The Productivity Commission on land supply

The Productivity Commission yesterday published its draft report on improving the supply of land for housing.  It builds from earlier work by the Commission and others identifying supply restrictions as one of the most important explanations for the high price of houses (more strictly, house+land) in New Zealand.

There looks to be a lot of fascinating material.  Being history-minded, the first thing I read was the fascinating little research note on the history of town planning in New Zealand.  Modern documents that quote from 1839 New Zealand newspapers appeal to me, even if the author of that research note seems more taken with the “need” for “town planning” than I would be.  And was the New Zealand Company really much involved in the founding,settlement and planning of Christchurch?  The books on my shelves don’t suggest so.

I also read the Summary Version of the report.  It is a summary, and while it lists the findings and recommendations and outlines the arguments,  there is a no doubt a lot more in the remaining hundreds of pages.  Some answers to my points below may lie in those pages, and I hope to look at them in more depth in coming weeks.

Land supply issues matter a lot.  That was one of the points the 2025 Taskforce stressed back in 2009.  It is a shame that the Commission does not pick-up the Taskforce’s recommendation that Councils be required to develop and publish indicators of the prices of otherwise similar land that is, and is not, zoned for residential development.  Information and data are a key input to any analysis, and even when the current public and official focus on these issues fades, it will be important to maintain the flow of data.

But what of the Commission’s own ideas and analysis?  Here is a list of thoughts/observations/concerns, in no particular order:

  • It is good to see the Commission come out in favour of land-value rating, reversing the trend in recent decades towards capital value rating.  Land value rating tends to focus the minds of owners of the scarce resource, land.  There are other ways to tackle “land banking” (ie don’t allow regulation to make new urban land scarce in the first place), but land value rating would be a step in the right direction.
  • As would, on a much smaller scale, levying local authority rates on Crown land.
  • But, as with many Commission reports, there seems to be a too-ready sense that government is the source of on-going solutions, rather than the source of the underlying problems.  In other words, the report doesn’t mainly focus on getting government (central and local) out of the way, but on finding smarter or better ways of the government being actively involved (eg “this means a greater degree of publicly-led development”).  Perhaps it shouldn’t be too surprising  –  after all, two of the three commissioners are former heads of government departments, and the Commission works on projects requested by government, in a process where ministers are advised by government departments –  but it is something to watch out for.  I had a similar reaction to the Commission’s recent draft social services report.
  • The report does not seem to grapple at all with the indications from historical cross-country experience that as cities grow richer they tend to become less dense, not more dense.  It also does not engage with the Demographia data suggesting that Auckland is already a relatively dense city by advanced New World standards.  I’m not at all suggesting that regulation should impede denser development, but some of the Commission’s lines of arguments become less persuasive if greater density is unlikely to be the main preferred market response to ongoing population pressures.
  • For example, the Commission focuses on the idea that local authorities do a poor job in this area because of the excessive weight of existing homeowners, concerned about the losses of price and amenity value on their houses.  That sounds plausible if we think about establishing high rise apartment through Epsom, but it is far less clear that existing home owners have any strong objection to greater ongoing development on the periphery of cities, where historically most new building has happened.     After all, existing home owners have children who will be looking for housing before too long –  but again the intergenerational perspective seems to be lacking in some of the Commission’s work.
  • The Commission does not seem to give much weight to the idea that restrictions on development at the periphery may have as much to do with the biases, preferences  and ideologies of Council staff.  Perhaps there is nothing to that suggestion, but I wonder how many Council staff come to work each morning dedicated to facilitating citizens doing as they like with their own property, rather than shaping and imposing a vision on “their” city.  I read the Wellington City Council’s recent draft long-term plan, and it confirmed my worries.
  • The Commission proposed removing “District Plan balcony/private open space requirements for apartments”, which sounds sensible.  But what about site coverage ratio restrictions?
  • I reckon the Commission oversells the gains to be had from improving land supply.  I’m reluctant to say that because I think the gains that are on offer –  much lower house prices –  are substantial and important, especially for the younger and poorer sections of the urban population.  But I’d say it is “case unproven” when it comes to gains in real GDP, or real GDP per capita.  The Commission cites recent work by Hsieh and Moretti, which suggests that releasing adequate land could lift GDP per capita in the US by as much as 9.5 per cent.  Perhaps it is true, and perhaps it is true of Auckland.  But New Zealand is already a highly urbanised country, Auckland already makes up a large share of the total population, and Auckland has had faster population growth than almost any other largest city in an OECD country in the decades since World War Two.
  • Related to this, the Commission seems to be too ready to embrace agglomerationist arguments.  Yes, it is true that cities tend to have higher levels of productivity than smaller centres, but that does not mean that policy designed to drive the growth of big cities will, of itself, lift productivity.  Yes, policy should avoiding impeding the distribution of population within the country to its most productive locations, but not go beyond that.  In fairness, many of the Commission’s specific recommendations are about removing roadblocks, but the supporting text often seems to go beyond that.
  • For example, there is the unsupported proposition that “Councils and their elected representatives also need to lead in persuading their communities of the benefits of growth. These are difficult conversations.  Facilitating growth requires communities to change, and change is hard.  Some people will lose from that change.  But the community as a whole, and New Zealand, will benefit from it”    Setting aside the condescending tone, where is the evidence that population growth is a “good thing” –  because population growth is the issue here?  Again, if we are going to have fast population growth, we need to find ways to absorb it, without causing scandals like, for example, current Auckland house prices.  But a reasonable voter (or elected representative) might reasonably ask “haven’t we had rapid population growth for 70 years, and some of the poorest  growth in productivity/GDP per capita of any advanced country?
  • The Commission proposes providing powers of compulsory land acquisition for housing purposes.  At one level, the claim that “compulsory acquisition of property by the state can be justified if it is in the public interest” is circular.  What is “the public interest”?  The public interest might, for example, involve the protection of private property rights, including the right to hold property undisturbed.  This is another example of the Commission’s apparent reluctance to grapple with pervasive government failure and abuse of regulatory powers.  The abuses of eminent domain powers in the United States should be a salutary warning here.  The Commission goes on to argue that “given the significant social and economic harm caused by the current housing situation, a good case exists for compulsory acquisition powers to assist in the assembly of sites for large masterplanned developments.”    As if to water down the rather shocking nature of this proposal, the report suggests that powers don’t need to be exercised much, as they can provide leverage (in the same way a mugger with a baseball bat won’t need to hit me to get my money) and the chair is also quoted as suggesting the powers might only be to deal with “holdouts”.     But it just is not clear why such powers should be given to public agencies.  In a well-functioning economy, housing is readily provided by the private sector.  Public agencies and political leaders got us into this mess, and why would we expect that new powers would not be abused?   Have powers of compulsion worked well in central Christchurch?  It hadn’t been my impression.
  • The Commission does not seem (I may have missed it) to touch on a more radical option.  Why not, for example, explore a proposal that would allow any land to have houses built on it, by right perhaps up to three storeys high?  One might make exceptions for geologically unstable land, but shouldn’t the presumption be shifted back in favour of the private land owner?    With something like that sort of model, combined with land value rating, it is difficult to envisage that peripheral urban land prices would be very high for very long.    Yes, I know this proposal does not deal with all the transport  and infrastructure issues, and many of the Commission’s suggestions on these issues appear sensible.

