Why do urban growth boundaries cause so many problems?

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.

Bid Rent Theory based on the classic work of Van Thunen

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”.

Regards

Phil Hayward


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).

Devonport

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.

  1. People can choose their residential location based on what most suits their preferences.
  2. 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.
  3. 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.
  4. I think if urban land is reduced to its cost of production this also means buildings for business can be more affordably provided.
  5. 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.

Cheers

Brendon

Comments

  1. Climate Change and Health in the Urban Environment: Adaptation Opportunities in Australian Cities

    Abstract

    Urban populations are growing rapidly throughout the Asia-Pacific region. Cities are vulnerable to the health impacts of climate change because of their concentration of people and infrastructure, the physical (geographical, material, and structural) attributes of the built environment, and the ecological interdependence with the urban ecosystem. Australia is one of the most highly urbanized countries in the region and its already variable climate is set to become hotter and drier with climate change. Climate change in Australia is expected to increase morbidity and mortality from thermal stress, bacterial gastroenteritis, vector-borne disease, air pollution, flooding, and bushfires. The cost and availability of fresh water, food, and energy will also likely be affected. The more vulnerable urban populations, including the elderly, socioeconomically disadvantaged groups, and those with underlying chronic disease, will be most affected. Adaptation strategies need to address this underlying burden of disease and inequity as well as implement broad structural changes to building codes and urban design, and infrastructure capacity. In doing so, cities provide opportunities to realize “co-benefits” for health (eg, from increased levels of physical activity and improved air quality). With evidence that climate change is underway, the need for cities to be a focus in the development of climate adaptation strategies is becoming more urgent.

    Disheveled Marsupial…. Climate weirding has to be factored in, models must accommodate the rise in 1 in 100/1000 year events over previous historical models and broad scope implications.

    • There are some good objective proposals emerging from some advocates, to the effect that the solution is more “back to nature”, self-sustaining-lifestyle living in greener surrounds, and utilising recent technology such as off-grid energy, and IT to support “work from home” – totally counter to the current fad for cramming people into concrete and tarmac jungles with heat island effects and local pollution concentration. The “Green” movement in the 1970’s was more about this, in the meantime they got hijacked by a different agenda-driven bunch of interests. The NZ Greens voted FOR an urban growth-boundary-abolishing legislative amendment that nevertheless failed in the NZ Parliament a few weeks ago, showing how far understanding has progressed. The National government voted it down, being more concerned about the Tory-supporting “big property” and “big finance” interests.

      • Thanks for the reply Phil.

        I think its important to acknowledge the events during the relevant period of time [political and industry agenda] which sought to change the methodology and mission perspectives of such groups you allude to under the term “Green” movement – the Wise Use movement.

        The wise use movement in the United States is a loose-knit coalition of groups promoting the expansion of private property rights and reduction of government regulation of publicly held property. This includes advocacy of expanded use by commercial and public interests, seeking increased access to public lands, and often opposition to government intervention. Wise use proponents describe human use of the environment as “stewardship of the land, the water and the air” for the benefit of human beings. The wise use movement arose from opposition to the environmental movement, and critics see it as anti-environmentalist.

        A range of groups belong to the wise use movement, including industry, grassroots organizations of loggers, mill workers, ranchers, farmers, miners, off-road vehicle users, and property owners. It also includes libertarians, populists, and religious and political conservatives. The movement became known as “wise use” after the 1988 Multiple Use Strategy Conference in Reno, Nevada.[citation needed] The movement includes or is supported by most anti-environmentalist groups, by companies in the resource extraction industry, by land development companies, and by libertarian and minarchist organizations.[citation needed] The movement was most active in the Western United States in the late 1980s and 1990s.[citation needed]
        Major organizations

        According to James McCarthy (2002),[1] the most prominent wise use groups receive most of their support from resource extraction industries (Amoco, British Petroleum, Chevron, Exxon/Mobile, Marathon Oil) as well as the American Farm Bureau, Dupont, Yamaha, General Electric, General Motors, National Cattlemen’s Association, and the National Rifle Association). The policies and political orientations of groups in the wise use movement range from some who self-identify as free-market environmentalists, to industry-backed public relations groups and mainstream think tanks, to some militia groups and fundamentalist religious groups. Major organizations promoting wise use ideas include Alliance for America, the American Land Rights Association, the Cato Institute, the Center for the Defense of Free Enterprise, People for the West, the Blue Ribbon Coalition, and the Heartland Institute.

