Six years ago, I penned an article entitled Why developers land bank, which attempted to explain the drivers and motivations for land banking.
Included in this article was the argument that land banking is more common in markets with regulatory barriers to land supply, such as urban growth boundaries (UGB), because this restricts competition from adjacent land owners on the wrong side of the UGB.
By contrast, by removing the UGB, competition from adjacent land owners would increase, in turn making land banking particularly risky since another nearby owner would always have the opportunity to move to the market ahead of the land banker.
Indeed, the benefits of liberalising the land market and planning system were acknowledged by Dr Arthur Grimes, former Chair of the Board of the Reserve Bank of New Zealand, who noted:
…that it is important to ensure that developers are competing with each other for the right to develop, so as to ensure that the land is offered at the most affordable price. Where competition amongst developers is limited by land availability constraints, the resulting prices will incorporate monopolistic rents (leading to high land and house prices).
With the above in mind, it’s interesting to note that ‘lifestyle’ block owners on Auckland’s fringe are facing falling values following the New Zealand Government’s election commitment to abolish Auckland’s UGB. From Interest.co.nz:
Auckland’s lifestyle block market may be facing a particularly difficult summer.
An indication of potential trouble lies within the Real Estate Institute’s latest commentary on the rural property market.
“Advice provided indicates a high level of listings in areas on the fringe of Auckland City, with the anticipation of increasing sales to come,” its commentary on the lifestyle block market said…
In the Auckland market, the sales trend for lifestyle blocks has been declining since March last year, and prices are now also falling.
The median price of lifestyle blocks sold in Auckland in the three months to October was $1.15 million, down from $1.2 million in the three months to September and down from $1.17 million in the three months to October last year.
Which suggests capital gains on lifestyle blocks in Auckland have come to an end and the market has passed its peak…
What is probably playing on the minds of many lifestyle block owners around Auckland is the government’s recent confirmation that it intends to carry out its election policy of forcing the removal of Auckland’s urban growth boundary.
When it released the policy there was no doubt about its intentions, they were spelled out in black and white for all to read, and the message couldn’t have been clearer.
“This will give Auckland more options to grow, as well as stopping land bankers profiteering and holding up new development,” Labour’s policy document said.
With speculative investments, timing is everything, and faced with the prospect of cheaper land just beyond their boundary that is capable of further development coming on to a market which is already softening, many lifestyle block owners may have decided that the time to sell is now.
But if the rush of new listings is not matched by an equal rush of new buyers, they may already be too late.
Subject to environmental concerns being met, nothing should prevent an adjacent landowner or a landowner further afield from developing their land merely because it sits on the wrong side of an arbitrary UGB barrier.
The important thing is to restore competition and contestability to the land market, thus preventing land owners (or developers) from cornering supply, land banking, and driving-up its cost.
Open competition underpinned by the right to develop (subject to standards being met), is a key factor for lowering land prices and ensuring that housing becomes affordable and the economy competitive.
Well done New Zealand Labour.
