Friday 1 March 2024

The Uncompetitive Urban Land Markets Theory of Everything

The Housing Theory of Everything has one of those wonderful self-explanatory titles. A good title matters. The recent and thorough essay explains how the anglosphere’s unnecessarily expensive housing affects, well, everything. Or at least almost everything.

Zoning makes it too hard to build houses where people want to build. Urban containment policies block new subdivisions, so downtown land no longer competes with land further out for developers’ attention and for residents. Land prices then inflate across the whole urban land market. Zoning that blocks new townhouses and apartment towers in places where people want to live further worsens scarcity and affordability.

It's at the root of a host of pathologies.

People aren’t left with much to live on after housing costs; inadequate housing causes misery.

The most productive cities could be even more productive if more people were allowed to live near each other. Bans on density are then taxes on productivity improvement, with existing landowners reaping the rewards. Those bans also make it harder than it should be to reduce carbon emissions.

The essay is superb. And it has been influential.

I’ve heard it cited by both Labour and National MPs, which shouldn’t be surprising as it explains a whole lot about New Zealand.

Uncompetitive urban land markets are at the core of the problem. Current practice requires council plans to demonstrate that they have zoned for about twenty percent more housing supply than expected demand. But expected demand will depend on whether housing is affordable, and tight zoning means unaffordable housing. 

Me over in Newsroom this week. 

I riff on a chat I'd had with Kevin Counsell on our podcast series about the economic consultancy reports that developers have to put up showing that there's massive excess demand if they want to get a building consent. 

A new supermarket then has to prove that there is so much excess demand that the new supermarket will not impinge on existing competitors’ viability.

And maybe that kind of outcome sounds great to the kinds of people who get involved in town planning. There’s already a supermarket, why should there be another one unless there’s enough customers for it?

The result is the neutering of competition, and substantial harm to consumers. If an existing business is seriously underperforming, a new entrant provides a service by driving it out of business. Even the threat of that kind of entry provides competitive discipline.

However, in New Zealand, that kind of entry would have a hard time getting a resource consent. The government likes to wring its hands about poor productivity performance while, at the very same time, making it almost impossible for new competitors to drive unproductive incumbents out of business.

Last week, I chatted with NERA director Kevin Counsell for the Initiative’s podcast series. When councils require evidence that a new development provides overwhelming benefits, someone has to write the economic analysis. Counsell writes a lot of the reports demonstrating whether there would be sufficient demand.

It isn’t just supermarkets. Consider potential entrants who need land at the edges of town.

In 2022, the government set a National Policy Statement on Highly Productive Land. That statement sets a very high hurdle if anyone wants to do anything other than farming on the 14% of the country that is classified in the top three soil categories.

Most of that protected land is dairy and sheep paddocks. Converting it to any other use requires proving a substantial benefit from that conversion.

Counsell has been working on a proposed new industrial park outside of Morrinsville. The National Policy Statement on Highly Productive Land requires that there be substantial benefit before anyone can build anything on a paddock.

How can you demonstrate substantial benefit? You have to prove that there is huge demand for the new use. The dynamic benefits of competition in forcing everyone to strengthen their game aren’t enough. They would be harder to prove in any case. Entrants wind up having to show that there is excess demand given current supply.

The effect is harshly anticompetitive. If a group of existing businesses organised in a smoke-filled room to block a new competitor’s entry, they could face criminal cartel prosecution. But resource management provides even stronger protection against competition whenever resource consents are required.

I titled this column ‘The Uncompetitive Urban Land Markets Theory of Everything’, but it’s never easy to tell whether a columnist’s draft headline will survive. The uncompetitive urban land markets theory of everything subsumes the housing theory of everything. Just about everything wrong in housing is downstream of uncompetitive urban land markets. But the same processes that block new housing also block new supermarkets, new commercial premises and new industrial parks. 

Go listen to the podcast. Our resource consenting systems entrench anticompetitive effects by making it difficult to set a new competitor unless the incumbent's existing rents are above a threshold, and dynamic Schumpeterian competition is largely blocked. 

