By Miles Workman*
Land makes up a pretty hefty chunk of the price of housing.
The cost of land has made some significant contributions to house price inflation in New Zealand over the years.
Yet take a drive though the Kiwi countryside and you could be forgiven for thinking there is an abundance of land and that a simple way to address housing affordability is simply to extend a few urban boundaries, pop in some roads and get building.
But alas, land appropriate for housing might not be as abundant as first thought and land available, particularly around key urban boundaries, is currently being put to good use.
Given the numerous downsides of urban sprawl, increased housing density is definitely going to have to be part of the solution to addressing housing affordability in New Zealand. While data suggests construction activity is shifting towards multi-unit dwellings, there’s still a decent way to go. And with cost pressures eroding profitability in the sector and construction firms recently becoming increasingly pessimistic about their own outlook, activity risks are skewed to the downside.
Papatūānuku
With around 19 people per square km of land in New Zealand, Kiwis don’t appear short of the stuff by international standards.
That said, population growth has seen this number more than double since the 1960s. And when you consider the fact they’re not making more of it, and that the land they do have is needed to feed not only the population (still growing at an annual pace of around 1.6 per cent) but also countries with a higher dependency on food imports - the backbone of the NZ economy – land use must be careful.
In Māori tradition, land (Papatūānuku) is so much more than a commodity to be traded. She is the mother who gives birth to all things (including Tāne-mahuta), and like all mothers, she deserves to be looked after and treated with respect.
Built up
Statistics often get bandied about: “only 2% of New Zealand’s land mass is being used for housing” - however much of the South Island, in particular, is completely uninhabitable mountains. More than 78 per cent of New Zealand’s land mass has no one living on it, mostly for pretty good geological reasons. (Similar arguments can also be made about Australian population density.)
According to satellite imagery data, land use in New Zealand has undergone some significant change over the past few decades. Grassland has made way for forestry to a degree that makes growth in urban land appear relatively small. However, that’s not to say the increase in urban land hasn’t been significant.
Between 1996 and 2012, built-up (settlement) land has increased by almost 21,000 hectares (or 210 km2) to a little over 187,000 hectares (1,870 km2). And given the latest data point is now seven years old, and the population has grown by almost half a million people over this period, it’s almost certain the amount of built-up land has continued to rise since then.
With land a finite, non-renewable resource, it’s little wonder the cost of land has made a significant contribution to house price inflation over the years. But it’s a bit of a chicken and egg story, as higher demand for housing lifts the price of houses while also lifting the price of “potential houses” (ie sections). So it’s hardly a surprise that median house sales prices and section prices move together.
On average, however, growth in median section prices has outpaced that of houses over the past two and a half decades. And using section prices as a proxy for land costs when buying a house, this suggests the cost of land has risen from around 39 per cent of the median house price 25 years ago to a little over 45 per cent currently.
However, it hasn’t been a straight line, with this share peaking at around 55 per cent in May 2008 following a period of strong growth in section prices. Over history, and in broad terms, the median section price share of house prices has had an inverse relationship with net migration flows, suggesting the existing stock of housing receives more of the initial impetus to housing demand from a population shock. Thereafter, as housing supply looks to catch up, it makes sense for land prices to follow suit.
Greater intensification
Looking through the noise, there are a number of reasons why land prices might outperform general house prices on average.
Supply constraints (which for larger towns and cities are generally a function of urban boundaries) are one, while changes in the rules that allow for greater intensification and therefore a higher potential capital value (more or taller dwellings on a given piece of land) are another.
The latter will be true for individual plots of land that are rezoned for higher density but of course will be a dampening impact on land prices in an aggregate sense. In addition, land costs become less relevant for an individual dwelling when construction shifts towards vertical multi-unit dwellings.
So with land prices such a significant component of house prices, could the New Zealand Government make housing more affordable by simply freeing up more land?
The short answer is yes, it probably could. And there are plenty of people advocating exactly this solution. However, there are real costs to this type of growth that make it far from a no-brainer as the best avenue to pursue. Urban sprawl means a larger carbon footprint; infrastructure requirements make it an expensive form of adding housing. Expanding urban boundaries also comes at the cost of diminished productive land for crops.
In any case, whether you view land-use constraints as an environmental or liveable cities no-brainer or merely the landed gentry protecting the value of their assets, the fact remains, with constraints on the degree to which land can be freed up for urban use, land prices appear set to remain a significant share of overall housing costs. In order to mitigate this, higher density housing (building closer and higher) is going to remain a very important part of meeting New Zealand’s housing needs.
