Eric Crampton: Govt has allowed councils to block new development

Auckland Council’s draft Future Development Strategy all but guarantees that Auckland housing will never be affordable.

Those keen on affordable housing ought to pay attention to it.

For too long, housing has been a terrible game of musical chairs. Government and councils make it incredibly difficult to add new chairs to the game, so families miss out on places to sit.

Councils try to manage the game by guessing how many new players might enter, the kinds of chairs they might want, and the places around the circle where those chairs should go.

But they always wind up with 9 chairs for 10 people.

It’s an approach that has delivered and will continue to deliver some of the world’s least affordable housing.

A different approach is needed. One that enables so much new development that there is no shortage of zoned places to build apartments, townhouses, and new subdivisions. After all, when it’s easy to build and sell new chairs, nobody would be willing to pay inflated prices for rickety old chairs.

But Auckland’s Future Development Strategy sticks with the same old broken game, setting out five principles:

• The strategy has to support greenhouse gas emission reduction.
• It must adapt to the impacts of climate change.
• It should make efficient and equitable infrastructure investments.
• It wishes to protect and restore the natural environment.
• Last, and seemingly least, it wishes to enable sufficient capacity for growth “in the right place at the right time”.

Council’s draft strategy turns those principles into options that simply cannot restore housing affordability.

Current zoning approaches make housing increasingly unaffordable

Last month, the Infrastructure Commission released work demonstrating the significant effect of Auckland’s rural-urban boundary on Auckland land prices.

A square metre of urban-zoned land costs almost $1300 more than a square metre of rural-zoned land, after accounting for the cost of making rural land fit for housing. That zoning premium more than doubled from 2010 to 2020.

And it inflates land prices across the entire city.

If avoiding a long commute and enjoying the downtown lifestyle is worth an extra half a million dollars when you’re buying a home, zoning that inflates the cost of a section at the edge of town automatically pushes up prices across the whole city.

Tighter restrictions in the Future Growth Strategy will only make problem worse

A rickety existing well-positioned chair in this broken game will sell for a lot more when council restrictions add $600,000 to the cost of building a new chair.

The proposed Future Growth Strategy suggests tighter restrictions on building at Auckland’s fringes:

“There will be less reliance on expansion into future urban areas and what growth there is will be phased over a longer timeframe. Growth in rural areas will be minimal to retain the rural environment and rural productivity.”

Allowing more development in downtown places where people want to live has obvious merit. But current restrictions at city fringes already add over $600,000 to the cost of a 500 square metre section at the edge of town – a cost that feeds through into downtown land prices.

The strategy document points to restrictions on developing agricultural land as one of the constraints council needs to work around. But the National Policy Statement for Highly Productive Land does allow for urban rezoning where the net benefits of rezoning are very high.

A quick look at the numbers show the cost of restricting land use

The Infrastructure Commission showed that a square metre of land at Auckland’s fringes is worth $1274 more if it has urban zoning.

Tupu.nz estimates the average gross revenue per hectare of potatoes is between $25,600 and $44,800. Let’s round that up to $50,000 per hectare, or $5 per square metre. And let’s suppose this potato land is magically productive: it costs nothing to produce potatoes there, so it’s $5 per square metre in pure added value.

At a discount rate of 5 percent, something that produces $5 a year is worth $100. The value of that land in housing is about 13 times higher.

Does it seem likely that the benefits of keeping a piece of land in potato production are 13 times higher than the value of all of the potatoes it will ever grow?

Food security and other values are not worth zero, but it beggars belief that they have more than 10 times the value of a highballed estimate of the value of even one of the higher-value crops in the area. Food security is a bit like insurance. Normally insurance is worth a fraction of the underlying value, not a multiple of it.

Even worse, the cost of that protection is foisted on those least able to bear it: those on lower incomes stuck in overcrowded housing. Building giant refrigerated warehouses for five-year strategic vegetable reserves would almost certainly be more cost-effective, and more equitable, than banning development at Auckland’s fringes.

Similarly, blocking development at city fringes is unlikely to reduce national-level greenhouse gas emissions. These emissions are already accounted for in the Emissions Trading Scheme. And if new subdivisions attract a lot of residents, adding new bus routes remains a great option anyway. So why not make that case?

Why not allow the city to grow up and out?

The simplest answer is that council officials simply did not want to do so. They preferred to maintain tight restrictions on who could build what, when, and where.

These kinds of restrictions make infrastructure planning easier for a council that finds it difficult to fund and finance infrastructure works. They have an unfortunate side-effect of making the city impossibly expensive. Those who are priced out of living in Auckland don’t vote in Auckland Council elections. Those who already own Auckland houses are in effect insured against rising house prices.

The Labour Government’s urban growth agenda has been laudable. It has delivered real results. But at every point it left councils with sufficient wiggle room to block new development. And because the incentives facing councils have not changed, they have used heritage designations, special character areas, carbon emissions, and even potatoes as reasons to block the new developments that would help restore housing affordability.

Auckland’s Future Development Strategy needs substantial revision if Auckland is ever to have affordable housing. But the council funding and financing environment that caused that strategy is in dire need of attention.

Dr Eric Crampton is Chief Economist at the New Zealand Initiative. This article was first published HERE