In the seemingly-endless housing supply debate, there is often a divide between those favouring greater intensification, and those favouring a larger physical footprint for growing cities.  My own policy view is squarely in the “it should be a matter of individual choice, provided the infrastructure etc costs of development are appropriately internalized, and the rights of existing property owners are protected” camp (and yes, I recognize that the definition of almost every word in that statement could be extensively debated). My practical prediction is that New Zealand is a society where most people –  people in their child-raising years –  will prefer to have a decent backyard (those living in Hastings or Timaru don’t flock to high rise apartment buildings or town houses with tiny sections), so long as regulatory restrictions don’t make that infeasible.  It was quite possible 50 years ago, when New Zealand incomes were much lower.  There is simply no reason, in a country with this much land, why it shouldn’t be now.

Apologists for the current disgraceful situation constantly cite Sydney, or Vancouver, or San Francisco or London, as if absurd regulatory restrictions in other places make it okay for us to mess up our housing/land supply market this badly.  Others look to the experience across the huge range of US cities.

Someone drew my attention to the chart below, drawn from the Wall Street Journal’s economics blog, and on a day when the house is over-run with builders (and holidaying children), it seemed worth reproducing.

Cities with rapidly growing populations (those big blue circles in the bottom right) have seen little or no increase in real house prices over the period 1980 to 2010.  They made it possible to build, relatively easily, and in turn made themselves attractive places for people to live.

I don’t know how large the increase in Auckland’s “developed residential area” has been over 1980 to 2010, or even how to go about trying to measure it, but I’d be astonished if it was anything close to even 100 per cent.

It is quite possible to accommodate rapid population growth without anything like the scandalous increases in real house prices we’ve seen in Auckland (or even, to a much lesser extent in many other urban areas in New Zealand).   Political leaders, of both main parties, who have failed to make it possible, posing a near-impossible burden on younger people in Auckland who don’t come from advantaged backgrounds, should really be held to account.  High house prices aren’t something to celebrate (NB Prime Minister)  –  and not even most existing home owners are better off, as they aren’t going anywhere –  but should really be a source of shame to those who rigged the market (or let the market stay rigged) and made it happen.

Last week I put out a post on possible mechanisms to enable groups of neighbours to protect their interests in their own and each others’ properties, while allowing the flexibility for them, rather than councils, to determine what, if any, and when changes in the land use rules affecting that group of properties would be put in place.  It was prompted by a combination of the Productivity Commission’s recent discussion of the private covenants that reportedly apply to most new developments, and  the conflict in various Wellington suburbs around the council’s desire to determine which suburbs should be more intensively built and which should not.  Neither the Commission’s apparent distaste for private covenants, nor the situation where councils can somewhat arbitrarily –  and without any compensation for the regulatory taking –  alter private property rights, seemed very appealing.

This afternoon, I stumbled on this post from the Not PC blog.  It is several years old, but still seems very relevant.    The gist of his proposal is as follows:

FIRST, ENACT A CODIFICATION of basic common law principles such as the Coming to the Nuisance Doctrine and rights to light and air and the like.

Second, register on all land titles (as voluntary restrictive covenants) the basic “no bullshit” provisions of District Plans (stuff like height-to-boundary rules, density requirements and the like).

Next, and this will take a little more time, insist that councils set up a ‘Small Consents Tribunals’ for projects of a value less than $300,000 to consider issues presently covered by the RMA and by their District Plans. These Consents Tribunal should function in a similarly informal fashion as Small Claims Tribunals do now, with the power to make instant decisions.

This would mean that instead of talking to a planner about your carport, about which he couldn’t give a rat’s fat backside, you decide for yourself.  And, if your carport would violate one of the covenants, you then talk about it to your neighbour—with whom you and he would have plenty of negotiating room.  And once you (and your neighbour if necessary) have made your mind up, The Consents Tribunals would consider your small project on the basis of the codified common law principles, the voluntary restrictive covenants on your title, and the agreements (if necessary) you’ve negotiated with your neighbour(s). Simple really.

You should be able to reach agreement in an afternoon, and have your title amended the next day.

No doubt there are pitfalls in this scheme that I don’t see. But I thought it was worth drawing attention to.  Finding mechanisms that allow both greater flexibility and protection of property rights, but on a basis that puts more weight on mutual consent, and rather less on rather arbitrary administrative or political fiat, should have considerable appeal.

