With a Federal election around the corner both major parties policies focus so much on more demand supporting higher prices, why can't prices just fall?
Thanks for the great analysis Cam. Apart from the supply issues, I think the demand side also needs to be addressed. Speaking as an immigrant myself, I don't think it's great for housing affordibility and quality of life overall to import half a million permanent residents per year, most of whom end up in Sydney or Melbourne. New immigrants should be encouraged to settle in less densely populated/regional areas. But I appreciate how politically difficult that would be for any party and politician to do.
Full marks for noticing what almost no-one does; upzoning makes "house prices" go up, not down. Every single property involved becomes a "site with redevelopment potential" and this sets its price. I have been predicting this for more than a decade; every time more upzoning is done. I predicted that NZ's draconian top-down nationally imposed upzoning circa 2020 would cause the biggest house price inflation yet. On top of an already absurd and disastrous housing affordability situation.
The only thing that changes this wicked paradigm, is liberalization of greenfields land supply, which then flips "urban" economies into a "differential rent" situation instead of an extractive monopoly one. To have differential rent rather than monopoly rent, you need the main resource to be superabundant in supply. This is how it has worked, beneficially, in all goods categories since the era of Karl Marx when he assumed all economic rent was monopoly. Transport system improvements, refrigeration and other technology, and free trade, made the important resources superabundant and the prices of everything "differentially derived" or cost-plus or "with consumer surplus". Automobility clearly did this for housing until the time came that urban planners or other regulators flipped the supply of land for housing back to monopolistic conditions.
The sheer prices paid for greenfields land that is allowed to be developed, actually makes the cost of infrastructure a sideshow. Among the very best land economics literature is from Alan W. Evans, and one of his many insights is that when land pricing is being derived by monopoly rent mechanisms, every cost input other than the land is merely a carve-out from the monopoly gain. So forcing higher payments "for infrastructure" won't make house prices go up; it will make developers bid less for the land. But the land vendors have the extractive powers that will take out any slack well-meaningly created anywhere else in the system.
This whole racket falls over the moment innovative developers are allowed to build "urban" developments on land they paid near to true rural prices for, within effective automobile accessibility to the city. The maths on this is very simple. The automobile in "exurbs" can travel at speeds that render the supply of land for "urban use" truly superabundant. There is no need and no validity of assumption of "paving over paradise" - as soon as urban land prices everywhere are rendered "differentially derived", every form of redevelopment and infill gains a massive leverage of its potential in the affordability of the finished properties. Issi Romem's research showed that in US cities where upzoning was allowed AS WELL AS unrationed greenfields development, infill and redevelopment occurs FASTER than in the cities where infill and redevelopment are assumed to be now "instead of" greenfields development. The resulting overall housing supply is some tenfold more elastic than infill and redevelopment "instead of".
Grimes and Aitken 2010 gave us the perfect one-liner in their conclusion about "instead of" urban economies: "all the profit potential from redevelopment is impounded in the rising price of sites". This is the wedge in "housing supply" that no-one has worked out how to remove - except that because it was put there by anti-sprawl regulations, presumably it could be removed by eliminating those regulations. It is perfectly possible to require the costing in of infrastructure to housing built on greenfields, and still have systemic affordability. This cost add-on is an order of magnitude smaller than the cost of site vendor monopoly rent extraction.
Thanks for the paper Cameron. You are right about the basic theme of the article, of course.
In terms of ways to address affordability, among the things you suggest is that infrastructure costs for greenfield development might be reduced, I presume by governments picking up more of the tab.
I note that this would need to handled very carefully in terms of its relationship to any new upzonings on the urban fringe. If the provision of infrastructure can be tied in with the upzoning so that government captures some of the increased land value to help fund more of the infrastructure, that would be preferable. Otherwise there is a high likelihood that the benefits of the upzoning and government infrastructure investment would go mostly to those who own the land at the time of the upzoning decision, with no real benefit either to the government/community in terms of supporting the high cost of greenfield infrastructure or to the end purchaser in terms of affordability.
I think increased government investment in infrastructure may get more currently stalled developments over the line to be feasible, because it reduces development costs, but there is a high likelihood the government investment would mostly be capitalised into the land value with no community benefit other than an increased potential for more lots to be brought to the market in the short term, if the demand is there at the feasible price.
More broadly I note that many economists talk rather glibly about relaxing zoning laws without any serious consideration of what that means in terms of the consequent new or upgraded infrastructure costs. Zoning is much more than colours on a map that can be changed with the stroke of a pen, it has implications for the supporting infrastructure required, and I think the effective government commitment to that infrastructure, at least in the medium-long term, is a large part of the increased land value from upzoning.
Also, you mention about the supposed success of upzonings in the US that is likely due, in part, to the greater presence of build-to-rent there. Can you give some evidence/references for either the success of the upzonings and/or the role of build-to-rent in that?
Thanks for the comments Geoff. I know it is very unpopular with the development industry but I am a fan of value capture when properties are upzoned. It's basically the luck of the draw and the value of the parcel of land surges because it has now been decided its highest and best use is something greater than before.
