Top ten reads for housing affordability

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By Leith van Onselen

This week, I was asked by New Zealand’s leading finance and business commentary site, Interest.co.nz, to publish a guest post for their Friday Top 10.

Given the vigorous debate in New Zealand around housing affordability and freeing up the planning system, I decided to use the post as an opportunity to summarise my views on urban consolidation policies, and why I believe they are incompatible with affordable housing and often lead to perverse outcomes. Friday’s Top 10 is reproduced below:

1. Strangling supply worsens housing affordability
Over the past few decades, many of the world’s housing markets have grown increasingly restrictive as urban growth boundaries, minimum targets for ‘brownfield’ development (urban consolidation), up-front infrastructure charges, amongst other measures, have been implemented across jurisdictions.

A key outcome of such growth control measures is that land supply and housing have become increasingly unresponsive to changes in demand, resulting in higher prices and declining affordability.

It is a phenomenon that was acknowledged in 2006 by former RBA Governor, Ian McFarlane, but has fallen on deaf ears from policy makers and the planning profession alike, with devastating impacts on affordability in places like Auckland, Sydney and Melbourne:

Why has the price of an entry-level new home gone up as much as it has? Why is it not like it was in 1951 when my parents moved to East Bentleigh, which was the fringe of Melbourne at that stage, and where they were able to buy a block of land very cheaply and put a house on it very cheaply? Why is that not the case now? I think it is pretty apparent now that reluctance to release new land plus the new approach whereby the purchaser has to pay for all the services up front – the sewerage, the roads, the footpaths and all that sort of stuff, has enormously increased the price of the new, entry-level home …

2. The volatility machine
Another consequence of urban consolidation policies, and the strangulation of land/housing supply, is that it makes housing markets not just less affordable, but also more prone to boom and bust cycles.

According to Harvard’s Edward Glaeser and Wharton’s Joseph Gyourko, who in 2008 released their seminal study of various literature relating to urban economics:

Recent research also indicates that house prices are more volatile, not just higher, in tightly regulated markets.

…price bubbles are more likely to form in tightly regulated places, because the inelastic supply conditions that are created in part from strict local land-use regulation are an important factor in supporting ever larger price increases whenever demand is increasing.

The authors went on to show that in the house price booms of the 1980s and 1990s “price increases were much higher in markets that were more supply constrained.” They also noted that housing bubbles generally do not occur in responsive markets:

It is more difficult for house prices to become too disconnected from their fundamental production costs in lightly regulated markets because significant new supply quickly dampens prices, thereby busting any illusions market participants might have about the potential for ever larger price increases.

3. Enjoy the ride up, and the fall down
Glaeser and Gyourko (2008) are by no means alone in their thinking, with a number of US researchers uncovering that the markets that experienced the biggest housing busts were also those with the greatest restrictions on land/housing supply.

Included amongst these reports is the below comprehensive study from Huang and Tang (2011), who sampled more than 300 cities and found that those that experienced the biggest booms brought about by supply constraints also experienced the biggest busts:

In a sample covering more than 300 cities in the US from January 2000 to July 2009, we find that more restrictive residential land use regulations and geographic land constraints are linked to larger booms and busts in housing prices. The natural and man-made constraints also amplify price responses to the subprime mortgage credit expansion during the decade, leading to greater price increases in the boom and subsequently bigger losses. Contrary to prior literature, our findings indicate a significant link between supply inelasticity and price declines during the bust …

4. Faulty logic
The rationale behind urban consolidation is the concern that excessive suburban sprawl is increasing humanity’s ecological footprint and greenhouse gas emissions, as well as requiring expensive new infrastructure to be built in these new developments.

By restricting urban growth, it is claimed that these ‘costs’ can be reduced via less car dependence and energy usage, as well as more efficient (intensive) use of resources.

The evidence, however, is sketchy at best.

For example, data from Sydney shows that inner city residents consume far more resources than suburban residents who, in turn, consume more than those from smaller cities and towns. While there is an income component to this – higher income residents will consume more than lower income residents – it does highlight one of the many fallacies of urban consolidation policies.