Considered approach
All up, despite the fact land costs have made a significant contribution to house price inflation over the years, the downsides associated with simply freeing up more of it for urban use suggest a careful and considered approach is required.
Indeed, there are some major economic and environmental benefits associated with higher-density housing,which, in an economy where productivity growth is all but non-existent and carbon emissions reduction a priority, shouldn’t be overlooked.
And while consents data show we’re on the right track, survey data suggests a cyclical downturn in building activity may not be far away.
*Miles Workman is NZ Senior Economist at ANZ. The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ. This article first appeared here in ANZ's Bluenotes and is reproduced with permission.
52 Comments
...and drive down, say, Tram Road and see 4-hectare 'lifestyle' blocks, 15 minutes from the centre of Christchurch, with one dwelling as far as the eye can see - all waiting for the day that they can chop the acreage up into 2,4 or 16 allotments. Trouble is, that won't happen, because if it was allowed under any coming District Plan, the 'new' land would swamp the market with "For Sale" signs, and guess what....
Govt wants house price to increase gradually around 2 to 3 percent per year. Banks want house price to increase as much and as long as possible. And all policies are setup to achieve those goals.
Why on earth do the gullible voters think any partys would solve the housing unaffordablilty issue?
(Libellous comment deleted, Ed. Please see our commenting policy here - https://www.interest.co.nz/news/65027/here-are-results-our-commenting-p…)
... no Mr X ... no no no ... alleged sexual improprietries were not against the party president ... he quit because of perceived mishandling of the accusations... it's all accusations at this stage , against a staff member , unnamed of course ...
Don't condemn and shoot the guy first , then have the trial afterwards ... this is not China ... not yet ...
Yes what a lovely place we would have with that party in charge https://www.theguardian.com/world/2019/sep/23/china-footage-reveals-hun…
The go-to real economist's view re land prices is that of Eric Crampton. The essence of that is
About a month ago, the government issued a proposed National Policy Statement allowing councils to designate areas of agricultural land where residential development would be banned.
I warned in Insights it risked undermining the urban growth agenda. Urban land makes up less than 1% of the country by area. It is utterly implausible that urban growth will take over the country’s agricultural land. The normal operation of markets provides additional protection. The price of agricultural land incorporates buyers’ and sellers’ expectations of the future value that can come from agricultural uses of that land. If turning a paddock or a horticultural block into a subdivision is profitable, that means the services provided by that land in housing are more valuable than the crops that otherwise might have grown there.
So I requested the Cabinet Paper and Treasury’s advice.
Corwin Wallace’s advice from Treasury’s side in the Cabinet Paper is correct and trenchant. The difference in land value on either side of urban-rural boundaries means the land in an 80-hectare farm at that boundary would be worth between $120 million and $182 million more if it were allowed to help solve the housing crisis. Banning that conversion destroys value and risks exacerbating the housing shortage.
Treasury recommended deferring the NPS until a more rigorous cost-benefit assessment had been undertaken, and that the Ministry for Primary Industries be directed to provide options to reduce the risk of the NPS restricting housing supply.
The indicative CBA provided to the Ministry by Market Economics was astonishingly poor. Treasury provided instructive critique. And Market Economics’ response to Treasury revealed such a confused understanding of the concept of market failure that it would have earned a failing grade in the intermediate microeconomics course I once taught.
Both demand and supply are at issue. Government is doing a pathetic job of doing anything about either.
Demand (for land and for housing, not quite same thing as Chinese bought lots of land round Auckland just to sit on, not build on) is not being restricted as immigration not being restricted, esp into Auckland. Supply: Kiwibuild, need I say more. Also, it is about supply where people want to live. No good building a shit load in middle of nowhere (like poker for example)
Yes, every couple of years we have to go back to the basics and remind them about land economics and common sense 101.
Like for example, that the pricing is set at the fringe and travels inward and upward to the CBD. This curve is the same in any city in the world, whether it be cities with low median multiples or high median multiples.
So in NZ if we start with zoning restricted high priced unaffordable suburban housing on the fringe, then we will have relative high priced unaffordable high density going in compared to those jurisdictions that have less zoning restricted low priced affordable homes on the fringe.