Maybe, just maybe, if the government is worried that NZ markets are often less competitive than they'd like, and if they're also worried that the country's less productive than it should be, it could have a look at this?

Maybe would-be competitors shouldn't have to produce reports like this?

I swear a good third of government activity is creating giant problems, not noticing that they caused the problem, then running endless inquiries about the consequences. 

Monday 19 February 2024

Tino Rangatiratanga and localism

My piece for the Saturday papers weekend before last, and now ungated here, went back to a theme that Richard Harman had noticed in the Waitangi speeches
Minister Shane Jones argued fuller debate on the meaning of Tino Rangatiratanga is inevitable, saying, “There is a deep, committed view from Pita Tipene and others that article two is a charter for iwi sovereignty. And at some point in time, that debate is going to be flushed out. It’s not a conception that I share. I conceive it to be more localised.”

Prime Minister Luxon said, “We are a party and particularly a government that is actually about making sure there is localism and devolution and that those closest to the problem should solve the problems. …Our fundamental belief is localism and devolution. We do not believe in centralization and control through Wellington.”

It is certainly not for a Canadian economist to weigh in on Treaty interpretation. I have neither the standing nor the understanding.

But one bit of the Canadian experience might be interesting.

Canada’s overall policies regarding its First Nations have been abysmal. But Canada’s First Nations nevertheless have some rights comparable to Canadian municipalities.

Basically, Canada's First Nations Band Councils have powers on reserves comparable to municipalities, except under federal rather than provincial jurisdiction. 

Decades ago, Manny Jules did the work to get band councils the authority to levy property taxes on reserve to fund band council activities. 

And look at this section of the Indian Act - I've bolded the interesting bits.

81 (1) The council of a band may make by-laws not inconsistent with this Act or with any regulation made by the Governor in Council or the Minister, for any or all of the following purposes, namely,

(a) to provide for the health of residents on the reserve and to prevent the spreading of contagious and infectious diseases;

(b) the regulation of traffic;

(c) the observance of law and order;

(d) the prevention of disorderly conduct and nuisances;

(e) the protection against and prevention of trespass by cattle and other domestic animals, the establishment of pounds, the appointment of pound-keepers, the regulation of their duties and the provision for fees and charges for their services;

(f) the construction and maintenance of watercourses, roads, bridges, ditches, fences and other local works;

(g) the dividing of the reserve or a portion thereof into zones and the prohibition of the construction or maintenance of any class of buildings or the carrying on of any class of business, trade or calling in any zone;

(h) the regulation of the construction, repair and use of buildings, whether owned by the band or by individual members of the band;

(i) the survey and allotment of reserve lands among the members of the band and the establishment of a register of Certificates of Possession and Certificates of Occupation relating to allotments and the setting apart of reserve lands for common use, if authority therefor has been granted under section 60;

(j) the destruction and control of noxious weeds;

(k) the regulation of bee-keeping and poultry raising;

(l) the construction and regulation of the use of public wells, cisterns, reservoirs and other water supplies;

(m) the control or prohibition of public games, sports, races, athletic contests and other amusements;

(n) the regulation of the conduct and activities of hawkers, peddlers or others who enter the reserve to buy, sell or otherwise deal in wares or merchandise;

(o) the preservation, protection and management of fur-bearing animals, fish and other game on the reserve;

(p) the removal and punishment of persons trespassing on the reserve or frequenting the reserve for prohibited purposes;

(p.1) the residence of band members and other persons on the reserve;

(p.2) to provide for the rights of spouses or common-law partners and children who reside with members of the band on the reserve with respect to any matter in relation to which the council may make by-laws in respect of members of the band;

(p.3) to authorize the Minister to make payments out of capital or revenue moneys to persons whose names were deleted from the Band List of the band;

(p.4) to bring subsection 10(3) or 64.1(2) into effect in respect of the band;

(q) with respect to any matter arising out of or ancillary to the exercise of powers under this section; and

(r) the imposition on summary conviction of a fine not exceeding one thousand dollars or imprisonment for a term not exceeding thirty days, or both, for violation of a by-law made under this section.

