www.ptua.org.au/myths/efficient.shtml

      And its not oil prices that are the problem, its the price spikes that will destroy demand in Australia/America… oil prices will come down as unemployment goes up!

      Although I agree about the reliable Japanese car part, and can only hope that the wealthy become considerably more interested in diesel/lpg plugin hybrids, else it might be back to the faithful bicycle and train for the masses.

      • The main point is the reliable Japanese car.

        The fact still remains that cars have got more efficient. The average fuel consumption may have stayed the same, but this involves massive discretionary spending on heavier, higher-performance vehicles, due to higher real incomes. Plus, all cars have got more reliable and last longer.
        Anyone who wants to, can have much much cheaper automobility in real terms, than anyone could have 30 years ago. Most aggregate analysis of the cost of automobility in the modern day, ignores this. The result is advocacy of massive subsidies for trains and buses for the poor, when 10 year old Honda Civics are the real answer.

  9. “mixed use medium density infill development”

    happens MORE RAPIDLY in cities like Houston with low regulation of fringe development and low base land prices, than it does in inflated land price, “planned” cities like Portland. In fact, the difference in this rate, between Houston and Portland, is ludicrous, absurd, laughable. This is because the high land prices in Portland means that the owners of under-utilised land expect a higher price for the land, than what potential home buyers can afford to pay for the ultimate development.

    Source: Shlomo Angel et al, “Making Room for a Planet of Cities”.

    This is confirmed over and over again in other papers by authors like Bertaud, Breuckner, Morrill, Cheshire.

    Furthermore, there are also numerous papers that find that “leapfrog” development, and later development of the leapfrogged land, results in more efficient use of land than arbitrary regulatory insistence on contiguous development. Do you want references?

    The expected “contiguous” development is ALWAYS “foiled” in any case, by land owners holding out for further capital gains.

    The damage being done today by a whole discipline – urban planning – because of a total failure to engage with the specialist literature on real estate economics – is considerable. It really represents another object lesson along classic Hayekian lines. Not that the economics profession is blameless – most economists are just as clueless as the urban planners, about the existence of a specialist literature. Most of them remember snippets of now-irrelevant theory devised by Ricardo to describe the evolution of rural land rents under 17th century land market conditions, and wade into specialist discussions of modern urban land economics like a loose cannon on the deck.

    • PhilBest,

      I assumed your comments are in response to mine. If not, then the following just adds to the general discussion

      I agree that car use has gone up because “… the efficiency and reliability of cars improves faster than petrol goes up in price”. When I say petrol price go up, I mean in real terms, and the cost of kms terms. To clarify, I mean petrol prices make to the total cost of driving increase.

      I read the Shlomo Angel et al report, but it doesn’t actually suggest any link between density, planning, and home prices. It simply says that two cities have two planning schemes and one happens to be cheaper. Indeed the authors state that infill development was greater in Houston, but figures 3.4 and3.5 don’t seem to support that assertion (and there is no further evidence presented). They avoid comparing infill housing development of Houston and Portland but instead add LA to the mix.

      Also, you do realise there was a Houston housing bubble in the 1980s. I imagine the same exercise in the 1980s would show that Portland, with its ‘restrictive’ planning, was much more expensive (noting that the Urban boundary was implemented in 1979).

      http://www.housingbubblebust.com/HM/HM-Main.html

      “It took 15 years, until 1997 for prices to recover and reach the 1981 level again.”

      My views on the role of planning and housing supply in determining prices are all here http://ckmurray.blogspot.com/2011/04/8-lessons-on-planning-and-housing.html

      Remember, planning and zoning control the location of different types of development, not the quantity of development.

      And I also disagree with the need for more road space. Just because car transport/km is getting cheaper, doesn’t mean that road building and maintenance is also getting cheaper. These are also costs of driving which need to be considered.

      • Edit:

        Also, you do realise there was a Houston housing bubble in the 1980s. I imagine the same exercise in the 1980s would show that Portland, with its ‘restrictive’ planning, was much CHEAPER (noting that the Urban boundary was implemented in 1979).

      • I only quoted the Angel et al paper, for the bit on infill development. The figures 3.4 and 3.5 may not look conclusive, but you need to read the rest of the paper regarding the way they analysed the mapping.

