Land use regulations matter

Most local councils don’t employ economists –  or at least not ones we hear of.  The Auckland Council does have an economics unit, and the previous incumbent did some interesting and stimulating work.

But yesterday on there appeared an article by two of the Auckland Council’s economists which argued, so the headline proclaimed, that “evidence from across NZ supports conclusion that land use regulation is unlikely to be the main culprit for house price rises”.   They even had an estimated empirical model in an attempt to back their claim.

But, frankly, it looks like an attempt to play distraction, and shift responsibility from their employer (and other local governments around the country).   And it is as if this is the very first time they had come to the subject and were, thus, unaware of the large number of thriving growing cities in the US with house price to income ratios not much more than a third of those in Auckland or Tauranga.

This is the centrepiece of the article


Which might look superficially fine, at least until one stops to think about what is going on here.

Firstly, it appears to be an odd model, in that they appear to be explaining changes in nominal house prices, but without any explanatory variables like general prices or wages.  Over the best part of a decade, one might expect nominal house prices to rise by around 20 per cent as general costs and prices rose.   Perhaps they’ve estimated the model in real terms, but there is no suggestion in the article that they have done so.

Secondly, all else equal, lower real interest rates might indeed tend to raise the value of an asset in fixed supply.  But, on the one hand, this proposition doesn’t engage at all with the reasons why real interest rates might have fallen.  If, for example, expected future income growth has fallen at the same time – a part of the story in most explanations of the last decade –  any such asset price effect will be greatly weakened.   And, on the other hand, in a well-functioning housing and land market, the only fixed factor here is unimproved land.   And absent land-use restrictions, unimproved land in most places –  even most parts of a city –  simply isn’t worth much.  Perhaps you might think of $50000 per hectare for good rural land.    You could see long-term real interest rates fall 300 basis points (more than we’ve actually experienced), with no changes in future income expectations, and it still wouldn’t make that much difference to the free-market price of unimproved land (and the component of that used in a typical suburban dwelling).

Third, what about population increases?   Auckland (and Hamilton and Tauranga) have had a lot of population growth –  indeed, over decades Auckland has had one of the fastest population growth rates of any largest city in an OECD country.  And when regulatory obstacles –  land, consenting/construction or whatever –  get in the way then shocks to population will boost house prices.  There are regular population estimates published, which are easy to drop into a model.  And, no doubt, had Auckland’s population growth rate been half the actual rate, house and land prices would be somewhat lower.   But all this simply ignores the point –  the insight we really get from that swathe of US cities, (as well, actually, as from basic theory) – that population growth alone makes little or no sustained difference to house prices when the land and construction markets are free to work effectively.  So ascribing responsibility for house price increases to population growth is largely just cover for the regulatory failures of central and local government.

As a reminder, in fairly substantial US cities –  with growing populations –  we find median house (including land) prices of around NZ$250000 to $300000   (from the Demographia report: Des Moines US$198000, Louisville US$176000, Omaha $179000).

Noting that across local authority regions places with larger population growth rates have tended to have higher house price inflation, the Auckland City economists attempt to cover themselves this way

To point the finger at land use regulation would imply that all the areas with the largest population increases have the worst land use regulations and those with the smallest gains have the best regulations.

But that simply doesn’t follow.  Of course, it is often the interaction between population pressures and land-use restrictions that matters in determining what happens to prices.  And it is quite plausible that places with the fastest population growth might even have some of the less worse land-use restrictions, but those restrictions are simply placed under more pressure.  Land-use restriction is, to some extent, endogenous.

As the end of their article approaches, they argue that

Council, the Reserve Bank and the Ministry of Business, Innovation and Employment have all estimated Auckland’s housing shortfall at between 43,000 and 55,000 and growing. The Auckland Unitary Plan allows for up to one million potential new dwellings. Yet the plan was implemented a year ago, and there is no evidence of decreasing land prices.

Put another way: If having already zoned to develop 20 times the current housing shortfall is not bringing land prices down at all, can land use regulation in Auckland be the major cause of high house prices?

As I’ve noted here previously, those estimates of a “housing shortfall” are almost meaningless.   In the Auckland market as it stands, given the regulatory and other features, effective supply and effective demand appear to be in more–or-less balance.  What makes me say that?  The fact that prices haven’t moved much for a year or more.     No doubt there would be demand for many more houses if the price of land were lower, but at current land prices –  regulated and thus artificially scarce –  effective demand seems to be largely sated.