The sustainability challenge is the challenge of consumption: how much and what we consume drives our impact on the planet.  But presuming that by enforcing urban intensification we will transform ingrained patterns of consumption in favour of the environment may be a step too far…

Ultimately, how we live is more important than where we live.  What the evidence here confirms, though, is that under current patterns of consumption promoting large scale urban consolidation is flawed as environmental as well as urban policy.

5. Planner sprawl
Many of the policies implemented to restrict growth and reduce urban sprawl also tend to have the opposite effect, thus eliminating many of the purported benefits.

Perverse outcomes occur principally because measures aimed at excluding growth from one jurisdiction naturally generates pressure to accommodate it elsewhere, and exurban, underdeveloped jurisdictions beyond the metropolitan limits tend to be more inviting.

For example, the imposition of an urban growth boundary (UGB) can force many lower income households to ‘leapfrog’ the boundary and settle in far flung locations where housing is more affordable. UGBs, therefore, can act to exacerbate urban sprawl and increase car reliance and energy usage, which has detrimental distributional impacts in particular on lower socio-economic groups. The below example is from Adelaide, Australia, but the story is similar in just about every place where growth constraints exist.

In the words of Kieron Barnes, senior planning officer at Adelaide Hills council, “The South Australia Labor government created an urban growth boundary around Adelaide three years ago [2002] with the intention to stop the sprawl and to consolidate the city. But you could have guessed what happened then: People decided to move behind the growth boundary to places like Mt Barker from which they then commute to work in Adelaide [map of Mt Barker in relation to Adelaide shown below]. I was actually lucky to have bought my house there just before the growth boundary was put in place because after it was introduced land prices in Mt Barker soared.” How did the state planners respond? “Well, now they have created more growth boundaries around the smaller cities as well to stop this kind of leapfrogging.”

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Talking about his own personal house preference, he admits that he likes having a large house and does not mind commuting to work by car. Asked whether that was not actually contradicting planners’ beliefs in consolidation and promoting public transport, he smiles: “It’s difficult for planners not to behave hypocritically when it comes to personal choices. Many I know live in big houses on large parcels of land with two cars that are not necessarily environmentally or economically efficient.”

6. Density in the wrong locations
A related phenomenon to leapfrog development is that by forcing-up the cost of land within a UGB, households budgets are squeezed and they are forced to trade-off both space (smaller homes) and location efficiency (i.e. live further out).

This is reflected in absurdly dense fringe suburban development, whereby postage stamp sections are crammed into cul-de-sacs in patterns that have been mathematically designed to maximise the number of saleable properties. They typically also have narrow streets, minimal number of intersections (as it’s a waste of valuable space), minimal public green space, and no bike paths or walking tracks.

Portland, Oregon, is held-up as a model for urban consolidation in the United States. Yet as revealed by Alain Bertaud, senior research scholar at the NYU Stern Urbanization Project, Portland’s urban consolidation policies have driven increased density at the fringe but not nearer to the CBD.

Market forces would normally increase population density around the CBD and decrease it progressively toward the suburbs…

Portland developed the concept of an Urban Growth Boundary (UGB), which limits for 20 years the area within which the city may develop…

Most neighborhoods resist any attempt at increasing significantly the current density and developers are uncertain about demand for higher density residential areas close to the center. 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…

In the long run, the higher density which is 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.

7. Urban consolidation will ensure people live closer to work, right?
Most urban consolidation policies are based on the presumption that the bulk of the population commutes to the central core for employment.

As such, there is the desire by planners to limit urban sprawl, which is believed to reduce overall commuting times, resource use and pollution, and the need for costly infrastructure improvements, such as new rail lines.

Similarly, there has been a growing desire by planners to increase the proportion of housing located along transit nodes, such as train stations, again based on the assumption that most citizens commute to the central core for work.

In most modern economies, however, the overwhelming majority of employment is located in the suburbs.

In fact, research derived using data from the Australian census shows that less than 15% of workers in Australia’s major capitals work in the inner-core – a result that is likely to be replicated in New Zealand.

Moreover, this trend away from the CBD is only likely to grow as more employees embrace technologies such as telecommuting. It also throws into doubt expensive new rail investment, which can only ever serve a small minority of the population.

