The social democrats at the Productivity Commission

A short time ago, a press release from the Productivity Commission dropped into my in-box, announcing the release this morning of the Commission’s draft report on better urban planning.    The Government asked the Commission to take a first principles, or “blue skies” approach to the issue.

I’ve been increasingly skeptical of the work of the Productivity Commission.  They often provide some interesting background analysis and research, and yet they increasingly seem to be well described by the old line “when your only tool is a hammer, it is tempting to see every problem as a nail”.  The Productivity Commission is mostly made-up of, and run by, (able) long-term public servants.  Public servants design and help implement the instrument of state –  government attempts to remedy problems, typically with government-based tools.  There is a self-selection bias problem –  people who are inclined believe in the importance/viability of government solutions are more likely to work for government than those who don’t –  and a greater reluctance than usual to ask hard questions about one’s own capabilities, since government agencies typically face few market tests and weak accountability.  The Productivity Commission –  like the OECD –  tends towards smarter better government, not to asking hard questions about whether we couldn’t just get government out of the way in many more areas, as prone too often to being the source of problems rather than the solution.

The Productivity Commission’s report runs to over 400 pages, and since it was released at 5am this morning, I assume no one has read it all.  I was, however, struck by the fact that in a 600 word press release there is no mention of property rights and a single mention of markets (and that not positively).  There is a 10 page overview of the entire report, and a word search suggests that “rights” does not appear at all and “markets” only once.

My unease was heightened when I read this line in the press release

Planning is where individual interests bump up against their neighbours’ interests, and where community and private objectives meet. It is inherently contested and difficult trade-offs sometimes have to be made. These decisions are best made through the political process not the courts.

Again, no mention of rights.  And the prioritisation of the amorphous “community interests”.   The suggestion of increased reliance on the political process rather than the courts hardly seems like a recipe for a clear, stable, predictable (and non-corrupt) regime for managing potential conflicts between the property rights of various individuals and groups.

Perhaps this draft report will recommend some  useful steps in the right direction.  Time will tell.  But on the face of it –  the shop window, of the press release and summary – it seems to fall quite a long way short of a first principles approach in a free society.

7 thoughts on “The social democrats at the Productivity Commission

  1. Well spotted. ( an almost relevant story in response, because its Friday and I’m waiting for the shot put)

    In 1988 Rob Cameron (NZ’s leading merchant banker in writing about rather than doing deals, famous for his Scott Perkins led sale/gift of the GPO which set Hartie up with a beginners parlay of $3m into $43m, and the only person his old mates at Credit Suisse/Jardens could find in the business community willing to give evidence in favour of the Feltex rort) was working at Fay, Richwhite – having joined the previous year.

    The latter of those 2 partners decided Rob could head up the rest of us in the Equities and M&A division who had been there since 1984 and had survived 2 near bankruptcies and were hunkering down for a couple more to come (including the one requiring some morality).

    Rob scored a mandate to value the Clarendon for Richmond Paynter. I was from Christchurch, so was given the brief.

    Knowing bugger all about real estate, except that the Catholics always have the best stuff, I went back to first principles, which is the main relevance of this short story to your own.

    The bottom line was gleaned from a steer that Peter Menzies, of Mainzeal fame, gave me a year or two before. Peter advised that CBD was defined over centuries and grew mere inches per decade. He opined that the stuff Hawkins was doing up on Symonds Street was not CBD, and under his definition even the ill fated ASB Bank tower, now the Auckland Council tower of babel, would have struggled to meet his definition.

    Peter said that pressure on the centre was what determined real growth in value. Over time if there was real economic growth and increasing population pressure, and competition amongst businesses to be at the centre of commerce, the land would become increasingly valuable ( at around 2.5% pa possibly mirroring gdp growth) which was important because inevitably the improvements would be demolished and that was most likely to happen when the real increase in the underlying land’s value would justify demolition and the building of something even bigger.

    And what is my point, I hear those of you who have bothered to come this far with me ask? My point is the same as it was then, land value and property prices are determined by how many people want to be in the same place for their own very valid reasons and what the person who owns the land is allowed to do with it by those geniuses of property purchase and architectural merit down at town hall/tower of babel.

    That 1988 theory indeed stood the test of time because Richmond’s Clarendon Tower https://en.wikipedia.org/wiki/Clarendon_Tower that I valued in a difficult and not yet at the bottom market at a hold at 9% but a sell at 7.5% isnt worth much anymore, but the dirt underneath still is.

