Cross-posted from Medium:
Many people find the economics of housing complicated. The two authors of this article attempt to present a hopefully simple overview of the key points. Phil Hayward explains how growth boundaries causes excessive housing inflation and Brendon Harré responds to explain why intensification restrictions may also need to be loosened.
The basic reason that land within a “generous” urban growth boundary imposed on a previously unconstrained city, starts inflating in price so quickly, is that there are two different “quantities of land” involved:
1) Total quantity
2) The quantity that the incumbent owners “were going to put on the market anyway”
The planners totally fail to grasp that the value of a superabundant resource is not determined by “the fact that it is all for sale right now”, which is nonsense; but by the fact that the superabundant supply is so vast that even a small proportion of owners bringing their portion to market in the normal course of events with no expectations of price gouging, will be more than sufficient to meet demand.
Within functional transport distance of cities that are noted for their housing affordability, there will be parcels of rural land coming onto the market within any period, and quite possibly many of these parcels continue to be bought as farms, purely for their value as farms, to be continued in their operation as farms, with the normal expected return on investment.
Some parcels will be bought by urban developers and developed.
The owners and sellers of land are not even bothering to distinguish between different classes of buyer, any more than the sellers of iron ore are distinguishing between different classes of buyer. The market price simply is what it is. It is set by the competition between suppliers, extracting the resource at the lowest possible cost, and making an honest profit. The lowest-value potential use of the resource is accordingly the one that can still afford a price determined by the cost of extraction plus an honest profit.
In the case of land, there is still land all over the world that does not need to be used for anything. This disciplines the price of rural land. If the world really did not have enough land to feed its population, then you could expect to see rural land prices and food prices start to reflect an economic principle called “monopolistic competition”. This was the case in the 1800’s and earlier because the “supply” for any given regional population was indeed limited, by transport system primitiveness and the absence of refrigeration.
I am skeptical with the current expectation in New Zealand that local government Councils will “release and service more land every time there was a hint of a price increase”, which will guarantee affordability. The mechanism by which New Zealand had decades of affordability even with Councils running things, was more a case that Council engineers were simply there to co-operate with developers. It was not a question of the impetus coming from the Council, “releasing and servicing more land” as deemed necessary; the impetus came from developers who secured sites in which they saw development potential regardless of any considerations of “in sequence or out of sequence” infrastructure, and they knew that the Council was there to co-operate with them, not obstruct them and tell them to wait another 50 years while other rural land owners who were “in sequence”, decided to sell.
In some cases the government was the developer; but certainly “the market” was doing most of it later on, when it was still all affordable.
Development “closer to the edge of the city” does end up happening, and happening more efficiently, because once a certain amount of splatter (out of sequence development) has taken place, there are price inducements to sell rural land that is in now-efficient locations — classic Van Thunen land value curve stuff.
But ironically this “price inducement” is nowhere near the level to which prices rise when a urban growth boundary exists!
This is why the “infill development” of fragmented land around Houston happens far faster than development of land within Portland’s urban growth boundary!
There is an abundance of literature that argues that the free-market, splatter and infill process is ultimately more efficient. Thinking this through, it is not hard for anyone with a bit of economic common sense. Even the formation of specialist clusters is far more likely in the absence of a growth boundary. Planners arguing for “clustering efficiency” as the basis of a growth boundary, are repeating the historic stupidity of their intellectual ancestors in the former Communist bloc. The “fatal conceits” and the “unintended consequences”. Sorry if this sounds ideological, but simply observing and commenting on “farce” (and tragedy) is not “ideological”.
To add to Phil Hayward’s worthy effort. Housing intensification also has two types of supply quantities – there is the absolute quantity of allowable building opportunities and then there is the actual amount of intensification which existing owners will agree to provide.
There is a massive difference between the number of existing plots/houses that are identified as intensifiable and the number that will come on to the market naturally.
There are many people who value their house higher than the prevailing price. Some would need a large offer -well above prevailing prices to induce them sell. This is not necessarily land-banking -it can be that where they choose to reside is due to a network of connections -family, schools, medical, work…. that would be hard or disruptive to replace in a new location. It may take many years before they choose to move on and their residence becomes available for intensification.
Against that there is a demand for upgraded housing in some locations -usually inner city or near desirable amenities like beaches. New Zealand has a long traditional of some people choosing older, cheaper, run-down houses in these locations and doing them up as an alternative choice to buying newer/larger houses on the periphery. There is a visible pattern of gentrification in some suburbs. This pattern of gentrification involves extensive internal modification and some limited expansion of the existing floor space.
In New Zealand we put a lot of restrictions on intensification -so we get very little increase in the number of residences and the number of people who can reside in an area. This can best be seen in places like Devonport -its population has been stable since 1950. Any increase in Devonport’s residence numbers through New Zealand’s limited provision for infill housing has been balanced out by falling household sizes (number of people per house).
This is in marked contrast with intensification in Houston -where intensification rules allow a different type of gentrification process. Creating a much bigger increase in floor space and residence numbers and I would guess from the before and after pictures in the above link -inner city suburban population numbers. Houston ‘makes room’ surprisingly upwards. They are not just building outwards -which Houston is more famous (infamous) for.
In my opinion the super-abundance (freedom of entry) of land parcels for urban development at rural prices in the peri-urban environment -which is absolutely necessary to stop the market failure of land banking also needs to be repeated in existing suburbs. But in this case it is freedom of entry to intensify at existing house prices. Hopefully of normal sane housing markets like Houston or Tokyo -not the land banking insane markets of London, Auckland and San Francisco. This proposal requires land banking and urban land price hyper-inflation to be stopped before affordable intensification will kick in -it would need to be part of a cultural change that is more permissive to urban development -a ‘making room’ concept -both up and out.
It is this super-abundance/ freedom of entry supply which was one of the background concepts for mine and David Lupton’s article where we laid out the case for more and more varied intensification supply. We argued for an intensification National Policy Statement be added to the Resource Management Act that could bypass the worst of restrictive zoning practices. Essentially we were arguing for the loosening of the urban growth boundary in the upwards direction, so that agreeable neighbours can intensify in such a way, they get the maximum amount of floor space and new dwellings from their combined properties.
What I think this increased supply competition (the combination of mine and Phil’s proposal) is hoping to achieve is a reduction in the cost of new housing across the entire urban and peri-urban area down towards its marginal cost of production. This allows several things to happen.
- People can choose their residential location based on what most suits their preferences.
- It becomes easy, through either the way we allocate infrastructure charges or transport charges to adjust location/transport marginal costs to reflect the full cost to society -including taking into account global warming pollutants. So we create a much more dynamic and effective way of allowing housing supply to respond to location demand compared to the blunt instruments of restrictive zoning and rural/urban boundaries.
- Peripheral and peri-urban developers have particular business models -restrictive covenants limiting house size for instance -which combined with high section prices basically dictates that a massive percentage of new builds are 4 bedroom family homes. New Zealand is under building smaller 1–2 bedroom homes, despite statistics showing the major growth in new households is in the 1–2 person group. By allowing greater intensification it is possible this unmet demand could be supplied at the marginal cost of production. So supply responds to size/type house demand.
- I think if urban land is reduced to its cost of production this also means buildings for business can be more affordably provided.
- Basically this will turbo-charge opportunities in all our cities (not just Auckland) in comparison with what we have done in the past -allowing us to re-balance our economy from an over reliance on rural primary produce.
I really don’t think the economics of urban land supply is too complicated or needs to be over-thought. Not only is the theory easily understood. There are empirical examples in places like Germany, Japan and the US which confirm the correctness of urban land supply economics.