        But the conclusion to that section is:

        “…….To prepare cities for expansion while
        ensuring the smooth functioning of land
        markets, we must be willing to designate
        ample room for 20 to 30 years of projected
        expansion—allowing for the expected level
        of fragmentation—and to make minimal
        preparations for rendering these areas of expansion accessible and supplying them with
        urban services. Such preparations, if done
        in earnest, cannot be considered rigorous
        containment…..”

        This agrees with other papers by authors like Alex Anas and Wendell Cox. An earlier paragraph in the conclusion makes it clear that “allowing for fragmentation” involves allowing up to 50% MORE land within the boundary than 20-30 years at current growth rates would indicate. This is with the purpose of maintaining land market price stability.

        Planners, and often economists supporting them, have made a serious elementary error in thinking that “3 years supply” of land, or some such, is sufficient to keep land prices stable.

        Have you seen a graph of median multiples in Houston’s famous 1980’s “bubble”? If I recall rightly, prices ballooned to a whopping 3.5 times household income.

        California, even back then, was more volatile in PRICING, than Texas, but Texas got more publicity, probably because their primary sin was “building too many houses”. “Too many houses is actually really GOOD for price stability and affordability. And it does not seem to cause much long term damage to an economy that is in growth mode.

        The “too many houses” Houston had back then, has been surpassed many times over by housing production since, seeing Houston has gained about a million people in a decade, and there is no sign of that letting up. Yet house prices remain affordable.

        “House prices being to high” involves FAR GREATER damage to an economy than “too many houses”, because the former applies to the entire housing stock, while the latter is only ever a tiny percentage of the total.

        If you enjoy reading, do check out the lists of research papers on the sites of Peter Gordon (University of Southern California), Alex Anas (State University of New York), and Paul Cheshire (London School of Economics).

        • You’ll have to explain why 3 years supply is insufficient, and why 20 years supply is sufficient.

          In SEQ there is 3 years supply already approved for development, and current planning schemes allow for much more than a decades growth even with the most optimistic population forecasts. Is that not enough?

          http://ckmurray.blogspot.com/2011/04/housing-supply-follow-up-more-evidence.html

          Second, you have to explain why spatial distribution has such an impact on the price level. Unless you are controlling the quantity of approved dwellings, you can’t control the general price level of housing.

          Third, I’m not sure why you refer to median income multiples for housing in the 1980s as if they are relevant today. The interest rate was 20%, so a price of 3.5x incomes was ridiculously high then. Of course, it does depend on the yields.

          While obviously roads are important and necessary prerequisites for development, I’m not sure exactly who gets the positive externality? If you don’t use it, you don’t benefit. They are often not pretty to look at, and often noisy and smelly, so some people don’t benefit.

          If you argue that roads lead somewhere and land holders in those new areas benefit, you are right. But that is not strictly the definition of an externality, as all productive investment has such indirect effects.

          As a side note, you need a very critical eye when reading anything be Ed Glaeser or Wendell Cox. They are vested interests with a tendency to tell industry what it wants to hear. For example, see this critique –
          http://ckmurray.blogspot.com/2009/10/lobbyists-if-they-are-always-wrong-why.html

          But I will read some material from the other authors you suggest.

          • Cameron, the fact that interest rates might go as high as 20% has NEVER resulted in commensurate falls in prices in the entire housing stock. The whole point of the median multiple is that it is not affected by marginal extremes.

            I am starting to realise where you are coming from on the “supply does not matter” side. I am in correspondence with Leith on this – there needs to be a special article done some time on how these misunderstandings of classical land econ theory have developed.

            I am afraid that even among academia, there are far too few that understand that 3 years supply is an easily-cornered quantity, and that 20-30 years is about the level that you need to avoid this. Angel et al are among the few that do get it.

            On roads, you say: “While obviously roads are important and necessary prerequisites for development, I’m not sure exactly who gets the positive externality? If you don’t use it, you don’t benefit.”. Nonsense. You live in modern society, you benefit from the existence of roads, whether you like it or not. Some of the most radical activists are nothing more than parasites on the very system they condemn. To be morally consistent, they should go live some part of the world where there are inadequate roads, and see how they like it.

            There simply is not and will never be a fully developed economy to match those of the modern western world, without a roading network of a comparable order of magnitude. I am appalled at the lack of literature that analyses the economic processes that underly the development of the modern economy, and the necessity of constantly bringing low cost agricultural-rent-level land into use by “entrants” into the urban property market, both residential and business. This keeps the rent of ALL urban land low.

