Palmerston North or Des Moines?

I’m still enfeebled by the last of a bad cold –  three days of Wellington Anniversary Weekend and I didn’t even get out the front door –  so there won’t be much here today. But I noticed that Demographia yesterday released their annual report on median prices relative to median incomes in Anglo countries cities (and a few other places).

As three academics from the London School of Economics put it in their introduction

Before we can have useful debates or even give a balanced assessment of the issues we need good measures. Here Demographia has done wonders over the past decade to focus public debate on the inequity of rising house prices relative to incomes. As Oliver Hartwich in his Introduction to the 13th edition last year said “Demographia’s‘ median multiple’ approach…firmly established a benchmark for housing affordability by linking median house prices to median household incomes. It… is not a perfect measure because it does not account for house sizes or build quality. But it is the only index that allows a quick comparison of different housing markets, and it is the best approximation of housing affordability measures we have to date.”   We agree.

(The house size point matters when comparing, say, New Zealand or Australian price to income ratios with those in, say, the UK  –  where the typical house is notoriously small –  but much less so for comparisons across, say, the US, Canada, Australia and New Zealand markets.)

The big strength of the report is the collation of the data.   But the authors have policy prescriptions in mind too.  This is the more “analytical” of the charts in the report –  a variant of one they seem to show most years.

demographia chart 2018

No New Zealand city is large enough to feature, but the general point isn’t reliant on a single observation: by and large, cities with high price to income ratios have restrictive land use laws.   And no city –  in their sample –  with liberal land use laws has particularly high price to income ratios.

As so often, the US offers a high degree of in-country variability.  There isn’t just a single large city, or a single large fast-growing city. And there are very substantial differences in the land-use restrictions regime.  All within a country that has the same currency (and interest rates), the same banking regulations, and much the same tax system.

So here are the median house price to income ratios for the New Zealand cities in the Demographia sample and a selection of US cities.

demographia 2 2018

Did I cherry-pick the US cities?   Well, yes, in some ways I did.  If I’d simply wanted to show what can be done in the US, there are 10 cities with populations over 2 million with price to income ratios of 3 and under.  But some of them are cities that haven’t done very well economically, and really depressed places with falling populations can have house prices below replacement costs.

Instead, I picked out a selection of cities –  of different size, although all larger than the typical New Zealand city – in a different parts of the country.  I don’t know a lot about some of them, but many are regarded as pretty nice places to live –  at least if one gets over New Zealand priors in favour of cities by the sea (which, of course, Hamilton and Palmerston North aren’t).

As for population growth, I found some scattered snippets:

  • the Charlotte area is estimated to experienced a 15 per cent increase in population from the 2010 census to 2016,
  • the Nashville MSA is estimated to have doubled its population in the last 30 years, and had a rate of population increase similar to Charlotte’s in the most recent decade,
  • the Boise (Idaho) area has doubled its population since 1990,
  • according to the US Census Bureau, Des Moines has recently been the fast-growing city in the mid-west (at around 2 per cent per annum).

As regular readers know, I’m not a fan of government-fuelled population growth.  But in the US as a whole, immigration policy isn’t a large contributor to population growth, and so rapid population growth rates in individual cities are mostly about people and firms locating where the opportunities are.       And, perhaps, where the housing is affordable.

There seem to be plenty of examples in the United States in particular showing what can be achieved –  functioning affordable housing markets – even in areas with fast-growing populations.     Perhaps there is something amiss in our construction (and construction products) markets, but there has to be something seriously amiss with our land use laws and regulations when price to income ratios in what is –  for now –  by some margin our least unaffordable market are materially higher than those in flourishing US cities, such as some of those shown in the chart.

It would be good to see the urgent report the Minister for Housing commissioned before Christmas on the problems around housing in New Zealand highlight some of these simple, but telling, contrasts.

23 thoughts on “Palmerston North or Des Moines?

  1. Reblogged this on The Inquiring Mind and commented:
    This post draws attention to a key factor in the housing market, the way in which land use regulations exacerbate the problem. This when the way construction materials are supplied explains much of our problems. However our politicians are fixated on the myth of the foreign speculators, rather than examining the real facts

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  2. Houston residential development boomed on the lightly regulated floodplains of Texas, structuring in the current disaster. US govt contribution, $15b and counting. How does this fit a model deregulation = cheap housing?

