High land prices encourage the production of larger & more expensive housing. In New Zealand, the Productivity Commission says the average size of new dwellings has increased by more than 50% since 1989.
The commission presented its draft report, Using land for housing, on Wednesday and wants responses to it back by 4 August. It’s required to deliver its final report to the Government by 30 September.
Along with findings & recommendations, the commission has highlighted some submissions in this report, among them evidence on:
- density & value, and
- how cheaper housing is sidelined.
The commission noted: “In the early 1960s the value of most new housing was lower than the average value of existing housing. In comparison, more than half of new-builds in 2014 were valued in the upper quartile of all housing stock.
“Professor Larry Murphy, of Auckland University’s Business School, offers an explanation for why only top-of-the-market dwellings are constructed, and how they inflate housing prices.”
Professor Murphy argued that it requires an understanding of the factors that underpin the decision-making processes of developers, and explained the residual value model:
Residual value is a central concept affecting all development feasibility studies and refers to the maximum bid that a developer will make for a site in order to undertake a particular development.
The residual value is simply the difference between the total value of the proposed development and the total costs of construction (including profit). Typically, banks want to see where the developer’s return is coming from and a developer needs to construct dwellings that sell at the top of the market if the developer is to be a successful land purchaser.
Professor Murphy argues that a developer cannot build a modest house with the expectation of selling the total property for say $500,000, because they will be outbid for the land by the developer who believes that by building a more expensive house, they can sell the total property for $700,000: “This is what drives the race to the top for both new house prices & land prices.”
Auckland density profile unusual
The commission also noted the view of a number of commentators on Auckland’s unusual density profile: “Hill Young Cooper concludes that when Auckland’s actual urban density (dwellings/ha) is compared to land values, then it is apparent that there is a significant deviation occurring close to the cbd. The densities in this area have not adjusted to the higher land prices. This is likely to be the result of the heritage zoning in this area. This suggests a significant imbalance between supply & demand, one that is likely to drag up the median house price.”
In its Housing affordability report in 2012, the commission found that binding urban limits are problematic, as they tend not to be accompanied by greater opportunities for intensification within existing areas and therefore push up land & housing prices.
Instead, the commission recommended that councils adopt “a strategy that allows for both intensification within existing urban boundaries and orderly expansion beyond them” and use alternatives to binding urban limits such as “using infrastructure planning to signal where development will take place”.
The commission said: “The tendency of New Zealand housing markets to produce larger, more expensive dwellings is likely to be increasingly at odds with demand because of demographic trends. “The average size of households is forecast to shrink over the coming 20 years (from 2.6 to 2.4 people/household). The number & proportion of couple-only & one-person households is projected to increase, with most of the expected growth in population coming from single-person & couples-only households.
“Speeding up the translation of spatial planning processes into land use regulation, without unduly compromising analytical rigour or consultation, is likely to require the development of a new legislative avenue for larger or faster-growing cities. This could combine infrastructure strategies, longer-term transport planning, longer-term strategic thinking about the growth of the city by councils and the development of land use rules.”
The commission said strengthening the recognition in the Resource Management Act of plans prepared under other statutes would be unlikely to significant speed up the translation of spatial plans into district plans: “Removing or relaxing RMA consultation & analytical requirements to enable faster translation of spatial plans into district plans would increase the risk of poor quality regulation.
“The best opportunity to integrate spatial planning and land-use regulation is to create a new, legislative avenue for larger cities.” Such an avenue would allow a local authority to develop a plan that combined:
- 30-year infrastructure strategies
- longer-term transport planning
- longer-term thinking about the growth of the city, and
- the development of associated land-use rules.
To be most effective, the new planning avenue would need:
- to be focused on the key activities that matter for the growth & development of cities
- to be a voluntary option for larger cities or fast-growing areas
- greater central government involvement, and
- processes to encourage high quality regulatory design.
The commission has recommended that a new legislative avenue should be designed to focus spatial plans on activities that:
- are of high importance to the functioning of cities and the provision of development capacity for housing (eg, land supply, infrastructure provision, transport services)
- relate closely to the use of land or space and the management of negative externalities, and
- are most efficiently dealt with at a local level and through local authorities.