It is fun to think about what could happen here if iwi had similar authority over building and development on iwi-held land, or Māori land more generally. 

For further fun, look at the 250 page services agreement between Vancouver City and the Squamish First Nation for the Sen̓áḵw development. That development is on Reserve land right next door to downtown Vancouver. 

It's very typical for Kiwi bureaucrats, or bureaucrat-adjacent types, to find the first hurdle that might cause an issue and just give up. Well, here's 250 pages of legal text working through difficulties and finding solutions. 

Back to the column.

A First Nations Band has autonomy over the Band’s land.

It isn’t mere parchment. The listed rights have consequences.

When Sḵwx̱wú7mesh Úxwumixw, the Squamish Nation, finally had five hectares of their land returned to them near downtown Vancouver, the Band had authority over that land. Not the city.

Vancouver has a housing shortage. And Sḵwx̱wú7mesh Úxwumixw wanted to build.

In Auckland, Section H27 of Auckland’s Unitary Plan sets out the Special Purpose - Māori Purpose Zone. A Marae is prescribed by H27.6.2 to be no more than 10 metres in height; height of buildings in relation to boundaries is prescribed by H27.6.3, and even the location of rainwater tanks is prescribed by H27.6.9.

Even if every one of those sections enjoyed the full agreement of every hapū when the rules were written, if a hapū’s needs changed over time, council would have to agree to any change. And City Council issues the consents.

Meanwhile, the Squamish Nation’s website describing the Sen̓áḵw development explains that “Sen̓áḵw is not part of the City of Vancouver, and is not subject to the City's typical development approval process.”

It appears that, in practice, collaboration with Vancouver City has been required in order to effect interconnection to water networks. But bargaining over such things is a bit different when the Band has real autonomy over its own lands.

The service agreement goes well beyond water of course. The Band Council levies a property tax on Sen̓áḵw to pay Vancouver for other services that Sen̓áḵw residents will enjoy. This stuff can be worked out. 

Localist approaches can be more responsive to local needs.

In 2015, the New Zealand Initiative put up a report on devolution. We argued that, if a local community saw central government’s regulations or policies as being unfit for local purposes, they should be able to negotiate their own carve-out. If the policy experiment proved successful, others could take it up. If it failed, the experiment would have been relatively small. Bespoke devolution options can make more sense where councils vary widely in capacity.

But nothing in that report needed to imply that local or regional councils are the only voices of local community. Devolution to iwi or hapū could also fit within the framework.

New Zealand has a housing shortage. Council zoning and consenting rules have obviously been part of the problem.

Devolving zoning, consenting, and rating authority over iwi-held land to iwi wishing that authority may be a longshot. And it would take a lot of work.

But it seems worth thinking about.

I have no expertise or experience in arguments around Treaty interpretation.

I just find it very hard to believe that iwi leaders signing onto the Treaty believed their descendants would wind up needing to beg a bureaucrat’s permission to build houses on their own land.

Morning roundup

The tabs did accumulate. A couple of worthies. 

YIMBY opt-outs

Marko Garlick makes the case for keeping the Medium Density Residential Standards but allowing small blocks to opt out through petition, with deed restrictions expiring within 25-30 years. 

If Houston was anything like cities in New Zealand (or Australia, the UK, or other big US cities) these density-enabling changes would’ve been fiercely resisted by density-hating homeowners. But by most accounts, these changes were largely uncontroversial. Why? Perhaps because Houston allowed pockets of homeowners to ‘opt out’ of these city-wide changes.

Anya Martin’s excellent article in Works in Progress goes through this opt-out process. Landowners within small blocks could collectively opt out of the density-enabling rules via private deed restrictions – similar to covenants in New Zealand – which are automatically recognised by the city. These deeds could be used to, amongst other things, set a higher minimum lot size than the new city minimum – effectively banning townhouses. A simple petition needed to attract just 51% support from landowners. These private deed restrictions would typically expire after 25–30 years.

In short the opt outs:

  • Apply to small geographic areas only; a block, not a whole suburb.
  • Require a majority consent from landowners in that area; a few people can’t decide for everyone.
  • Have a sunset clause; they don’t last forever.