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    • Various commenters have made the point about Houston and the floods previously, but I really don’t get the point (as substance rather than rhetoric). Even if the argument were correct in respect of Houston, and I’ve read counter-arguments, how much did the NZ govt have to spend in Christchurch (a city not a 10th the size of Houston) or will it face in Tauranga (when the Mt Maunganui tsunami almost inevitably comes), or Wgtn when ‘the big one” finally arrives”, or San Francisco. or……even potentially Akld when the next volcano erupts.

      If the NZ argument were genuinely one that said “we can’t allow development west of Hamilton (say) because of major geological risks that would be something specific to debate. But I’m not aware that in any of our cities such geological risks are the issue holding govts/councils back; rather it is issues around transport and infrastructure funding and ideologies (about what cities should look like and how officials/politicians think people should live).

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      • Good point re Chch. There was an engineering report published early 90s CV (“Lifelines something something”, University of Canterbury from memory) that predicted significant damage in the (eventual) event of a shallow earthquake. Of course 2/3rds of the city was sunk costs by then. No pun intended.

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    • Plenty of reasons a forced “more compact” city would fare worse, not better, in a natural disaster. The rainfall that hit Houston in Harvey was colossal, several times greater than New York got during Sandy – and New York took a pretty big hit. If New York had been hit by Harvey, it would be a far bigger mess than Houston was. I completely fail to understand why anyone thinks it is smart to use this argument against Houston. Their reticulation is some of the best in the world; Harvey was just something extraordinary.

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  3. That Demographia survey is a wealth of information. But their belief in removing urban growth boundaries as the sole key to housing nirvana is so out of touch as to be ridiculous.

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    • A lot may rest there on “sole” and “nirvana”. There are issues around funding/allocating transport/infrastructure costs, and – in NZ anyway it appears – issues around constructions cost/products, and in some places natural geogrpahic constraints are an issue – but the US experience suggests we could deliver much more, more affordable, housing if the market in urban and peripheral urban land were freed up. Claims of justice, even if nothing else, call for substantial moves in that direction.

      In a NZ context, it was partly why I didn’t focus on Akld, Wgtn and Tauranga where there might be somewhat-plausible arguments about natural constraints. There are none in Hamilton, Palmerston North or Napier-Hastings.

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      • I do support removing the urban boundary, particularly if the government captures some of the land value increment via a windfall tax as in the ACT. In my experience however, the quality of life in outer Auckland is pretty bad and the people who are living there would like to move closer in given the chance. I also think that once the negative externalities of car travel are fully priced in (which they should be), new houses in the exurbs aren’t going to be that cheap. I actually think more terraced housing and 3-4 storey walk-ups are going to help Auckland more.

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      • Of course, if they were pretty liberal in freeing up land there would be no material land value increment to tax (potentially a different issue if you change zoning around transport hubs etc).

        No problem with road-charging etc, but even if that were done I’d be open to saying what private preferences deliver. my prediction – nothing more – is that pleasant spots like the land between Whangaporoa and Helensville would be filled in pretty quickly, mostly with standalone dwellings.

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      • Blair: certainly the ideas presented on the Greater Auckland website and underlying much of the Auckland Unitary Plan are for terraced and 3-4 storey walk up. In Auckland North shore numerous apartment blocks are under construction. However you only have to read one article about body corp and leaky homes and all enthusiasm for actually buying such properties is severely dented. My elderly standalone Auckland property will retain much of its over-inflated current value until a rock solid new building guarantee scheme is implemented.
        http://www.stuff.co.nz/business/money/100789055/15-years-of-leaky-buildings-and-the-brutal-economics-of-owning-a-leaker

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      • Not to diminish the plight of those affected by leaky homes. But humanity has been building terraced houses and small walkups for millenia and they are common in every great city. I have lived in such places in London, San Francisco and Sydney and thought they were great. If there is some legal or structural impediment in our building industry I would prefer we fix it rather than trying to create some kind of chimerical suburban paradise.

