I’ve just come across a New Zealand Productivity Commission research note attempting to quantify the effect of Auckland’s urban growth boundary (called the “Metropolitan Urban Limit” or MUL) on land prices.
The results indicate that Auckland’s MUL has significantly increased urban land prices in general, with land prices in the lower part of the distribution worst affected. From the Report:
Pressure on land prices has been particularly acute in Auckland and land now accounts for around 60% of the cost of an Auckland house, compared to 40% in the rest of the country…
Auckland’s Metropolitan Urban Limit (MUL) is a zoning restriction that defines “the boundary of the urban area with the rural part of the region”…
Grimes and Liang (2009) find that the MUL has had a significant impact on land prices in the city, with the price of land just inside the MUL around 10 times higher than land just outside the MUL. In its Housing Affordability Inquiry published in April 2012, the New Zealand Productivity Commission used a similar methodology and found that the value of land just inside the MUL boundary is almost nine times greater than the value of land just outside the boundary (Figure 2).
These results suggest that Auckland’s MUL is a binding constraint on land supply. Further, the magnitude of the land price differential across the MUL has increased since the late 1990s, suggesting that the MUL has become an increasing constraint as housing demand has intensified. These results are consistent with the international evidence of a strong positive relationship between restrictive land use policies and house prices (Gyouroko, 2009)…
However, the impact of the MUL is estimated to be uneven, with a disproportionately large impact on lower decile land. Specifically, the price differential associated with the MUL for land in the lowest decile of the price distribution is around 10, compared to a price differential of 5 for land at the median price point and 1.3 for land in the highest decile…
The empirical results presented in this paper indicate that the containment of Auckland region via the MUL results in upward pressure on residential land prices within the urban areas. This impact is found to be uneven with a much larger impact on land at the lower end of the price distribution. This suggests that the impact of the MUL on housing affordability is most pronounced for those at the lower end of the housing market. One reason for this is that lower priced land is more often found further out on the fringes of cities…
When an artificial “fence” delineates residential land from non-residential land on the urban fringe, it limits the supply of lower priced land, with a resulting impact on prices at the lower end of the housing market. And, when the supply of land on the urban periphery is restricted, the price of available residential land rises and new builds tend to be larger and more expensive houses. This suggests that the MUL has become increasingly binding at this end of the market as housing demand has intensified in the Auckland region.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