I don’t usually look at Sunday’s Herald but I was filling in time in an airport yesterday and noticed an article on private residential rents, drawing on MBIE’s tenancy bond database.  I don’t think I had previously realised that the data were easily available, at both a TLA and regional level.

One of the striking aspects of the house price boom has been the way rents have lagged well behind house prices.  House price to rent ratios have increased substantially.  Of course, in many ways that should be no surprise.  After all, real interest rates have fallen very substantially over the last 25 years or so  (having risen sharply over the previous decade).  Even in New Zealand – with the highest real interest rates in the advanced world –  real interest rates are lower than at any time in modern history (the heavily regulated period of the 1970s and early 1980s excepted).  Falling rental yields might reasonably have been expected, and that is what we have seen.

The MBIE data go back to the start of 1993. Since then, consumer prices (the CPI) have risen by around 60 per cent.   Average private rents on this measure have risen by about 150 per cent in that period.  The QV measure of house prices has risen by just over 300 per cent in that time.

Perhaps what is most striking, and something the Herald article didn’t bring out, is how similar Auckland’s experience has been to that of much of the rest of the country.    Since the start of 1991, Auckland rents, on this measure, have risen by 158 per cent.  Those in Gisborne –  the median regional council – have risen by 130 per cent.  Auckland rents have risen faster than those in most of the country, but they just don’t stand out the way that the increases in Auckland house prices do.

And if we restrict the analysis simply to the period since, say, 2007, the picture is not materially different.

And what of incomes?  Nominal GDP per capita increased by 144 per cent from 1992q4 to 2015q2.  Even in Auckland, rents have not increased much relative to (national) average per capita GDP.  Purchasing a house might have become “unaffordable” for many, but accommodation doesn’t appear to have.

And that conclusion is reinforced when one recognises that these MBIE data do not purport to be like for like measures.  The average house today is larger than the average house in 1993.  The average house is better appointed now than in 1993 (more likely to have double-glazing, heat pumps, or central heating).  And as the home ownership rate has dropped in the intervening years, it is likely that the median rental property in 2015 is further up the 2015 spectrum of New Zealand houses than the median rental property in 1993 would have been along the spectrum of New Zealand houses in 1993.

In the CPI, Statistics New Zealand attempts to adjust for the quality and compositional issues.  However, they only appear to report, in Infoshare, rental prices since 1999.  And even that series, which includes both public rentals and private rentals, is made harder to read by the abandonment of market-related rents for state houses in 2000/01.  But since 2001 (ie after the levels adjustment from the policy change), the CPI rentals component has risen by 37 per cent (very similar to the change in the CPI over that period), whereas the MBIE private rents series has risen by 87 per cent.  Per capita nominal incomes have risen by 71 per cent over that same period.    Even over the period of the biggest house price boom in modern history, a constant-quality house looks to have become more affordable to rent, not less.  And, of course, that is what one would normally expect.  Stable long-term ratios of house prices to incomes, for example, tend to reflect the fact that as incomes rise, the size and quality of houses tends to increase.

Of course, if land use restrictions –  in conjunction with policy-driven population pressures –  had not driven urban land (and house) prices sky high, we might perhaps have expected to see real rents falling.    All else equal –  which it never is –  sustained lower real interest rate lower the real cost of providing rental accommodation services.  But the fact that Auckland rents have not increased enormously relative to those in the rest of the country tends to reinforce the idea that it is not so much an issue of an extreme shortage of accommodation in Auckland, as of the regulatory restrictions on land use.  Such restrictions, which “bite” more in Auckland because of the population pressures, offer returns to landlords through actual/expected capital gains.

And for anyone interested in the rental increases at the TLA level, here is that chart.  (To deal with a few missing observations at the start of the period, this chart uses the percentage increases from the first 12 months of the series  to the most recent 12 months).

My post last week about the Wellington City Council’s consultation meeting, on its proposals to amend the district plan to allow more medium-density housing in Island Bay, attracted some attention and a range of interesting and thoughtful comments.  Readers seem to have taken from the post what they wanted (those opposed to more density focused on the critical comments about the Council’s case, those in favour on the critical comments on the residents and the planner mentality that dominates the Council).   Perhaps that reflects my own ambivalence.  In general, I favour allowing greater flexibility to property owners, but I don’t think we  would see much pressure for the sorts of development that concerns many residents, at least beyond the immediate fringes of the central city (Thorndon, Mt Victoria, Kelburn etc) if councils did not continually and actively resist the expansion of the physical footprint of cities.