And because the housing going in is dearer than it should be, then it forces people to the fringe to find what they need that is affordable, ie it encourages sprawl for the wrong reasons, including disassociating people from where they work.
If you want to make it easier for people to move into the center you need to make the fringe cheaper.
All Auckland has become is a sprawled city that is unaffordable everywhere, and all because of restricting the urban boundary.
And let's not forget the gross stupidity of blanket single-use zoning (I've just re-read Jim Kunstler's 'Geography of Nowhere', where the madness of such zoning is given the roasting it deserves, plus an entertaining history of urban development in the US).
Yes, the splatter growth of less restrictive zoning allows the in-between bits to develop as mid, then higher density, with supporting commercial.
Also because the land can be purchased at closer to the rural land price, developers can afford to put aside more green space and added amenities.
Crux here is tow fold: firstly it is about where people WANT to live and that connects directly to where decent paid work is available. Second: land (sections) in Auckland - demand for this has been driven by Chinese buyers in Ponzi of land sales and subdivision and council changes in permit status, since 2002. Look at detailed figures and you will see that section sales rose most in 2014-15 (massive capital outflow from China) and in mid 2018 (pre running OBB). THIS is what drove up price of land, and hence also house prices, in Auckland, which has worst problem. Section sales down 40% plus since OBB. But price has not taken similar hit yet.
There is a big limit on land in right area for sale and slowing Chinese to buy so much of it over last 17 years has massively aggravated unaffordability. Meanwhile people love to distract attention form this by blaming Auckland Council. State supply and private rentals of 3 beds in right areas being so utterly inadequate does not help.
A bank economist against freeing up land that would decrease the value of the properties they have on their books as securites against the mortgages they have already issued, and decrease the ever increasing mortgages from which they make their bread and butter. Well, fancy that....
... yes ... a vested interest in keeping the bubble inflated ...
I be curious to know what % of a house cost was the actual land in the past , as a comparison to what it is now ... I have a niggly naggly feeling that if we solve the high section prices we solve the " unaffordability " problem lickety splick ..
Well of course, where supply is allowed to meet demand, it doesn't. But what you also find in those jurisdiction, as this supply equalling demand balance, banks cannot rely on capital growth to give then the equity buffer they need, so what they do is require a larger deposit as a counter to a stable steady as she goes inflation only market price increase.
And coupled with the less restrictive zoning, houses are 1/2 the price. Same deposit as you would require in NZ for same double the price house therefore gives you twice the equity in your home. Banks have more security. You as a homeowner have 1/2 the mortgage, a lot more disposable income, no need to strike to get a pay rise that your employer can't afford to give you.
"In order to mitigate this, higher density housing (building closer and higher) is going to remain a very important part of meeting New Zealand’s housing needs."
Yet when building higher density its profitability is inversely proportional to the cost of the land and keeping the cost of land high blocks intensification. The ANZ, for example, remain very unwilling to loan the funds required to build this sort of high cost intensification on high cost NZ land and the ability to construct intensely is low.
Yes exactly. The government could introduce a capital investment fund to assist developers to develop much needed medium-density developments that banks are so averse to financing. NZ needs to transition to more efficient cities where people can be closer to their workplaces and not have to be addicted to cars to sustain their "lifestyle".
There are two ways to increase land supply in order to build more houses. The quantity of land that can be built-on could be increased. This is what people mostly think when there is a call to increase land supply.
The second option is the productivity of the land that can be built-on could be increased. The second option is about building more floor area on a given plot of land, so that different types of taller housing typologies can be constructed.
The second option is about substituting in capital (floors built on top of each other) for land. So ensuring construction costs are competitive is especially important for this option.
When cities grow -they grow up and they grow out. So both types of land supply are important.
In theory and practice house prices are related in the long term to the marginal cost of construction i.e. the marginal cost of the land (either up or out) + capital costs needed to build more houses.
This is why ensuring competition in land supply and construction is so important -hence why land-use regulations, infrastructure provision and a competitive construction industry is important.
This is also why rates should be on land value not land+capital value because it decreases the marginal cost of construction, whilst increasing the holding costs for land bankers.
Yes it is interesting how they interpret what we say. PT seemed to understand but thought he could change the priority of things.
Maybe he thought he had super powers like superman and could put the undies over top of his pants. Unfortunately just made him look like a dickhead which is undie-served (see what I did there) as I give him the credit for fronting up, unlike JK. It would've worked if he had stuck to our plan and priorities.