            An economy where urban land balloons in price because its supply has been arbitrarily limited, is an economy doomed to stagnation from that point, regardless of its existing level of development. Of course some tiny state like Hong Kong is going to run out of land and suffer the consequences (but not now that it is part of China anyway), but why would nations like Australia and NZ voluntarily and arbitrarily level the playing field between Hong Kong and themselves, as far as all urban living costs, business land costs, and their effect on production, is concerned?

  10. Roading, we seem to have forgotten, is not just “a cost of driving”, but the source of massive positive externalities in the economy. We would not even have a modern developed economy at all without them. No economy in the world is going to match our level of development without at least nearly matching us for roading provision.

  11. Leith
    The NZ govt is actually reviewing the RMA (our planning legislation) around the impact it has on housing affordability amongst other things. It’s “Phase 2” of a wider reform of the legislation.
    Time will tell how meaningful it is, versus some navel gazing and tinkering at the edges

  12. I can see that until we convince Cameron that “supply of land DOES affect the price of land”, he won’t see anything in the following sort of analysis of the unintended consequences (BTW Anthony Downs is an octegenarian academic who “got it” about growth restraints DECADES ago – he sometimes claims to have been “the first”, and he might be right).

    From Anthony Downs; “Can Transit Tame Sprawl”? Jan 2002

    “…..In “The Costs of Sprawl 2000,” a recent study conducted by Rutgers University, the Brookings Institution and several other organizations, part of the research examined how housing prices vary with distance from the regional downtown of each metropolitan area. Although only a few areas were analyzed, the study showed consistently that prices of similar homes tended to decline about 1.2 to 1.5 percent per additional mile from the regional downtown, except where proximity to the ocean had more influence on prices—as in Southern California. Meanwhile, longer-distance commutes added to fuel and travel-time costs by about the same amount per mile in every region. The study also found that per-mile housing-cost savings from added commuting distance were much larger in regions with absolutely very high housing costs than in those with absolutely low housing costs. Therefore, it was MORE LIKELY TO BE ECONOMICALLY WORTHWHILE FOR HOUSEHOLDS TO MOVE FURTHER OUT TO GAIN CHEAPER HOUSING in HIGH-HOUSING-COST REGIONS such as the San Francisco Bay and Boston areas, THAN IN LOW-HOUSING-COST areas…..”

    (My emphasis)

    This is excellent additional statement of a case made comprehensively by Alain Bertaud in his papers on “The Spatial Distribution of Density”. Alain Bertaud’s major contribution, has been identifying distorted patterns of density WITHIN the city boundaries of Portland and other growth restricted cities; this is separate to the “leapfrog” effect. This is because lower income households have been forced by higher land values, to accept smaller homes further away from the CBD;

    “…….instead of being able to make a trade-off between distance and land consumption……..”

    “……..the practical outcome of a positive density gradient is longer trips for more people…..”

    “…… As predicted, land prices are going up because of the supply constraint imposed by the UGB, developers respond by developing higher density housing in the vacant areas between the limits of the current built-up area and the UGB. This of course has a tendency to reverse the slope of the gradient………In the long run, the higher density which will built-up on the vacant land along the UGB will increase the accessibility of suburban shopping malls at the expense of the relative accessibility of the CBD. This is not the outcome that the planners intended…….”

    Anthony Downs in his 2004 book “Still Stuck in Traffic”, analyses the inter-action between the costs of running a vehicle, and the costs of servicing a mortgage – an extremely valuable insight. He provides some calculations to demonstrate the points at which households will be incentivised to “drive to qualify” (for a mortgage). He most usefully concludes that a median house price of $170,000 is a kind of “tipping point” above which “driving to qualify” will be entirely rational, and the further the drive, the greater the savings. This is what I have been trying to get across to advocates of UGB’s for a long time. If you drive the median house price up, you are causing the exact opposite effect to what you intend.

    The figure of $170,000 will fluctuate according to fuel prices and interest rates, but the principle remains vital. Also, this figure could be lower if households are making careful choices of vehicle purchase according to fuel efficiency.

    • Commuting 2hrs a day does not add to quality of life.

      Have you ever lived in a European city? Having lived in France for a year, Australia has a lot to learn. They build appartment blocks everywhere. The average house does NOT have a block of useless green lawn, in fact the ‘average’ house is what we would call a town house. However go two minutes outside the town and you are surrounded by farms.