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      • But recall that mosty “great cities” were developed – particularly those inner parts where such housing is common – before cheap and easy transport developed.

        Personally, I’m happy to accommodate the tastes of potential purchasers, but most New World cities are not very dense at all.

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    • On the contrary, it is breathtakingly out of touch to assume that removing growth boundaries is inconsequential to affordability. And when it comes to nice townhouse redevelopment, if you have growth boundaries and high median multiples, you end up with expensive townhouses as well as expensive suburban McMansions. If you have no growth boundaries and low median multiples, you end up with all options being affordable. Townhouses near Houston CBD are half the price or less than Auckland’s equivalent. There is no evidence from anywhere in the world that “unleashing intensification potential” in the absence of freedom to spread out, does anything other than reduce the size of housing that people pay rip-off prices for.

      And the argument that expanding fringes get more and more sterile is ignorant nonsense, based on a non-existent monocentric urban form. Growing urban areas evolve new nodes of employment and all kinds of amenity as they grow; so while Houston covers something like 6 times Auckland’s land area, average commute to work times are about the same, possibly even lower (Auckland data is low quality). In fact the biggest factor in commute distances, is how dispersed or centralised employment is, and how steep or flat the land price curve is. A median multiple of 9 means simply that a great proportion of locations are unaffordable to most people, regardless of the location of their employment opportunities.

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  4. As quality of build matters so do earthly forces.
    To make a valid comparison and a single house across the range one should factor in the building regs as they pertain to things like rain, wind, earthquakes, heat and cold.
    A render of what can happen.
    on THIS DAY ~ 23 January (1855) at 9:11 pm an 8.2 magnitude earthquake shook the whole country. Centred in the Wairarapa, it caused extensive damage and altered our city’s shoreline considerably.
    The earthquake triggered extensive landsliding on the Rimutaka Ranges, along the Kaikoura coast and in Wellington, where access to Petone was cut off when a large landslide containing 300,000 m3 of material cascaded down to block the coastal track north. The slip is still visible today along the Hutt Road.

    More info & details (source of the right photo) can be seen at this link … http://info.geonet.org.nz/display/quake/M+8.2+-+8.3,+Wairarapa,+23+January+1855

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  5. If land use restriction really is a big issue, wouldn’t one expect a step change but there isn’t, just a nice curve which would suggest that it is an effect not a cause. Which would tie with most places having land use restrictions for practical reasons.

    We only have to look at the possibility that NZ might have to import vegetables because of possible development in Pukekohe. Once the market gardens for Auckland were at Mangere Bridge which is long been lost. Why should we enable Auckland to grow, as previously demonstrated Auckland is a every low added valued city. Which may be related to its geographical size, very long and narrow negating the added value to be expected of a city of that size.

    https://www.stuff.co.nz/business/farming/agribusiness/79606735/imports-needed-to-replace-veggie-growing-land-consumed-by-urban-sprawl

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    • On your first point, no I don’t think we would expect a step change, because land-use restrictions are 0/1 in nature and because even in the presence of tough land use restrictions other things can matter (including the degree of population pressures). Land use restrictions seem to be more in the nature of a dragging anchor, and some anchors are heavier than others. eg if there was a total prohibition of having ever expanded the physical footprint of Tauranga, or on allowing high-rises, the consequences for Tauranga house prices would no doubt be worse than we’ve actually seen.

      Why should we enable Akld to grow? Bottom-line: given central govt’s immigration policy, not to do so just puts poorer younger Aucklanders at a permanent disadvantage, skewing wealth towards the old and established. It is poor economics, and atrocious from any sort of social justice perspective.

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    • If by “step change” you mean in the price of land in the vicinity of the growth boundary, then by gum you bet there is a step change, especially if you consider that land just outside the boundary is already being speculated in in anticipation of an expansion in future.

      Median multiple 3 cities do have a gradual land price curve from rural land inwards to increasingly-developed areas. The factor of inflation in Auckland relative to that, is around 30 (the ProdCom commissioned research into this). The factor in London is 900, so we have a way to go!

      By the way, the inflation in the price depends a lot on the allowed density of development; the denser the allowed development, the greater the price inflation. Ironically Boston has mandates for fringe developments to have lot sizes like 4 acres, and the inflation in the land price over rural is mild enough that even with this forced land consumption, the median multiple ends up in “6” territory versus Auckland’s current 9.