It seems an easier way of operationalising opt-outs from MDRS than having it at district plan level, subject to easy-to-game requirements for immediately releasing 30-years worth of supply. 

Higgsean worlds

I was a panelist after Treasury Secretary McLiesh's talk at the Waikato Economics Forum on Friday morning.

I'd made a few notes to myself for my opening 5 minutes. I never quite say what I'd written down. But this is what I'd written down.
Fiscal consolidation and ratchet effects

Covid has taught us two awful lessons.

First, when Parliament gives government a loose rein to deal with a crisis as it sees necessary, trusting that fiscal capacity will be used to necessary purposes, that flexibility will be abused. Core agencies may provide veiled, and sometimes not-so-veiled, warnings that spending is difficult to justify. But ultimately neither they, nor the Public Finance Act, provide discipline. 

Second, New Zealand may well sit in a Bob Higgs world. And I certainly hope we aren’t.

Let’s take the latter first before looking back to the former.

In the late 1980s, Robert Higgs argued, in Crisis & Leviathan, that public spending exhibits a ratchet effect. It is easy for spending to go up in a crisis. Much of it may even be justified for dealing with the crisis. But fiscal consolidation after the crisis maintains a larger government share of overall economic activity than before the crisis: a one-way ratchet effect.

That isn’t a very good world to be in. If you’re in that world, it is harder to get agreement on giving the government the flexibility it might need in dealing with a crisis. There are always tradeoffs between speed and oversight. If you can trust the government to do its best honest job and to retrench after the crisis, then you can afford to cut the government a lot of slack – and get closer to a first best. If you can’t, then those who do not want a permanent expansion in the size and scope of the state have to trade off losses from an inadequate crisis response against losses after the crisis from the permanent part of that increase.

Treasury’s charts in the BIM showed that we might not have been crazy, ex ante, to think we weren’t in a Higgs world. After the Asian currency crisis, Core Crown expenses retrenched, under a Labour government to almost 28% of GDP. The GFC and then Christchurch earthquakes saw them hitting 34% of GDP before retrenching to below 28% of GDP by 2017. 

And the Great Wellbeing Budget promised that every social problem in the world could be solved, with Core Crown Spend projected at 28.8% of GDP by 2023.

In early 2020, there was phenomenal agreement that the government needed to be given the room it needed for dealing with the crisis. It had authorisation to issue the debt necessary for dealing with it. And it had widespread support across the business community. Few atheists in that foxhole. Core Crown spend topped 35% of GDP. 

During the 2023 election campaign, the National Party’s aspirational goal was to get Core Crown spending down to 30% of GDP – above what Ardern’s wellbeing budget had promised. 

And Treasury’s briefing to the government suggested a mix of spending cuts and tax increases would be needed to fill the gap. Inflation, all on its own, increased Crown revenue through fiscal drag by perhaps a billion dollars from Q1 2021 to Q2 2022 – if we can trust Treasury’s tax calculator for changes that large.

Those who prefer a larger size of government have painted normal fiscal consolidation after a crisis as being terrible austerity, and that that austerity’s purpose is to deliver tax cuts. 

It is a dangerous partisan game. 

If returning Core Crown spending, after a crisis, to a level higher than it was before the crisis is going to be painted as austerity, good luck getting social licence for government to have the flexibility it needs to deal with the next crisis. 

Worse, in the crisis, our institutions proved unable to constrain the government against diverting debt raised for dealing with Covid into party-preference spending, like school lunches, and into destructive measures like Envirojobs. 

When New Zealand was running a substantially positive output gap and the country’s lowest unemployment rates on record, the government was running make-work schemes. 

While Treasury did provide some warnings against misguided spending, it also provided the Finance Minister with substantial cover for his initiatives. Measures of fiscal impulse in budget documents seemed designed not to enlighten, but to provide the Minister with a way to claim that massive deficits fuelled by non-Covid spending were, in fact, fiscally responsible – because he was spending slightly less than the year before.