        Most members of the wise use movement, including the related County Movement,[2] share a belief in individual rights, as opposed to the authority of the federal government, in particular with regard to the rights of land use. They argue that the environmental movement is both anti-private property and anti-people. While some in the wise use movement have strongly anti-environmental views, others assert that the free market, rather than government regulation, will better protect the environment.

        The Wise Use movement first gained prominence in 1988 when Ron Arnold, a vice-president of the Center for the Defense of Free Enterprise, helped a organize conference that led to adoption of a 25-point “Wise Use Agenda”.[5] This agenda included initiatives seeking unrestricted commercial use of public lands for timber, mining, and oil, and to open recreational wilderness areas for easier access by the general public. Critics point out that Ron Arnold has been quoted as saying his goal is to “destroy the environmental movement”.[6]

        According to Arnold, many in the wise use movement believe the possibility of unlimited economic growth, in which environmental and social problems can be mitigated by market economy and the use of technology. In his book Ecology Wars, which has been called the “Bible” of the wise use movement, Arnold writes: “Environmentalism is an institutionalized movement of certain people with a certain ideology about man and nature”[7] and that “the goal of our ecology wars should be to defeat environmentalism.”[7] Arnold claims that environmentalism is “the excess baggage of anti-technology, of anti-civilization, of anti-humanity, and of institutionalized lust for political power.”[7] – snip

        As one can plainly see the same socioeconomic – sociopolitical camp keeps popping up under various guises seeking to control the narrative, regardless of any evidence against it, these are social engineers and not scientists.

        Disheveled Marsupial…. I’m reminded of the Salem Hypothesis: “In any Evolution vs. Creation debate, a person who claims scientific credentials and sides with Creation will most likely have an Engineering degree.”

        Engineers aren’t scientists. Scientists discover things, engineers use that knowledge that make something useful. It’s possible to be both an engineer and a scientist, but there aren’t as many of those types.

      • Yes, the way the enviro movement has been hijacked since the days when it more honestly cared about humans and their environment, certainly includes the social engineering “urge” from the Left. Urban planning that wishes to force people to lose some degree of their freedom of movement and choice of location, has an inherent appeal to Left mindsets. The opponents of this utopian stuff are also opponents of social engineering, and this is one reason they oppose it.

        Advocates of “pricing” – including via taxes and fees – as an alternative to blunt prescriptive planning, have sincerity and intelligence on their side. They cannot be accused of not wanting to “conserve”, because they are supporting intelligent and efficient ways to do so. Pricing allows myriads of mechanisms to come into play to achieve the desired outcomes, versus the prescriptive plans foregoing of every way except the “approved” one along with massive unintended consequences. But as China-Bob points out below, there are interests for whom the consequences are not unintended at all.

        It is ironic that there can be a lot of hyperbole about “vested interests” advocating for freedom of choice, and pricing rather than “plans”, allegedly because there are “profits” being made in “sprawl”. Question: how much profits are there, really, in being a developer in a competitive market where your finished McMansions are competing in a price range of $180,000 to $300,000? This is how markets are supposed to work; there is a concept called “consumer surplus”, in contrast to forcing everyone to pay what they can stand, and pricing out half the population. Suppliers and producers make modest and honest profits and provide products of genuine value.

        There is a certain class of activism that seems to quite like the idea of products that ideologically they believe to be “over-consumed”, becoming price-gouged in this fashion; but it is odd that they thus wink at the fattest and most obscene profiteering in the history of capitalism, given any claims on their part to caring about concepts like social justice, future generations, and “resisting vested interests”. In the process, they are condemning and opposing honest producers and providers of value because they may become modestly wealthy in time, and supporting the biggest Croesuses on the planet with the biggest incumbent property portfolios. Guess who has the most to gain or not gain, from cities land prices being inflated by a factor of several hundred over 5 decades? Tens of thousands of new houses won’t be built, which is one in the eye for those evil developers, I suppose, many of whom go bust under the conditions in which they operate (meat in the sandwich between the rentier land vendors and the poor cannon-fodder housing consumers). Meanwhile a good proportion of those who were in the top 1 percent to start with, are laughing all the way to Bermuda with their “several hundred fold” land capital gain.