Central-local partnership, and plan cleanup
The commission said future plans prepared under the new legislative avenue “should be developed in partnership with the full set of central government actors whose services matter for the functioning of cities. Given the fiscal implications of greater central government involvement in spatial planning, both Cabinet & the relevant local authority should approve such plans.”
Evidence collected through this inquiry suggests to the commission that some local authority regulations are imposing high compliance & economic costs, leading to increases in the cost of development and the loss of potential housing.
“The costs of some particular regulations appear to outweigh any likely benefits. Problems with excessive regulatory costs stem from a number of sources, particularly conflicting objectives, inadequate analysis & poor targeting.”
The commission identified a number of regulatory requirements that appeared to impose costs above their likely benefits – minimum apartment floor size rules, apartment balcony size requirements, minimum parking requirements and building height limits.
“Minimum floor size rules limit the ability of individuals to trade off private space for location, and limit the supply of smaller, cheaper dwellings, increasing housing costs more widely. As a result, they can have the effect of encouraging crowding & other undesirable behaviours, as people with limited incomes seek to minimise their housing costs.”
A number of reasons are cited for the imposition of minimum apartment size rules in New Zealand – in particular, concerns about the adequacy of ventilation, natural light, internal noise insulation & visual amenity.
In the commission’s view, “While issues such as ventilation, natural light & noise insulation are important, they are better resolved through targeted regulation rather than blunt tools such as minimum size rules.
“In addition, given that these are largely issues of building safety & sanitation, they are best dealt with through the Building Act & building code rather than district plans. The Ministry of Business, Innovation & Employment’s 2014 briefing to the incoming minister of building & housing noted that a need exists to update the ‘code & associated guidance relating to multi-unit dwellings (air quality, lighting, acoustics, access etc)’. Once this work is complete, urban local authorities should review minimum apartment size rules in their district plans, with a view to removing them.”
Not all standardisation works
The commission said an approach taken to speed up approvals and reduce uncertainty was to standardise & ease regulatory requirements around some forms of residential development. “This standardisation enables fast-tracked assessment & approval of lower-risk development types. The Australian Productivity Commission, in a 2012 examination of the impact of development assessment reform, estimated the full introduction of code assessment could create compliance cost savings of $A220 million/year, $A45.3 million of which would accrue to residential development.
“Some degree of standardisation in land use rules is already occurring, as a result of local government reforms. The establishment of the Auckland Council and development of the unitary plan means that the 99 residential zones in place across the region prior to amalgamation will be replaced by 6 (subject to any recommendation from the independent hearings panel). The Housing Accords & Special Housing Areas Act has also – albeit temporarily – introduced common & streamlined approval processes for particular types of residential developments in declared areas.”
However, the commission said costs were involved with moving to a system of nationally consistent zones: “Moving to such a system would effectively require full plan reviews, creating considerable costs & upheaval for local authorities and uncertainty for developers. Based on the average cost of $1.9 million to produce a first-generation district plan, the direct costs of such a move could exceed $127 million. Further, it is not certain that national consistency would necessarily deliver less complexity & more efficiency in the planning system.”
Step-by-step thinking on infrastructure
The commission’s step-by-step thinking is illustrated in its findings, such as this series on infrastructure provision & funding: “Most inquiry participants suggested that higher-density urban developments are less costly to service with infrastructure, particularly when existing infrastructure assets have not yet reached capacity. International research examining the relationship between urban form & infrastructure costs generally supports this proposition.
“Councils tightly control the supply of infrastructure to support urban growth. This is a prudent approach from the perspective of managing costs & risks. However, it can constrain the supply of land for housing. In turn, this can contribute to higher land prices by reducing competition among developers and reinforcing expectations among investors of a scarce supply of land for housing.
“Development agreements enable developers to take responsibility for building major infrastructure. This shift has the potential to generate a swifter supply of infrastructure at a lower cost.
“Innovative approaches to infrastructure construction that lower upfront costs and allow services to be scaled up as demand increases can help to overcome the difficulties of investing in infrastructure to support future growth. The staged construction approached used by Selwyn District Council is a good example of this leading practice.
“Improving the supply of infrastructure for housing is not just about rolling out new infrastructure. Effective use of existing assets is also an important part of the equation. Councils can unlock land supply by enabling growth in areas where there is spare capacity within existing infrastructure networks. This leading practice requires councils to establish a good understanding of existing infrastructure capacity along with appropriate planning rules that allow intensification to occur in areas where capacity exists.”
