David Norman says more compact housing growth policies may mean lower emissions and congestion growth, but upzoning will generate large windfall gains that could be used to fund the infrastructure needed to make development successful

By David Norman*

• A recent bi-partisan announcement brings forward and widens the coverage of more relaxed development rules across high growth cities in New Zealand.
• The changes will allow even more compact (particularly residential) development, which means lower emissions and congestion growth than the alternative.
• But caveats, called “qualifying matters”, could limit the benefit of these changes if the wrong trade-offs are made.
• An objective way of evaluating qualifying matters and practical ways to pay for supporting infrastructure are desperately needed.

On 19 October, the government and opposition jointly announced a plan to accelerate implementation of the National Policy Statement on Urban Development (NPS-UD), to sharply increase density around city centres, town centres and rapid transit stations. Further, the new rules will increase potential density on an even wider range of properties across high growth cities.

A lot of good news

I argued for increased density for several years and was more welcoming of the original NPS-UD than some. This newly-announced expansion and acceleration must be applauded on a number of fronts.

First, the new rules will stimulate more development closer to jobs, existing public transport and amenities. i.e., where more people want to be. We have already seen a remarkable shift toward brownfield (existing urban area) development and away from far-flung greenfield development as Auckland’s current zoning rules came into force from 2016. In the five years since, 90% of all growth in new dwellings consented in our largest city has been in predominantly brownfield areas, and only 13% of new dwellings consented in total in the year to June 2021 were in predominantly greenfield areas.

Figure 1 Given choice, people prefer proximity to the city (predominantly greenfield Local Boards shown in green)

Second, development in existing urban areas uses existing infrastructure more efficiently. It is true that the increased density will also trigger demand for more infrastructure, but in areas where latent capacity exists, that will be used first. Existing brownfield areas are also where most new infrastructure is being delivered, such as the City Rail Link in Auckland, which offers huge development potential in areas around Mt Eden for instance.

Third, more development around town centres, rapid transit nodes and wherever land prices (the best indicator of demand) are high, adds to the vibrancy of those neighbourhoods. More housing attracts a wider range of goods and services into communities, bringing improved safety through a more substantial night-time economy, for example.

Fourth, compact development means lower emissions and congestion per home delivered. In Auckland, for instance, more permissive zoning has shifted the share of multi-unit dwellings consented (terraced houses and apartments) from 41% in 2016 to 64% today.

Still too much leeway?

The newly announced rules^[1] still allow for local “qualifying matters” to prevent relaxation of zoning rules to deliver more housing under certain circumstances for the purpose of:

• ensuring the safe or efficient operation of nationally significant infrastructure
• open space provided for public use
• an area subject to a designation or heritage order
• consistency with iwi participation legislation
• sufficient business land suitable for low density uses
• any other matter that makes high density development inappropriate in an area.

This list of extenuating circumstances allows for a fair bit of subjective interpretation, particularly the point about “any other matter that makes high density development…inappropriate”. The NPS-UD does require that if these exemptions are employed, some justification must be provided, including a site-by-site analysis. The exemption needs to be appropriate “in light of the national significance of urban development”, but “appropriate” is still left up to the individual authority to define and defend.

Real-life implications: less housing where it is most valued

In the Auckland context, two main qualifying matters that opponents of more density in their neighbourhoods appeal to are “special character” and “volcanic viewshafts”. The special character rationale has also been applied in Wellington and will likely crop up in other high growth cities.

A criticism of Auckland’s 2016 zoning rules was that it left so much low density zoning closest to the city centre. Around 30,000 mostly central dwellings (about one out of every 18 Auckland homes) were deemed to be of “special character” during that rezoning process. Because these rules restrict development closest to jobs, public transport, and amenities, they also force the city to develop in a more congested, car-oriented, higher emissions way.

Further, the city has preserved over 80 volcanic viewshafts, sometimes from obscure places (such as from vehicles driving south on Highway 1 toward the city centre), and often limiting development in highly desirable parts of the city where housing could be closer to jobs, public transport and other amenities. Viewshafts are not about protecting access to these sites, which have cultural, environmental, and social value, but effectively determine how many people should be able to see volcanoes and from where.

Figure 2 Auckland’s special character areas and volcanic viewshafts, mostly close to the city centre

As an economist, I help clients evaluate trade-offs. In this instance, we must ask how much we want to limit people accessing homes closer to jobs, public transport and other amenities to protect these other valued things. Preserving “best in class” historical buildings and the most prominent volcanic views undeniably has value, but so does housing more people safely, and closer to jobs, public transport and amenities. What is the right number of protected properties to preserve part of our history? The answer is likely much less than 30,000, but is it 2,000 or 6,000? Or what is the right number of viewshafts to protect iconic views?

At present, these questions, which could be replicated in other parts of the country and for other qualifying matters, such as “outstanding natural landscapes”, are seldom answered objectively. In recent years, the price premium (a good measure of value) people pay for special character properties has declined, while that for properties receiving denser zoning has grown.^[2] This implies that the value of homes with special character status may be accruing to those around them, who don’t want more development in the neighbourhood, rather than to the property owner. Meanwhile, those actually purchasing properties find ones with more development potential more attractive.

We are unlikely to remove NIMBYism from the debate without a pragmatic approach to trading off these values. This could include a contingent valuation or similar experiment, where answers can’t be gamed, and where the number of people signing an online petition that does not tackle the implied trade-offs of their preferences is not used as the basis of decision-making.

Real-life implications: two infrastructure challenges

There are two further, infrastructure-related problems related to the announcement. First, the assumption is that properties covered by the new relaxed zoning will be adequately infrastructured. But infrastructure is eye-wateringly expensive, and councils have traditionally not charged the full price of new infrastructure to the properties that benefit from it. Encouraging signs have emerged from Hamilton and now Auckland of development contributions that come closer to the true cost of development infrastructure. But there is a huge gap yet to overcome across high growth councils, and at present no clear plans to fund the gap.

Second, the socialising of private costs of development (one reason for the existence of NIMBYism) is seldom factored into development decisions. For instance, as special character overlays have forced development further from the city, burgeoning new multi-unit development in Auckland’s sellers’ market often socialises private infrastructure costs. An example is parking, often underprovided on private properties (yes, distance from the city means most people still need a car), leading to people socialising those costs by parking on berms, pavements, and across driveways, reducing safety for pedestrians and drivers, and pushing amenity down.

To end, a plea or two

In deciding what qualifies as a reason not to deliver more housing, we must provide empirical, data driven evidence that we are making the right trade-offs.

And with more upzoning due by next September, high growth councils need to have funding policies in place before going out to consultation on how and where zoning will be relaxed. These policies need to demonstrate the large windfall gain properties will likely receive as the upzoning lever is pulled. The policies also need to clarify how part of those gains will fund the infrastructure needed to make development successful, including internalising costs that would otherwise be borne outside the development.

* David Norman is an Executive Advisor in Economics and Strategy at GHD. This article is here with permission. You can contact him here.