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) |
| 1950000 | 1.557 |
| 1478000 | 1 |
| 2450000 | 2.493 |
| 2976000 | 3.189 |
| 1250000 | 0.303 |
| 1950000 | 0.9809 |
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?
croaking cassandra 
As the owner of an Auckland home with the land component being worth between about two thirds and three quarters of its $1m current value it is comforting that nobody ever believed Cassandra.
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I have to wonder if NZ will ever have the political courage to pull the plug on the property market. I’d be afraid the upheaval would be as big as Rogernomics, and difficult to stop once started.
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If it ever happened I would be screaming mad until it sunk in that I still had my house to live in and that my kids were able to buy as I had done at their age.
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What New Zealand needs is to embrace a Urbanisation Project -being a broad range of policy options to improve the affordability and amenity values of our urban areas. We should do this for social justice and economic efficiency reasons. That is the broad thrust of my writings here.
View at Medium.com
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My son in law and daughter have just returned from visiting Auckland, They live in West Melton just out from Christchurch. Two of their friends are living in Auckland in Houses that are “worth” about twice the “value” of an equivalent house in Chrisctchurch. Both are looking at taking up jobs in Christvchurch that pay as well as the ones they have in Auckland. Both are likely to move and pay down most of their mortgage.
Maybe market forces will overtime solve the Auckland housing problem.
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If NZ had State or Provincial government that might work. Because a chunk of the relocators taxes would go from Auckland to Canterbury. This would mean Christchurch’s infrastructure would improve, which would make Canterbury more attractive to more people -and so on. This sort of decentralisation would help NZ by giving incentives for land-use regulations to be more effective.
But given infrastructure decisions are made in Wellington, where Canterbury has very little influence, that feedback loop is missing…. In fact central government treats infrastructure spending like a lolly scramble to be used to boost political popularity…. bridges of significance, roads of national significance, light rail of importance, inspirational sky-paths…..
The danger is this all falls apart in the near future and it is not Christchurch which gains at the expense of Auckland, but Brisbane -which has the best package of affordable housing and infrastructure amenities..
https://www.greaterauckland.org.nz/2017/08/24/need-talk-brisbane-strategic-planning-matters/
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Brisbane can gain younger New Zealanders until they discover that New Zealanders are actually 3rd class Special Visas and will not have freebies on their kids futures. Kicked out of the Senate. Unable to vote. No free education. Make a criminal mistake and end up on Nairu isolation island prisons and no legal protections.
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Christchurch is fine until the next big shake.
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What Labour should do is leapfrog past the expensive blocks of land and purchase a few thousand hectares of forestry land in Dairy Flat by compulsory acquisition at its forestry value. So that would be at a few $thousand a hectare not $millions per hectare. They should then rezone the land so it can be used to construct affordable Kiwi Build houses.
Given Labour would save billions of dollars on land purchases, they could easily spend more money on infrastructure, say by extending the express bus-lane to Dairy Flat (with the bus-lane land corridor acquired in such a way that it could be converted to light rail if demand for road-space indicates this is desireable in the future). Further they should remove planning restrictions which prevents the private sector from investing in similar development projects.
A close look at Labour’s housing policy shows this approach is consistent with their policy statements. http://www.labour.org.nz/housing
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“The Harvey-wrought devastation is just the latest example of the consequences of Houston’s gung-ho approach to development. The city, the largest in the US with no zoning laws, is a case study in limiting government regulations and favoring growth—often at the expense of the environment.”
https://qz.com/1064364/hurricane-harvey-houstons-flooding-made-worse-by-unchecked-urban-development-and-wetland-destruction/
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For an alternative perspective on that particular claim, which I found quite persuasive
http://philmagness.com/?p=2126
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“The primary flood threat facing the citizens of west Harris County and west Houston comes from the inability to drain the Addicks and Barker reservoirs in an efficient manner,” the report said.
When built in the 1940s, the area’s reservoir system was adequate, the report said. But because of changes made to the system, and given the pace of urban development 50 years later, “the project’s original design parameters and assumptions are severely outdated and invalid.”
