Why minister’s home plan will fail
The Minister of Urban Development recently laid out his strategy of Making Room for Growth. Phil Twyford seeks to reduce urban land prices by “flooding the market with development opportunities” and to “break the current land market model”.
Blaming an Auckland market characterised by “land banking and speculation” for creating an artificial scarcity of land, he wants rid of a planning system based on urban containment and to replace it with a “more expansive approach to spatial planning”.
The most obvious target is Auckland’s urban growth boundary.
Housing prices are too high — no argument.
But the minister blames an “inefficient” land market. His key evidence is that urban land values are far higher than rural values. The favoured solution is to create a “competitive urban land market” by allowing cities to spread into their rural surrounds, adding to land supply and “flooding the market” to drive down land values.
Unfortunately, the core premise of an inefficient land market arises from misinterpretations of how land markets function and particularly how cities expand.
Higher values for urban land reflect efficient urban development.
The inefficient market premise stems from a backward-looking focus on rural land prices instead of examining how the market values urban land. The theory is that urban land values should be not much above rural values — and any differences should be no more than infrastructure and development costs, plus some convenience and amenity value.
However, there are major weaknesses in the concept. Its assumptions that land
value is not influenced by potential land use or location conflict with economic theory and principles of valuation, and understanding of how land markets operate.
Markets value land according to how it may be used, and where it is. Urban land is more valuable than rural because it can be used more intensively, get greater returns, and incurs substantial costs to sustain urban activity. Differences in potential returns are reflected in prices – Auckland’s urban residential land has about 30 times the housing capacity of rural residential land, and is valued about 30 times higher.
If land use and location effects are allowed for, then expected urban values are higher, and evidence of market inefficiency fades.
The alternative view is there should be big differences in land value, especially at the urban edge.
Cities evolve because major economic and social benefits arise when people and activities group together. Co-location is efficient: transaction costs are low, economies of scale and scope are available, and agglomeration benefits are realised. Costs of urbanising — infrastructure, land development, restructuring land holdings to sustain urban activity — are high. Urban values reflect land’s high earning potential and advantages as a place to live, as well as those high urbanisation costs. Land values reflect the intensity of activity — highest in the CBD, lowering towards the urban edge. A compact urban form, where high densities allow efficient use of land and infrastructure, generally enhances city efficiency, sustainability and competitiveness.
When a city grows, economic pressures encourage efficiencies by taking up the minimum extra land, at the urban edge, as late as possible. Efficient growth sees new land fully urbanised quickly, its value well above adjacent, lower earning, rural land.
Time and location are critical. The advancing edge increases rural owners’ land values in anticipation of higher returns from impending urban use, especially for land near the edge — urbanised sooner, more attractive for business or residential use, incurring lower holding and infrastructure costs. Owners know their value will likely peak when urbanisation is imminent — their incentive to await maximum value, rather than sell prematurely at a lower price when the edge is still distant, seems obvious.
The sequence of rising values — the urban edge advances, land is serviced, subdivided, developed and fully urbanised for more intensive use — shows an efficient urbanisation path.
The dynamics and complexities of urban growth highlight the significance of location, time and scale in understanding land markets, and how important it is that urban strategies are based on sound economics.
Twyford’s “making room for growth” raises major concerns. A strategy as blunt as “flooding the market”, seems based on an Economics 101 demand-supply diagram rather than clear understanding of land markets. Second, the underlying “inefficient market” premise is based on flawed economics. Efficient city growth results in urban values far above rural values.
Pursuing the “competitive urban land markets” mantra by flooding the market is fundamentally misdirected.
Encouraging urban sprawl and removing growth limits will come at high cost from undermining key objectives for sustainable cities, urban efficiency and making urban living more affordable — with minimal effect on housing prices.