      Another perverse reality is that when the land values are distorted in the way they are, and higher density development is permitted, there is MORE density near the fringe than is natural. You can upzone all you like, but the high land prices will act as a choke on redevelopment in efficient locations. The prices represent “development potential” and speculators and incumbent property owners love to take this into account. Doesn’t mean that development will actually take place. Developers working out what they can actually sell at a profit after paying through the nose for land, will cram in 20 units per acre on a site 30kms from the CBD because buyers might just be able to afford the $750,000 per unit – but the $1,500,000 per unit near the CBD, no way.

      You can visibly see on Google Earth, every city with these perverse distortions, has dense housing development way out in the boondocks, and whole suburbs of $1,500,000 dilapidated cottages still intact near the CBD in spite of upzoning long since. In fact every upzoning just gooses the price of those same shacks (the dirt they are sitting on) and makes development there even riskier because all the potential is captured by the land vendor, not the developer.

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  6. Wondering if your data had any evidence supporting my theory that a well planned city was a network not a star shape I called up maps of Charlotte and Nashville MSA. My attempt to grasp the theory of agglomeration involves imaging the journey from one random location (say home or home office) to another random location (say lawyer or steel fabricator) and in Auckland the mix of geography and design leaves one more often than not travelling through the same congestion zone on SH1.
    Charlotte looked promising with an outer ring road and some motorways that didn’t enter the centre and it had two other advantages – virtually no students and nearby cities could communicate without going through Charlotte (compare to Whangarei and Hamilton). Just building a decent argument when I discovered Charlotte has half the population of Auckland. When Auckland had a similar population I doubt daily congestion was the trouble it is today and certainly house prices were rational back then.
    I came to two conclusions – to many variables to make valid comparison and the other conclusion surprised me – looking at your graph of Housing affordability and land regulation I realised some of the most cities with high land regulation are the most ugly. OK there are exceptions but certainly no positive correlation. Which makes sense; Waiheke’s quirky attractive suburbs apparently predate Auckland council’s invasion.

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    • not sure the answer to your question but Charlotte’s metropolitan statistical area has a population of about 2.5m (Charlotte city, narrowly – as Auckland City until 2011 – is probably the smaller number.

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      • I’ve made that mistake about population before on this blogsite. When I asked Len Brown why he didn’t distribute facilities from Auckland CBD (law courts, uni, sports, etc) he replied “all great cities have a great centre”.

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      • The problem is, Auckland does not have a centre. It has 10 metropolitan cities with the high rise centres Auckland CBD, Albany, Manukau City, New Lynn as the tallest with 18 level zoning. The major problem is connecting the metropolitan cities. Len Brown’s $2 billion intercity rail is rapidly falling apart with an initial estimate of $2 billion to Mt Eden from Britomart is now around $4 billion.The $8 billion to complete the project is now looking like $25 billion.

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      • It is NOT a “PROBLEM” that Auckland “doesn’t have a centre”. That is beneficial!! Dispersion is a powerful force for efficiency and social justice and is the way that cities have grown and provided for people and businesses of all levels.

        “Clusters” are of multiple types, and one of the stupidest ever policies in human history, is forcing an entire urban economy into a straightjacket footprint “to create agglomeration economies”!!! Most clusters of most kinds, evolve where there is ROOM for potential new participants and they can afford it, you dimwits!Think Silicon Valley in the 1960’s – cheap rural land.

        High-income dense-city-centre clusters can’t be replicated by planning fiat, that is worse than cargo cultism as believed in by ignorant savages in New Guinea. They all evolved, usually involving unique sectors like global finance and media. Manhattan evolved at the same time as New York urban area was sprawling out dozens of miles onto hinterlands in several directions. Houston’s city centre is evolving in the direction of high-income high-density right now. In fact urban growth boundaries and gouging land prices are a hindrance, even to potential clusters in the centre, of the high income kind. There is no “spare land” anywhere, what there is can be gamed mercilessly by speculators; the minute something like a “cluster” seems to be evolving, potential participants find themselves priced out of it.

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