It is now pretty well-recognised that local authority zoning decisions can materially affect land values, creating an artificial scarcity in developable land and driving up the price of such land relative to the price land would otherwise command for alternative uses. The best-known empirical study on this effect around Auckland (and the metropolitan urban limit in particular) was by Grimes and Aitken, summarised as follows:
We capture the impact of the MUL boundary on land prices by separately allowing for land which is: (i) well inside the MUL boundary,(ii) just within the boundary, (iii) sitting astride the boundary, (iv) sitting just outside the boundary, (v) sitting just a little further beyond the boundary, and (vi) sitting well beyond the boundary. We find a boundary land value ratio of between 7.9 and 13.2 (i.e. land just inside the MUL is worth around ten times more per hectare than land just outside it)
In a well-functioning liberal market, one might normally suppose that developable land on the periphery of an urban area would trade for around the value of that land in its best alternative use – typically agriculture. If it went for much more than the agricultural use value, most farmers would be well-advised to sell, and they would do so until the prices in the alternative uses were more or less equalised. The median sale price of dairy land is around $50000 per hectare.
Everyone knows that that is not remotely how things are in our highly distorted market. But sometimes concrete examples bring home the point more starkly.
The other day a reader who knows something about property sent me a copy of a real estate agent’s newsletter on recent land sales in Dairy Flat, an – as yet – largely undeveloped area between Albany and Whangaparoa/Orewa, which is apparently classified as a “future urban zone”. As my reader noted, the area does not yet have wastewater connections, so in his words “it is ages from development”. Here were the sales in July.
|Total price ($)||Parcel size (hectares)|
The average price of this land was $1.266m per hectare.
In our subsequent exchange, my reader noted that the value of this land for agricultural purposes might not be much more than $30000 per hectare. He went on to point out that not that long ago 3800 hectares of forest land – a little further inland than Dairy Flat, but similar terrain and a similar distance from central Auckland – had sold for $1700 per hectare. In other words, the preferentially-zoned Dairy Flat land was selling as 750 times the price of the forest land.
Perhaps $1.266m per hectare doesn’t sound too bad. But this is the unimproved value of the land – none of any relevant earthworks have been done, no suburban streeets been formed, no development levies incorporated. Even the holding costs for the few years until development actually occurs won’t be trivial (at, say, a low end estimate of a 10 per cent per annum cost of capital). By the time tiny suburban sections are being sold to potential residents, they will have to be very expensive to cover the costs of someone now paying $1.266m per hectare.
And most of this “value” is simply added by politicians and bureaucrats drawing lines on a map. It is obscene, and unnecessary. It continues to skew the game against the young and those on relatively low incomes and/or limited access to credit, in favour of those who already have, or who can lobby councils to draw the lines in suitably limited places.
And, although I don’t have a time series of this sort of data, it doesn’t speak of any confidence among those actually buying and selling land right now that the next government – of whatever political stripe – will make much difference in sorting out the shameful disgrace that is the New Zealand housing and urban land market. I’ve long been sceptical, but these people are putting real money on such a call. Perhaps they’ll be wrong and lose the lot. But what reason is there to believe that is likely, when not one of our major political figures will even suggest that much lower house and land prices would be a desirable outcome towards which their party would be working?