It is hard to avoid the conclusion that the only real fiscal discipline that our institutions provide is the need for vote allocations to compete with each other for a limited pool of resources. When a strong focus on value for money drives Cabinet decisions, Ministries will provide evidence in support of that. When other drivers determine allocations, Ministries will target those other drivers. And when budget constraints disappear because government has taken on tens of billions of dollars in debt, there simply is no restraint. 
Because Secretary McLiesh's opening pointed to the Treasury's view on the criteria for successful fiscal stimulus, with some emphasis on the need to get spending now back down (the limited party), I quoted back what she'd said at the June 2021 workshop Treasury and the Reserve Bank ran on the lessons of Covid. The first sentence is pretty much word for word what the Secretary said this time. The second bolded sentence, well, I wonder whether they've reconsidered that part.
"The well-accepted objectives for effective fiscal stimulus are that it is timely, temporary, and targeted. Overall, New Zealand's fiscal response is meeting those objectives perhaps better than most."

My Twitter thread on the full conference is here.

After my session, I was reminded by an attendee that previous large structural deficits meant the end of two careers in politics for those who had to clean up the mess. That attendee wondered where the hell Treasury was when the structural deficits were being locked in, this time. 

I wonder that too. 

It's like Treasury entirely forgot that regardless of whether one accepts the economic merits of Keynesian fiscal stimulus, the political economy of it just doesn't work. Government has a much harder time scaling back spending in the upswing than it has in scaling up spending in the downturn. And so it just doesn't work. 

Tuesday 13 February 2024

Chris Trotter's brain hasn't melted

After the 2017 election, the brains of some folks on the NZ right seemed to melt. They imagined that Ardern was controlled by Davos, or the World Economic Forum, or the International Socialist Youth of which she had been President, or Soros. 

It was all just stupid. Labour had won the election, there were no conspiracies, and that people with similar outlooks chat with each other is hardly scandalous no matter how much crazy people want to claim that it is. 

Same thing's happening now with National's election. 

Chris Trotter figures it fills a psychological need on the left: someone external to blame for the loss.

THE ATLAS NETWORK has been trending lately – in the minds of the New Zealand Left. Devastated by the election result, and further demoralised by recent polling showing the Right increasing its grip on New Zealanders’ political imagination, the Atlas Network has provided the Left with what it most needs – an explanation for its failure.

I expect that's a reasonable part of it. But also a general view that throwing mud can make one's ideological opponents less effective regardless of whether any of it makes a darned bit of sense.

Trotter concludes, but read the whole thing:

It is highly instructive that left-wing politicians with CVs that show them working for “progressive” organisations, NGOs and yes, even left-wing think tanks with links to billionaire donors, are not portrayed as evil-doers by the mainstream media. Having a background in the trade unions, student organisations, environmental groups, etc, is seen as perfectly natural. Where else are left-wingers going to learn their trade? Exxon? British & American Tobacco? Pfizer?

David Seymour’s links to the Atlas Network do not make him a villain. Working for the Frontier Centre for Public Policy is not the same as working for Hamas. Morally speaking, is taking money from oil companies really all that distinguishable from giving money to oil companies every time we fill up our petrol tank? Getting from A to B; winning the battle of ideas; the Devil clips our tickets either way.

The Left’s election defeat is not the work of the Atlas Network. It is not even the work of David Seymour and Act. It is the work of ordinary citizens who liked the Right’s stories better than they liked the Left’s. If the Right’s stories were made more convincing by a sympathetic think tank, then the Left should not be getting mad at their opponent’s effective apparatus, it should be getting mad at itself for not having one of its own.

After you've read Trotter, watch this excellent 1985 documentary about a real conspiracy. 


Monday 12 February 2024

Around the traps on housing

Wellington's Independent Hearings Panel put up its recommendations on the Wellington District Plan. 

They note that Council's plan provides far more than the minimum required zoned housing to keep up with projected demand and so scaled it back.

A few bits from me on all this.

Oli Lewis and Dileepa Fonseca at BusinessDesk

Wellington already suffers from infrastructure challenges, and restricting housing development in existing areas may worsen it. 