In addition to the report’s main proposal of a conduit, its authors raised other alternatives, such as digging the reservoirs deeper, buying out properties at risk and creating new regulations on development.
And then there was a final, stark alternative: “Do nothing and accept risk of flooding.”
https://www.dallasnews.com/news/harvey/2017/09/05/houston-grew-officials-ignored-lifetime-chance-spare-thousands-flooding
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Need to check the veracity of that $1700 per hectare
Show me where you can buy land for $1700 that is not a swamp nor goat country
And note the language used “had sold for $1700 per hectare
When? 1940? How big?
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Nov 2015
With luck, this should take you to an image of the material I was sent
I wouldn’t put much weight on the $1700 per hectare, which may be specific to low timber prices (?) but use the best alternative agricultural use numbers – more representative typically.
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Riverhead Forest – It is owned by Matariki Forests and once part of the Carter Holt Harvey empire – imagine Auckland City Council have it covenanted up to the eyeballs – explains the unusual price
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Value creation and value destruction – all by the whim of politicians’/bureaucrats’ pens
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Nice land but you can’t build houses on that without the infrastructure. Add another couple of billion for roading, sewerage, drainage, rail, drinking water, waste treatment, earthworks etc.
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Getgreatstuff, perhaps the money that is being spent on grossly inflated housing costs by all future generations could have been put towards financing infrastructure instead?
If you finance infrastructure with the debt, you have at least got something in return for the debt.
Inflated house prices represent NOTHING in return for the debt. Which option is rational?
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Actually I do not think house prices are grossly inflated after spending close to $600,000 and 3 years on a 3 site subdivision in Mt Roskill. 2 years for the RMA and a year so far on the building consent.
The house was the cheap part as I just relocated an existing house that cost me $25k for a 130 sqm 4 bedroom house. Relocation and piles cost me another $60k and a bit of tidy up. All up $100k for the house. As I also moved an existing house, that cost another $60k The rest of it was in the Plans, Council development contributions, legal paperwork Section 223 and section 224c and LINZ, drainage infrastructure, fencing, retaining and earthworks.
Therefore each line you draw for a subdivision, plan for $200k a line before the building cost.
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…..current political capital falls proportionately with declining house prices….it might change; I pick it sarts with a summer BBQ season where the talk of house prices falling doesn’t generate more heat than that under the grill..!!
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With tourism and International students injecting $15 billion every 12 months into the local townships and communities. The question is more what is the lag time of the $15 billion being spent and for that liquidity to enter the housing market? How many 12 months $15 billion spendup will it take to put the heat back to compensate for the Chinese capital controls that have dried up liquidity in the housing market?
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500 hectares at 20 houses a hectare would create a years worth of houses for Auckland -about 10,000 houses (this is approximately the number housing consents Auckland issued in the last 12 months)
500 hectares at $1.266m would cost $633m
500 hectares at $50,000 would cost $25m
500 hectares at $1,700 would cost $0.85m
So there is a potential saving of at least $600m if Auckland can access lower priced land.
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The savings per house would be $600m/10,000 so $60,000 from the above figures.
A recent study commissioned by Steven Joyce though shows the land use regulatory impact on new construction costs in Auckland to be over $500,000 for each newly constructed house (once you strip away the pre-development land costs and building construction costs)
Perhaps Michael should cast his expert economic eye on that study?
http://www.superu.govt.nz/publication/quantifying-impact-land-use-regulation-evidence-new-zealand
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Can we assume that the sort of restriction/rort in the housing market that Michael exposes in this article is one of many similar such restrictions/rorts adding excessive costs to house building in Auckland?
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Brendon, do bear in mind that around half the land in a development is not saleable sections. So you need to double the land cost per housing unit when running the big numbers.
But the differences are so massive between true land value (according to bid rents based on the next most valuable use) and extractive land “value”, that the point is highly valid anyway.
I know you have rightly pointed out that one of the reasons NZ managed to achieve housing affordability in past decades even without the market freedom of the MUD system that is common in affordable US cities, was because government was involved in urban expansion, and they were fully co-operative with the private sector in doing developments in conjunction with the big infrastructure investments. Ironically the bogeyman of “sprawl” happened either way.