If we are going to allow more development we're going to need a lot more infrastructure investment and that has to be funded someway.
Thanks for the great analysis Cam. Apart from the supply issues, I think the demand side also needs to be addressed. Speaking as an immigrant myself, I don't think it's great for housing affordibility and quality of life overall to import half a million permanent residents per year, most of whom end up in Sydney or Melbourne. New immigrants should be encouraged to settle in less densely populated/regional areas. But I appreciate how politically difficult that would be for any party and politician to do.
Full marks for noticing what almost no-one does; upzoning makes "house prices" go up, not down. Every single property involved becomes a "site with redevelopment potential" and this sets its price. I have been predicting this for more than a decade; every time more upzoning is done. I predicted that NZ's draconian top-down nationally imposed upzoning circa 2020 would cause the biggest house price inflation yet. On top of an already absurd and disastrous housing affordability situation.
The only thing that changes this wicked paradigm, is liberalization of greenfields land supply, which then flips "urban" economies into a "differential rent" situation instead of an extractive monopoly one. To have differential rent rather than monopoly rent, you need the main resource to be superabundant in supply. This is how it has worked, beneficially, in all goods categories since the era of Karl Marx when he assumed all economic rent was monopoly. Transport system improvements, refrigeration and other technology, and free trade, made the important resources superabundant and the prices of everything "differentially derived" or cost-plus or "with consumer surplus". Automobility clearly did this for housing until the time came that urban planners or other regulators flipped the supply of land for housing back to monopolistic conditions.
The sheer prices paid for greenfields land that is allowed to be developed, actually makes the cost of infrastructure a sideshow. Among the very best land economics literature is from Alan W. Evans, and one of his many insights is that when land pricing is being derived by monopoly rent mechanisms, every cost input other than the land is merely a carve-out from the monopoly gain. So forcing higher payments "for infrastructure" won't make house prices go up; it will make developers bid less for the land. But the land vendors have the extractive powers that will take out any slack well-meaningly created anywhere else in the system.
This whole racket falls over the moment innovative developers are allowed to build "urban" developments on land they paid near to true rural prices for, within effective automobile accessibility to the city. The maths on this is very simple. The automobile in "exurbs" can travel at speeds that render the supply of land for "urban use" truly superabundant. There is no need and no validity of assumption of "paving over paradise" - as soon as urban land prices everywhere are rendered "differentially derived", every form of redevelopment and infill gains a massive leverage of its potential in the affordability of the finished properties. Issi Romem's research showed that in US cities where upzoning was allowed AS WELL AS unrationed greenfields development, infill and redevelopment occurs FASTER than in the cities where infill and redevelopment are assumed to be now "instead of" greenfields development. The resulting overall housing supply is some tenfold more elastic than infill and redevelopment "instead of".
Grimes and Aitken 2010 gave us the perfect one-liner in their conclusion about "instead of" urban economies: "all the profit potential from redevelopment is impounded in the rising price of sites". This is the wedge in "housing supply" that no-one has worked out how to remove - except that because it was put there by anti-sprawl regulations, presumably it could be removed by eliminating those regulations. It is perfectly possible to require the costing in of infrastructure to housing built on greenfields, and still have systemic affordability. This cost add-on is an order of magnitude smaller than the cost of site vendor monopoly rent extraction.
Thanks for the paper Cameron. You are right about the basic theme of the article, of course.
In terms of ways to address affordability, among the things you suggest is that infrastructure costs for greenfield development might be reduced, I presume by governments picking up more of the tab.
I note that this would need to handled very carefully in terms of its relationship to any new upzonings on the urban fringe. If the provision of infrastructure can be tied in with the upzoning so that government captures some of the increased land value to help fund more of the infrastructure, that would be preferable. Otherwise there is a high likelihood that the benefits of the upzoning and government infrastructure investment would go mostly to those who own the land at the time of the upzoning decision, with no real benefit either to the government/community in terms of supporting the high cost of greenfield infrastructure or to the end purchaser in terms of affordability.
I think increased government investment in infrastructure may get more currently stalled developments over the line to be feasible, because it reduces development costs, but there is a high likelihood the government investment would mostly be capitalised into the land value with no community benefit other than an increased potential for more lots to be brought to the market in the short term, if the demand is there at the feasible price.
More broadly I note that many economists talk rather glibly about relaxing zoning laws without any serious consideration of what that means in terms of the consequent new or upgraded infrastructure costs. Zoning is much more than colours on a map that can be changed with the stroke of a pen, it has implications for the supporting infrastructure required, and I think the effective government commitment to that infrastructure, at least in the medium-long term, is a large part of the increased land value from upzoning.
Also, you mention about the supposed success of upzonings in the US that is likely due, in part, to the greater presence of build-to-rent there. Can you give some evidence/references for either the success of the upzonings and/or the role of build-to-rent in that?
Thanks for the comments Geoff. I know it is very unpopular with the development industry but I am a fan of value capture when properties are upzoned. It's basically the luck of the draw and the value of the parcel of land surges because it has now been decided its highest and best use is something greater than before.
If we are going to allow more development we're going to need a lot more infrastructure investment and that has to be funded someway.