      This means that large parks, swimming pools, shopping centres, theatres, sports fields are within walking/bicycle distance for most in urban areas, and if they are too far then there are regular buses and trains to get you there.

      If you are ‘driving to qualify’ in 2002 with an oil price at $20/barrel then you are ‘driving to survive’ in 2008 when oil hits $145/barrel. The result of rampant urban sprawl is the setup of unsustainable, unlivable and unresilient communities.

      • I’m with you Dave, Paris must have some of the most restrictive planning in the world but doesn’t seem too shabby to me..

      • Dave BD is 100% correct. Although there are lots of problems with European cities (there are slums there too), they are far superior in terms of planning, layout, public transport, access to services, business, etc ad nauseam.

        Hey I like inner city Melbourne, but that’s it for Australia – everything else is just a clone of everything else. (I actually got depressed when I rode across the country in early Feb this year – all our cities and suburbs are seemingly identical.)

        It don’t understand the mentality of living in a massive house with a small lawn out the back, but your boundaries are 1-3 meters to your next door neighbours.

        I live, relunctantly, in a new estate, and I can hear both my next door neighbours having barnies, talking on the phone, listen to their (horrible) music, even the glow of their plasma TV’s screens reach my office.

        And then I have to maintain a lawn and clean a house that is about 50% too big. Check out this article in The Age about big houses this morning: http://theage.domain.com.au/design-and-living/room-to-move-but-is-a-bigger-home-better-20110419-1dneh.html

        And then I have to drive anywhere to get to anywhere or anything.

        Is this better than an apartment?

        The urban sprawl has been rightly categorised as the biggest misallocation of scarce resources in the history of capitalism.

        • I quite coincdentally just stumbled across this little GEM from Robert Bruegmann:

          “….In virtually every affluent nation on earth, the old Nineteenth-century industrial cities have exploded outward, allowing densities to plummet at the core as residents move further and further out into low-density suburbia and a very low-density exurban penumbra around that. The city of Paris today has a third fewer residents than it did a century ago, and the suburban and exurban territory around it leapfrogs more or less from the English Channel to Burgundy. In this process, the very distinction between urban and rural has all but disappeared as citizens in almost every part of affluent societies are able to participate in what is essentially an urban culture…..”

  13. Paris also has one of the best planned roading systems in the world. Lane miles are approx. double those of London. Their multiple ring roads, with flyovers and interchanges to minimise cross-traffic conflict, are by far the best measure to combat congestion. We definitely can learn from them there.

    I have never been there, but I can use Google Earth. Paris also has sprawl within the same order of magnitude of many US cities.

    DaveBD said:

    “If you are ‘driving to qualify’ in 2002 with an oil price at $20/barrel then you are ‘driving to survive’ in 2008 when oil hits $145/barrel. The result of rampant urban sprawl is the setup of unsustainable, unlivable and unresilient communities.”

    You fail to understand urban economics. Travel costs are inevitably capitalised into the value of homes according to how conveniently located they are. What MATTERS, for location decisions, is the “base price” of land. If it is derived from uninflated agricultural land rents applying at the fringe, there will be a maximum of efficient location decisions.

    But hey, don’t take it too personally if you don’t understand this, almost all of the world’s highest paid policy makers don’t either.

    Also: “….if they are too far then there are regular buses and trains to get you there…..”

    Very nice….! Vatanen and Harbour (2005 I think) found that “the cost of public transport subsidies weighs heavily on Europe’s economy”.

    • PhilBest, I see the crux of where we disagree. You state that

      “What MATTERS, for location decisions, is the “base price” of land. If it is derived from uninflated agricultural land rents applying at the fringe, there will be a maximum of efficient location decisions”

      For my mind, I would argue that what matters for location decisions are the costs and benefits of each location option. The price of land is just one of these factors.

      I would also like to hear more about why you think fringe land priced at an agricultural value results in an form of efficiency. How does such thinking apply to existing development sites within the urban footprint?

      The flaw I see is that land values are derived from the highest and best use – not the second best use.

      Imagine there are two equal size neighbouring city finge agricultural blocks. The soil on one is much better and the block much flatter. For terms of agricultural value the flatter one with better soil is worth twice as much, say $200,000/hectare.

      But each block would yeilds the same number of residential lots, at the same value should it be subdivided. Does that mean that the developer can buy one block at $100,000 and the other at $200,000? No way.