        The Rockefellers must have learned a bit from the London Dukes dynasty, and got firmly behind the “conservation” movement from the 1970’s onwards. George Soros has joined in more recently. Do these people invest in property, I wonder? I don’t notice their prominent involvement in any actual productive industries, unlike some of the modestly wealthy folk who donate to “freedom” advocacy. People on one side of this debate, are the biggest suckers for vested interests, by orders of magnitude.

      • “Yes, the way the enviro movement has been hijacked since the days when it more honestly cared about humans and their environment, certainly includes the social engineering “urge” from the Left. Urban planning that wishes to force people to lose some degree of their freedom of movement and choice of location, has an inherent appeal to Left mindsets. The opponents of this utopian stuff are also opponents of social engineering, and this is one reason they oppose it.”

        Sorry Phil…. it seems your opinion is that of the Wise Use movement, ascribing Left to everything that does not mirror your camps world view. This highlights the conversation I had with mig and Marginalist economics, the premise leads the conclusion[s, all that is remaining is how to flesh that perspective out. I really can’t find how you arrive at the conclusion that social engineering “urge” from the left [non defined] is relative considering the dominate right wing social engineering over the dominate time span since the 70s.

        Disheveled Marsupial…. I strongly advise you to drop the watery terminology and seek out those knowledgeable about the ramifications of AGW and infrastructure demands i.e. coastal water – effluent treatment plants, chemical plants, industries and a plethora of other activitys, and how that needs to be reconciled. Freedom is not a metric by which to ascribe – as a determinate in the discovery – mitigation process.

      • You’re just wasting time on an economics and finance blog, pal. You don’t understand, or don’t want to understand. I will leave it to others reading what we have said, to form their own conclusions.

  2. The New Zealand Government forgets what it says from one week to the next, it appears. 18 May this year …

    beehive.govt.nz – Labour support on city limits welcomed

    https://www.beehive.govt.nz/release/labour-support-city-limits-welcomed

    The new position by the Labour opposition calling for an abolition of city limits has been welcomed by Building and Housing Minister Dr Nick Smith.

    “This is a welcome repositioning by Labour. Tight city limits and not allowing intensification is at the core of Auckland’s housing problems. It is limiting new housing developments, driving up section and house prices and encouraging land banking.

    “A broad political consensus that the policy around city limits needs to change is helpful to progressing the necessary reforms to increase housing supply and to make them more affordable. … read more via hyperlink above …

    Further information accessible via http://www.PerformanceUrbanPlanning.org

  3. Good work!

    Unfortunately, driving up and maintaining sky high assets prices is fundamental to our current monetary model where public money creation is largely privatised and mostly directed at speculation on land prices, and that alone will provide powerful motivation for many to argue against sensible liberalisation of policies regarding land development.

    Plus there is also the cognitive dissonance of many who support a big Australia and high rates of immigration ALSO being the most critical of any expansion of urban areas or intensification of usage (apart from a few recycled former industrial sites rendered vacant by an exchange rate inflated by offshore borrowing to support land speculation lending).

    The net result is remarkably expensive land and a population increasingly crammed into smaller and smaller spaces.

    Madness!

  4. Why do urban growth boundaries cause so many problems?
    Hmmm : Do urban growth boundaries cause problems?
    I’d answer it depends on your definition of “problem” : If a problem is defined as an unexpected outcome than I’d have to answer that urban growth boundaries do not cause problems because the outcome is 100% predictable. Even the follow on consequences are predictable, matter of fact everything about the problem is predictable, Only a fool or those with a vested interest would bother even suggesting otherwise.
    None of this knowledge fixes the “problem” but it does shift the problem into the correct context. Here the fool is the one that believes that the problem can be addressed if they can only find a clear and concise way to describe the problem and thereby convince others that they have found the root cause of the problem and by extension a solution to the problem.
    At least it’s good to know who the real fool is.