…despite their profile, our CBDs account for a very small proportion of jobs in the economy. Census data for employment has its limitations but even with these limitations in mind, the evidence is emphatic: employment in our cities is overwhelmingly located in suburban locations …

…what will also come as a surprise is that in the past decade, suburban jobs have been growing as fast or faster than in the inner city, meaning that CBDs are only holding their share, or losing their share, to suburban employment. This has come about despite what has arguably been a decade or two of intensive debate and policy investment into our inner city locations.

8. But doesn’t everyone want to live in the inner city?
For decades now, an array of commentators and academics have written-off suburbia, claiming that households are increasingly choosing to live in the inner city in order to be closer to night life and amenities. Of course, planners and governments have climbed on board, erecting barriers to contain the urban footprint and force more in-fill development to take place in pre-existing areas, often arguing that they are “improving housing choice”.

Again, the data often does not live up to the hype. For instance, the 2010 Census – by far the most accurate measurement of demographic trends – showed that over 90% of all metropolitan growth over the past decade in the US took place in the suburbs. Moreover, the suburbs actually did better in the 2000s than in the 1990s, when they accounted for only 85% of the growth. This result is even more remarkable given the growing use of urban consolidation policies across many US cities.

In any event, if planners and policy makers are so certain that most home buyers no longer want to live in detached houses on the fringe, then why are urban consolidation policies required at all, since consumer preference would drive such an outcome? Why not free-up land supply and planning requirements and let consumers choose for themselves?

In his masterwork A Planet of Cities, NYU economist Solly Angel explains that virtually all major cities in the U.S. and the world grow outward and become less dense in the process. Suburbs are expanding relative to urban cores in every one of the world’s 28 megacities, including New York and Los Angeles.  Far from a perversion of urbanism, Angel suggests, this is the process by which cities have grown since men first established them…

Clearly the data supports a long-term preference for suburbs. Even as some core cities rebounded from the nadir of the 1970s, the suburban share of overall share of growth in America’s 51 major metropolitan areas (those with populations  of at least one million) has accelerated—rising from 85 percent in the ’90s to 91 percent in the ’00s. There’s more than a tinge of elitism animating the urban theorists who think that urban destiny rides mostly with the remaining nine percent matters. Overall, over 70 percent of residents in the major metropolitan areas now live in suburbs…

9. The urban consolidation end game
The UK is arguably the developed world’s most dysfunctional housing market. Thanks to the Town and Country Planning Act 1947, the right to develop has been virtually nationalised and the UK is ruled by NIMBYs. All of the major cities and towns in the UK are surrounded by “greenbelts” that are off limits to development. And the centralisation of government finances has also led to a situation whereby local governments receive little benefit from increased population and development, but bear most of the costs, making them anti-development.

The end result is a chronic undersupply of homes, driving-up both prices and rents. And the situation has recently been made worse by the implementation of the government’s “Help-to-Buy” shared equity scheme for first home buyers and the Bank of England’s “Funding-for-Lending” program, which have artificially increased demand and pushed against the constipated supply system to further inflate prices.

If you want to see the ultimate end-game of forced urban consolidation, look no further than the below video, which shows that when you constrain land/housing supply via planning, you end up with deleterious consequences.

Essentially, Generation Y (dubbed “Generation Rent”) is unnecessarily being forced to live in expensive, cramped living conditions, renting at exorbitant prices from asset rich Baby Boomers or investors, who are gaming the rigged housing system to their own advantage.

10. It ain’t rocket science
Ultimately, expecting to achieve more liveable cities by restricting the urban footprint at the same time as the population is increasing is a contradiction in terms and mutually exclusive.

Residents in pre-existing areas will always oppose development, whereas owners of vacant land within the urban growth boundary will land bank in full knowledge that they do not face competition from land holders on the other side of the growth constraint.

The end result is a further appreciation of urban land values, deteriorating housing affordability (despite shrinking home sizes), development in the wrong locations, and worsening levels of congestion. Those lucky enough to be pre-existing land holders will benefit from the rising wealth brought about from higher values, whereas those yet to enter the market (and future generations) will suffer immensely.

The solution is as clear as day: free-up the supply of land; deregulate the constipated planning system with “right to build” laws; and improving the funding and provision of housing-related infrastructure.