      The developer will work backwards from the revenue from selling residential blocks, subtract and allowance for costs and profits, and offer the residual amount to buy the block. It might result in a development site value of $500,000/hectare.

      In this case, both blocks are worth $500,000 for redevelopment. If they were zoned for agriculture, they would then have different prices. But the market value arises from the highest and best use allowed, not from the second best use.

      • Cameron,

        Yes, that is the crux of our disagreement.

        What I am drawing on, is simply real life examples of cities around the world, in comparison of their land policies and the consequences. But economic theory DOES explain these real life examples; the theory that “land supply does not matter” is only correct at one level: the price of the “total supply of land”, which happens to be a lot of land, once all higher value uses are satisfied according to equilibria with demand in that use.

        Different USES of land, need to be viewed as competing for the WHOLE supply, NOT just for an arbitrary quantity ROUGHLY EQUAL TO THE AMOUNT DEMANDED. Urban land requirements might be only 2% of the total; these requirements can be satisfied with next to nil impact on the rents of the other 98% of the total. The rents of the other 98% of the land, will be set by lower value uses of the land. Higher value uses invariably require a lot LESS land than lower value uses (eg growing spices might be a higher value use than growing trees or wheat, or raising cattle).

        There is virtually NO agricultural land whose rent is so high that it is not worth converting to urban land; however, in free market situations, the higher value agricultural land will be “leapfrogged” by developers because there is lower value land available. However, once the city has expanded a bit further and there is a “location advantage” premium to be gained by converting the higher value agricultural land, this will start to happen.

        This is ONE reason for “leapfrogging” development. Another is “attachment” of property owners to their land – “My family has been farming this land for 150 years; piss off, Mr Developer”. Another reason is that property owners may think it worthwhile to “hold out” for higher prices once the city has expanded further.

        Incidentally, infill development of leapfrogged land always IS a more efficient use of that land than if development proceeded strictly contiguously as the planners think it does or should. This is because it is more obvious what the best use now is.

        WHEN you apply a tight urban growth boundary, what do you think happens to the expectations of property owners within that boundary? Even under free market conditions where their land could be leapfrogged, it was always quite typical that owners of property might hold out for higher prices later. What you have done, is create “monopoly rent” values. It is deeply ironic that this Marxist body of theory has been ignored by leftwing economists today, who prefer to advocate in favour of planning.

        Marx was wrong about ALL land having a “monopoly rent” component merely because of its location; however, some part of rent IS monopoly rent IF potential market participants have been prevented from “supplying”. THIS theoretical condition is perfectly satisfied by an urban growth boundary.

        I would love to see your argument that “the developer works backwards” from the prices people are prepared to pay, used in court by the oil companies. “But, your honour, supply is irrelevant, we ARE bringing one day’s supply to market every day; our pricing just works backwards from what people are prepared to pay…”

        Incidentally, if the world started to REALLY run out of food, say, then agricultural rents SHOULD rise to the point that it would NOT be worth converting land to urban uses. Food prices would have risen quite a lot of course, possibly to the point that population would be declining anyway through malnutrition.

  14. “The Prince”

    “The urban sprawl has been rightly categorised as the biggest misallocation of scarce resources in the history of capitalism.”

    I agree, in so far as “minimum section size zoning” has forced people to consume more land than they wanted. But I completely disagree with your thesis otherwise. Low urban land costs, and ever-lower-cost “automobility”, are THE forgotten “secret of economic development”. I stand by what I said above: at any stage in a city’s development, if its existing footprint is deemed to be the “limit of growth”, that city is doomed to rising land prices, falling competitiveness, and increasing inequality.

    Read the papers of Cheshire and Sheppard on Britain’s planning system. They find that the effect of inflated land costs results in “rationing” of every attribute of homes – space, location, and amenities – according to income levels. This steadily worsens over time; the effect is said to be a “multiplier” of inequality worse than the initial income disparities.

    There are also numerous research papers now, analysing Britain’s loss of economic competitiveness due to inflated land costs compared to its competitors. Germany, especially, has urban land a fraction of the cost.

    The cost of “automobility” has AWAYS been lower than the cost of “urban constraint” and inflated land prices; and has steadily got lower in real terms.

  15. As a resident of Christchurch, those advocating density on this thread need to examine closely the failure of it in this city, following the earthquakes since 4 September 2011.