Now that Wellington has gone all “anti sprawl”, what happened is that all the abundant land supply between the existing fringe and the splatter development of the past – eg Porirua and further – has been removed from the market. Yet unintended consequences of this approach, noted by Alain Bertaud in studies of Portland and other cities, is that an absurd proportion of “intensification” happens at the furthest-out locations where the land prices are the least exorbitant. (“Most affordable” would be the wrong term, “least exorbitant” is the right one).
So looking at the Wellington region for evidence, we see intensification and high density development going on apace at Titahi Bay, Pahatanui Inlet, Stokes Valley, and wonderfully logical efficient spots like those, while trendy nurbie Thorndon and the Green Belt remain untouched. Not to mention the hundreds of square kilometers of land adjoining Karori, the Western suburbs, Newlands, Churton Park etc.
As Bertaud suggested, the likely outcome is longer average commutes. Hayek would be laughing if he was looking on.
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My numbers are not far off for Auckland Phil. Look at the Hobsonville redevelopment
“On the 1.67 km² of Crown land, about 3,000 homes were to be built (in addition to facilities such as parks and schools). Of the homes, 85% were to be privately owned, while around 15% were to be state housing social rentals financed by Housing New Zealand and dispersed throughout Hobsonville”
https://en.wikipedia.org/wiki/Hobsonville
That works out at 17.96 houses per hectare -which is quite close to 20 per hectare. The figure I used because it was a nice round number.
If public transport is provided from the get-go medium density housing becomes more desirable/preferable. Probably the private sector developments adjacent to the KiwiBuild sub-division would be lower density and the KiwiBuild would develop into a natural transport and commercial hub. The density of private sector developments depend on access to alternative transport modes, rules for congestion charging and parking minimums, plus how much street space and number of intersections (particularly important for active modes of transport like walking and cycling) developers are required to provide, when they initially divide land into public/private spaces.
I think developers should be given access to rural priced land but in exchange they shouldn’t be allowed to make sprawling cul-de-sac subdivisions which have a low allocation of public spaces for streets and intersections -which makes them impermeable for walkers and cyclists -which perpetuates private automobile only transport options. If you think about it this is a hidden subsidy for private automobiles.
NZ doesn’t have perverse incentives and racism around schooling which blights US urban planning and causes such large section sizes -so I think density in NZ will naturally gravitate towards European not US norms. But if it doesn’t, it is not an issue that greatly worries me -as long as infrastructure is paid for and hidden subsidies are removed.
Otherwise I completely agree with you Phil.
P.S Good to hear from you : )
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Thanks Brendon. I see what you meant, the development is 40 units per hectare of the total site. Therefore each housing “unit” on average is occupying 1/80 of a hectare of privately owned “section”?
This is dog-box living, a disgrace in Godzone, all the more so at the heinous unit prices.
Much of the stinginess in street space, and the travel-inefficient layout, is a consequence of the inflated land prices as developers desperately try to maximise the proportion of land that is saleable. In the affordable US markets developers work in the opposite way, because the land is so cheap, they often aim to maximise their returns by “adding value” in the form of amenity; often including wide streets, green space, multi-transport-mode orientation, nature trails, intelligent mixed uses and housing variety. The myth that suburban development under freedom is “sterile”, is long out of date as developers have learned from “urbanism” theory and contemporary demand patterns.
Some small proportion of new development might still be bargain-basement no-frills housing, but there is minimal need for this if everything else is such good value for money, from CBD apartments to old central-suburb depreciated housing to townhouse redevelopments in central suburbs to master-planned community housing. Our “worst of all worlds” has us paying far more for shite like Hobsonville “housing” than all these far superior choices in undistorted markets. And we pay even more for dilapidated old hovels in central suburbs. The website “Crack Shack or Mansion” is about Vancouver but it might as well be about Auckland.
I know you are fighting the same good fight overall, keep it up.