The New Zealand Initiative’s recent report, Different Places, Different Means: Why Some Countries Build More Than Others, provided a number of viable reform options, with the Texas model my preferred approach:

[Texas] is a bustling state, with record rates of economic growth, barely touched by the global financial crisis, and with one of the highest standards of living in the United States. Annual per capita income is $NZ70,000 and the cost of living is low. One of the key reasons for the growth of Texas is its low-cost housing…

There are several reasons for this, and different cities in the state organise themselves in their own ways; however, what they have in common is a liberal land use law at the edges of cities. There is also a very clever model, becoming more widely adopted, by which new infrastructure can be funded and growth allowed.

 

Comments

  1. I have read till the end and had been feeling there is something wrong there. Then I realized. There is a completely different cultural concept in US on the living in “downtowns” (what we call CBD here). In North America downtowns are not the attractive areas to live – they are centers of crime, dirtyness, noise etc. In Australia it is very different. Therefore what did not work in US would work here. Other thing – I saw very positive examples of development of satellite urban centers: Canary Wharfs in London and UE square in Singapore.

    • US “downtowns” that predated the automobile have indeed tended to end up “blighted” as suburban locations proved more attractive to most residents.

      But “gentrification” is the norm more recently; and post-automobile cities like Houston tend to not have had quite the same problems.

      The way a city like Houston grows really is an indication of genuine choices. When you can get a CBD Condo in a vibrant economy (not blighted) for $100,000 and a suburban McMansion for $150,000, how do you think people will exercise their choices compared to $450,000 suburban McMansions and $1,000,000 CBD condos?

      I discussed yesterday on the thread about apartments, especially in Sydney and Melbourne, why this is the case.

  2. I think you over emphasise a few things and under emphasise others, but recognise a lot of truth in your arguments.

    Green belts are a good thing as they increase amenity but they are best placed between cities, so Sydney ought have multiple real CBD’s with greenbelts maintained between the cities.

    There is a spectrum of suburbs and many of the outer ones have relatively little employment. Say 10 or 12 years ago Sutherland shire in Sydney had only about 15%(?) of it’s workforce working in the shire. The Sydney CBD might have 70% of its residents who work working in the CBD (although some of those residents will have weekenders out of the city too. Relocating jobs to the outer ring increases its attractiveness to newer entrants to the workforce and to those who build the houses and sell the goods and services necessary for everyday life.

    Many cities in Europe are less than 2 million people but there are more cities of say 1M in the country eg Netherlands. But unless the employment is created in the regional cities it won’t matter how cheap houses are in them.

    Transport is important and our radial pattern focused on Sydney CBD, without much radial pattern around Parramatta, Hurstville, Hornsby, Chatswood, Blacktown, Penrith, Campbelltown means mass transport is difficult in those alternate cities.

    The developers paying upfront costs rather than the rest of the community paying for the infrastructure for new developments (through utility charges, local rates and state taxes) was a substantial contributor to housing price inflation, as was double incomes, banking policies taking the second income into account, lower interst rates on the back of lower inflation reducing required rental yields and increasing capitalisation rates for investment properties.

    A realisation that if you are likely to want to move within say 5 years you may lose all your expected capital gain in transaction costs and the excess of interest over rent (as there is very little principal reduction in the first 5 years of a 95% LVR home loan) has also probably increased rental demand relative to FHB demand, although that will likely reach a plateau as the marriage/”permanent” de facto age stabilises.

    There is also a confidence based on the post war experience that in Australia house prices never fall more than say 10% and they always recover in a few years, so if you are buying for a family home there is the advantage of getting it cheaper now and having the security of ownership for the 25 years there are kids at home. Inflation and promotion will ease the repayment burden and increase the cost of construction, so buy pretty much as soon as you are in permanent relationship and intending to have kids, or have had one.

    Then there are complications like the overlay of ethnic clustering, which started with the Anglos who clustered around Sydney Cove and which has continued to this day, whether it be Chinese, Italians, Greeks, Vietnames or Sudanese.

    • Agree that green belts are better spread throughout cities. This happens when cities are allowed to spread-out, but does not occur when cities are hemmed in by urban growth constraints, like growth boundaries.

