By Jason Krupp*
At a recent Local Government New Zealand (LGNZ) event on housing affordability, the most telling moment came when economist Arthur Grimes said: “You can have big cheap cities, or small expensive cities, but just don’t say you can have small and cheap.”
This statement seemed to come as a surprise to some, particularly Auckland Deputy Mayor Penny Hulse, who appeared to strongly disagree with Grimes’s position. Her reaction is understandable given that the Auckland Plan aims to deliver affordable housing by increasing the population density of the city. In other words, transforming Auckland into a compact city.
The council’s argument is centred on the belief that apartments are a more efficient use of land, require a smaller utility network, and should increase the supply of houses so that prices start to stabilise.
So who is right, Auckland Council or Grimes?
The search for the answer is complicated by the fact that Auckland has strict height restrictions in place across large parts of the city, which has preserved the suburban character of inner city neighbourhoods but prevented development of apartment blocks.
As such, it is reasonable to assume that there is pent-up demand for quality apartments in areas close to employment and consumer amenities. As these height restrictions are lifted and apartments come to market, some frustrated consumers looking to move out of the traditional suburban house will buy these properties.
But, if there is any positive impact on housing affordability from densification (and this is debatable) it is likely to be a short-term one because apartments only appeal to a very narrow segment of the market, such as older people, childless couples, and single people.
In the long run, the historical and academic record shows us that the scarcity value of land quickly causes house prices to rise faster than wages in growing cities that have chosen to limit their geographic footprints.
That is why cities like Hong Kong, Vancouver, San Francisco, Sydney, San Hose, Melbourne and London – the majority of which are hailed as successful compact cities – have some of the least affordable housing in the world. And Auckland ranks right up there with them.
The evidence clearly underscores the economic truism that where demand exceeds supply, prices will always rise. City planners and officials may choose to pursue a compact city plan, but the trade-off will always be higher prices in the long term.
We at the Initiative will highlight other trade-offs of compact cities on 17 June, when we release our latest report Up or Out? Examining the Trade-offs of Urban Form.
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* Jason Krupp is a research fellow at the New Zealand Initiative.
6 Comments
In the long run, the historical and academic record shows us that the scarcity value of land quickly causes house prices to rise faster than wages in growing cities that have chosen to limit their geographic footprints.
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it also shows that geography plays a role:
Geography was shown to be one of the most important determinants of housing supply
inelasticity: directly, via reductions in the amount of land availability, and indirectly, via
increased land values and higher incentives for anti-growth regulations.
http://real.wharton.upenn.edu/~saiz/GEOGRAPHIC%20DETERMINANTS.pdf
Nothing happens in a vacuum
Check out what Royal Commision on Auckland Governance has to say on that.
The construction industry grew by 10,000 firms since 2002.
62% want more restrictions on immigration. "Despite Mr Key being on the wrong side of public opinion, he won't budge". However, he crossed the floor (so to speak) and piched labours policies in the last budget, so perhaps he can afford to be on the wrong side of public opinion (if people don't connect all the dots)?
I think the councils approach will increase the cost of housing.
My propertys QV values it at what it would sell for if it was already subdivided. Even though it is not subdivided. With no subtraction off the subdivided values to account for all the expenses which would be incurred in order to subdivide it.
A side effect of this is that my rates are huge.
If land supply is limited, and planning rules relaxed it would only reinforce this undesirable practice.
If an apartment block was allowed to be built on my section, then its QV would rise further. Increasing the price any new owner would need to pay to buy it off me. Not everyone will have the wherewithall or financing ability to build an apartment block. The valuation of my property would increase solely due to what the council has done.
But in the meantime, the council would benefit by my rates bill increasing further. Is this the real reason why the council wants to keep Auckland compact? Increased rates income.
Increasing property values don't increase the councils rates income. If your property value has risen more than average, then your share of rates has gone up, likewise if it goes up less than average your share of the total rates bill does down. The total rate take remains the same.
"apartments only appeal to a very narrow segment of the market, such as older people, childless couples, and single people."
Not sure what your defintition of narrow is but here are some projections:
By 2031, Auckland is projected to have 80,000 more couples without children and 72,000 more single person households than in 2011.
Depends how you value things.
Intrinsic value, or value based on utility, which for housing is 'shelter at a given location'.
From this view point apartments are far better value for money. They aren't 'in mid air' a free hold apartment (only type you should buy) includes a share of the land (often very expensive cdb land) too.
Another valuation method is income. Again apartments win using this, yielding far better returns.
SOME landed properties, if selected with good due diligence, and insights into current and future planning changes, will have future increases in utility and income (from building more rooms, going up etc) priced into current price. BUT if you buy any old landed property for the same high price, that doesnt have development potential, then I think you're likely to be paying too much
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