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I am a fan of moving Auckland into a ‘dumbbell’ shape with two new centres of development with a concentration of high speed transport connections between. A new MUL could be created and the existing one demolished together with Government being able to acquire the new land at undeveloped pricing. The speculators could be left to ‘rot’ for a few years responsible for all infrastructure costs prior to release to build on or until they moved their pricing into line.
Meanwhile leave central Auckland to concentrate only on port and tourism servicing and a few localised shopping centres.
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The little-understood trouble with prescriptive rationing of land supply is this. The “supply of land” is NOT the total volume contained within a boundary or a zone. It is the amount of land contained within the sites for which the owners happened to intend to sell it anyway.
This is the logical explanation, noted by numerous economists, for Portland imposing a “20 year growth boundary” in 1977 and land prices exploding in 1980. The land for which owners were willing sellers, ran out in 3 years flat.
Because developments take several years, and also developers need to secure their next site before they finish with their current one, as much as “10 years supply” can be spoken for at any one time under normal commercial conditions. This is why land prices absolutely explode in short order, as the situation quickly becomes one of developers frantically door-knocking around all site owners within a boundary or zone, creating correct perceptions of “holdout” power on the part of the land owners. If there is a “10 year growth boundary” absolutely every site owner must be induced to sell immediately. If there is a “20 year growth boundary” there is a short hiatus only.
We can calculate some rough estimates of how much land supply is actually needed to keep prices down to “bid rent in next most valuable use”. If “20 years” is really “3 years”, and developers really need “10 years worth NOW”: 10/3 X 20 = 67 years supply. And that is “for now”. Every year, to stabilise prices, the boundary should be pushed out by another 3.3 years “supply”. Even then it might be only just in balance, more would be safer.
Economists considering this question have concluded that the outcome with a “growth boundary” that actually was sufficient to keep prices from inflating, would be little different to having no growth boundary at all.
The question is really “are we going to allow splatter development with later infill”? I know of several papers that state that splatter development with later infill is the most economically efficient anyway. One of the stupidities we now have is that we have the splatter from past decades and now we have disallowed the “greenfields infill”. Redeveloping Titahi Bay at higher densities, and building 20 units per acre overlooking Patahanui Inlet is “encouraged”; a whole new subdivision somewhere around Karori / Wilton / Crofton is not allowed. Absurd!
Splatter development with later infill allows land uses to evolve, with later decisions being guided by what is already happening. Forcing growth to be in a slowly creeping-out “carpet” results in every potential spatial “agglomeration economy” being atomised into diversely-located individual actors AND crammed in cheek-by-jowl with other actors with whom mutual efficiencies are not possible.
Everything the urban planning faddists are using as justification for their approach is wrong in practice. Everything. There are no mitigating “benefits” and there are massive foregone gains that no-one quantifies because there is no way of knowing. For example, Silicon Valley might never have happened if it were not possible for whiz-kids with bright ideas but no capital, to secure cheap exurban space to play with. I noted with interest a DomPost article a few weeks ago where two guys actually from Silicon Valley are buying up land in Whitemans Valley because after looking around, and based on their experience, they see that as the most likely place for a future tech hub. Of course the Central Planners will tell them that potential tech-industry operators are required to obtain office space on Lambton Quay, not cheap commercial buildings newly built in Whitemans Valley, which might displease the Gaia Earth Mother.
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The thing that worries me about the growth of Auckland is what happens to the land south. The land around Pukekohe is some of the most fertile land you will find anywhere in New Zealand, and is a major source of potatoes, onions and cabbages. Historically, that is one of the main reasons for the restrictions on land use in that area – to maintain security of food supply.
I’ve seen the market gardens slowly get encroached upon by the growth of the town, and seen the remarkable land around Karaka get filled up with housing and horse farms, which are the least productive use of arable land I can think of. Are we going to free up land use restrictions to provide ‘affordable housing’, and lose Auckland’s breadbasket? Or are nimbys going to do the job, complaining about spraying next to their nice new houses,
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Hi so do you mean that lands just outside the future urban zone of dairyflat are 10 times cheaper than one that is just inside?
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