All we can do now is make jokes at their expense, and laugh at them and their ilk.
Here's a bargain. https://www.realestate.co.nz/3322497
There are a lot of new sections approaching market in Auckland, quite a glut and Auckland might soon be a bit dicey on the land price.
The bulk of the new sections are mostly a decent hike away from Auckland, drive 5-15 minutes out from the suburbs to find the land where Auckland Council wants lots of new housing.
There are 1412 listings of sections currently for sale in Auckland. There are more sections for sale as some listings have multiple number of lots for sale at the same land development.
https://www.trademe.co.nz/Browse/CategoryAttributeSearchResults.aspx?se…
This development has 6 lots for sale - https://www.trademe.co.nz/Browse/Listing.aspx?id=2304207661&rsqid=2862f…
No easy fixes...too many vested interests. Land prices and availability are two factors which hardly anyone wants to address. Instead they are happier to give the local council a box around the ears over the time it takes to process a consent. Up here in the Waikato much of the buildable greenfeild land around towns and cities is landbanked and sitting idle with a few cows on it. Which is ridiculous when it could be developed enmasse to release plentiful supply onto the market. Brownfield is interesting, but its extremely costly to do. No easy way out. My perfect world scenario would be a use it or lose it approach to landbankers, maybe even a compulsary accquisition mechanism where the state owns the land and leases it to home owners to build a house on. Works in Europe!
This is how land prices can fall ...
A) 41 Candia Road, Swanson, Auckland
A house with 0.625 hectares of land was purchased in October 2014 for $1.68mn
The house was sold in Nov 2018 for $1.25mn, about 26% lower than their purchase price (and 42% below July 2017 CV of $2.16mn)
As you can see there are development plans, so the buyer may have purchased with the intention of developing or selling to a land developer.
https://homes.co.nz/address/auckland/swanson/41-candia-road/4ZkqV
Also interesting to note that the neighbouring property at 41A Candia Road, is on a mortgagee sale (listed since November 2018 it seems) - https://www.trademe.co.nz/Browse/Listing.aspx?id=2237490558
B) Another example is this one at 46 Upper Queen St.
Property purchased for a reported $7.5mn, and sold in July 2019 for $3.2mn (vs July 2017 CV of $2.725mn).
1) https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12…
2) https://www.qv.co.nz/property/46-upper-queen-street-eden-terrace-auckla…
Note that there was lots of land speculation in Ireland.
From the Irish property bubble. As construction of houses was expanding, there were speculators buying plots of farmland on the fringes with a view of selling the land to other land speculators or land developers.
1) As a result the prices of farmland got to speculative levels which ultimately led to higher costs for land developers.
2) as a result, this led to higher prices for sections,
3) this then led to an increase in the total cost of construction for houses (when including the land component).
4) and ultimately led to higher sale prices for new houses.
"In 2007, Irish farmland prices were the highest in Europe at Euro66,000 per hectare. ... It was ten times the value of similar land in Scotland and six times more than the same fields would be worth in England.
There was no relationship at all between the astronomical price of farm land and the amount of money that could be made from actual farming. What was driving the increase was a mixture of speculators buying up land for potential development and farmers enriched from sales for public infrastructure projects looking to replace the fields they had sold."
"In 2007, Irish farmland prices were the highest in Europe at Euro66,000 per hectare"
Taking a look at this land for sale in Swanson of 2.92 hectares, and applying the July 2017 CV of NZ$5.75mn, this translates into NZ$1,971,812 per hectare. Translated into Euro, this is Euro 1,129,418 per hectare ( about 17.1x the level of Euro66,000 per hectare for farmland prices in Ireland in 2007)
https://www.trademe.co.nz/Browse/Listing.aspx?id=2237490558
https://www.qv.co.nz/property/41a-candia-road-swanson-auckland-0614/262…
Apart from the worldwide low interest rates its really simple - just get on with it:
1) manage the immigration rate down to a sustainable level to maximise gdp/capita growth (not gdp) & reduce the demand pressure
2) Free up the RMA to reduce/remove density & zoning restrictions
This is more likely a case of the banks wanting to keep land prices and thereby house prices high, to protect huge number of house mortgages.
If we don't want to use up all our land, we should stop all the immigration. Immigrants also reduce the amount of food that we can export by virtue of what we have to feed them.
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