  3. I don’t know what’s going on here, but my comment seems to have gotten lost in limbo. Here it is again but please feel free to delete if it turns up twice.

    Perhaps instead of spending so much effort trying to find ways to forever accommodate more people in terms of space and resources (and remembering that cities are built based on assumptions around population growth expectations), we should be focusing our efforts on raising the debate on how family friendly communities that make family planning readily available and invest in education actually is win-win. It improves quality of life while also allowing populations to stabilise and builds economic resilience.

    As William Bourke of Stable Population Party suggests “A country’s finite natural resource base is the true source of our wealth – not the population growth that dilutes & erodes it.”

    Perhaps we should be highlighting that it is just misguided thinking from people like Rupert Murdoch who regards population growth as essential despite all the evidence that it is more destructive to an economy and the health of a country and it’s people and wildlife than any other force or system.

    When Murdoch became a US citizen, he took his holdings with him and is reportedly “worth” around 9 billion. He sees immigration-fed population growth as the way to ‘prosper in the 21st Century’. But is this for the benefit of you and I, or the 0.01/0.1/1%? He reportedly suggested that Australia should be more like the US. How it then escapes him that 50 million us citizens live in poverty and shoe-box sized apartments sell for a fortune is beyond me. No wonder he’s one of the most despised men living.

    http://www.theguardian.com/world/2013/oct/31/rupert-murdoch-australia-embrace-immigrants-economy

    • Immigration is responsible for almost all our population growth. Population growth is the root of all our problems. There is no valid, logical reason to be doing it.

      • It keeps the housing Ponzi going, so I guess that is the logical, valid reason. Whether we want this Big Australia or not (I certainly don’t) is another matter.

  4. Very interesting post – particularly having lived in both London and Sydney. I found the law against blocking the view of St Pauls hilarious, and shocking – who’d have thought?

    As you know I am all for green belts, but I have no problem with going up – the new development Central Park in Sydney is a good example of what can be done – I’d live there in a flash if I could afford it.

    Transport and jobs are the key as well though. High Speed rail would get me to move to Newcastle, or Bowral. Whereas NOTHING could entice me to move to an outlying suburb of Sydney with no fast transport or cultural centre.

  5. Look at the comments on the same thread on Interest.Co.NZ to see how far ahead MB is as a forum.

    No matter how often the evidence is stated and restated, the same tired old, disproved excuses for growth containment will be trolled all over every thread on housing on interest.co.nz as if it is a deliberate tactic to swamp the facts and common sense and make it harder for the swinging audience to get enlightened.

    • I just went and read the NZ post comments area. I am speechless.

      My favourite quote:

      “Very pour journalism, completely lacking objectivity…..the obvious missing word..? some…Dear Guest, the word some at the front of (asset rich Baby Boomers or investors) Lookie see….. now don’t that look way better ? Being forced is also inflamatory by design…..as in live here and pay me hippy or I’ll kill you and your family….? just drivel”

      The stream of consciousness is deliciously tactile. 🙂

      I also liked:

      “Just another Left Wing Loonie pushing an outdated Marxist policy”

      Wait what?

      And the use of Zombies.

  6. A couple of observations on the article linked above.

    Of course the young aren’t buying properties at the age they used to. They aren’t getting married as early, they’re not having kids as early, many of them have university debt that didn’t exist in the eighties & nineties and they are enjoying the single lifestyle living in places that they won’t want when the settle and have kids. To buy and sell has high transaction costs and the interest payments exceed rent and would for the whole 5 years, so it is not economic to buy based on average growth.

    The value of land with zoning compared to the average of rural land without residential zoning is possibly very misleading. A fairer comparison would be a gradient of valuation to see how far further out values are dramatically increased by the prospect of future valuation.

    Given the size of the borders of the greater Sydney metropolitan area not bounded by water or national park, I suspect it would only be a few kilometres, although probably uneven with higher values along road and rail corridors. 5km by the size of the modified circumference at the average density of Sydney would probably cover future growth for 20 years or more.

    I suspect that making new purchasers of fringe land pay the costs of development of services has a big impact.