    Dense thinking is dead in Christchurch, simply because of the loss of life associated with it (likely will be around 200). It would appear that 80% of the deaths occurred where 10% of the people were in the CBD at the time of the 22 February 6.3 mag close and shallow shake that lasted only 11 seconds. The 7.0 mag shake further out and deeper on 4 September lasted 40 seconds.

    Christchurch’s “former” CBD is now nearly a complete writeoff, that over the long term will be replaced with “low and light” type development.

    Residents have no intention whatsoever of living and working in suspect and high level dense type buildings. Those remaining are now obsolete.

    While in central Sydney recently I shuddered at the thought of an earthquake occurring there and what the potential loss of life could be. The Newcastle event of some years ago was completely unexpected.

    Low density wins on all counts.

    I would strongly urge readers to study the evolving situation in Christchurch. The costs of years of poor quality local government administration and urban planning are horrendous in human, social and economic terms.

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

    • Low density wins what exactly?

      I’m pretty sure that density is not the key variable, but building design is. Japan seems pretty good at building dense cities that are quite safe during earthquakes.

      • A much more expensive approach, though, than simply utilising lower cost land at lower densities. The Japanese, 120 million of them on 250,000 square kms, do feel this is somewhat necessary. But even so, their economy has never really recovered from the consequences of THEIR massive land price bubble. Is it smart of Australia to voluntarily level the playing field with Japanese manufacturers rent costs and their workers cost-of-living pressures?

  16. I’d rather their metro system than their flyovers Phil, but that could be just me.

    I don’t understand how building more houses further and further from the centre of a city will solve affordibility issues. Lowering the land price at Pakenham won’t make a townhouse in South Yarra more affordable. People will still pay crazy multiples to live near the CBD.

    Your approach doesn’t lower the tide and therefore all boats, it sinks the boats on the urban fringe leaving prices just as high in the inner suburbs. We need tighter credit, together with more medium/high density housing within 25km of the CBD to solve the problem, not more housing 50+km away. High land prices can be dealt with by building upwards, rather than outwards.

    Clearly that’s all just my opinion.

    • Deenominator,

      The assumption that all jobs are located in the CBD, is flaw number one in most thinking today regarding urban planning.

      Decentralisation is just as much a feature of natural free market urban form as “sprawl” is. Sprawl and decentralisation are actually free market responses to congestion.

      There are studies now that show that the increase in miles driven under conditions of increasing sprawl, are due to
      1) increasing numbers of households with two or more breadwinners, so that optimum location relative to a single job is no longer possible
      2) increased discretionary non-commute trips

      Take these out of the figures, and there is nothing wrong with sprawl and decentralisation. In fact, the commutes to NON CBD jobs are frequently much shorter in duration than those to the CBD, even if the distance is longer. (There is a paper by Banister and Ma on this).

      There are some good papers by Wheaton, and by Anas and Rhee, on what happens to urban land values under different conditions of decentralisation. A heavily monocentric city, would theoretically have land values that are around 100 times more expensive in the centre than at the fringe. Dispersion of jobs, also disperses land values, so that some very dispersed cities in the USA have land prices that vary by a factor of “7”, or “9” or something absurdly low like that. That is why such incredibly cheap homes can be found quite close to the “centre” of the city – however, the “centre” does not have the importance it does in a more moncentric city. When the urban fringe land is at uninflated agricultural prices, the low cost of ANY land in that city is a serious international competitiveness advantage. No wonder the Japanese Car manufacturers build factories in Texas and Tennessee.

      Urban growth constraints force fringe land prices up, to begin with. Real Estate market expectations lead to absurd expectations for inner suburb prices. These elevated prices actually themselves drive decentralisation. This is easily seen in an urban density profile for Portland, done by Alain Bertaud a few years ago. (See my quote earlier from one of his papers).

      Another recent paper by Prof. Richard Morrill of Washington State University, concluded re Seattle, that its urban growth boundaries had left it with high land prices and similar amounts of decentralisation to what would have occurred anyway. The decentralisation is the cause of efficiency gains, rather than the urban growth constraint; the inflated land prices and unaffordable housing are deadweight losses to the economy.

      I don’t know what happens if urban planners somehow disallow job decentralisation. I suggest that the distortions in the economy will kill the city ultimately. You can’t have the worst of all worlds forever – high house prices at the fringe, plus expensive commutes; horrendous house prices (multimillionaires only) in inner suburbs; and maximum congestion due to all traffic going the same way at the same time, instead of a high proportion of it going suburb-to-suburb.