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    • Tony;

      There is a “single biggest” difference-maker with the price of urban land. In all locations. The classical land rent curve has a nice gradual slope starting from true rural land values, ramping upwards towards the centre of the city. In fact historically, the slope has varied considerably in steepness and “peak height” (relative to true rural land value).

      From around 1920 to 1960 in most of the first world, urban land rent curves were flattened, both in the steepness of slope and the height of the central peak. This is because of the effect of roads and automobiles on the potential supply of land for use by “urban” actors. The land values even at the centre of the city were reduced, because of the knock-on effects of competition from alternative locations, all the way out to the exurbs and their true rural land pricing.

      Urban land values ceased to be derived by a process that earlier economists would have called “monopoly rent”, and instead urban real estate started to have “consumer surplus” in it.

      If you can get hold of Grebler, Blank and Winnick (1956) “Capital Formation in Residential Real Estate: Trends and Prospects”, it is an eye-opener assembly of actual land value data supporting what I am saying. Even Manhattan’s land values. An interesting theoretical postulation that was proved right, is Robert Murray Haig (1926): “Towards an Understanding of the Metropolis”. This included what has been referred to since as Haig’s Theory of Transportation and Land Rent.

      Even non-economists of this era referred to the reduction of urban land prices by the automobile: for example, Frank Lloyd Wright’s writings are saturated with this observation. Henry Ford was gleeful in the role that he was playing in destroying the big rentiers in property and finance, and eliminating a principal cause of the appeal of Marxist nationalisation (of land) to the masses.

      The re-creation of a sharp discontinuity in urban land prices, de-anchoring them from rural land values and restoring the “monopoly rent” means of derivation (and the old pre-automobile speculative volatility) is absolutely undeniably due to regulatory restrictions on the conversion of MOST land to urban use, including super-abundant quantities of it within economic transport distance of the existing urban fringes.

      Your point about land values being affected by “what the person who owns the land is allowed to do with it” is correct, but this is especially important when the entire urban land market has values being derived from a “monopoly rent” type effect. (In fact although there is allegedly “competition” between a myriad of land owners, the correct conceptual rebuttal to this is to be found in the literature on “monopolistic competition”). Under these conditions, it is a total falsehood that increases in urban density will result in falling average housing costs; in fact the correlation runs the other way, just as tighter and tighter supplies of any essential consumption item under a quota or oligopoly will result in with a higher and higher per-person cost even as the quantities obtained with that rising cost will be falling.

      Otherwise, why does Hong Kong, 26,000 people per square km, have a house price median multiple of 17 and Atlanta, 700 people per square km, has a median multiple of 2.9? Obviously land values elasticity to density are exponential.

      We see this playing out in every city that conducts the contemporary fashionable but disgraceful experiment in compact-city urban planning. No “housing unit”, no matter how battery-hen in its nature, is able to be provided as affordably as the pre-experiment median home, which would have been a middle-aged stand-alone multi-bedroom suburban house. That pre-experiment median home, once 3 times median income, becomes a 10 to 15 times median income home.

      Winston Churchill once said of Vladimir Lenin that he was learning the world’s most expensive economics lesson, the cost landing on millions of innocent people. The current economics lesson relating to urban planning fads, differs only in the magnitude of the monstrosity.

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  2. I’ve had a quick skim of the report. It’s pretty weak tea. Makes some noises about markets and more of a presumption in favour of development, but nothing really bold like a right-to-build law.

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  3. Brendon

    A really interesting article thanks. I like your specific proposal – and encourage others to read it – and see it as broadly consistent with my, much less developed, notion that the rights and interests of existing owners should be translated into contract, which would in turn by variable by mutual consents (super-majorities if the group of owners in any contractural arrangement was large enough.

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  4. A similar thing happened with the Australian Productivity Commission with their 2005 report into housing affordability. A long, comprehensive, otherwise interesting report which concluded that supply factors meant little or nothing to the then decade long housing price boom, and weren’t a major source for concern.

    Since then, it seems that Commonwealth politicians are getting better advice (privately – but not publicly). Liberal party types I’ve spoken to fully understand the issue and every now and then say bland things about increasing supply, but they seem powerless to do anything, and can’t see any political traction in the issue either. And one would surmise that they don’t see much value in asking the PC to have another crack at it.

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