It perhaps also reflected the fact that I’m not overly affected personally.  We are probably 12 minutes walk from the “town centre”, not the rather arbitrarily-chosen 5 or 10 that the Council focused on.  If a slightly largely population increased the chances of the convenient neighbourhood supermarket surviving into the years of my dotage, so much the better.   And it would be almost impossible for any conceivable development to materially impair either our sun or our views.

However, there is no point pretending that the sentiments of residents are just illegitimate or misguided.  Or that what happens elsewhere in their neighbourhood cannot impinge on their wellbeing. Nor do I favour riding roughshod over the concerns –  in fact, on a city or countrywide basis it is just not going to happen.  As I’ve pointed out previously, I’m not aware of any examples anywhere where tight land use restrictions, once put in place, have been substantially unwound.

Perhaps as importantly, the  private marketplace itself has mechanisms to deal with the sort of issues and concerns that drive the vocal residents of Island Bay or Khandallah, at least in respect of new developments.

As the Productivity Commission’s recent land supply report noted

Restrictive covenants in new subdivisions are a very common feature of property developments in New Zealand.  The mayor of one fast-growing New Zealand city told the Commission that all subdivisions in their area were subject to detailed covenants.

And according to one source I looked at, around 55 million Americans now live in “homeowner association” complexes –  some mix of apartment blocks and suburban developments/gated communities etc.    These arrangements  presumably exist because they meet a demand, and hence enable developments to occur more profitably than otherwise.  They add value to the people’s homes.    They are not just a legacy of centuries gone by, but have become much much more popular in the last few decades (at a time when local authority planning restrictions have also become more onerous).

I’m no expert in these sorts of arrangements.  As the Commission notes, in some cases they just last until all the homes in a particular development have been built (ie they govern what is first put on the section, and nothing subsequent to that), but many others are permanent.  The rules are often very detailed –  the example the Commission cites particularly caught my eye when it specified the details of the size and construction of the letterbox.  The focus is clearly intended to be on collective action provisions that limit the possibility that some future action of a neighbour might impair the value of my property.

I wouldn’t want to live in such a tightly restricted subdivision myself.  As one succinct summary put it, they aren’t the place for people who don’t like being told what to do.

The Productivity Commission seemed rather ambivalent about these covenants.  They had three “findings” and one “recommendation”.  One was arguably just a factual statement

Covenants established in new subdivisions are increasingly common and impose detailed restrictions on purchasers.

although that could easily have been reworded to include the phrase “provide considerable protections, and impose detailed restrictions on, purchasers”.  That is, after all, what contracts do in all areas of life.

The Commission finds that

regulatory controls on covenants should reflect both the costs and benefits of covenants

which is fair enough perhaps, but fails to recognise that these are already a market solution to a revealed demand.  Market contracts might reasonably be assumed to have internalised the costs and benefits already.  The case for regulation isn’t really made.

The Commission also notes that

Covenants reduce the flexibility of land use now and in the future, and increase the cost of constructing dwellings.

Of course, the first part of the sentence is true, but really the point of these voluntary contracts.  Voluntary contracts exist to enhance welfare.  Flexibility is not an unalloyed good.  The second point is unsupported in the report –  all it seems to amount to is that buyer and sellers have voluntarily agreed that, as a condition of buying in that development, they will not use certain lower end building materials. Why is that a public policy issue?  It does not detract from the ability of other people to build using those materials and technologies.  And each covenanted development presumably has to survive the market test, in competition with other covenanted developments, and standalone dwellings (new or existing).

Consistent with the uneasiness that pervades the discussion, the Commission then recommends (page 118) that

The Ministries of Justice and of Business, Innovation, and Employment should review the legislative provisions governing covenants with a view to:

• reducing the proportion of landowners required to agree to covenant changes from all to a super-majority; and
• introducing a statutory sunset period on restrictive covenants of 25-30 years.