      • I’m all for decentralisation, but combined with greater investment in public transport and higher density living, not greater use of cars.

        Why should a household need 1 car per person when each car gets driven to work, sits in a carpark for 8 hours (at ~$15 a day) then drives home again? What does each car cost? $20k? Plus another couple of grand a year rego and insurance, then there’s petrol and servicing.

        Wouldn’t it be preferable if you could get away with 1 car per house, to do the grocery run once or twice a week, visit the inlaws on the weekend and when you’re going long distance?

        Maybe you’re right, the UGB is the wrong way to go about it, but I don’t believe lifting it and letting the free market go for it will work either. Sprawl will continue, but decentralisation won’t happen on its own. That requires planning, but maybe that just makes me a lefty.

        • Decentralisation IS happening on its own, IN SPITE of what lefty planners THINK they are trying to make happen.

          There is not a cat’s chance in hades that it is possible to stuff everyone into a single CBD area just so they can do without a car. The ONLY way to achieve anything LIKE this result, is in multitudes of urban villages with jobs-housing balance. “Centralisation” drives land prices up, up, up in the very place you want people to move to. It only takes about 4 years for prices to become completely unaffordable, and you need 40 years of sustained centralisation process if you are going to achieve anything.

          The “high” costs of automobility that you worry about, are only a FRACTION of the costs of living imposed under a regime of ever-inflating land prices. The higher land prices go (on average) the LESS sense it makes to buy a condo near the office and do without a car – and the LOWER land prices are, the MORE sense it makes.

          Planners are stuck in a cleft stick that they can’t even see, not knowing anything about real estate economics.

          • The more decentralised jobs are, the lower parking costs are, too.

            A 10 year old Honda Civic does not cost $20,000.

            If you can afford more, then you spend more. But that is not a reason to lump discretionary spending of this nature into comparisons of how public transport “for the poor” is a better option than “expensive motoring” – which the poor do not happen to indulge in.

          • If you can let me know where decentralisation is happening on its own in Aus i’m happy to stand corrected.

            “The higher land prices go (on average) the LESS sense it makes to buy a condo near the office and do without a car – and the LOWER land prices are, the MORE sense it makes.”

            I can’t see how that works. In my head it goes the other way.

            That’s me done for the week, thanks for your point of view phil. Enjoy your long weekend.

  17. Cameron – with respect, I would urge you to study closely the evolving situation in Christchurch and consider carefully how prescriptive urban planning strangling fringe land supply, is causing massive problems.

    I need to correct one error in the post above. It is likely 90% ofthe loss of life (not 80%) occurred in the CBD, where about 10% of the population was at the time of the 22 February event.

    The 22 February event was a close and shallow moderate quake of 6.3 magnitude – about 40 kilotons of energy released or 6% of the earlier 4 September event of 7.0 magnitude releasing about 640 kilotons.

    My understanding is that the major Japanese event, 100’s of kilometres from Tokyo was 8000 times more powerful than the second major Christchurch event.

    People in Christchurch now are extremely fearful of high density urban environments.

    The ramifications of the Christchurch earthquake events are goimg to be enormous for urban planning in Australasia and elsewhere going forward.

    Preference always trumps policy.

    I have written on Christchurch issues with “Houston: We have a housing affordability problem”; “Christchurch: A bureacratically buggered city” and “Christchurch Earthquake: Sound political leadership required” – all within the Highlighted Articles Section on my website.

    Hugh Pavletich
    http://www.PerformanceUrbanPlanning
    Christchurch

    • AND, Hugh, don’t forget that PROVIDENTIALLY, all the shonkiest buildings had ALREADY fallen down in the middle-of-the-night quake in September – otherwise there would have a lot more dead people in February.

  18. Interestingly, as fringe market participants get used to the effects of an urban growth boundary, the biggest “gain” tends to be captured by the original farming (or other non urban user) owner of the land. These people quickly wise up to the fact that they do not NEED to sell to a speculator (or legitimate developer) who will cream the capital gain.

    Even quite early analyses of Portland’s boundary in operation, found that more than HALF of the land within the boundary, was owned by people unwilling to sell it. That straight away lowered the “supply” from 20 years to 10. At some point, developers realise that they need to outwit each other for sites if they are not suddenly going to be left with “no business” when they complete their current project. Other land owners quickly cotton on, and play “Dutch Auction” or simply hold on for further gains as land prices continue to rise without showing any signs of stopping.