That’s the view of Geoff Cooper, general manager for strategy at the Infrastructure Commission, Te Waihanga, who commented to BusinessDesk expressing surprise at recommendations made by an independent hearings panel (IHP) convened to hear submissions on a proposed district plan put forward by the Wellington city council.

...

Cooper said that the NZ infrastructure strategy, produced by the commission, also highlighted a need for national direction to help guide planning decisions. 

“The aim of this national direction is often about balancing economic matters, like enabling housing supply for future New Zealanders, with other factors.” 

Economic considerations needed to be given appropriate weight, he said. 

“We note that as of today, the list of 999 accredited RMA independent commissioners includes just 12 that report having expertise in economics – amounting to 1.2%.” 

Crampton was far more scathing, saying the Wellington IHP clearly needed economic assistance. 

“Their engagement with the economic evidence presented was incredibly poor; they were unable to distinguish academically credible arguments from academically risible arguments, and they provided a series of recommendations that will worsen housing affordability,” he said. 

“All in all, the report discredits the IHP process and the methods used to select panellists. Wellington council would be right in dismissing the IHP report’s conclusions.”

Tom Hunt asked what I'd thought about it:

The New Zealand Initiative chief economist Eric Crampton said the council’s proposed district plan had a larger buffer between planned-for supply and projected housing demand in Wellington in coming decades. The new recommendations significantly reduced that buffer, which particularly mattered when Wellington was starting from a housing shortage.

But he believed the whole system may need to change to rely less on forecasts of whether housing demand would be met by zoned supply. If housing was unaffordable, people could be expected to leave town, reducing forecast demand, he said.

Instead, councils and the Government could watch land values. If those prices showed that zoned land was scarce, as work by the Infrastructure Commission had shown, then the Government could get councils to zone for more development.

There had been 2016 work by Covec and MRCagney for MfE looking at how prices could be used as signals of zoned scarcity. This was part of the prep for the older National Policy Statement on Urban Development Capacity. NPS-UDC was replaced by NPS-UD, and none of it took price signals as seriously as it should have. They're mentioned as one of many possible things to look at when they should be a trigger compelling release of more zoned land. 

I talked about this a bit more over at The Herald. The full column is gated but I've snipped a couple bits. 

In short, it’s a backward kind of way of setting urban plans. Forecasts of demand are not only highly uncertain, they also depend on housing affordability.

If you start with overcrowded, poor-quality housing, you will have a hard time fixing it. And if the resulting unaffordability discourages people from moving here while encouraging young families to flee, projected demand is the wrong measure entirely.

None of it faces a simple sanity check. Land prices can quickly show whether councils have zoned sufficient land for development. Last year, the Infrastructure Commission compared the 2021 price of land just outside of city limits to the price of land just inside the boundary. They accounted for the cost of turning rural land into urban land, like earthworks, surveying, planning, and development contributions. And they found urban zoning quadruples the price of land inside Auckland and Tauranga’s boundaries, while more than tripling land value in Wellington, Hamilton and Queenstown.

Those ratios had increased substantially since 2010.

Since the commission’s work accounted for land development costs, the price multiples at the boundary largely reflect scarcity caused by zoning.

If it were legal to turn rural land around Wellington, like in Ōhāriu, into housing, land zoned for housing in Wellington would not cost $490 per square metre more than land just outside the boundary. As the typical Wellington section is about 600sq m, the commission’s figures mean zoning at the boundary added almost $300,000 to a Wellington section’s price in 2021.

This simply would not happen if the council had really zoned enough land for development.

But the problem is not just at rural-urban boundaries. It will also be at every other zoning boundary where zoning creates scarcity.

On the plus side, the IHP work really didn't mess around. Some reports are just kinda bad. And then inertia sees them adopted. But this one's bad enough that it's unified everyone other than the more hopeless NIMBYs against it. So it's more likely to be tossed.

It also seems to have inspired the latest NZ Association of Economists member's survey. If you're an NZAE member, do check your inbox for that survey. It asks member whether zoning provides a binding constraint against housing supply and consequently affects prices. 

And on the fun side, Twitter urbanist Boxcar Joey mapped the conspiracy of Twitter urbanists against the IHP proposal.