On the question of paying for infrastructure, the commission continued: “Considerable scope exists for councils to increase their use of targeted rates in order to recoup the costs of growth-enabling infrastructure over a longer timeframe.
“Evaluation of the financial prudence & reporting regulations should monitor how the regulations affect councils’ ability to provide infrastructure to support growth and review whether 15% is the most appropriate debt-servicing ratio for high-growth councils.
“Councils should include information in their development contributions policy about the relationship between dwelling floor area and the cost of providing infrastructure services. If smaller dwellings impose lower costs on the infrastructure network, this should be reflected in lower charges.
“The Local Government Act should be amended to make clear that developers may formally request that councils construct growth-enabling infrastructure, to be repaid through targeted rates on the properties that benefit from the infrastructure connections, and obliging Councils to consider such requests.”
Another was the series of findings on shaping local behaviour – effectively on nimby (not in my back yard) behaviour:
“Groups that have high home ownership rates have higher rates of participation in local government elections. Restricted housing supply will tend to inflate the value of existing homes. Existing homeowners have an incentive to be risk-averse in opposing developments that could affect the amenity & value of their home. Existing homeowners have an incentive to oppose development that involves council expenditure on infrastructure that does not benefit them but will be recovered through general rates.
“Cities that are subject to geographic constraints to development (eg, near to a large body of water) show less supply responsiveness to housing demand, both because of the geographic constraints and because these constraints encourage higher land prices, strengthening the incentive for existing owners to support anti-development regulations. This is particularly true in larger & faster-growing cities.
“The influence of homeowners in local government elections & consultation processes promotes local regulatory & investment decisions that have the effect of reducing housing supply. Tools such as statistically robust & representative surveys can help to offset the tendency of planning engagement processes to be skewed towards particular segments of the community.
“High-growth councils tend to see accommodating population growth or new housing development as a net cost. The construction of new dwellings increases a council’s ability to fund expenditure from rating those properties over time, but overall the direct financial incentives on councils to accommodate growth are weak.”
Landbanking a symptom
The commission said landbanking was a symptom, rather than a primary cause, of land supply constraints, and it has recommended a shift from rating on capital value to using land value: “In New Zealand those constraints are the result of local regulatory & investment decisions. The holding costs of land, including rates & financing, are low relative to Auckland’s current rapidly inflating land values.
“The use of capital value rating systems makes it marginally less expensive to carry undeveloped & underdeveloped land. The use of land value rating systems would encourage land flowing to its highest value uses, including more & denser housing. Rating based on land valuation appears to be a better proxy for ability to pay than rating based on capital valuation.”
In addition, the commission saw no justification in principle for the Government not to pay rates on Crown land, advocated the use of urban development authorities to lead development of larger blocks of land, and saw justification in value capture from rezoning.
“Urban development authorities can play an important role in de-risking development and bringing land to market. No territorial authority within the scope of this inquiry currently has an urban development agency in place. However, the Auckland & Wellington City Councils are actively considering establishing such agencies. [Auckland’s will be in place on 1 September.]
“It is justifiable for the public to capture some of the increase in private land value that is created by public actions. No reasonable argument exists for capturing increases in property values resulting from infrastructure builds that developers are required to fund through contributions, as the uplift is not ‘unearned’.
“A good case exists for the public to capture unearned land value increases that result from public action. But land value increment taxes & betterment levies have proved difficult to sustain in other countries. An urban development authority may be able to capture some portion of unearned land value increases through participation in the land market.
“The Treasury should investigate the possibility of providing an exemption from the foreign investment screening regime for developers purchasing land, providing the land is developed into housing & resold within an acceptable timeframe.
There is a place for an urban development authority to lead & co-ordinate residential development at scale in both greenfield & brownfield settings, working in partnership with private sector developers. Legislation would be required to establish & give powers (such as compulsory acquisition) to one or more of these in New Zealand.”
2 June 2015: Productivity Commission draft on land for housing out in fortnight
30 March 2015: Transport specialist Litman itemises cost of sprawl
2 March 2015: Economic report for council an exhortation to relax land use rules
12 November 2014: Hawkins chief lambasts Government & lawyers for blocking productivity gains
7 November 2014: Productivity Commission launches land supply regulation inquiry
Attribution: Productivity Commission.