And what of the argument that “we’ve done the Unitary Plan and prices aren’t coming down, so the problem can’t be land regulation”?   Well, yes, of course it can.  If anything, given the manifestly obscene prices people face for land in  or around Auckland, Auckland Council officials (and their political masters) should be looking at the failure of land prices to fall back and concluding that their latest planners’ vision had failed.   It is all very well to talk of the potential for a million more houses, but these are the sorts of lines local authorities have run for a long time –  I recall councils running these lines when the 2025 Taskforce was looking at these issues.   I haven’t looked into the “million house claim” in any depth, but as I understand it, much of this potential is about the possibility of increased density on properties that the existing owners are simply never going to sell (they like living in their existing house/location).   There was probably a lot of theoretical capacity before the Unitary Plan, and of course there has been a lot more population pressure in recent years.

And the bigger issue is that when Council planners and politicians deem that certain places can be built on and others can’t etc etc, there isn’t much of the market at work.  A well-functioning land market would be one in which developers and land owners on the fringes of growing cities were in active competition with each other as to which could supply new sections and new homes more effectively, and where those options in turn competed with realistic options for increased density (according to the tastes/incomes of potential purchasers, not the whims and preferences of officials and politicians).     In a competitive market, holding costs are quite substantial –  not so where regulation rewards “land-banking” –  rewarding bringing land to market early.

The Auckland Council economists’ final line is cute in a way

In the case of Auckland at least, the answer is simple: You can’t live in a resource consent. It is because not enough houses are being built fast enough (for a range of reasons), rather than just the technical availability of developable land, that is keeping prices up. Land may be resource consented for development, but until houses are actually built on it, a premium will be placed on houses that are available.

And, of course, one can’t live in a consent, and we know from other work that the net addition to the housing stock in Auckland has been well less than the number of consents issued for various reasons (including that densification often loses existing houses).  But the point isn’t really relevant to the claim the economists are trying to rebut.

I did a brief post last year on one small example of undeveloped land on the fringes of Auckland –  property at Dairy Flat, still some years from actual development –  where various plots were selling at an average of $1.266 million per hectare.   When that sort of land –  with no prospect of a house on it for the next few years –   is still that expensive –  land which for rural purposes might be worth $30000 per hectare –  we know there is still something very wrong with land use regulation as it is being applied in Auckland.  If one looked, I can only assume we’d find similar examples around Tauranga.

None of this is deny that there might be problems around consenting processes, construction costs (and the construction products supply chain), and/or infrastructure, but please Auckland City stop trying to pretend that black is white and that land use regulation is not a major part of why house price to income ratios are so high in New Zealand –  not just in Auckland, or even Tauranga, but in places with few natural obstacles and modest population growth like Napier-Hastings, Christchurch, or even Palmerston North.

demographia 2 2018

25 thoughts on “Land use regulations matter

  1. Not too sure when economists decided that limiting supply when demand was increasing does not affect prices? It is clear that the corrupting influence is a paycheck in the mail. This is a clear example of corruption which is rife in NZ. Corruption comes in many forms, but the key is giving up your principles to keep your employer happy is a also a form of corruption.


    • There is also a disingenuous aspect to the claim the Unitary Plan allows up to one million extra dwellings for the city. This is not the feasible supply of developable residential space. For the claim to be true it would require that every house in Auckland be demolished and replaced with the maximum number of dwellings the Unitary Plan allows.

      In fact, recent Auckland Council reports estimate Auckland’s feasible housing supply has decreased by a quarter and for intensification by a half. Auckland Council economists would have known that information but they chose to conceal it.

      There is more information about the Unitary Plan’s influence over housing supply here.
      View at


      • Thanks very much for linking to that Brendon. I do now recall reading your piece previously, but it must have been in a rush just before I went away.

        ‘disingenuous aspect’ would appear to be one way of putting it- the way one might describe things if falling over oneself to be courteous and make all possible, even implausible, allowance for the authors.

        Liked by 1 person

      • Michael I have found being very polite prevents me from going off on angry rants which I suspect turns people off from listening….


      • You can’t really blame migrants for the price increases. Most of the new migrants have merely swapped their student Visas for work and eventually residency. They would not have the financial clout to be pushing house prices.

        People forget that 60% of the property market is by people who buy and sell property in the same market for a home to live in. Anyone with any financial sense will know that price is not a factor when you are buying and selling in the same market.


      • It is pleasing to write ‘I agree with GGS’. You cannot blame house prices on the number of permanent immigrants. That has been a fairly consistent known figure for many years.

        Possibly if regulations did not involve delay and cost then normal demand and supply would operate. They could remove cost by delaying payment until the property is inhabited – just add the debt to the LIM / land registration.
        Personal note: I own a house on a large section which could be sub-divided – to get to that point would involve council, surveyors, geo-tech engineers, large overhanging tree on adjacent council domain, drainage and access. The time, cost and hassle have put me off doing anything other than planting more roses. When I die or move on the next owner may take on the task but they will have to consider the risk that the up-front costs will exceed the profit to be made about two years later. That also effects the type of building they will construct..