Partly in the cause of research, and partly because I have a bit more time these days, last night I went to my first ever Wellington City Council public consultative meeting.  The Council is keen to promote more medium-density housing in Island Bay (and several other suburbs).  To their credit, they have gone beyond the formal requirements of the RMA and are undertaking an informal community consultation, with information delivered to every household, very early in a process that they hope will eventually lead to a change in the district plan. I think I recall seeing a comment in the recent Productivity Commission report commending this WCC initiative.

The meeting wasn’t an edifying experience, but then I’m not sure that was a surprise.

It doesn’t help that the Council doesn’t have a great reputation in Island Bay at present, despite (or perhaps even because of ) the Mayor being a local resident.  There has been a sense of them ignoring community opinion –  the seawall, severely damaged in a storm almost 2.5 years ago, still not repaired, and a hugely acrimonious debate over a rather expensive new cycle-way which can’t pass any conceivable cost-benefit test.   All that makes for a degree of cynicism –  vocally expressed last night – about the genuineness of any consultative process.  (And all that is before one considers the folly and hubris of an organisation that wants to put tens of millions of dollars into an uneconomic airport runway extension. )

There is also a degree of hostility to the local Special Housing Area. I don’t fully understand that hostility.  The moribund buildings of a former Catholic school (closed by the church 35 years ago) are less than a couple of hundred metres from our place, and I have long looked forward to them being replaced with houses or apartments[1].   Island Bay is a popular place to live, and this private land is not currently being used at all.  If someone is keen, at last, to develop it, it might be small step towards keeping housing only moderately unaffordable.

But that is all by way of background to the medium-density housing consultation, which continues to puzzle me.  Question 1 on the WCC consultation form says “Where should medium-density housing development happen in your suburb?”, which on the one hand presumes that people agree that such development should happen at all, and on the other leaves me scratching my head thinking “well, surely on any site where someone finds it worthwhile to do so”.   And then “what standards of design should the medium-density housing meet?”, and I’m thinking “whatever works best for developers and willing buyers”.   But I’m pretty sure I was the only person in the room last night thinking anything remotely along those lines.  Not that I would be any more sympathetic if it was, but Island Bay is not some olde worlde place with uniform Edwardian architecture.  It is a pleasant mix of the old and new, where the number of dwellings per square kilometre has increased enormously in the 37 years since I first came here (through some mix of infill, new streets further up hills, and medium-density developments on several larger existing sites).

Instead, it was a case of the regulatory state run rampant (from both the supply and demand side).  The Council staff had a Powerpoint presentation which started well –  headed “Housing Supply and Choice”- but it was pretty much downhill from there.  Instead of a focus on facilitating landowner rights, consumer choice, and competition, the whole thing flow from a central planner’s identification that Island Bay is one of those places with a strong “town centre” and hence a candidate to promote medium-density dwelling.  I was trying to work out why Island Bay is identified and not, say Seatoun –  similar public transport, similar vintage houses –  and I can only conclude that it is because the latter lacks a supermarket, an anchor of the “town centre”.  It puzzles me what happens to the Council’s logic if the(small by modern standards) supermarket were to close –  or if the Council were, for once, to do a hard-headed cost-benefit analysis and close the small local library.    The local identities who have run a stationery and children’s bookshop for the last 40 years are just about to retire, and the chances of that business continuing can’t be strong.

But part of the consultation is about preparing a “plan to guide development in Island Bay town centre”.  The so-called “town centre” is perhaps 15 private shops, in a higgledy-piggledy variety of styles, several of which are threatened by the Council/government earthquake-strengthening requirements.  But why do we need bureaucrats “planning” a “town centre” to “ensure coherency across different developments and help contribute to a more attractive and vibrant centre”?    At the meeting, the bureaucrats talked of checking to ensure that “we have located the town centre in  the right place” –  to which one response might be that the market already resolved that one more than 100 years ago.  Sometimes I think I must be missing something important, but then I think it is just bureaucrats and local politicians run amok.

And the Council draws on some demographic projections for the next thirty years to argue that they need to facilitate housing for older people who will want to downsize but stay in the neighbourhood.  Quite possibly there will be such a demand –  I expect to be one of the older people, although I don’t intend going anywhere  – but when you rely on such projections, and especially when you can’t even adequately explain how they are done, you are on a hiding to nothing.  Council staff drew a lot of fire for those numbers.  Much of it was quite ill-informed, but it was hard to have much sympathy.  Inevitably, holes appear the moment you prod, ever so gently, a projection of that sort. Choice and flexibility etc should be the watchword not “we wise bureaucrats have identified this specific need 25 years hence and want to change the law now to meet it”.