    When your theory does not fit reality, you need to look at what is wrong with the theory. The supply curve for a total quantity of land that is many times greater than what is needed for urban expansion, is pretty much flat, and pretty much set by “demand” for the product of the LEAST productive use for which land is left over after more productive uses are satisfied. THIS is where the theory that “demand sets the price of a fixed total quantity of land” comes from.

    But in any market where HIGHER value uses fill MOST of the land contained in it, whether a tiny nation state, island, or a city with an urban growth boundary, the “supply” curve SLOPES UPWARDS (like most supply curves), and moves upwards as market participants expectations change.

    The fact that “people will pay” means that demand is inelastic, not that suppliers can “work back from that”. Hence the intersection of the inelastic demand curve and the upward-sloping supply curve will move towards higher and higher prices. The DEMAND curve, in the recent bubble situation, has also moved up due to the “speculative” aspect, and the “catch the train” aspect for first home buyers.

    If the supply curve is “anchored” in the lower cost land that urban uses are NEVER going to take up any more than a fraction of, all this is avoided. There we have a theory that actually explains reality regardless – i.e. Houston, Dallas, Atlanta, Sydney, Melbourne, Vancouver.

    Agricultural land rents vary, even internationally, by a far smaller range of values than urban land prices do. Some of this is due to the fertility of the land, some of it due to convenience of location. The cost of transport even then, is now so low as a cost of the total product, that rural “convenience of location” has resulted in lower and lower premiums on rural land rents.

    It is even quite usual for speculators holding “farmland” for 10 years, to not even bother to have it farmed during that time, as the returns are simply so low by their standards (in proportion to the hassle involved).

    Last point – the “circumference” of a mature city is usually so long, that surprisingly small distances beyond it, for a boundary to end up enclosing “30 years supply”, are necessary. I recall figures as low as 2, 3, 4 kms being suggested for various cities in various papers.

  19. Deenominator is having problems with THIS:

    “The higher land prices go (on average) the LESS sense it makes to buy a condo near the office and do without a car – and the LOWER land prices are, the MORE sense it makes.”

    Deenominator says: “I can’t see how that works. In my head it goes the other way.”

    As a broad principle, in a city with an uninterrupted land price curve and low overall land prices (due to fringe land being unrationed), higher densities occur in redevelopment and infill and so on close to the urban centre(s) and fringe development is invariably much lower density. Households trade off land cost against travel distance.

    But as land has escalated in price in growth-constrained cities, this trade-off has been eliminated. Households are now forced to “drive to qualify” for a mortgage. The cost of transport always is reflected in real estate values – a premium needs to be paid for a location that enables transport savings. This effect remains constant regardless of the “base price” of the land, which is determined by the price of the lowest-priced, least conveniently located land. But an elevated “base price” due to a discontinuity at a regulatory boundary, results in the “cost of transport” price signal being swamped in the COMBINED “cost of mortgage plus cost of transport” signal.

    Consider this hypothetical case (which DOES reflect real life). Before land price inflation, an average young household might have the following choices at each extreme. Central location: transport costs 5% of income; mortgage costs 80% of income. Total 85% of income. Fringe location: transport costs 15% of income, mortgage costs 40% of income. Total 55% of income. There will be numerous viable choices in between.

    AFTER land price inflation: Central location: transport costs 5% of income; mortgage costs 160% of income. Fringe location: transport costs 15% of income, mortgage costs 80% of income. Still impossible. So it becomes necessary to trade off space as well as location; that is why fringe development becomes denser. Increase the density to the point where the average young household MIGHT, with a sub-prime mortgage, be able to buy a home at all. They now might have, transport costs, 15% of income, mortgage costs, 60% of income – for a smaller home than they had under the low-land-price scenario. The total strain on their income is much higher. And the “range of choices” they had to live closer to the urban centre(s), is now non-existent. They are forced into the worst option on all counts; cost, location, and space. There is an excellent, clear discussion (from which the foregoing is derived) of this in Anthony Downs’ classic book “Still Stuck in Traffic”. It is also confirmed by studies by Alain Bertaud (and colleagues), Jan Breuckner (and colleagues), Alex Anas (and colleagues), and Paul Cheshire (and colleagues).