    The gradient of incomes probably also has a big impact. More money, closer to the seats of power and prime locations.

    • Here is a great piece of research on the land values around Auckland:

      http://www.productivity.govt.nz/sites/default/files/research-note-mar-13-auckland-mul.pdf

      This showed that the UGB increases land prices by a factor of 800% once other drivers of land prices are taken into account. But it also chops off the low end of the normal distribution of land values.

      UK experience shows that the factor by which the price of land is inflated gets steadily greater the longer the boundary policies are persisted in.

      The point is that the land value curve is “interrupted” at the regulatory boundary. Without this interruption, it is always worthwhile for developers to do splatter development further out because the savings on land costs are greater than the costs of infrastructure and travel.

      The established urban economics literature says splatter with later infill is more efficient. Here is my small collection of references:

      J. C. Ohls and D. Pines, (1975) “Discontinuous Urban Development and Economic Efficiency”; Land Economics Vol 51: 306-316
      M. Fujita, (1976) “Spatial Patterns of Urban Growth: Optimum and Market”; Journal of Urban Economics Vol 3 (3)
      John R. Ottensman (1977) “Urban Sprawl, Land Values, and the Density of Development”; Land Economics Vol 53: 389-400
      S. Titman, (1985) “Urban Land Prices Under Uncertainty”; American Economic Review, Vol 75 (3) (June)
      Max Neutze, (1987) “The supply of land for a particular use”; Urban Studies Vol 25 (5)
      Richard B. Peiser, (1989) “Density and urban sprawl”, Land Economics, Vol 65: 193-204
      J. E. Moore and L. Wiggins, (1990) “A Dynamic Mills heritage model with replaceable capital”; Papers in Regional Science Vol 61 (1)

      Problem is that the urban planning profession are complete strangers to this sort of stuff.

      Yes, “making new purchasers of fringe land pay the costs of development of services” has an impact, but not as big as the impact of the UGB and the inflation in cost of raw land. Both are inherently wrong concepts. The correct way to finance infrastructure is by borrowing paid back out of revenue from the benefiting residents taxes.

      The basic reason is that anything that is costed upfront into the price of new housing, filters through into the price of all existing housing. Therefore every first home buyer ends up paying an equivalent of the upfront charge on new homes, as a windfall gain to the sellers of existing property.

      The old system worked and was fair. Everyone paid local taxes for a lifetime, and there was no intergenerational inequity.

  7. If it’s so expensive to develop land, the processes are so slow how come we just had a near record 16,000 odd BA’s in the month of September? annualised nearly 200K? Can’t be too bad out there.

  8. Leith, and for those who are concerned about scrapping growth boundaries creating uncontrolled sprawl may find this paper interesting: “How Over-regulation Creates Sprawl (Even in a City without Zoning)”

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=837244

    It’s referring to how Texan cities physical layout and car dependance are very much a result of their planning controls. Things like huge minimum lot sizes, excessive on site parking requirements, wide roads, large set-backs etc, are the cause of the very sprawled out nature of their cities, rather than “natural” market forces.

    • In Houston, those things are the result of “localism”. It is odd indeed to write a paper on this subject – zoning and regulations – without referencing William Fischel.

      He is the author of numerous books and papers: a 1999 one is entitled “Does the American Way of Zoning Cause the Suburbs of U.S. Metropolitan Areas to Be Too Spread Out?”

      He concludes that the utility value placed on these zoning regulations by the local people outweigh the negatives of excess land consumption.

      And nowhere are these regulations responsible for systemic housing unaffordability. The thing that matters is how easily rural land can be converted to urban use. If there are no UGB’s or proxies for them, the raw land value at the urban fringe will be anchored in rural values. These values are so low, and the value of land is kept so low throughout the entire city, that even a 1 acre lot size remains a fraction of the price that we have to pay for 1/10 of an acre in our growth-contained cities.

      More explanation here:

      http://www.macrobusiness.com.au/2013/10/sydney-melbourne-drive-shift-to-apartment-living/#comment-293435

      There is also no proven excessive cost to this free market sprawl; congestion is lower, trip times shorter, local taxes lower (which suggests that infrastructure costs are lower, not higher); and there are numerous beneficial effects besides housing affordability.