And then Council staff talk of undertaking a “character assessment of the suburb”, and burble on about wanting to “make sure that all new development is high quality, the design and appearance fits in with the surrounding environment, and it can stand the test of time”.    Just like the IMF the other day, the Council is keen on only “high quality” housing, but why is that something for them to decide, rather than willing buyers and sellers?

And so it goes on.  Bureaucrats talk of a desire to “decrease private motor vehicle use” and “encourage more walking”  (and hence medium-density housing might be encouraged five minutes walk from the town centre but not seven).  What happened to facilitating choice I wondered?  Oh, and fixated on accommodating possible demands from old people, the chief planner present commented that the Council wanted to encourage medium density housing in which the core living facilities were on the ground floor.  It gets tedious to say it, but isn’t there a market test in these matters?  Dwellings that meet market demand will sell better than those that don’t.  And aren’t maximum site coverage rules one of those things that work against single storey dwellings?

So the Council staff were bad, but they met their match in the residents.  There was a strongly negative reaction to the notion that anyone outside Island Bay should have any say on the proposed changes – forcing staff to downplay the very suggestion.  There was a great deal of concern about protecting people’s house prices (up), but no apparent sense that allowing land to be used more intensively would, all else equal, make it more valuable not less.  There was concern about what sort of socially-undesirable people might move into these new dwellings (and this is one of the more left wing suburbs around), and so many demands for controls and restrictions that –  briefly – the Council staff were forced to defend the ideas of choice and private property rights.  One person was appalled at the idea of three storey dwellings – this is a suburb surrounded by, and partly built on, high hills. And not a mention from the floor – although it was hard to get a word in – of the idea that people should be able to use their own land as they liked, or of the attractions of helping keep places only moderately-unaffordable so that perhaps one day our children might be able to buy here.

Council officers were reduced to plaintive observations that “the city is growing and people have to live somewhere” (downtown high rises appeared to be the response from the floor), which I might have sympathised with were it not for the historical evidence that as cities get richer they tend to get less dense not more dense –  something the planners are no doubt oblivious to, and perhaps disapproving of.  Harder to encourage walking I suppose, as if technological change had not given us options.  The invention of the tram helped open up places like Island Bay in the first place –  otherwise it was a bit far to walk to work.

I recently criticised the Productivity Commission for the bits of its land supply report that appeared to endorse the way some (most?) Councils were setting out to promote compact urban forms (rather than to facilitate choice and respond to individual preferences).  I came away from last night confirmed in that view.  I’m all for allowing more intensive development, not just in individual suburbs but across Wellington (and all other areas for that matter).  But the pressures to do so, and the sorts of vocal clashes I witnessed last night, arise largely because Councils are reluctant to see the physical size of the city grow.  Wellington might not have much flat land –  although most people probably don’t live on flat land in Wellington anyway –  but any time I fly in or out of the place I’m reminded that it is not short of land.   Regulatory restrictions –  and perhaps at the margin the rating system –  combine to make it optimal for developers to release land only slowly, and that helps keep the price of all urban land high.  For landowners in existing suburbs part of the appeal of more intensive housing (eg infill on existing rules) is realising the value that regulatory restrictions had artificially added to land prices.  If a section on our main (flat) street, The Parade, is worth $500000 or more, subdivision and more intensive development must be attractive.  If it were worth $150000 –  which it might well be if  new building opportunities were readily available on the periphery (or in greater Wellington’s case, most actually between Wellington on the one hand and Porirua and Lower Hutt on the other)), more people would probably prefer to keep a decent-sized backyard or front lawn.  I’d probably still favour allowing more intensive development, but I don’t think we’d see much of it, especially this far from the centre of town.  Space appears to be a normal good.

As it is, the confrontations will go on.  I don’t like to predict how our one will end, but whatever the outcome the process is a pretty unedifying, and unnecessary, one.

[1] There is a beautiful chapel in the buildings, and I would be sorry to see it go. But I’d also be reluctant to see my rates used to save it, especially if doing so compromised the development opportunities of the site.