  2. When there are competing theories without compelling evidence you know the “science” isn’t settled

    DNA was first identified in 1869 by Swiss chemist Friedrich Miescher
    Linus Pauling first became interested in DNA in 1933. In 1952 Linus Pauling was informed that DNA was the genetic master molecule. Pauling considered DNA to be a Triple-Stranded Structure. Wilkins and Franklin also considered it to be a 3-strand structure. Crick and Watson using x-rays supplied by Franklin realised it was double stranded and helical in shape. That was the end of it. The controversy was closed.

    From 1869 till 1953 the shape and organisation of the structure was unknown. From 1933 to 1953 the science of the structure of the molecule was “open” with the competing theories ebbing back and forth. Since the Crick and Watson discovery of the Double-Helix the science has been settled and sealed in a black-box

    Liked by 1 person

    • The Singapore solution works. Good luck getting it accepted when we are not a city-state with no other options to prevent the economy being destroyed by volatile property cycles.

      There are several problems identified with the Albert Saiz paper. One is that he used the same radius to evaluate the land characteristics, for all cities regardless of their existing size or growth rates. Another problem is that there seems to be an unfortunate correlation between cities with geographic constraints, and those with anti-sprawl regulations. It is provable fact from historical data, that the cities with “geographic constraints” had a golden era of several decades with affordable housing (median multiples of 3) and the inflation started with the regulations.

      There is actually little evidence that any “geography” is solely responsible for unaffordable housing markets; modern engineering handles almost anything. Wellington is one of the worst, and it was affordable for decades as it was building new suburbs on steep hills all over the place. Then it stopped the competitive building of new suburbs and the prices started inflating.


  3. It seems to be standard wisdom that immigration pushes up house prices within property investment circles.
    When vested interests are talking to the public it is a different story?
    From The Landlord Says:
    Meanwhile the National Party released its immigration policy. You may wonder what this means for the property market. It is clear from research that immigration is one of the key drivers of house price growth.
    The logic is simple. If you import more people into the country, then you need more houses. Supply and demand means that prices are then pushed up, this is particularly so in Auckland.
    While the latest immigration numbers show the number of people coming into New Zealand is starting to rise, the Nat’s policy looks like it wants to increase immigration levels even further. (Although it is unclear what sort of number they are targeting.)
    This policy is, arguably, a plus for people who want house prices to rise. (But may be not so good for first home owners wanting to buy.)
    My guess has always been that property investors lean heavily towards the right rather than the left. (This was made clear in an email newsletter I saw from one developer this week.)

    Maybe part of the problem is that growth is happening by stealth. In Noelle McCarthy’s A Slice of Heaven, Mathew Houton points out: “If Bill English wants Auckland to grow by __ he should make a speech to that effect, but I’ve never heard him state that”. My guess is that people don’t want the growth and therefore there is no discussion clearly setting out who pays for it (a fudged discussion)?

    The other thing is what can a low paid population truly afford? Land aside how much building material is imported? Are we headed for a new low in accommodation?


    • Bear in mind that the working classes are no longer represented by politicians who are now (on the left) attracted to identity politics and globalisation; on the right they are Darwinist.


    • When Universal Superannuation and the age of entitlement is under pressured to push back the age of entitlement to 67 and beyond. It is clear that old people are still young at 65. The old are staying in their properties a few more decades longer which prevents the younger people from moving into those properties and therefore the consequence of a new low in accommodation.


  4. Auckland has had a bit of turnover with Economists, and it is tiresome that each new lot has to have the same remedial lessons patiently explained to them. Unless they are deeply implicated enough in the ideological smokescreen for the racket and won’t learn because their incomes depend on them not learning.

    The only formulas that explain the prices of housing properly, are those that do NOT line up the factors in a nice linear fashion, with interest rates adding “x” and immigration adding “y” and “supply of land” adding “y”. The correct way is to have everything BUT “supply of land” INSIDE a pair of brackets, and “supply of land” as an integer OUTSIDE the brackets. Elastic supply of land nullifies everything inside the brackets and determines that the median multiple will be around 3. Inelastic supply of land means that everything inside the brackets multiples out into higher house prices.

    Malpezzi and Wachter did this; Mills and Jansen did it; Heeboll and Anundsen did it; Glaeser and Gyourko joined the trend. Every other formulaic approach is nonsense that does not stand up to proper multi-city data-set testing.


    • Sorry, I meant to say “Z”: interest rates adding “x” and immigration adding “y” and “supply of land” adding “Z”


      • With 40 million square metres of land in Auckland subject to a viewshaft visual height limit, it is not a land supply issue but a height restriction issue.


      • Add another 160,000 square metres of the Waitakere Ranges national parks preservation which they are considering blocking anyone from stepping foot into due to Kauri dieback fungus.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s