Thursday, February 29, 2024

Dr Eric Crampton: NZ's uncompetitive urban land markets at root of housing problems

A good title matters. The recent and thorough essay explains how the anglosphere’s unnecessarily expensive housing affects, well, everything. Or at least almost everything.

Zoning makes it too hard to build houses where people want to build. Urban containment policies block new subdivisions, so downtown land no longer competes with land further out for developers’ attention and for residents. Land prices then inflate across the whole urban land market. Zoning that blocks new townhouses and apartment towers in places where people want to live further worsens scarcity and affordability.

It's at the root of a host of pathologies.

People aren’t left with much to live on after housing costs; inadequate housing causes misery.

The most productive cities could be even more productive if more people were allowed to live near each other. Bans on density are then taxes on productivity improvement, with existing landowners reaping the rewards. Those bans also make it harder than it should be to reduce carbon emissions.

The essay is superb. And it has been influential.

I’ve heard it cited by both Labour and National MPs, which shouldn’t be surprising as it explains a whole lot about New Zealand.

Uncompetitive urban land markets are at the core of the problem. Current practice requires council plans to demonstrate that they have zoned for about twenty percent more housing supply than expected demand. But expected demand will depend on whether housing is affordable, and tight zoning means unaffordable housing.

The Independent Hearings Panel reviewing Wellington’s proposed district plan managed to convince itself that zoning for more development wouldn’t affect housing supply or affordability. The panel’s report even scoffed at the idea that allowing more housing might improve affordability. Meanwhile, 98% of the country’s economists said that easing zoning constraints would increase supply and improve affordability.

Our resource management system simply does not understand how competition works, or care about the consequences.

It isn’t just housing. It’s uncompetitive urban land markets writ large. Housing, retail space, commercial premises, and land for industry are all affected.

During the Commerce Commission’s market study into retail grocery, it quickly became clear that it is effectively impossible to open a new large-footprint supermarket chain.

Few sites are zoned for retail grocery that aren’t already supermarkets. But even if you can secure a set of sites and jump through the Overseas Investment Office’s hurdles if you’re an international entrant, there’s a bigger problem.

To get a resource consent to open your supermarket, you will need to prove that your new supermarket will not substantially hurt existing competitors.

Now the law isn’t written that way – in fact, it pretends that the opposite is true. But the effect winds up being the same.

You need to prove that your new supermarket would not have adverse retail distribution effects. What do councils mean by that?

Suppose that an existing supermarket is an anchor tenant in an existing town centre. If that supermarket failed, because a new and better supermarket attracted too many of its customers, then that town centre’s viability could be eroded.

And existing resource management practice and precedent says that councils are supposed to worry about that.

A new supermarket then has to prove that there is so much excess demand that the new supermarket will not impinge on existing competitors’ viability.

And maybe that kind of outcome sounds great to the kinds of people who get involved in town planning. There’s already a supermarket, why should there be another one unless there’s enough customers for it?

The result is the neutering of competition, and substantial harm to consumers. If an existing business is seriously underperforming, a new entrant provides a service by driving it out of business. Even the threat of that kind of entry provides competitive discipline.

However, in New Zealand, that kind of entry would have a hard time getting a resource consent. The government likes to wring its hands about poor productivity performance while, at the very same time, making it almost impossible for new competitors to drive unproductive incumbents out of business.

Last week, I chatted with NERA director Kevin Counsell for the Initiative’s podcast series. When councils require evidence that a new development provides overwhelming benefits, someone has to write the economic analysis. Counsell writes a lot of the reports demonstrating whether there would be sufficient demand.

It isn’t just supermarkets. Consider potential entrants who need land at the edges of town.

In 2022, the government set a National Policy Statement on Highly Productive Land. That statement sets a very high hurdle if anyone wants to do anything other than farming on the 14% of the country that is classified in the top three soil categories.

Most of that protected land is dairy and sheep paddocks. Converting it to any other use requires proving a substantial benefit from that conversion.

Counsell has been working on a proposed new industrial park outside of Morrinsville. The National Policy Statement on Highly Productive Land requires that there be substantial benefit before anyone can build anything on a paddock.

How can you demonstrate substantial benefit? You have to prove that there is huge demand for the new use. The dynamic benefits of competition in forcing everyone to strengthen their game aren’t enough. They would be harder to prove in any case. Entrants wind up having to show that there is excess demand given current supply.

The effect is harshly anticompetitive. If a group of existing businesses organised in a smoke-filled room to block a new competitor’s entry, they could face criminal cartel prosecution. But resource management provides even stronger protection against competition whenever resource consents are required.

I titled this column ‘The Uncompetitive Urban Land Markets Theory of Everything’, but it’s never easy to tell whether a columnist’s draft headline will survive. The uncompetitive urban land markets theory of everything subsumes the housing theory of everything. Just about everything wrong in housing is downstream of uncompetitive urban land markets. But the same processes that block new housing also block new supermarkets, new commercial premises and new industrial parks.

In the short term, the government could consider broader application of its new fast-track consenting system – for example, for new supermarkets and their required warehouses.

But ultimately any reform of our resource management systems must prioritise competitive urban land markets. The Commerce Commission could perhaps assist in assessing whether district plans have enabled or restricted competition. Processes and practices that embed anticompetitive outcomes, like consideration of retail distribution effects, must end.

Land prices could provide an ongoing check. When zoned land is scarce, that scarcity will affect its price. Those prices are a better signal of whether councils have zoned enough land for development than any planner’s forecast. If a suite of price indicators shows that zoning has created scarcity, councils could be required to zone more land.

Enjoying the benefits of competition will require attending to New Zealand’s uncompetitive urban land markets. It would help address the housing crisis, and a whole lot of other problems as well.

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


Anonymous said...

Land is not important in NZ. Lets just fill all our spaces, especially all our flat land(that is not sheep and cow paddocks) with people.
Lets become like every other country and have wall to wall people and no export income.
It's good all round for the corporates and the oligopolies who can make more dollars and buy up more land and fill with more people.
Look at real productivity .We in NZ earn our export dollars from the land and what we really need is a population plan to stop this never ending plundering of life and instead implement a focus on quality of life and lifting export income.

robert Arthur said...

Unlike America, Australia, in NZ there is limited flat low productivity land remaining where desirable. We seem determined to heavily populate the country and make it like elsewhere. (Without immigrants we will become a maori/polynesian country; cheaper housing may not compensate.) Apart from housing costs, carbon considerations will force cities like the UK pre car. Personally I find the bulldozing of perfectly functional houses for box apartments sad. These go to land fill at 20 tonnes a time . Meanwhile we spend hours sorting household rubbish to save a few kg of waste. About the only way to reduce land costs is forced govt purchase at farm value prices with resale similar; anathema to free marketeers

Scott said...

I'd be interested in comments about the effect of immigration on the housing market as well? We've gone to 5m people from 3.8m people in 20 years. Surely that increase is a key factor in the price of land and houses?

Anonymous said...

for gods sake we are currently about 1% urbanized. Stop the bullshit.
If it specialist land that's a concern consider diverting pressure to more of the rubbish clay's that so many of our cities are built on.
Think about the UK about 12X the population and largely (90%) not covered in developments.