Keen as I am to see a more responsive supply of urban land, I came away from the report with a question.  Supply and planning restrictions have become an increasing obstacle to affordable urban house prices in many advanced countries in recent decades.  There are individual areas that have held out – Houston is among the best known – but are there any cases where there has been a move back from heavily planned and regulated urban land markets to much more liberalised ones?  I’m not aware of any, but my detailed knowledge in this area is pretty limited.  My prior is to be a bit sceptical about how likely it is that far-reaching changes to the planning regimes, of the sort that would materially reverse the growth in real urban land prices, could be made, and then made to last.  If the Commission is aware of examples of successful substantial durable reforms it might be helpful to include them in the final report.  A low prospect of success is not a reason for not doing the analysis and continuing to make the case, but there is a question as to where political capital might best be devoted.

Which brings me to my final point.  The Commission has to take population growth as given, since it was asked by ministers to look at land supply issues.  But it is too often forgotten that most of our population growth in recent decades, and all of it now, arises directly from active government policy.

The chart below shows New Zealand’s actual population, and what it might have been under two different immigration scenarios.  Immigration policy only affects the movement of non-New Zealand citizens, and so what I’ve shown here is what population would have looked like if there had been no net non-NZ citizen immigration, and if net non-NZ citizen immigration had been kept at the sort of levels seen in the 1980s.  They aren’t precise estimates by any means –  it is possible, for example, that if there had been less non-New Zealand citizen immigration, there might have been somewhat less New Zealand citizen emigration.  But it is just designed to make the point that population pressures on the housing market are not any longer about the choices of New Zealanders (to have children or not, to stay or to migrate) but about active government policy.   With 1980s levels of non-citizen immigration, the total population would now be flat or falling slightly.   The only aspect of the non-citizen migration that is unrestricted is the (modest) flow of Australian citizens: all other arrivals require explicit government approval, and a planned policy of high net inward migration of non-citizens.

population scenarios

If we are worried about house prices –  and I certainly think we should be  –  a strategy with a higher probability of durable success might be to combine land supply liberalisation with some reduction in the targeted level of inward migration (bearing in mind that our government’s target for inward migration of non-citizens is itself very high by international standards).  There would still be considerable cycles in net immigration flows (as the net outflow to Australia waxes and wanes with the economic cycles), but the trend is the issue for longer-term affordability concerns.

And to hark back to the discussion on why New Zealand interest rates have been so persistently high, if lack of sufficient agglomeration and scale were really the big issue in New Zealand, we should tend to see low interest rates, and a low exchange rate, not the reverse.

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